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Education and Training

September 2013
Jeffrey M. Silber
Managing Director & Senior Research Analyst
Business Services and Education
(212) 885-4063
jeff.silber@bmo.com

Paul Condra
Research Associate
(212) 885-4176
paul.condra@bmo.com

Refer to pages 428429 for Important Disclosures, including Analysts Certification.


For Important Disclosures on the stocks discussed in this report, please go to
http://researchglobal.bmocapitalmarkets.com/Company_Disclosure_Public.asp.

Education and Training

BMO Capital Markets

Table of Contents
Key Investment Considerations..................................................................................................5
Education Industry Overview......................................................................................................7
Risks ........................................................................................................................................17
Early Childcare: A Small but Steady Market.............................................................................20
Growth Divers ...................................................................................................................23
Largest Childcare Providers ..............................................................................................30
Worksite Childcare ............................................................................................................32
Back-Up Care....................................................................................................................35
Economics of Operating a Childcare Center .....................................................................36
Characteristics of Superior Childcare Facilities .................................................................39
Merger and Acquisition Activity .........................................................................................41
Risks .................................................................................................................................43
K-12 Education: Largest Opportunity, Though Risks Abound ..................................................44
Market Overview ...............................................................................................................44
Impact of the Great Recession on K12 .............................................................................47
ESEA (Formerly NCLB) ....................................................................................................51
Instructional Media and Services ......................................................................................54
Technology in the K-12 Sector ..........................................................................................64
Other K-12 Services..........................................................................................................76
Postsecondary Education: Tough Near Term, But Solid Long Term........................................95
Postsecondary School Market Overview...........................................................................95
Long-Term Drivers for Postsecondary Education Growth .................................................98
For-Profit Postsecondary School Market Overview.........................................................104
Advantages of For-Profit Schools....................................................................................112
Military Market.................................................................................................................115
Growth Components for For-Profit Postsecondary Schools............................................127
Postsecondary Schools Enrollment Growth Trends ........................................................128
Postsecondary Schools Funding Sources and Tuition Rate Trends ...............................141
Postsecondary Schools EBITDA, Operating Income, and Margin Trends ......................195
Postsecondary Schools Instructional Costs Trends ........................................................198
Postsecondary Schools Sales and Marketing Trends .....................................................206
Postsecondary Schools New Campus Opening and Relocation Trends.........................222
Postsecondary Schools New Program Trends................................................................227
Postsecondary Schools Persistence/Retention/Attrition Rate Trends .............................240
Postsecondary Schools Completion/Graduation Rate Trends ........................................252
Postsecondary Schools Placement Rate, Salary, and Other Job-Related Trends ..........262
Postsecondary Schools Legal and Regulatory Issues ....................................................269
Online Postsecondary School Market .............................................................................322
Characteristics of Superior For-Profit Postsecondary Schools .......................................339
Postsecondary Schools: Valuation Trends......................................................................341
International Postsecondary Education...........................................................................350
Study Abroad Programs..................................................................................................367
International Education Providers ...................................................................................377
Postsecondary Publishing Market ...................................................................................386
Postsecondary Technology Market .................................................................................391
Postsecondary Institutional Services Market...................................................................395
Corporate Training: Moving to Software Driven Model...........................................................399
Market Overview .............................................................................................................399
Content Delivery Channel ...............................................................................................403
Technology and e-Learning Overview.............................................................................405
e-Learning Content .........................................................................................................408
e-Learning Services ........................................................................................................410
e-Learning Infrastructure Solutions .................................................................................411
Content Type...................................................................................................................415
Business Skills Training ..................................................................................................416
IT Skills Training..............................................................................................................418
Trends in Corporate Training ..........................................................................................419
We would like to thank Nicolas Viveros for his help in creating this report.

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Education and Training

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Key Investment Considerations


For-profit education growth has slowed, though we expect some rebound. This roughly

$133 billion industryserving the childcare, K-12, postsecondary, and corporate training
segmentsis a small component (just over 10%) of the estimated $1.32 trillion to be spent on
education in the US in 2013. While this sector has made significant inroads in recent years,
we believe it has also had a major impact on how traditional providers operate (e.g., greater
acceptance of online education). Although annual growth has slowed owing to economic
and regulatory issues, among others we expect growth rates to recover, though not to those
seen in the sectors heyday last decade. We project for-profit education revenues will increase
at a 3.7% compound annual growth rate (CAGR) over the next five years, reaching just over
$161 billion in 2018, generating about 10.6% market share. This would be slower than the
5.3% CAGR at which we estimate the industry has grown since 1999.
There are a number of underlying growth drivers. We are still bullish on the long-term

prospects for all the subsectors within the education industry. In our view, for-profit education
could gain positive momentum from factors such as increased recognition of the benefits of
early childhood education, the growing importance of accountability and education reform,
rising awareness of the advantage of more education to ones lifetime earnings potential, and
the expansion of addressable markets through technology (i.e., online learning). However,
owing to new regulations and an uncertain economic recovery, growth in the near- to
intermediate-term is expected to be a bit sluggish.
Contrary to prior popular belief, the economy does matter. If the past two downturns have

taught us anything, it was that the acyclical theory of education was incorrect. Anecdotal
evidence shows some companies cut back somewhat on expanding their worksite childcare
offerings, as recruiting and retention perks became less of a priority in a downturn. State and
local budget pressures forced severe education funding cuts, limiting what had been growth in
services for K-12 public schools. Conversely, these same limitations had halted some
advances by not-for-profit postsecondary institutions (e.g., online expansion) and made them
weaker competitors just when demand for programswhich tend to be countercyclical
increased; we note, however, the not-for-profit sector has regained some of the share lost in
the Great Recession. Corporate training providers experienced revenue declines because, in
many cases, this training is considered a discretionary expense. As the economic expansion
matures, we believe for-profit worksite childcare, K-12 and corporate training should benefit,
though for-profit postsecondary may not to the same extent.
We believe technology is a key enabler for success. Education providers that use

technology as part of their service delivery will continue to outperform, in our view. In certain
sectors, particularly postsecondary, an online delivery model has become more accepted and
fewer quality-related questions are being asked (some argue that quality is better online owing
to real-time updates and ability for customization). While we do not believe online education
will ever fully replace classroom-based learning, those traditional education providers that
smartly incorporate technology in their existing offeringsknown as blended learning
should have a competitive advantage. Within the K-12 sector, technology is now virtually
ubiquitous in every classroom, while inroads have also been made via virtual schools,
though we do not envision the type of online penetration seen in the postsecondary sector. We

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also see greater acceptance of the blended learning concept in the corporate training world,
though we believe this is more of a replacement for the traditional instructor-led training
(ILT) model. Many so-called edruptors (e.g., Massive Open Online Courses, or MOOCs)
have started to have some influence within the sector, though the hype may precede the
profits.
Childcare: growth could accelerate in this later cycle segment. While some

demographic drivers are on a down-cycle (e.g., population under five), other drivers (e.g.,
dual income couples with children under six) are trending up. This, along with the greater
recognition of the importance of early education and potentially more government funding
should continue to underlie steady growth in this sector. Centers run by for-profit providers
which represent about half the market have been gaining share, and we expect will continue
to do so. This especially holds true for corporate-sponsored childcare, which tends to be later
cycle, as more employers use this perq as a recruiting and retention tool.
K-12: sector with the greatest opportunities, but also many risks. We believe a

fundamental change has occurred in the K-12 sector as the desire to improve school quality
has overtaken demographics as a key growth driver. Given the worsening performance of the
US K-12 system relative to many other countries, this trend should continue. We believe
education technology (ed-tech) has the greatest opportunity to make radical changes in this
sector. However, funding issues remain a concern; despite an apparent increase in state and
local tax revenues the key driver for funding levels the expiration of federal stimulus
funds and further sequestration puts a damper on near-term expectations. In addition, K-12
could also be the riskiest investment sector, owing to heavy political and public pressures, as
seen with opposition in certain areas within the school-management sector (e.g., charter
schools).
The worst may be over for the postsecondary sector, though we do not expect a Vshaped recovery. The latter part of last decade was among the best periods ever for for-

profit postsecondary providers, given strengthening enrollment growth owing to the subpar
employment market and funding constraints for most traditional schools. However,
enrollment has declined since peaking in fall 2010, and will likely continue to do so in the
near term, though at a lesser extent. While some of the reasons driving this decline have been
anniversaries (e.g., incentive compensation rule changes effective July 2011), others, such as
concerns over the value proposition of higher education may linger. Yet this issue does not
only affect the for-profit sector, as seen by President Obamas August 2013 Making College
More Affordable plan. Competition is also intensifying as non-for-profits target online
working adult students a space traditionally dominated by the for-profit sector.
Corporate training: history shows this is a later cycle segment. The past two recessions

have shown that corporations considered some training to be discretionary, with many
reducing training budgets as part of broader cost-cutting measures. Nevertheless, we still
believe this sectors secular growth drivers -- such as the importance of an education in
moving up the career ladder and greater acceptance of life-long learning -- are as strong as
ever. In addition, the shift to less expensive models (e.g., software as a service) could lessen
the adverse economic impacts. As the economic expansion matures, this could be among the
fastest growing segment within the education industry.

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Education Industry Overview


We have seen many developments in the education industry since our Back to School
conference in September 2012. Although some developments were predictable (e.g., M&A
activity, which investment banks always seems to predict), others were not. Below, we
highlight some of the major developments by sector:

Child care: The IPO of Bright Horizons Family Solutions (BFAM) in February 2013 has
once again attracted investor attention to this segment, which has strong secular growth
drivers including the greater acceptance of promoting early education.

K-12: Despite a rebound in state and local tax revenues, K-12 funding levels remain a bit

sluggish as these locales attempt to fill the gaps created by the removal of federal
stimulus funding and sequestration pressure. Preparation for the adoption of Common
Core Standards across much of the US has provided some impetus for future spending in
areas related to curriculum, technology and professional development, among others.

Postsecondary: While enrollments in the for-profit sector continued to decline, the rate
of decrease is arguably getting less worse. The entire segment including not-forprofit schools is under pressure to better define its value proposition as potential
students rethink taking on debt loads for returns that may initially be subpar. Competition
across the sector has intensified and the increased acceptance of MOOCs could be a game
changer.

Corporate training: Corporations are beginning to spend training-related dollars often

seen as a recruiting and retention tool which had been deferred during the Great
Recession, as the employment market tightened
While the bulk of the historical market capitalization within education has been in the
traditional postsecondary space, there are a wide variety of niches within this industry. Given
the myriad of underlying drivers (to be discussed in detail in this report), the stock
performances within each subsector do not always move together. Nevertheless, while the
median performance of the stocks in the whole education industry has outpaced the majority
of the broad market indices for most of the last decade, it has underperformed in recent years,
although has outperformed in 2013 year-to-date (see Exhibit 1).

Stock
performance
varies by
education
subsector

Exhibit 1. BMO Capital Markets Education Index vs. Market Indices (2000-2013YTD)
Sector
PreK-12
Postsecondary
Corporate Training
E-Learning
International
Education industry

2002
N.A.
22.9%
0.2%
-25.8%
N.A.
18.0%

2003
N.A.
54.1%
54.9%
33.0%
N.A.
56.3%

2004
N.A.
0.9%
0.4%
3.1%
N.A.
4.8%

2005
N.A.
-18.8%
-2.2%
-13.1%
N.A.
-14.7%

2006
N.A.
12.3%
1.7%
52.7%
N.A.
14.5%

2007
N.A.
44.7%
28.3%
-11.4%
-6.1%
20.7%

2008
-27.5%
1.0%
0.0%
-59.5%
-37.1%
-17.3%

2009
8.1%
1.2%
4.1%
69.5%
52.6%
29.0%

2010
14.6%
-13.5%
-11.8%
47.8%
2.6%
-11.1%

2011
-24.8%
-19.2%
-14.6%
28.9%
-25.4%
-19.8%

2012
-24.7%
-40.3%
-26.2%
10.8%
-7.1%
-21.4%

2013
(YTD)
64.9%
8.3%
13.8%
21.1%
24.2%
21.8%

S&P 500
Russell 2000
NASDAQ

-23.4%
-21.6%
7.3%

26.4%
45.4%
3.4%

9.0%
17.0%
13.3%

3.0%
3.3%
1.4%

13.6%
17.0%
9.5%

3.5%
-2.7%
9.8%

-38.5%
-34.8%
-40.5%

23.5%
25.2%
43.9%

12.8%
25.3%
16.9%

0.0%
-5.5%
-1.8%

13.4%
14.6%
15.9%

14.5%
19.0%
18.9%

Note: The BMO Capital Markets Education Index represents the median return for the following publicly traded education companies: ABCD,
AMBO, APEI, APOL, ATAI, BPI, CAST, CECO, CEDU, CEU, COCO, CPLA, DL, DV, EDMC, EDU, ESI, FC, GPX, HSTM, LINC, LOPE, LRN,
LTRE, MBA, NAUH, NED, SABA, SPRO, STRA, UTI, XRS and XUE. All returns exclude dividends. 2013 year-to-date as of August 30, 2013.
N.A. Not Available.

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Education and Training

Diversity is an
attractive feature
of investing in
education

BMO Capital Markets

While we acknowledge the issues facing the sector, we maintain a bullish longer-term outlook
for investment opportunities throughout the education industry in generalthe specific
growth drivers for each sector will be discussed in depth later in this report. In addition, we
believe the education industry is among the most diversified within any vertical, providing the
opportunity for investors to choose different paths based on their beliefs about the direction of
the macro environment and other issues.

Size of the Education Industry


Education capital
of over $64 trillion
has grown at a
4.2% real CAGR
since 1960

The Office of Management and Budget (OMB) annually estimates the stock of education
capital, which is the cost of replacing the years of schooling embodied in the US population
aged 16 and over, i.e., how much it would cost to reeducate the US workforce at todays
prices, rather than at its original cost. The OMB estimates that the federal governments
component an estimated $2.24 trillion in FY2014 represents about 3.5% of the nations
total education stock. As such, we estimate that real education capital (i.e., excluding inflation
impact) will be worth more than $64 trillion in 2014, up from $6.8 trillion in 1960 (see
Exhibit 2). This represented a real CAGR of 4.2% (excluding inflation) over that 54-year
period. We note the bulk of spending comes at the state and local tax level as well as through
personal spending. As such, the education industry serves a large and wide customer base, in
our view.

Exhibit 2. Net Stock of Federally Financed Education Capital


(1960-2014E)
$70

5%

Education capital
% federally financed

60

3%

40
30

2%

20

% federally financed

Assets ($ tril. in 2005 $)

4%
50

1%
10
0

0%
1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2006

2007

2008

2009

2010

2011

2012

2013E 2014E

Source: BMO Capital Markets and Office of Management and Budget.

Estimated total
spending: about
$1.32 trillion in
2013, growing 2.8%
CAGR to roughly
$1.52 trillion in 2018

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The education industry represents a significant amount of spending no matter how it is


defined. As shown in Exhibit 3, we estimate that nearly $1.32 trillion will be spent on
educational services in the US in 2012. This would represent roughly 8.1% of estimated GDP
for the year. We note that economic downturns have had varied impacts on each sector,
slowing for some (K-12, corporate training), while accelerating growth for others
(postsecondary). We project that the education industry will grow at roughly a 2.8% annual
rate through 2018, when total spending is expected to reach roughly $1.52 trillion.

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Education and Training

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Exhibit 3. US Education Industry Revenues (1993-2018E)


Revenues ($ Trillions)

$1.6
1.2

Corporate Training
Postsecondary
K-12
Childcare

0.8
0.4

19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
1
20 2
13
20 E
14
20 E
15
20 E
16
20 E
17
20 E
18
E

0.0

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates, US
Department of Education National Center for Education Statistics and Training Magazine.

For-profit sector:
estimated
$133 billion to be
spent in 2013 or
about 10.2% of
total education

Although the entire industry may be vast, the for-profit portion has only recently emerged.
The past two decades or so have seen the birth of the K-12 alternative school movement, the
explosion (and then contraction) of the for-profit postsecondary sector, and the creation of the
e-learning sector. Based on data compiled from a number of different sources, we estimate
that the for-profit sector will generate about $133 billion in revenues in 2013, or roughly
10.2% of the roughly $1.32 trillion expected to be spent on US education for the year.

spending

From 1999 to 2003, the for-profit component declined as a percentage of total industry
revenues from 9.3% to 8.6%. Just before that downturn, much of the new for-profit
investment and excitement was concentrated in the corporate training sectorthe area that
suffered the most during and after the most recent US recession, in our view. However, the
for-profit sector rebounded thereafter, growing faster than the overall education industry.
From 2003 through 2013, the for-profit education sector grew at an estimated 5.7% CAGR
versus the 4.1% CAGR for the entire education industry.
For-profit sector:
projected 3.7%
CAGR through
2018, slightly
expanding market
share to 10.6%

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Certain economically sensitive sectors (e.g., K-12, corporate training) could see accelerated
growth assuming an accelerated economic recovery, potentially offsetting the expected
decline in the postsecondary sector as the industry transitions itself to be better positioned to
comply with recent regulatory changes. As such, we forecast that for-profit education
revenues will grow at a 3.7% annual rate through 2018, reaching more than $160 billion in
revenues that year. This would equate to about 10.6% of the roughly $1.52 trillion in total
education spending expected in 2012, up slightly from the estimated 10.2% share captured in
2012 (see Exhibit 4).

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Education and Training

BMO Capital Markets

Exhibit 4. US For-Profit Education Industry Revenues (1999-2018E)


For-Profit %

11.0%
10.5%

125

10.0%

100

9.5%

75

9.0%

50
25

8.5%

8.0%

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates, US
Department of Education National Center for Education Statistics, Training Magazine and Eduventures.

Investments and M&A Activity in the Education Industry


Throughout the past few decades, there has been strong interest in investing in the sector at
the venture and early stage levels. While few of these companies have been successful public
entities in their own right, many have sold to larger companies. Since the end of the Great
Recession, we have seen an increase in the number of venture-backed deals in the education
space, given the sheer size of this market, the issues facing the various segments and the
recognition of the importance of education to future success. Many of these investments also
contain the additional social benefit aspect of doing good while doing well.
A 2012 survey by merchant bank GSV Advisors highlighted the perceived opportunities and
challenges among education market investments gleaned from a survey of more than 1,300
participants in the education ecosystem. As shown, the most attractive features are the
addressable market size and potential growth rate, while the biggest challenges and related to
regulatory and talent issues (see Exhibit 5).

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10

September 2013

Percent of total spending

For-Profit Spending

150

19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
E
20
14
E
20
15
E
20
16
E
20
17
E
20
18
E

Revenues ($ billion)

$175

Education and Training

BMO Capital Markets

Exhibit 5. Opportunities and Challenges of Investing in the


Education Industry (2012)
Investment challenges

Investment opportunities

Addressable market size


Market growth rate
Online education model
Availability of "big ideas"
Visible revenue models
Cash flow characteristics
Scalable revenue models
Capital expenditure requirements
Classroom technology adoption
School district sales model
Precedent VC exits
Established publisher models
Availability of management talent
Federal regulatory environment
State regulatory environment
0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Source: GSV Advisors survey.

The number of publicly held education companies has substantially increased since 1994,
when only a handful of companies traded in US equity markets. Not surprisingly, the pace of
issuance accelerated during the dot.com heyday with 11 IPOs in 2000 -- the bulk of them for
companies specializing in e-learning. Similar to most sectors, the pace of public offerings
slowed significantly thereafter, while many of those dot.com providers disappeared from the
public company landscape.
Some resurgence
of education IPOs
in latter part of
last decade, but
few since late
2009

However, in the latter part of last decade there was a bit of a resurgence of IPOs for US
education providers, some of which were among the few deals during that period. A list of
recent transactions can be found in Exhibit 6. As we can see, the commonality for many of
these companies lies in their online platform. However, owing to the myriad of issues facing
the sector, there have been few new public offerings of US education companies since late
2009; we note that Bright Horizons Family Solutions (BFAM) offering was not necessarily
marketed as an education play.

Exhibit 6. Recent Public Offerings of US Education Companies


(2006-2013)
Date
Nov-06
Nov-07
Dec-07
Nov-08
Apr-09
Oct-09
Nov-09
Jan-13

Company Name/Ticker
Capella Education (CPLA)
American Public Education (APEI)
K12 Inc. (LRN)
Grand Canyon Education (LOPE)
Bridgepoint Education (BPI)
Education Management (EDMC)
Archipelago Learning (ARCL)
Bright Horizons Family Solutions (BFAM)

Description
Online postsecondary provider
Online postsecondary provider
Online K12 provider
(Mostly) Online postsecondary provider
(Mostly) Online postsecondary provider
Postsecondary provider
Online K12 provider
Early childhood education provider

Stock Market
US (NASDAQ)
US (NASDAQ)
US (NYSE)
US (NASDAQ)
US (NYSE)
US (NASDAQ)
US (NASDAQ)
US (NYSE)

Source: BMO Capital Markets and Capital IQ.

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September 2013

Education and Training

Non-US education
companies going
public

BMO Capital Markets

There have also been a number of public offerings of foreign education companies in both the
US and in their domestic markets. A list of recent foreign company IPOs can be found in
Exhibit 7.

Exhibit 7. Recent Public Offerings of Non-US Education Companies (2006-2013)


Date
Sep-06
Mar-07
Aug-07
Aug-07
Oct-07
Oct-07
Nov-07
Dec-07
Dec-07
Jan-08
Apr-08
Jun-08
Jun-08
Jul-08
Aug-08
Aug-10
May-10
Oct-10
Oct-10
Nov-10
Mar-11
Jul-11
Aug-11
Jul-11
Apr-12
Aug-12
Aug-12
Feb-13

Company Name/Ticker
New Oriental Education (EDU)
Anhanguera Educacional Participacoes SA (AEDU11.BR)
Estacio Participacoes SA (ESTC11.BR)
Kroton Educacional SA (KROT11.BR)
Sistema Educacional Brasileiro (SEBB11.BR)
Noah Education Holdings, Ltd. (NED)
Al-Khaleej Training and Education Company (SASE:4290)
Early Learning Services Limited (ASX:ELY)
ChinaEDU Corp. (CEDU)
ATA Inc. (ATAI)
CIBT Education Group (MBA)
Chungdahm Learning, Inc. (KOSE:A096240)
Visang Education Inc (KOSE:A100220)
China Distance Education Holdings, Ltd. (DL)
Seigakusya Company, Limited (JASDAQ:2179)
Ambow Education (AMBO)
Masterskill Education Group
Global Education & Technology Group Ltd (GEDU)
TAL Education Group (XRS)
Xueda Education Group (XUE)
APFT Berhad (KLSE:APFT)
Prestariang Berhad (KLSE: PRESHD)
Tree House Education & Accessories Limited (BSE:533540)
Abril Educao S.A. (BOVESPA:BRE11)
MT Educare Limited (BSE:534312)
Success Holdings Co. Ltd. (JASDAQ:605))
LZYE Group plc (AIM:LZYE)
Overseas Education Group (SGX:RQ1)

Country of
Origin
China
Brazil
Brazil
Brazil
Brazil
China
Saudi Arabia
Australia
China
China
China
Korea
Korea
China
Japan
China
Malaysia
China
China
China
Malaysia
Malaysia
India
Brazil
India
Japan
Hong Kong
Singapore

Sector
Postsecondary
Postsecondary
Postsecondary
Postsecondary
K-12/Postsecondary
K-12
Corporate Training
Childcare
K-12/Postsecondary
Postsecondary
Postsecondary
K-12/Postsecondary/Corporate
K-12/Postsecondary
Postsecondary
K-12
K-12/Postsecondary/Corporate
Postsecondary
K-12/Postsecondary
K-12
K-12
Postsecondary
Postsecondary
K-12
Publishing
Test Prep / K-12
Childcare
Childcare
K-12

Stock Market
US (NYSE)
Brazil (BOVESPA)
Brazil (BOVESPA)
Brazil (BOVESPA)
Brazil (BOVESPA)
US (NYSE)
Saudi Stock Exchange
Australian Securities Exchange
US (NASDAQ)
US (NASDAQ)
US (AMEX)
Korea (KOSDAQ)
Korea Stock Exchange
US (NYSEArca)
Brazil (BOVESPA)
US (NYSE)
(KLSE:MEGB)
US (NASDAQ)
US (NYSE)
US (NYSE)
Malaysia (KLSE)
Malaysia (KLSE)
India (BSE)
Brazil (BOVESPA)
India (BSE)
Brazil (BOVESPA)
London (AIM)
Singapore Exchange (SGX)

Source: BMO Capital Markets and Capital IQ.

Recent going
private
transactions

A member of BMO

While the past few years has seen new education companies become available to public
equity investors, a number of companies in the sector went the opposite way via going
private transactions. Several of those transactions are summarized in Exhibit 8.

Financial Group

12

September 2013

Education and Training

BMO Capital Markets

Exhibit 8. Recent Going Private Transactions of Education Companies (2006-2013)


Date
Closed Company Name
Jun-06 Education Management

Transaction
Value ($ mil.)
$3,200

Aug-11 Nobel Learning


Oct-11 Blackboard

Buyer(s)
Providence Capital Partners and Goldman
Sachs Capital Partners
Liberty Partners
Investor group, including Sterling Capital
Partners and Citigroup Private Equity
Pearson Education (PSO)
Investor group led by CEO Doug Becker
and a consortium, including Kohlberg
Kravis Roberts & Co. (KKR), Citi Private
Equity, and S.A.C. Capital Management
Bain Capital Partners, LLC.
Vista Equity Partners
Thoma Bravo LLC
Berkshire Partners LLC, Advent
International Corporation and Bain Capital
Partners, LLC
Leeds Equity Partners
Providence Equity Partners

Oct-11

Permira

437

Pearson

155

Description
Postsecondary school operator

Sep-06 Concorde Career Colleges


Jun-07 Educate

Postsecondary school operator


K12 supplmental education services
provider
e-learning provider
International postsecondary school
operator

Jul-07 eCollege
Aug-07 Laureate Education

May-08
Jul-09
Mar-10
May-10

Dec-11
May-12
Mar-13

Bright Horizons Family Solutions


SumTotal Systems
Plato Learning
SkillSoft

Worksite childcare provider


Corporate training provider
K12 educational software provider
Corporate training provider

Early childcare and K-12 operator


Education learning management
systems
Renaissance Learning
K12 professional development
services, curriculum and customized
classes
Global Education and Technology Foreign language training and test
preparation
Archipelago Learning
Provides SaaS education products
K12, postsecondary and professional
McGraw-Hill Education
educational publishing and services

PLATO Learning (Thoma Bravo LLC)


Apollo Global Management (APO)

99
535
538
3,820

1,300
160
141
1,200

149
1,743

303
2,400

Source: BMO Capital Markets and company reports.

There has also been a significant number of private-to-private transactions in the education
industry, many of which are listed in their respective sections in this report.
There have also been some landmark mergers/acquisitions within the industry in recent years.
These include the following:

Childcare: One of the more interesting stories was the rise and fall of Australian-based

childcare provider ABC Learning Centers (ABS.ASX). The company had been very
active in both the US and UK markets, acquiring (among others) The Learning Care
Group (January 2006) for US$153.5 million and La Petite Academy (January 2007) for
US$339.4 million. Unfortunately, ABC ran into some trouble after this aggressive
expansion strategy and, in late June 2008, sold 60% of its US business to Morgan Stanley
Private Equity (MS), using the proceeds to pay down debt. This was not enough as the
company collapsed into receivership (i.e., bankruptcy) in November 2008. Since then, most
of its other units have been sold as well.

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K-12: In December 2006, Irish educational software publisher Riverdeep acquired US


textbook publisher Houghton Mifflin for $3.4 billion, becoming Houghton Mifflin
Riverdeep. In December 2007, it acquired the US business operations of Harcourt
Education from Reed-Elsevier (RUK) for $4 billion. The publishing company is now
known as Houghton Mifflin Harcourt and has recently filed for a public offering. This
follows the $2.4 billion acquisition of McGraw-Hill Education by private equity firm
Apollo Global Management in March 2013.

Financial Group

13

September 2013

Education and Training

BMO Capital Markets

Postsecondary: The rate of school acquisitions by publicly held companies has come to
a halt, owing to regulatory issues and deteriorating fundamentals. Most recent
transactions have been those of companies expanding geographically such as DeVrys
(DV) August 2011 purchase of American University of the Caribbean Medical school for
$235 million or those expanding beyond their core business for regulatory or other
reasons, such as the $6.8 million investment made in September 2012 by American
Public Education (APEI) for 19.9% of IT training company New Horizons Worldwide.

Corporate training: In May 2007, SkillSoft acquired NETg from Thomson Corporation
for $270 million, creating one of the worlds largest providers of e-learning content for
the corporate sector. In May 2010, SkillSoft was taken private by a consortium of private
equity firms for $1.2 billion.

We have provided detailed merger and acquisition activity data for each sector in the
respective sections throughout this report.

Impact of Economic Cycles


The economy still
matters

Interestingly, although many had thought the performance of the economy had little
correlation with the education sector, the experience over recent cycles has, in our view,
proven this to be wrong.

Childcare. We believe workplace childcare has proved to be a relatively inexpensive way

to maintain employee morale in challenging operating environments. Corporatesponsored childcare also appears to be somewhat of a later-cycle play, owing to the long
timeframe (as much as three to four years) between an initial sales contact and the
opening of a new center. In addition, purchase decisions may often be delayed, owing to
budget constraints.

K-12. K-12 spending growth has been somewhat stable through most prior US recessions

and spending levels generally improved during the ensuing recoveries. However, state
funding fell in both FY2009 and FY2010 with the fallout from the Great Recession (December 2007 June 2009) as state and local tax revenues fell, though offset somewhat
with federal stimulus funding. While much of that stimulus is now gone, state, and local
tax revenues have rebounded helping to spur some growth in the sector.

Postsecondary. The Great Recession was a boon for this sector, which generated stellar
enrollment growth, as the sector experienced some of its historical countercyclical traits
(i.e., accelerating enrollment growth and lower attrition rates). However, regulatory
issues and negative publicity (among others) have hurt the for-profit sector, which has
continued to shrink since its record fall 2010 level. While some believe an economic
recovery may help as potential students become more willing to take on debt, the jury is
still out on that thesis.

Corporate training. This tends to be among the most cyclical of sectors, as corporations

use training as a recruitment and retention tool, i.e., when the labor supply is plentiful
during an economic downturn, this becomes a discretionary expense. While somewhat
later cycle, there are some signs that corporate training is once again picking up.

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Financial Group

14

September 2013

Education and Training

BMO Capital Markets

Regulatory Overview
Education, similar to healthcare, is a highly regulated industry. While the private sector plays
an important role as a funding sourceparticularly in the childcare and corporate training
marketsfederal, state, and local governments play an ever greater role in the K-12 and
postsecondary sectors. Within the discussion of each of the industry sectors in this document,
we outline the specific regulations applicable to each that we believe are important to
investors.
While we believe the regulatory environment had improved for much of last decade, the
arrival of a new administration under President Obama increased some concerns.
Conventional wisdom prior to his tenure was that this administration would focus more on the
K-12 sector than on the postsecondary sector and that a Democratic-controlled Congress
would be less favorable to the overall for-profit education industry. This conventional wisdom
has appeared to have played out.
President Obama
has raised the
profile of the
education sector

Interestingly, President Obama raised the profile of the education sector to a higher level than
most imagined during his first address to Congress on February 24, 2009, when he
highlighted education as one of his chief policy priorities, along with energy and healthcare.
Among the more notable quotes were these (per the official White House transcript):

In a global economy where the most valuable skill you can sell is your knowledge, a

good education is no longer just a pathway to opportunityit is a prerequisite.

It will be the goal of this administration to ensure that every child has access to a complete
and competitive educationfrom the day they are born to the day they begin a career.

But we know that our schools dont just need more resources. They need more reform.
That is why this budget creates new incentives for teacher performance, pathways for
advancement, and rewards for success. Well invest in innovative programs that are
already helping schools meet high standards and close achievement gaps. And we will
expand our commitment to charter schools.

I ask every American to commit to at least one year or more of higher education or
career training . . . we will provide the support necessary for you to complete college and
meet a new goal: by 2020, America will once again have the highest proportion of
college graduates in the world.

Though the promises were there, little has been accomplished but much of that can be blamed
on the financial crisis, in our view. In addition, the level of regulatory oversight especially
on the for-profit postsecondary sector has increased dramatically, stunting the sectors growth.
While there are two major education bills that need to be reauthorized the Elementary and
Secondary Education Act (ESEA), which covers the K-12 sector and the Higher Education
Act (HEA), which covers the postsecondary sector it is highly unlikely that both of them (or
even one) will be completed in the current Congressional session. Nevertheless, there could
be proposals that may emanate from committee meetings and other discussions that we suggest investors follow closely.

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Financial Group

15

September 2013

Education and Training

BMO Capital Markets

Education Industry Growth Drivers


Common growth
drivers

Although some issues remain uncertain in the near term, we are bullish about the longer-term
growth opportunities for investing within all sectors in the education industry. Although each
sector has its own growth drivers and risks (which we discuss at length in the rest of this
report), we believe a number of underlying trends have a broad influence on the group:

Importance of learning outcomes. We believe this theme plays across all four sectors.

Childcare providers are stressing the advantages of starting an education as early as


possible to gain a head start before entering elementary school. K-12 providers are under
pressure to improve their academic performance under mandated federal and state
accountability regulations or face repercussions such as the loss of funding. Careerfocused postsecondary schools are trying to stay ahead of changing hiring trends to
enhance students marketability. These outcomes are being stressed even more than
before by recent and potential regulatory changes (e.g., gainful employment). Finally,
corporate training buyers have attempted to quantify the benefits derived based on
potential skills improvement and other factors when justifying the purchases of their
products.

Growth of blended learning. This term often applies to the marriage of classroombased and online-learning approaches. We believe classroom-based training and online
learning each have their own merits and limitations. In our view, a blended approach can
cater to the increasing student demand for greater flexibility. We have seen blended
learning approaches become well accepted in the postsecondary and corporate training
areas and it is gaining traction in the K-12 sector, in our view.

Greater use of technology. While the use of technology is somewhat commonplace

throughout the entire education landscape, we believe the implementation of new


technologies will continue to have a substantial impact on the industry. Education, in
particular the K-12 sector, is notoriously a follower (as opposed to a trailblazer) when it comes
to using technology. Yet given the size of this industry and its issues, we believe sizeable
opportunities await.

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Intersection of various sectors. Although we believe each sector within the education
industry should be viewed on its own merits, we have seen selective instances where
different sectors merge. This could be another growth driver for the industry overall.
Examples include childcare/K-12 (e.g., childcare providers extending their programs
through early elementary school), K-12/postsecondary (e.g., pre-college test preparation
companies providing services to help K-12 schools acclimate to the post-NCLB
environment), postsecondary/corporate (e.g., the increasing focus on working-adult
students and the growth of specialized corporate universities), and childcare/corporate
training (e.g., childcare facilities catering to adult education programs in the evenings to
maximize facility usage).

Financial Group

16

September 2013

Education and Training

BMO Capital Markets

Risks
We have identified specific risks that we believe are inherent to each education sector within
the appropriate sections of this report. However, certain key risks apply to most sectors:
Regulatory risks. In our opinion, government regulation is by far the biggest risk to investing

in education companies, particularly those serving the K-12 and postsecondary markets.
Although for-profit companies have expanded their penetration of this industry, the public
sector still dominates, whether by providing competitive services and/or potential funding.
Companies generating a significant component of their revenues from the public sector could
be affected by decisions that may be based more on politics or other issues than on business
fundamentals. The gainful employment regulation is a perfect example of that, in our view.
Economic cyclicality. The past two economic cycles have revealed the benefits, and more

importantly, the disadvantages of economic cyclicality to the education industry, in our


opinion. For example, during recent recessions, postsecondary providers experienced
accelerated enrollment growth, as a weak job market provided fewer options to graduating
high school students and a greater numbers of older students went back to school to enhance
their skills. Conversely, providers to both the K-12 and corporate sectors saw revenues tumble
as part of funding shortages and broader cost-cutting efforts. These roles seemed to have
reversed for the most part (albeit with a bit of a delay) in the current economic recovery.
Aggressive new entrants. We believe the increased focus on the for-profit education sector
has transformed what was once a sleepy industry into one where competition has intensified.
In addition to new pure-play entries in virtually every sector, competition has increased from
traditional providers that expanded their reach (e.g., traditional universities growing their
online and continuing education programs, publishing companies broadening their corporate
training exposure), as well as more formidable privately held entities funded by private equity
firms and the like. Many of these so-called edruptors could have sizeable impacts in the
industry, in our view.
Not-for-profit competitors. We caution investors that, in certain sectors, not-for-profits have
become tougher adversaries. This is becoming even more apparent in the postsecondary school
market, in our view, where budgetary constraints and the rise of third-party funded enablers
and MOOCs (Massive Open Online Courses) have led to what we believe is a tipping of
traditional schools entering the working adult and online sectors.
Headline risks. Throughout much of its history, for-profit postsecondary providers have

faced negative headlines unrelated to operating fundamentals, specifically the rise of


allegations of impropriety in areas such as recruiting and disclosure. This, along with the
filing of lawsuits, had adversely affected the stock performance of most companies in this
sector as virtually all have been tainted by association. Similar headline risks have affected
some in the for-profit K-12 school sector (e.g.., K12).

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Financial Group

17

September 2013

Education and Training

BMO Capital Markets

Impact of performance of comparable stocks. The stocks of education companies within a


specific sub-sector tend to move together. As a result, negative newswhether external or
operationalrelating to one company could have a detrimental effect on the share prices of
others. Until investors truly segment the industrys innovators from other publicly held
competitors, this unwarranted negative association may continue.
Access to capital markets. An influx of private capital fueled much of the early growth in

the education industry. Earlier this decade, as these investors rationalized their current
holdings, they were somewhat reluctant to inject fresh capital into the space. Although there
has been an inflow of fresh capital in certain components of the industry (e.g., ed-tech), the
current regulatory uncertainly has stymied that in others (e.g.., postsecondary schools). Lack
of liquidity had also impacted the student loan market underlying the postsecondary sector as
the loan securitization markets dried up.
In the remainder of this report, we analyze in detail the four major sectors in the education
industry: childcare, K-12, postsecondary, and corporate training. A summary of this analysis
is found in Exhibit 9.

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Financial Group

18

September 2013

Education and Training

BMO Capital Markets

Exhibit 9. Summary of Education Sectors


Total
Spending
2013E

ForProf.
Rev.
2013E

ForProf.
Rev.
2018E

Childcare

$34.0

$20.3

$23.8

3.2% Demographics,
increasing awareness of
early education benefits,
tax incentives and other
positive legislation

Finding and retaining staff, competition, regulations

Potentially latercycle, relatively


little negative impact seen during
last recession

K-12

731.9

23.8

24.7

2.6% Focus on quality improvement and accountability, alternative school


movement

Budgetary constraints, regulations,


need to show academic improvement

Budgetary shortfalls hurt during


recession; should
improve as economic recovery
matures

Postsecondary

494.8

63.9

77.5

4.0% Demographics,
increasing demand for
skilled workers, proven
earnings premium,
continued influx of older
students, greater acceptance of online education

Regulatory, increasing competition (traditional universities,


online enablers,
MOOCs), economic
expansion

Somewhat countercyclical (enrollment and tuition


levels historically
increase during
and after a downturn)

57.5

25.4

31.9

4.7% Potentially tightening


labor market, an
accelerated pace of technological improvements,
need to remain competitive in an increasingly
global economy

Economic cyclicality,
shift from instructorled to e-learning,
increasing competition from other sectors (i.e., postsecondary)

Potentially latercycle recovery, although apparently


more discretionary
than previously
thought

$1,318.2

$133.3

$160.3

($ Billions)

Corporate
Training

Total

CAGR
20132018E Key Growth Drivers

Risks

Effect of
Economic
Business Cycles

3.7%

Note: For-profit revenues may differ somewhat from the segments for-profit projections within the remainder of this report as they may
exclude certain categories. Source: BMO Capital Markets estimates, US Department of Education National Center for Education Statistics,
Eduventures, Gartner, Training Magazine and Veronis Suhler Stevenson.

A member of BMO

Financial Group

19

September 2013

Early Childcare

BMO Capital Markets

Early Childcare: A Small but Steady Market


While an improving economy and increased public awareness bode well for the childcare industry, we are aware of only one publicly traded company in this segment in the US, Bright
Horizons Family Solutions (BFAM), which returned to the public markets in February 2013
after being taken private in a $1.3 billion deal in 2008.
While the Great Recession had an adverse impact on supply/demand and funding levels for
early child care, and the declining birth rate poses a longer-term headwind, we believe several
other industry growth drivers for childcare providers (which we outline below) remain intact.
However, we caution investors this is a highly fragmented industry where few companies
have been able to achieve significant scale.
Center-based
childcare has
gained share
since 1997,

According to childstats.gov, the bulk of child care for children with working mothers is provided by a relative. However, since 1997 center-based care has expanded its share from 20.4%
to 24.1% in 2011, although it had remained relatively stable since the peak of 24.3% in 2002
(see Exhibit 10). We will focus this section of our report on center-based care and the like.

though most of it
early in that
period

Exhibit 10. Primary Childcare Arrangements for Children 0-4 With


Employed Mothers (1997-2011)
Relative care:
Mother care
Father care
Grandparent care
Other relative care
Subtotal
Other nonrelative care
Center-based care
Other

1997

1999

2002

2005

2010

2011

3.2%
17.7%
17.5%
7.4%
45.8%
20.2%
20.4%
13.7%

3.0%
17.1%
19.7%
8.0%
47.8%
18.8%
21.0%
12.4%

3.2%
17.5%
18.6%
6.2%
45.5%
17.2%
24.3%
13.0%

4.4%
17.3%
19.6%
6.6%
47.9%
16.0%
23.8%
12.0%

4.4%
18.6%
19.4%
5.8%
48.2%
13.5%
23.7%
14.1%

3.6%
19.5%
20.5%
5.3%
48.9%
13.1%
24.1%
14.0%

Note: Mother and father care each refer to care while the mother worked. Other relatives include siblings
and other relatives. Center-based care includes day care centers, nursery schools, preschools, and Head
Start programs. Other nonrelative care includes family day care providers, in-home babysitters, and other
nonrelatives providing care in either the childs or providers home. Source: www.childstats.gov.

According to Private Enterprise and Public Education, published in 2013, researcher Todd
Grindal estimates that about half the children under the age of five in the US that regularly attend childcare do so in non-public (i.e., private) programs.
Limited and
conflicting reports

Information about the size of the current childcare market is limited. Some of the estimates
include:

re: market size

A July 2013 report by Ibis World estimated the US childcare industry will generate $47
billion in revenues in 2013, having grown at a 1.4% CAGR from 2008.

A February 2012 report by First Research found the roughly 53,000 commercial child
care facilities in the US generated roughly $20 billion in the US, with nonprofit organizations generating $13 billion, for a combined market with annual revenues of about $33
billion.

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20

September 2013

Early Childcare

BMO Capital Markets

According to the Pew Center on the States (as provided by BFAM), the US spent approximately $43 billion on licensed group child care in 2007.

For our addressable market estimate, we use data from the US Census Bureau that the Child
Day Care Services industry (NAICS 6244) generated roughly $33.8 billion in revenues in
2012. Then we take 60% of this (which is the amount of spending in this category generated
by taxable organizations, according to the Census Bureau) to arrive at roughly $19.9 billion in
revenues in 2012.
Projected 3.2%
CAGR through
2018

We forecast steady growth over the next few years, driven primarily by more two-workingparent families, wage inflation which should drive continued tuition increases and the
growing efforts of legislators to fund these programs. While the population of children under
age 5 has been on a down-cycle in recent years, we believe this could be offset by higher
market penetration rates. Using the Census Bureau estimate as our base for market size, we
forecast for-profit childcare expenditures to grow by roughly 3.2% annually, reaching nearly
$24 billion in 2018 (see Exhibit 11).

Exhibit 11. For-Profit Childcare Market (2007-2018E)


For-profit chid care revenues

4%

y/y change

20

3%

15
2%
10

y/y % change

Revenues ($ in bil.)

$25

1%

5
0

0%
2007

2008

2009

2010

2011

2012 2013E 2014E 2015E 2016E 2017E 2018E

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and US Census Bureau

Child care centers


make up 75% of
capacity

A member of BMO

The early childcare market is highly fragmented and includes care based in homes and housed
by community organizations (e.g., churches, synagogues, YMCAs), as well as those funded
by state and local governments. According to the 2008 Child Care Licensing Study released in
May 2010 (latest available) by the National Association for Regulatory Administration
(NARA), the bulk of licensed childcare programs are home-based businesses, which represented
about 60% of the roughly 330,000 licensed childcare providers in 2008 (see Exhibit 12). However, the vast majority of capacity is provided by center-based programs, which are typically
much larger than home-based businesses. Center-based represented 75% of the total capacity in
2008, down slightly from 78% in 2007.

Financial Group

21

September 2013

Early Childcare

BMO Capital Markets

Exhibit 12. Childcare Providers by Type (2005, 2007 and 2008)


No. of Programs
2005
2007

Type
Childcare Centers
Family Childcare Homes
Other Licensed Programs
Total
As % of Total
Childcare Centers
Family Childcare Homes
Other Licensed Programs

2008

2005

Capacity
2007

2008

Avg. Capacity
2005
2007

2008

105,444
213,966
16,110

110,252
197,294
17,743

107,199
199,216
23,467

6,634,247
1,921,639
449,001

7,371,751
1,697,014
434,946

7,435,774
1,775,494
663,568

62.9
9.0
27.9

66.9
8.6
24.5

69.4
8.9
28.3

335,520

325,289

329,882

9,004,887

9,503,711

9,874,836

26.8

29.2

29.9

6.3%
-4.2%
-12.0%
8.9%

3.7%
3.6%
15.4%
2.5%

31.4%
63.8%
4.8%

33.9%
60.7%
5.5%

30.0%
60.4%
7.1%

73.7%
21.3%
5.0%

77.6%
17.9%
4.6%

75.4%
18.0%
6.7%

100.0%

100.0%

90.4%

100.0%

100.0%

93.4%

4.6%
-7.8%
10.1%
-3.0%

-2.8%
1.0%
32.3%
1.4%

11.1%
-11.7%
-3.1%
5.5%

0.9%
4.6%
52.6%
3.9%

% Change
Childcare Centers
Family Childcare Homes
Other Licensed Programs

N.A. Not Available. Source: BMO Capital Markets and National Association for Regulatory Administrations and National Child Care
Information and Technical Assistance Centers 2005, 2007 and 2008 Childcare Licensing Study.

We believe most business and investment opportunities lie in center-based care, which can
take many different forms, including preschools (nurseries), workplace centers (located onsite
at the company), lease-model centers (located in a real estate developers office building),
back-up centers (a variety of on-site and off-site back-up care programs), and family daycare
facilities (located in someones home or center).
Pct. of children
under five
attending daycare
at all-time high

In its latest report on the childcare population, the US Census Bureau reported that in spring
2011 (most recent) the population of children under five years old with working mothers was
10.9 million, of which 6.9 million (roughly 63%) were in some kind of regular daycare arrangement (excluding family or relative care), with 2.3 million of those attending. daycare
centers or about 21% (see Exhibit 13). While this penetration rate can be volatile, this rate
was flat since spring 2010, indicating some potential sustainability that may help offset the
overall decline in the under-five population.

11,000

With employed mother


% in day care center

25%

10,000

20%

9,000
8,000

15%

7,000

'9
5
Sp
rin
g
'9
7
Sp
rin
g
'8
9
W
in
te
r'
02
Sp
rin
g
'0
Su
5
m
m
er
'0
6
Sp
rin
g
'1
0
Sp
rin
g
'1
1

'9
3
Fa
ll

Fa
ll

'9
1
ll
Fa

Fa
ll

W
in

10%
'9
0

6,000

In Day Care Center (%)

12,000

te
r'
85
Fa
ll
'8
8

Total Children Under 5 With


Employed Mothers

Exhibit 13. Working Mothers with Children Under Five Years Old
in Daycare Centers (1985-2011)

Source: BMO Capital Markets estimates and US Census Bureaus Report Whos Minding the Kids (various
editions).

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22

September 2013

Early Childcare

BMO Capital Markets

Growth Drivers
While the sectors growth rate may be somewhat muted, among the drivers for the early childcare market are:

Number of working mothers with young children

Demographics (although this has abated in recent years)

Increase in families with two working parents

Growing recognition of the importance of early education

Positive legislation, tax incentives, and budgets

Corporations recognizing the work benefits of childcare services

Mothers with young children in labor force. Women have increased as a percentage of the

overall civilian labor force from 38.1% in 1970 to 46.9% in 2012 (see Exhibit 14). However, the
Bureau of Labor Statistics estimates this percentage will increase only slightly to 47% by 2020.

Exhibit 14. Civilian Labor Force (1970-2012)


Percent of Civilian Labor Force
(Age 16 and Over)

65%
60%
55%

Men

50%

Women
45%
40%

10

08

06

12
20

20

20

02

00

98

96

94

04

20

20

20

20

19

19

90

88

86

84

82

92

19

19

19

19

19

19

78

76

74

80

19

19

19

19

19

19

19

70

72

35%

Source: BMO Capital Markets and US Census Bureau.

Women with
children under six
have higher labor
participation rates
than the overall

Women with young children have significantly increased their presence in the workforce. In
2012 (latest data available), the labor force participation rate (either working or looking for
work) for women with children under age six was 64.8% versus 39% in 1975 (although
slightly down from the 65% peak in 1997). Nevertheless, this rate exceeds the 2012 participation rate for all women of 57.7%; see Exhibit 15).

female population

80%
75%
70%
65%
60%
55%
50%
45%
40%
35%

Men

Women with children


under 6

Women

19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12

Labor Force Participation Rate


(Age 16 and Over)

Exhibit 15. Labor Force Participation Rates (1970-2012)

Source: BMO Capital Markets and US Census Bureau.

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Financial Group

23

September 2013

Early Childcare

Decreasing
population of
children under
age five

BMO Capital Markets

Demographics on down-cycle. According to Census Bureau data, the population of children under five has been on a downward cycle in recent years, attributed to the Great Recession
and slower immigration driving a lower fertility rate. According the data, this population has declined slightly in each of the last four years through July 1, 2012 (latest available; see Exhibit
16). While we believe this creates some headwinds to growth in the childcare industry, we note
the absolute value of this decline has been relatively small, about 270,000 children since 2008
a drop that may partially be offset by the increasing penetration of center-based care in recent
years.

Exhibit 16. US Population of Children Under Age Five (2000-2012)


Children Under 5

% Change

20.5

1.2%
0.8%
0.6%

19.5

0.4%
0.2%

19.0

0.0%
-0.2%

18.5

-0.4%
-0.6%

18.0
2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

-0.8%

Source: US Census Bureau and BMO Capital Markets

More dual-income

Increase in percentage of dual-income families. While the 1990s saw a sizeable increase in

families could

the number of dual-income couples with children under age six, since then, the trend appears to
be a bit more cyclical, i.e., decreasing during a recession and increasing somewhat thereafter as
both spouses eventually go back to the workforce. As shown in Exhibit 17, there were about 5.6
million such families in 2012, up from 2011 levels. This amounted to about 56% of all dualincome couples the highest since 2008. This cyclical trend could spur demand for more childcare services.

drive childcare
demand

Dual Income Couples w/Children Under 6

% of All Dual Income Couples

60%
58%

6.5

56%
6.0
54%
5.5

52%

12
20

10

11
20

20

08

07

09
20

20

20

05

04

06
20

20

20

02

01

00

03
20

20

20

99

20

19

97

96

98
19

19

19

19

95

50%
94

5.0

% of All Dual Income Couples

7.0

19

Dual Income Couples with


Children Under 6 (mil.)

Exhibit 17. Dual-Income Couples with Children Under Six (19942012)

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and US Census Bureau.

A member of BMO

Financial Group

24

September 2013

Annual % Change

Population (Millions)

1.0%

20.0

Early Childcare

BMO Capital Markets

Recognition of importance of early education. Several studies support the benefits of


early childhood education. A study issued by Center for Early Care and Education (a collaboration of the Schuyler Center for Analysis and Advocacy and Child Care, Inc.) concluded that
quality early education increases the likelihood of children obtaining higher education at
lower delinquency rates and generating greater lifetime earnings. This results in higher tax
collections and more productive time for parents.
We have summarized similar studies in Exhibit 18.

Exhibit 18. Summary of Research Showing Benefits of Pre-K Programs


Date Source of Research
2012 Council for Exceptional Children;
(Sept.) Department of Psychology,
Georgetown University

Findings
Findings are interpreted as indicating that high-quality state pre-K
programs can serve as effective early intervention programs for children
with special needs.

2011 Journal of Psychological Science; Elliot Preschool may reduce inequalities in early academic achievement by
(Sept.) Tucker-Drob
providing children from disadvantaged families with higher-quality learning
environments than they would otherwise receive.
2011 Journal of the American Medical
(June) Association

Found that preschool attendance was connected to a person's success in


life 25 years later.

2007 Economic Policy Institute


(May)

The benefits of a voluntary, high-quality, publicly funded targeted pre-K


education program serving the poorest 25% of 3 and 4 year-old children
would exceed the cost by a ratio of 12:1 in 2050.

2007 Abercedarian Project

Tracked students in 1970s and 1980s and found children who received
high-quality care and education programs from infancy through age 5
fared better on several quantitative and qualitative metrics when compared
to a control group that did not receive similar benefits.

2006 W.E. Upjohn Institute for Employment


(May) Research

Every $1 invested in universal preschool would generate a present value


of $3.79 through increased employment, earnings, taxes and other
benefits.

2005 National Institute for Early Education


(March) Research

2005 HighScope Perry Preschool Study

2004 Cornell University

2003 Federal Reserve Bank of Minneapolis

2002 Frank Porter Graham Child


Development Center

A quality prekindergarten experience can have long-term positive effects


on childrens lives. Many of these benefits, including impacts on
participants own health, decisions about marriage and family, and
financial stability.
Tracked low-income African-American 3 and 4 year-olds over 40 years,
and found those receiving early intervention earned more and had fewer
arrests. This resulted in a return of $17 for every dollar of investment in
such programs.
Each $1 spent in the child care sector has a broader statewide economic
impact of $2 and each job created in the child care sector creates 1.5 jobs
statewide. The output multiplier for childcare exceeds agriculture,
manufacturing and services sectors as childcare dollars are spent locally
and circulate longer in the local economy.
The annual rate of return for investments in quality early childhood
development programs for low-income youth was 12.5%.
High-quality childcare programs have considerable long-term effects on
such areas as school achievement, cognitive skills, language ability, math
skills, grade retention, and social adjustment.

Source: BMO Capital Markets

Results of the Chicago, High/Scope and North Carolina studies were aggregated in a May
2009 report by the Bay Area Council and are contained in Exhibit 19, which compares the
outcomes of students who took part in the studies relative to their respective control groups.

A member of BMO

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25

September 2013

Early Childcare

BMO Capital Markets

Exhibit 19. Chicago, High/Scope and Carolina Childcare Studies;


Results of Treatment Group vs. Control Group
Chicago
Child-Parent
Centers

Outcome Variable
Education
Special Education Placement
Grade Retention
High School Completion
College Enrollment

Carolina
High/Scope
Perry Abecedarian
Project
Preschool

-41%
-40%
+20%
+30%

-26%
-13%
+44%
N.A.

-23%
-31%
+16%
+23%

-33%
N.A.

-39%
-46%

N.A.
N.A.

$24,823
N.A.
8,763
N.A.

$57,403
N.A.
16,019
N.A.

Social Services
Incidence of Child Abuse & Neglect
Reliance on Welfare

-5%
N.A.

N.A.
-17%

N.A.
-50%

Health
Smoking Reductin

N.A.

-24%

-16%

Crime
Arrest by Age 19
Incarceration of Children
Income and Tax Revenue
Increased Lifetime earnings
Increased Maternal Earnings
Increased Tax Revenue
Intergenerational Earnings

Other
Child Care Savings

$2,005

$1,031

$40,416
74,012
35,506
6,162

$29,735
st

N.A. Not available. Source: Bay Area Council, May 2009: Keys to Economic Success in the 21 Century. Note: Monetary figures reflect 2005 price-level.

Demand for state-

Positive legislation and government involvement. We believe this research, along with

funded programs

lobbying efforts, continues to raise political awareness and improve voter attitudes toward the
benefits of early education. In a June 2008 survey conducted by Peter D. Hart Research Associates, about 70% of registered voters wanted state and local government to make voluntary
pre-kindergarten (pre-K) available to all children as a way to help improve K-12 education.

is high, but
funding remains
challenged

Many politicians, including President Obama, have been very vocal in support of early education and/or universal pre-K. According to the National Institute for Early Education Research (NIEER)s The State of Preschool 2012, 40 states had funded pre-kindergarten initiatives, enrolling over 1.3 million students in the 2011-2012 school year. These programs
enrolled roughly 28% of the nations four-year-olds (up from 14% in 2002), and 4% of threeyear-olds (up from 3% in 2002). States with the highest state-funded pre-K population include
Florida, (79% of 4-year-olds) Oklahoma (74%) and Vermont (65%).
However, while total enrollment in these programs continues to slowly grow, funding levels
are decreasing.

A member of BMO

NIEER found that total state preschool spending of $5.1 billion in FY2012 was down by
about $400 million from FY2011 the third straight year of declines and one of the largest declines ever partially owing to the withdraw of $127 million in stimulus funding
FY2011.

Financial Group

26

September 2013

Early Childcare

BMO Capital Markets

According to NIEER, pre-K spending per child decreased 7.5% in 2012 to $3,841, when
measured in 2009 dollars (see Exhibit 20). This is well below levels of the early 2000s
and reflects the nearly $400 million decrease in pre-K funding nationally in 2012 (this
follows a $60 million decrease in 2011).

Exhibit 20. Average State Spending per Child for Childcare (in
2009 dollars)
Amount

y/y % change

8%
4%

4,500

0%
4,000
-4%
3,500

y/y % change

Avg. Per Child (2009 $)

$5,000

-8%

3,000

-12%
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Note: Shaded area represents recessionary period. Source: NIEER and BMO Capital Markets

Lack of funding has clearly had an impact on program quality. In 2012, NIEER rated only 15
states as having sufficient funding to meet its 10 benchmarks for quality standards accounting for about 20% of all children enrolled in state-funded programs. While this is up from 12
states in 2011, we view it as a relatively poor result.
Federal pre-K
funding programs

In his 2013 State of the Union address, President Obama announced a new preschool initiative
to be funded through state and federal partnerships. The plan would work by giving states incentives to broaden and expand preschool and kindergarten options to receive federal funding.
The president also plans to invest $1.4 billion in Early Head Start programs. However, apart
from a $1.3 billion budget request for Preschool for All, there has been little movement on
this proposal since it was announced.
Nevertheless, the federal government continues to allocate funding for childcare related programs through several programs (see Exhibit 21). We note annual budget requests are often
not funded or funded at lower levels.

A member of BMO

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27

September 2013

Early Childcare

BMO Capital Markets

Exhibit 21. Overview of Key Federal and State Funding Areas in Childcare
FY2012
Appropriation

FY2013
FY2013
Request Appropriation

FY2014
Request

Department

Program

Details

Federal (Dept. of
Education)

Preschool Development
Grants

Provides competitive grants to states to implement preschool


programs.

Federal (Dept. of
Education)

Preschool for all

To implement universal preschool.

Federal (Dept. of
Education)

Effective Teaching and


Learning for Literacy

Provide competitive grants to states to improve literacy


instruction, especially in high-need schools for children and
youth from preschool through grade 12

Federal (Dept. of
Education)

Grants to States

Helps States pay the additional costs of providing special


education and related services to children with disabilities
aged 3 through 21 years.

$11.6 billion

$11.6 billion

$11.6 billion

$11.6 billion

Federal (Dept. of
Education)

Preschool Grants for


Children with Disabilities

The Preschool Grants Program, authorized under IDEA


provide grants to states to serve young children with
disabilities, ages 3-5.

$373 million

$373 million

$373 million

$373 million

$8 billion

$8.1 billion

$8.1 billion

$9.6 billion

$750 million

$1.3 billion
$187 million

Federal (Dept. of
Head Start
Health and Human Early Headstart
Services)

Head Start and Early Head Start erve children from birth to
age 5

Federal (Dept. of
Health and Human
Services)
Federal (Dept. of
Health and Human
Services)

Childcare Entitlement to
the States (CCES)

Provides child care support for working parents

$2.9 billion

$2.9 billion

$2.9 billion

$3.4 billion

Child Care and


Development Block Grant
(CCDBG)

Provides monthly direct child care assistance to children of


low-income families.

$2.3 billion

$2.6 billion

$2.3 billion

$2.5 billion

Federal (Dept. of
Temporary Assistance for
Health and Human Needy Families (TANF)
Services)

TANF provides grants to assist needy families with children

$16.7 billion

$16.7 billion

$16.7 billion

$17.1 billion

Federal (Dept. of
Education)

Grants for Infants and


Families

Assists states in operating a statewide program of early


intervention services for infants and toddlers with disabilities

$443 million

$463 million

$442 million

$463 million

Federal (Dept. of
Education)

Promise Neighborhoods

These programs would be designed to combat the effects of


poverty and improve education and life outcomes

$60 million

$100 million

$60 million

$300 million

Provides a broad range of social services, including childcare,


child welfare, and the like.

$1.8 billion

$1.8 billion

$1.7 billion

$1.7 billion

Federal (Dept. of
Social Services Block
Health and Human Grant (SSBG)
Services)

N.A. Not Available. Source: BMO Capital Markets, National Child Care Information and Technical Assistance Center (NCCIC), US
Department of Health and Human Services, and US Department of Education.

States very active


in childcare
legislation

Consumer tax
incentives

A member of BMO

While federal action on childcare may be slow, we believe states are very active in passing
childcare-related legislation. According to the National Conference of State Legislatures
2012 report (latest available), states enacted 103 bills in 2012 related to childcare and early
education.
To offset some funding issues, certain tax incentives are available to parents utilizing childcare programs, including the following:

Section 21 of the Internal Revenue Code provides a federal income tax credit (Child and
Dependent Care Credit) ranging from 20% to 35% (increased in 2003) of certain childcare expenses for qualifying individuals.

The Economic Growth and Tax Relief Reconciliation Act of 2001 created a federal employer tax credit for certain childcare expenses beginning in 2002. Employers can receive
a credit of 25% of their spending on the construction or rehabilitation of a childcare facility or on contracts with a third-party childcare facility to provide childcare services to
employees.

Financial Group

28

September 2013

Early Childcare

BMO Capital Markets

In addition, we believe there are numerous grant sources available to those in the pre-K industry. One such is the Teacher Quality Enhancement Grant under Title II of the Higher Education Act (enacted in August 2008). This provides funding for early educator preparation programs.
Employers recognize the need. While the latest poll we could find on employer views on preschool education was from 2005, we believe little has happened in the intervening years that
would result in largely different results were this poll conducted today. The Zogby poll of Fortune
1000 companies measured the views of American business leaders on pre-K and the advantages
to the economy. According to the study, 88% of US business leaders agree that effective childhood preschool programs are important for the US to remain competitive (see Exhibit 22).

Exhibit 22. Zogby Poll Views on Preschool Education


Select questions from poll
Children who receive pre-kindergarten education are more likely to start
school better prepared
Children who begin school better prepared are more likely to perform better
throughout their educational experience
Investments in effective preschool programs for children are important if the
U.S. is to remain competitive in the global economy.
Investments in effective preschool programs for children are important for
the long-term success of the U.S. economy.
Voluntary pre-kindergarten for all children would improve the workforce.

Agree
94%

Disagree
4%

Not Sure
2%

92%

8%

1%

88%

10%

2%

87%

10%

3%

86%

11%

3%

Investments in effective preschool programs for children are important to


remain competitive in the global economy
Public funding of voluntary pre-K for all children would improve Americas
workforce.
Investments in effective preschool programs for children are important for
the long-term success of the U.S. economy
Pre-kindergarten made available to all children would improve the workforce

83%

14%

3%

81%

16%

3%

80%

17%

3%

75%

19%

7%

75%

20%

6%

68%
62%

30%
28%

2%
10%

Public funding that enabled all children to attend pre-K if their parents
wanted it would improve Americas workforce
More highly educated workers are better workers
Workers who receive early childhood education like pre-kindergarten
programs will be better workers

Source: American Business Leaders Views on Publicly Funded Pre-Kindergarten and the Advantages to
the Economy, (December 2005) by Zogby International for the Committee for Economic Development

Recession

Impact of recession on child care demand. We believe economic cycles can affect child care

reduces

demand. On the one hand, demand may increase as both parents have to return to work. On the
other hand, demand may decline as parents lose jobs or can no longer afford child care benefits.
We believe the availability of publicly funded childcare centers generally decreases during recessions, as funding sources are cut or reduced. For example, an April 2009 survey (most recent
available) conducted by Child Care Aware of America found the following results over the period
from June to December 2008 (the midst of the Great Recession):

availability

A member of BMO

Of participating Child Care Resource and Referral Agencies (CCR&Rs) representing 40


states, 74% said the number of families falling behind or unable to make childcare payments
increased between June and December 2008.

Half of agencies said that child care centers in their communities had closed in that sixmonth period, losing an average of six centers per community, or about 327 spaces.

Financial Group

29

September 2013

Early Childcare

BMO Capital Markets

High
unemployment
reduces demand

Among child care centers still open, 65% of agencies reported an increase in vacancies during that time. In addition, 48% said centers were closing classrooms while 41% said centers
were laying off staff.

While it is difficult to gauge the impact of recessions on company-sponsored child care, we believe that high unemployment may negatively affect demand and utilization levels. As shown in
Exhibit 23, Bright Horizons (BFAM) saw a material decrease in utilization immediately following the end of the Great Recession the trough of which coincided with peak unemployment
rates during the recession.

Exhibit 23. Bright Horizons (BFAM) Cyclical Utilization and


Unemployment Rates (2007-2012)
79.0%

80%

12%

78% Historical Utilization

78.0%
Center Utilization Rate

10%
76%
74.0%
74%

8%
71.5%

72%

6%

69.5%

70%
68.0%
68%

4%

66%
2%

Avg. Annual Unemp. Rate

78%

64%
0%

62%
2007

2008

2009

2010

2011

LTM 2Q12

Note: Shaded area is recessionary period. LTM is through 2Q12. Source: Company reports and BMO
Capital Markets.

Largest Childcare Providers


The childcare market is extremely fragmented, as it includes many not-for-profit providers. According to data provided by Child Care Aware of America (formerly NACCRRA), roughly 60%
of the licensed childcare centers in the US in 2010 were operated by family-run businesses. Exhibit 24 contains the top US for-profit childcare providers in terms of capacity and number of
centers. As shown, no single for-profit company has more than a 2.2% market share (when including home-based businesses) or 2.7% (when only measuring center-based business).

A member of BMO

Financial Group

30

September 2013

Early Childcare

BMO Capital Markets

Exhibit 24. Top US For-Profit Childcare Providers (Ranked by Capacity


Rank Company
Child Care Providers:
1 KinderCare/Knowledge Universe
2 Learning Care Group
3 Bright Horizons Family Solutions
4 Nobel Learning Communities, Inc.
5 Childcare Network
6 Phoenix Children's Academy
7 The Sunshine House
8 Minnieland
9 Children of America
10 New Horizon Academy
11 CCLC, Inc.
12 Brightside Academy
13 Children's Choice Learning Centers
14 Rainbow Child Care
15 Creme de la Creme
16 Sunrise Preschools
17 Children's Friend, Inc.
18 Action Day Nurseries, Inc./Primary Plus, Inc.
19 Hildebrandt Learning Centers, LLC
20 Country Home Learning Center
21 Xplor
22 Accelero Learning
23 Stepping Stone School
24 Youthland Academy
25 Rogy's Learning Place
26 Pinecrest Schools
27 Edleun (Education Learning Universe)
28 Celebree Learning Center
29 The Malvern School
30 StarChild Academy
31 Next Generation Children's Centers
32 The Children's Workshop
33 Valley Child Care/Cacuts Preschools*
34 Doodle Bugs! Children's Center
35 Creative Playrooms, Inc.
36 Kid's Country
37 The Gardner Schools
38 Little Sprouts LLC
39 Bobbie Noonan's Child Care
40 Kids Kare Schools
41 Center Management Associates
42 U-Gro Learning Centers
43 Children's Discovery Center, Inc.
44 EduKids Inc.
45 Creative Child Care, Inc.
46 Junior Academy Children's Centers
47 K.I.D.S. Day Care
48 Gretchen's House
49 The Compass Schools
50 O2B Kids
1
2
3
4
5
6
7
8
9
10
11

National Child Care Franchising Organizations:


Goddard Systems, Inc. (The Goddard School)*
Primrose Schools Franchising Company
Kids R Kids International
The Learning Experience
Kiddie Academy
Discovery Point Franchising Inc
Children's Lighthouse Franchising Company
Creatie World School
Rainbow Station
Legacy Academy*
KidsPark

Centers

Mkt. Share as % of
Center-Based
Capacity Centers

Headquarters

Ownership

Portland, OR
Novi, MI
Watertown, MA
West Chester, PA
Columbus, GA
Scottsdale, AZ
Greenwood, SC
Woodbridge, VA
Delray Beach, FL
Plymouth, MN
Portland, OR
Pittsburgh, PA
Richardson, TX
Troy, MI
Greenwood Village, CO
Tempe, AZ
Warner Robins, GA
San Jose, CA
Dallas, PA
San Antonio, TX
Arlington, TX
New York, NY
Austin, TX
Cincinnati, OH
East Peoria, IL
Sherman Oaks, CA
Calgary, Alberta, Canada
Forest Hill, MD
Glenn Mills, PA
Apopka, FL
Franklin, MA
Cumberland, RI
Phoenix, AZ
Buffalo, NY
Solon, OH
Snohomish, WA
Brentwood, TN
Lawrence, MA
Frankfort, IL
Fresno, CA
Tarrytown, NY
Harrisburg, PA
Maumee, OH
Buffalo, NY
Richland, OH
Colorado Springs, CO
Westmount, Quebec
Ann Arbor, MI
Glen Allen, VA
Gainesville, FL

Private
Private
BFAM
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private

212,000
145,000
88,000
28,500
25,928
22,500
18,483
15,519
15,300
13,335
12,942
10,735
10,561
9,521
7,000
5,488
4,966
4,750
4,550
4,180
4,016
4,000
3,360
3,080
3,015
3,000
2,802
2,747
2,713
2,441
2,139
2,047
1,990
1,898
1,823
1,786
1,750
1,711
1,700
1,663
1,659
1,506
1,498
1,425
1,352
1,185
1,090
1,048
1,024
966

1,596
950
770
184
176
129
133
125
70
88
106
63
50
71
24
25
37
20
44
10
16
29
18
22
20
9
20
20
20
6
10
19
9
11
7
11
9
17
13
11
12
12
8
13
12
23
13
10
5
6

2.1%
1.5%
0.9%
0.3%
0.3%
0.2%
0.2%
0.2%
0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

0.5%
0.3%
0.2%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

2.9%
2.0%
1.2%
0.4%
0.3%
0.3%
0.2%
0.2%
0.2%
0.2%
0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

1.5%
0.9%
0.7%
0.2%
0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

King of Prussia, PA
Acworth, GA
Duluth, GA
Parsippany, NJ
Abingdon, MD
Duluth, GA
Fort Worth, TX
Bonita Springs, FL
Glen Allen, VA
Sugar Hill, GA
San Jose, CA

Private
Private
Private
Private
Private
Private
Private
Private
Private
Private
Private

55,826
45,664
41,000
18,646
14,600
12,825
8,500
4,700
3,471
2,750
798

382
255
166
111
98
57
34
22
10
11
14

0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

6,242

0.8%
0.6%
0.6%
0.3%
0.2%
0.2%
0.1%
0.1%
0.0%
0.0%
0.0%
12.5%

0.4%
0.2%
0.2%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%

930,472

0.6%
0.5%
0.4%
0.2%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
9.4%

Total

Capacity

Mkt. Share as % of
Total
Capacity Centers

1.9%

5.8%

Notes: All data as of January 1, 2013. Source: Child Care Exchange and BMO Capital Markets.

There are also a large number of not-for-profit childcare providers running multiple centers, although they tend to be relatively smaller than the larger for-profit chains (see Exhibit 25).

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Financial Group

31

September 2013

Early Childcare

BMO Capital Markets

Exhibit 25. Top US Not-For-Profit Childcare Providers (Ranked by Capacity)

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Company
PLASP Child Care Services
Easter Seals
Kama'aina Kids
Sheltering Arms Early Education and Family Svcs.
Kidango, Inc.
Bradford Child Care Services
YMCA of the Fox Cities
Lehigh Valley Children's Centers, Inc.
Red Apple Child Development Center
Federation Early Learning Services
The Campagna Center
Play and Learn Centers
The Guild of St. Agnes
One Hope United
Salem Child Development Center
Day Nursery Association
Seagull Schools Inc.
Encompass early Education & Care, Inc.
Rancho Santiago Community College District
For Kids Only Afterschool
Children's Home/Chambliss Center
Marry Linsmeier Schools, Inc.
Ebenezer Child Care Centers, Inc.
Northwest Child Development Centers, Inc.
KCAA Preschools of Hawaii

Headquarters
Mississauga, Ontario
Chicago, IL
Kailua, HI
Atlanta, GA
Fremont, CA
Bridgeville, PA
Neenah, WI
Allentown, PA
New York, NY
Philadelphia, PA
Alexandria, VA
Fort Washington, PA
Worcester, MA
Lake Villa, IL
Salem, OR
Indianapolis, IN
Kailua, HI
Green Bay, WI
Santa Ana, CC
Salem, MA
Chattanooga, TN
Brookfield, WI
Milwaukee, WI
Winston-Salem, NC
Honolulu, HI

Ownership Capacity Centers


Private
13,113
205
Private
10,107
103
Private
10,000
105
Private
3,338
17
Private
2,750
38
Private
2,300
31
Private
1,500
32
Private
1,445
21
Private
1,391
8
Private
1,307
10
Private
1,215
23
Private
1,213
10
Private
1,200
6
Private
1,150
10
Private
1,115
22
Private
1,017
7
Private
920
7
Private
801
7
Private
800
6
Private
768
17
Private
716
6
Private
707
14
Private
700
10
Private
659
6
Private
650
7

Mkt. Share as % of
Mkt. Share as % of
Total
Center-Based
Capacity Centers Capacity Centers
0.1%
0.1%
0.2%
0.2%
0.1%
0.0%
0.1%
0.1%
0.1%
0.0%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

Notes: All data as of July 1, 2011. Source: Child Care Exchange and BMO Capital Markets.

Worksite Childcare
Worksite childcare (i.e., employer-sponsored) consists of onsite childcare centers located
within a corporate office building or complex and typically managed by external providers.
There are roughly 8,000 employer-supported childcare centers in the country (per Sandra Burud
of Burud & Associates as cited by workfamily.com).
Recession and
weak economy
likely had adverse
impact

Employersponsored
childcare:
offered by roughly
4% of companies

A member of BMO

Although data regarding the size of this segment are limited, we believe roughly 5,000 employer-sponsored childcare centers can generate about $5 billion in annual revenues (average of
$1 million per center). According to Childcare Exchange, the employer-sponsored childcare
market grew at more than a 10% annual rate for most of the 1990s but has slowed in recent
years to the low- to mid-single-digit level, although it is likely the market declined during the
Great Recession.
Estimates on the number of companies offering worksite childcare vary. According to Work
& Family Connection, 9% of employers said they offer onsite childcare, while 11% of employees said they had access to onsite childcare. According to the Society for Human Resource
Managements (SHRM) 2013 Benefits Survey Report, only 4% of companies provided some
type of childcare subsidies for their employees (see Exhibit 26).

Financial Group

32

September 2013

Early Childcare

BMO Capital Markets

Exhibit 26. Percentage of Employers Providing Access to Child


Care Centers (1997-2013)
Subsidized child care center (on-site or near-site)
7%

6%

6%

6%

Nonsubsidized child care center

6%

5%

6%

6%

Consortium child care center

6%

5%

5%

4%

4%

3%

4%

4%

3%

4%

4%

4%

3%

3%
2%

1%

1%

1%

1%

1%

1%

1%
0%
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Note: Shaded areas represent recessionary periods. Source: Society for Human Resource Management
and BMO Capital Markets.

We believe the worksite childcare market is less fragmented than the industry as a whole given
fewer companies provide this service. The largest by far is Bright Horizons (BFAM), which operated 585 centers as of 2011 (see Exhibit 27).

Exhibit 27. Top Five US Child Care Providers by No. of Centers


(2011)
Top 5 For-Profit US Child Care Providers
Knowledge Learning (Kindercare)
Learning Care Group
Bright Horizons
Nobel Learning
Childcare Network

1700
1000
585
183
168

Top 5 US Employer-Sponsor Providers


Bright Horizons
Knowledge Learning (CCLC)
Children's Choice
Hildebrant Learning Centers
EduKids

585
107
47
41
12

Source: Company reports and BMO Capital Markets.

More expensive
than other forms

Employer-sponsored childcare centers tend to be more expensive than other providers although employers may provide a subsidy. Exhibit 28 compares BFAMs monthly average tuition to national averages as provided by Child Care Aware of America.

Exhibit 28. Monthly Childcare Tuition; Bright Horizons vs.


National Average
Infants
$1,400

BFAM average tuition (2012)


National average tuition (2011)

$383-$1,248

Toddlers
$1,300

Pre-schoolers
$1,050

Average
$1,250

$326-$972

Source: Company reports, Child Care Aware of America and BMO Capital Markets.

There are typically two distinct models for worksite childcare: 1) the management fee model;
and 2) the sponsor model.
Management fee (cost-plus) model. Under this model, the childcare provider typically re-

ceives a management fee from a corporate sponsor and an operating subsidy to supplement tuition within an agreed-upon budget. The sponsor typically provides the facility, pre-opening and
start-up costs, capital equipment, and facility maintenance. We believe many corporate sponsors
prefer the management fee model as it provides the option to readjust contracts with vendors to
suit their needs and empowers the corporate sponsor with a greater degree of control in terms of
budgeting, spending, and operations. The provider is responsible for maintaining quality stan-

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Financial Group

33

September 2013

Early Childcare

BMO Capital Markets

dards, recruiting center directors and faculty, implementing curricula and programs and interacting with parents. In general, contracts range in length from one to five years.
Profit and loss model. In this model, the childcare provider designs and operates a worksite

childcare center in exchange for financial consideration from the sponsor. The provider maintains profit-and-loss responsibility and is subject to variability in financial performance driven
by enrollment levels. The sponsorship model is generally classified into two subcategories:

Employer-sponsored (sponsor), where the company provides childcare on a priority


enrollment basis for employees of a single-employer sponsor. However, if the employer
is unable to fill the slots, then the provider can market its services to parents outside the
company.

Lease (consortium) model, where the company provides priority childcare to the employees of multiple employers located within a real estate developers property.

Exhibit 29 compares financial metrics for Bright Horizons under these various model types.

Exhibit 29. Example of Financial Metrics Under Various Childcare


Operating Models (BFAM: 2011)
($m)
Revenue/Center (US)
Revenue/Center (Europe)
Gross Margin
Average ROI
Contract Term
% of total centers

Cost Plus

Profit & Loss

$1,600
$750
15%-20%
100% +
3-5 yr
30%

Single Sponsor Consortium Lease


$1,300
$1,400
$650
$1,100
17%-25%
20%-25%
75% +
25% +
5-10 yr
10-15 yr
30%
40%

Source: Company reports and BMO Capital Markets.

Emerging centerbased models

Skewed toward
larger employers
owing to its costs

Great recruiting
and retention tool

Study reveals
employer
benefits
A member of BMO

Some emerging models include hybrid office space/childcare locations where parents who freelance have access to a shared office-space, which also provides on-site childcare that can be
used during important phone calls or meetings. These companies include Bean Work Play Caf,
Mothersfields and Mothership HackerMoms.
As would be expected, larger employers tend to be more willing to provide sponsored childcare
owing to its costs. According to a 2012 National Study of Employers by the Families and Work
Institute, 18% of large employers (over 1,000 employees) provide childcare at or near the worksite, down from 21% in the 2008 study, but up from 17% in the 2005 study. This compares to
only 5% of small employers (50-99 employees), down from 7% in both prior studies.
Employers sponsor childcare mainly as a recruiting and retention tool for their workforce.
Nearly one-third of Fortunes 2012 list of the 100 Best Companies to Work For provide onsite
employer-sponsored childcare.
We believe onsite childcare is a valuable recruiting tool that also has the potential to improve
employee productivity. A 2002-2003 study by Bright Horizons found the following benefits to
firms with onsite childcare:
Financial Group

34

September 2013

Early Childcare

BMO Capital Markets

60% of center users had been with their organization for more than five years.

The average voluntary turnover for employees who used childcare centers was nearly
50% less than that of non-users, resulting in an aggregate $3.4 million in annual cost savings for the eight organizations (the cost of replacing employees, hiring, and training).

The percentage of top performers who used the centers was nearly 22% more than the
overall workforce population.

Retention among top performers who used the centers was 97%.

25% of the surveyed centers were open for use by grandparents (as an estimated 70% of
people over the age of 45 are planning to work past the age of 65).

Back-Up Care
Back-up centers provide emergency childcare services usually when employees discover that
their regular childcare providers cannot care for their child (this generally occurs when a regular
provider is sick or an existing center is closed). Usage of back-up care tends to be higher when
school is not in session and during holiday periods.
Benefits of back-up care to employers include reducing unscheduled child-related absenteeism
and providing a more cost-effective alternative to high-cost full onsite centers.
Relatively
underpenetrated;
though
percentage
offering declined
after Great
Recession

According to the Families and Work Institutes 2008 National Study of Employers (latest available), only 6% of companies surveyed offer back-up or emergency childcare, versus 9% of
companies that offer regular care at or near the worksite. In addition, according to the SHRM
2013 Benefits Survey, only 4% of firms offered back-up care in 2013 - down from 6% in 2008
and well below the 8% historical average (although this is potentially due to a change in data
definition; see Exhibit 30). We attribute the recent decline to general corporate cost reductions
following the Great Recession.

Exhibit 30. Percentage of Employers Providing Emergency


Childcare (1997-2013)
14%

15%
10%

11%

11%

14%

12%
9%

10%

9%
7%

6%

6%
4%

5%

5%

4%

3%

3%

4%

0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Note: Shaded areas represent recessionary periods. Source: Society for Human Resource Management
and BMO Capital Markets.

Back-up care
could be more
profitable

A member of BMO

Bright Horizons is the top provider in this market, and the company offers a nationwide network
of hundreds of backup care facilities. Despite having higher overhead, the companys back-up
centers generate higher gross margins than its core childcare centers. Exhibit 31 shows financial
metrics for BFAMs back-up care models from prior to 2008. The company did not update this
data in its most recent IPO, although we expect this data has not changed much.

Financial Group

35

September 2013

Early Childcare

BMO Capital Markets

Exhibit 31. Example of Financial Metrics Under Various Back-Up


Care Operating Models
Managed
$500K
15%-25%
N.A.
100+%
Customer
3-5 years

Revenue at maturity
Gross margin at maturity
Average investment
Average ROI
Enrollment risk
Contract term

Consortium
$1.2 mil.
30%-50%
$500K-$1,500K
40+%
Provider
Annual

Source: Bright Horizons Family Solutions and BMO Capital Markets.

Economics of Operating a Childcare Center


Revenues. According to a report by Child Care Aware of America citing 2011 data, (latest

available) the average annual fees for a full-time childcare center range from $4,591 to $14,908
for an infant, to from $3,911 to $11,669 for a four-year-old. A number of variables go into the
amount that centers typically charge for childcare. Among them are the following:

Average weekly
fees

A member of BMO

Location (Mississippi is the least expensive, with Massachusetts the most costly)

Type of services provided (e.g., the more educational-oriented the program, the more expensive it typically is)

Childs age (the younger a child is, the more expensive the program as the caregiver/child
ratios are smaller)

Full-time versus part-time (part-time typically charges more when measured on a per hour
basis).

A 2012 poll conducted by Childcare Exchange shows the average weekly fee for full-day childcare services for various regions in North America (see Exhibit 32). Since 2008, weekly fees
rose for most children in virtually every region, although at slightly higher rates for older children.

Financial Group

36

September 2013

Early Childcare

BMO Capital Markets

Exhibit 32. Average Weekly Fee for Full-Day Childcare (2008 vs.
2012)
Region
2012 poll results:
Canada
New England
The Mid-Atlantic
The Midwest
The South
The Southwest
The West

6-month-olds

2-year-olds

4-year-olds

6-year-olds

$225
245
220
200
171
175
250

$201
237
205
175
150
169
200

$181
200
190
157
140
159
192

$121
185
150
140
105
122
155

2008 poll results:


Canada
New England
The Mid-Atlantic
The Midwest
The South
The Southwest
The West

$200
225
195
185
155
180
200

$183
215
180
160
140
150
174

$157
180
163
145
129
140
164

$85
160
140
125
100
94
135

CAGR: 2008-2012:
Canada
New England
The Mid-Atlantic
The Midwest
The South
The Southwest
The West
Average

3.0%
2.2%
3.1%
2.0%
2.5%
-0.7%
5.7%
2.5%

2.4%
2.5%
3.3%
2.3%
1.7%
3.0%
3.5%
2.7%

3.6%
2.7%
3.9%
2.0%
2.1%
3.2%
4.0%
3.1%

9.2%
3.7%
1.7%
2.9%
1.2%
6.7%
3.5%
4.1%

Source: BMO Capital Markets and Childcare Exchange.coms Insta-Poll.

Revenue sources. Funding for childcare services comes from a variety of sources. According
to the World Bank (2008 data):

For child care, on average, the contribution is as follows: federal government, 25%; state
and local government, 15%; and parents the remaining, 60%. Low-income parents pay on
average 18% of family income per child enrolled in child care.

For preschool (36 years), approximately 34% comes from public sources and 66% from
private sources, half of this being from household expenditures.

In both cases, federal funding is largely targeted to children with disabilities and children from
low-income families.
Average costs per center. The aforementioned Ibis World report estimates industry profit-

ability at 6% (EBIT) in 2012, with the biggest cost component being labor at about 48% of
revenues (see Exhibit 33)

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Financial Group

37

September 2013

Early Childcare

BMO Capital Markets

Exhibit 33. Estimated Annual Budget for a Childcare Center (2012)


Revenues
Expenses:
Labor
Purchases (e.g., food, beverages, supplies)
Depreciation
Marketing
Rent, utilities and other
Subtotal
Operating margin
EBITDA (est.)

100.0%
47.9%
10.5%
1.1%
6.0%
28.5%
94.0%
6.0%
7.1%

Source: IbisWorld

The World Banks Investing in Young Children guide categorizes the costs associated with
early childcare centers into two groups; initial investment costs and operational/working costs
as follows (see Exhibit 34):

Exhibit 34. Childcare Center Operating Costs


Investments/Startup Costs
Project development: creating/testing the
approach, infrastructure, and materials

Operationa/Working Costs
Staffing salaries and benefits: ECD administrators, supervisors,
directors, ECD workers, health personnel, cooks,
support personnel (drivers and maintenance)

Facilities: constructing or upgrading

Food: purchase cost

Equipment: transportation, office, instructional


(tables and chairs), storage, and food
preparation

Health care: supplies (salaries included above) and facilities


(prorated)

Materials: reusable guides, books, and toys

Administration: general administration (overhead) costs

Training: initial training at all levels (trainers,


locale, per diems, transport, and supplies)
Consultants: fees, honorariums, and
expenses
Micro-enterprise: loans for project-financing
schemes

Training: in-service training


Communication: telephone, fax, printing, and media
Supplies: non-reusable items
Transportation: gasoline and maintenance of vehicles
Per diems: costs associated with supervision, training, and
field visits
Maintenance: facility costs, electricity, telephone, and
insurance
Evaluation: periodic monitoring and evaluation activities
Contingency: fund for unexpected costs

Source: BMO Capital Markets and The World Banks Investing in Young Children (2011)

Economies of scale. In addition, we believe there are considerable economies of scale in this

business for the larger providers and note the average capacity for the 50 largest for-profit providers (171 children) was well above the industry average capacity of 69 children (according to
the National Child Care Information and Technical Assistance Centers 2010 Childcare Licensing Study). These larger providers have the potential to generate higher margins, in our
view.

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Financial Group

38

September 2013

Early Childcare

BMO Capital Markets

Characteristics of Superior Childcare Facilities


We have outlined several quality related factors below.
Quality/accreditation. The childcare industry has two forms of accreditation: the National Association for the Education of Young Children (NAEYC), which accredits centers, and the
Council for Early Childhood Professional Recognition, which accredits caregivers. NAEYC accreditation has grown from 19 in 1986 to over 6,500 by 2013. This number has decreased in recent years (from 10,000 in 2007), which NAEYC attributes to increased standards and more
stringent requirements.
Low child/teacher ratio. We believe centers that have low staff-to-child ratios typically provide

a higher-quality product, although generally at a higher cost. The national child/teacher ratio is
roughly nine children per teacher, varying based on age and group size (the younger the age
group, the lower the required ratio). The NAEYC recommended levels are shown in Exhibit 35.

Exhibit 35. NAEYC Recommended Minimum Staff/Child Ratios


GROUP SIZE
AGE OF CHILDREN
Infant Accreditation Strand
(birth to 15 months)

10

12

1:3

1:4

1:3

1:4

1:4

1:4

1:4

1:5

1:6

14

16

18

20

1:7

1:8

1:9

1:8

1:9

1:10

1:8

1:9

1:10

22

24

Toddler and Twos Accreditation Strand


(12 to 36 months)
12-28 months
21-36 months
Preschool Accreditation Strand
2.5-year-olds 3-year-olds (30 - 48
months)
4-year-olds
5-year-olds
Kindergarten Accreditation Strand

1:6

1:10 1:11 1:12

Source: BMO Capital Markets and National Association for the Education of Young Children.

Educational focus. We believe an educational offering is becoming increasingly important and

expect demand for these services to increase, as parents try to give their children a head start.
Wage rates have

Staff pay rates. According to the data released by the Bureau of Labor Statistics, hourly labor

increased 3%

costs for childcare providers has increased at an average rate of 3% since 1990 roughly in
line with historical inflation rates. In recent years, wage rates have been sluggish, as they tend
to lag following a recession, in our view (see Exhibit 36). Through June 2013, the average
year-to-date rate was just over $12 per hour up 1.6% from the same period in 2012.

annually; tend to
lag postrecession

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Financial Group

39

September 2013

Early Childcare

BMO Capital Markets

Exhibit 36. Average Hourly Childcare Labor Costs and Annual Percentage Change
(1990-2013 YTD)

6%

$13

5%
4%
10

3%
2%
1%

0%
-1%
2013 YTD

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

-2%
1990

Note: Shaded areas represents recessionary periods. 2013 year-to-date through June. Source: BMO Capital Markets and Bureau of Labor
Statistics

Low turnover. Historically, given the low pay, childcare operators have long been plagued by

high turnover. According to the NACCRRA, the national average teacher turnover in childcare
facilities is somewhere between 25% and 40%.
Utilization rates. Among the larger childcare providers, we believe typical utilization rates are

in the mid-60% area (based on the weighted average number of full-time children with two halfday children equal to one full-day) although that rate can vary by location. Some centers offer
after-school programs, summer camps, and tutoring programs to increase utilization.
Attractive facilities. We believe spending on facilities improvement and on building a "com-

munity of caring will attract more customers. Given available public data (admittedly it is quite
dated), worksite centers appear to have more leverage in reducing these capital expenditures
compared to consumer off-site centers. For example, from 1999 to 2004 (only data available),
KinderCare Learning, a leading consumer-focused childcare provider acquired by Knowledge
Learning in January 2005, reduced its capital expenditures to 6.8% of revenues from 15.8%.
This compares to Bright Horizons, which reduced this percentage to 2.4% from 7.4% over the
same period, demonstrating stronger leverage, in our view. (We note that BFAM increased this
percentage to 6.5% in 2012 as part of an expansion strategy.)
Alternative revenue streams. In most communities, the childcare market is highly competitive
and research shows the highest-quality centers do not rely solely on tuition fees for revenue, but
have alternative sources such as corporate sponsorships, charitable donations, and government
funding to offset price competition. Public agencies, centers with public funding, and workplace
centers subsidized by employers fall into this category

A member of BMO

Financial Group

40

September 2013

Early Childcare

BMO Capital Markets

Merger and Acquisition Activity


In recent years, the childcare industry has seen growing interest from the investment community. Major acquisitions include the following:

In July 2013, Bright Horizons Family Solutions (BFAM) acquired the Dallas-based Childrens Choice Learning Centers, which operated 49 centers, for $53 million. Childrens
Choice generated $41 million in revenue and $6 million EBITDA in the prior year.

In April 2013, BFAM acquired the UK-based Kidsunlimited, which operates 64 centers, for
45 million. The company earned 41 million in the prior fiscal year.

In January 2013, BFAM completed an IPO raising $222 million, and establishing a market
value of $1.4 billion. BFAM was taken private by Bain Capital in May 2008 for roughly
$1.3 billion (12.1x TTM/EBITDA). As of the date of this publication, Bain still owns
roughly 65% of the company.

In May 2011, Nobel Learning Communities announced it had reached an agreement to be


acquired by private equity firm Leeds Equity Partners ("Leeds Equity") for $11.75 per share
or approximately $149 million. At the time, the proposed price was about 0.6x and 8.7x
trailing 12-month sales and EBITDA, respectively, by our calculation. This followed earlier
bids by Knowledge Learning Corp in September of 2008 ($158 million offer) and March
2009 ($132 million offer).

In December 2005, Australian childcare provider ABC Learning Centres acquired US provider Learning Care Centres for $154 million. The company completed several deals thereafter including Childrens Courtyard in August 2006 for $66 million and La Petite Academies in January 2007 for $339 million. In May 2007, ABS raised $1 billion in debt and
equity to continue its acquisition strategy. However, in June 2008 it sold 60% of its US
business to Morgan Stanley Private Equity (MS) for roughly $420 million, using the proceeds to pay down debt. The transaction price was an estimated 7.6x trailing 12-month
EBITDA.

In January 2005, Knowledge Learning (owned by Michael Milkens Knowledge Universe)


undertook a leveraged buyout of KinderCare Learning Centers for more than $1.04 billion
to become the largest childcare provider in the US, serving roughly 200,000 children. The
deal was priced at roughly 1.2x and 7.3x trailing 12-month sales and EBITDA, respectively.

A list of recent acquisition activity in the childcare sector can be found in Exhibit 37.

A member of BMO

Financial Group

41

September 2013

Early Childcare

BMO Capital Markets

Exhibit 37. Recent Childcare Transactions (2005-2013)


($ in millions)
Annc.
Date
Jul-13
Apr-13
Apr-13
Apr-12
Mar-12
Dec-11
Dec-11
Oct-11
May-11
Aug-11
Mar-11
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Jan-10
Dec-09
Jun-09
Jun-09
Jun-09
Jun-09
May-09
Apr-09
Apr-09
Feb-09
Jan-09
Dec-08
Aug-08
Aug-08
Jun-08
Mar-08
Jan-08
Jan-08
Aug-07
May-07
May-07
Feb-07
Feb-07
Jan-07
Jan-07
Dec-06
Dec-06
Dec-06
Oct-06
Aug-06
Aug-06
Aug-06
Jun-06
Jun-06
May-06
Apr-06
Feb-06
Jan-06
Dec-05
Nov-05
Oct-05
Sep-05
Feb-05
Jan-05
Jan-05

Target
Childrens Choice Learning Centers
Tribal Nova
Kidsunlimited Limited
Children's Progress
Eight Child Care Center
The Children's House Montessori Daycare Centers (3 Schools)
Four Child Care Centers
Literacy First
Nobel Learning
Fredericksburg Children's Academy
Five5 Preschools
30 Childcare Centers
Catalpa
9 Childcare Centers
Rainbow Early Education
10 Childcare Centers
Little Cherub Child Care Center
ABC Learning Centres (678 Childcare Centers)
Montessori Corner at Princeton Meadows
Montessori Corner Country Day School
Children's House of the Windsors
Busy Bees Group
Crayon Campus
Mother's Pride (50%)
Highpointe Children's Academy
Country Tyme Early Education Center
Entervision
Work Options Group
Ivy Kids Early Learning Center
Wiz Korea
Primrose Schools
ABC Learning Centres (Learning Care Group Division - 60%)
Bright Horizons Family Solutions
Barnebygg (70%)
Leapfrog Nurseries
ABC Learning Centers (12%)
Barnstable Academy
Nobel Learning Communities (One Preschool)
Forward Steps Holdings
Enchanted Care Learning Center
Insight Schools
Macquarie Leisure Services (55 Childcare Centers)
La Petite Academy
Busy Bees Group
Discovery Isle Child Development Center
College Coach
Hutchison's Child Care Services
Children's Courtyard
Honor Roll School
17 California Childcare Centers
Child Development Schools
Camelot Schools
Primrose Schools
Learning Care Group
SageWalk
Ombudsman
Keystone Education and Youth Services
ChildrenFirst
Gateway Learning
Academy Childcare Group
KinderCare Learning Centers

Acquiror
Bright Horizons Family Solutions
Houghton Mifflin Harcourt
Bright Horizons Family Solutions
Northwest Evaluation Association
Edleun Group
Edleun Group
Edleun Group
Catapult Learning
Leeds Equity Partners
Phoenix Children's Academy (Audax)
Nobel Learning Communities
G8 Education
Providence Equity Partners
G8 Education
Spire Capital
G8 Education
Rainbow Child Development Center
Benevolent Society & Brotherhood of St Laurence
Nobel Learning Communities
Nobel Learning Communities
Nobel Learning Communities
Knowledge Universe
Mini-Skool
AEZ Infratech
Nobel Learning Communities
Nobel Learning Communities
Good Life China
Bright Horizons Family Solutions
Nobel Learning Communities
Riverside Group
Roark Capital Group
Morgan Stanley Private Equity
Bain Capital
CapMan Oyj
ABC Learning Centres (Busy Bees Group)
Everitt Investments (Temasek Holdings)
American Education Group
Undisclosed Preschool Provider
ABC Learning Centres
Nobel Learning Communities
Apollo Group
ABC Learning Centres
ABC Learning Centres
ABC Learning Centres
Nobel Learning Communities
Bright Horizons Family Solutions
ABC Learning Centres
ABC Learning Centres
Nobel Learning Communities
ABC Learning Centres
Glencoe Capital
Charterhouse Group
American Capital Strategies
ABC Learning Centres
Aspen Education Group (Warburg Pincus, Frazier and Sprout)
Educational Services of America (Trimaran Capital Partners)
Universal Health Services
Bright Horizons Family Solutions
Educate
Creative Education
Knowledge Universe

Note:
Mean and median data include proprietary information not publicly disclosed.

Transaction
Value
$53.0
NA
$69.0
NA
$0.5
$5.4
NA
NA
$149.0
NA
NA
$20.7
NA
$2.3
NA
$8.6
NA
$90.7
NA
NA
NA
NA
NA
$100.0
$1.1
$1.3
NA
NA
$0.7
NA
NA
$420.0
$1,274.8
NA
$62.9
$2,748.9
NA
$1.9
$48.1
$15.0
NA
$51.1
$339.4
$207.2
$12.0
NA
$83.3
$66.0
$3.0
$33.7
NA
NA
$91.7
$153.5
NA
NA
NA
$61.0
$8.0
$8.3
$1,040.3
Mean
Median

Transaction Value / LTM


Revenue
EBITDA
1.3 x
NA
1.1 x
NA
NA
NA
NA
NA
0.6 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1.7 x
NA
NA
3.8 x
NA
NA
NA
1.3 x
NA
NA
0.8 x
NA
1.2 x
NA
1.9 x
NA
NA
0.6 x
NA
NA
NA
0.7 x
NA
NA
NA
2.0 x
NA
NA
1.2 x
1.4 x
1.2 x

NA
NA
NA
NA
NA
NA
NA
NA
8.7 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
7.6 x
12.1 x
NA
NA
15.6 x
NA
NA
NA
NA
NA
NA
10.1 x
NA
NA
NA
11.6 x
6.1 x
NA
4.7 x
NA
NA
NA
14.3 x
NA
NA
NA
NA
NA
NA
7.3 x
10.1 x
10.1 x

N.A. Not Available. Source: BMO Capital Markets and Capital IQ.

A member of BMO

Financial Group

42

September 2013

Early Childcare

BMO Capital Markets

Risks
Finding and retaining staff. We believe low pay and high turnover make staffing a consistent

difficulty for childcare providers. According to Yales National Prekindergarten Study (2005),
14% of prekindergarten teachers earned a salary below the federal poverty guidelines and nearly
71% earned a salary below the threshold for low income. These statistics are notwithstanding
the fact that 73% of these teachers had a bachelors or higher degree. About 19% of such teachers across the nation work an extra job for pay.
A weak economy or recession. We believe a weak economy and higher unemployment lead to

lower demand for childcare services and lower utilization rates.


Government funded pre-K. Universal pre-K initiatives may provide government-sponsored

services that would lessen the need and demand for private care providers.
Government budget cuts. We believe roughly 40%-50% of childcare funding originates from

the government. A cut in state or federal funding could have a detrimental impact on the industry's favorable subsidies and/or demand.
Regulatory risks. Companies that provide lower-quality services and that do not have sufficient
revenues to meet rising standards may face greater regulatory risks. There are minimum standards in the areas of staffing, nutrition, health protection, and safety. If those standards are significantly raised, some companies might be unable to meet the costs.
The fear of child abuse. We believe child abuse is less common in center-based care. However,
if a child or parent makes an accusation and the dispute becomes public, both the facility and
staff members may lose credibility, which in turn could hurt future revenue flows. In addition,
the accusation alone may be enough to put selling pressure on the stock given the highly
charged nature of the issue. The 1980s saw a number of major child abuse allegations that
provided negative publicity for the sector. These included McMartin Preschool (1983), Fells
Acres Day Care (1984), Wee Care Nursery School (1985), Little Rascals (1989), and Breezy
Point Day School (1989).

A member of BMO

Financial Group

43

September 2013

K-12 Education

BMO Capital Markets

K-12 Education: Largest Opportunity,


Though Risks Abound
While we believe the K-12 market may represent the largest investment opportunity within
the education landscape, there are currently relatively few ways to play this market from a
public equity perspective. Other than a few publicly traded publishing companies and some
other content and service providers, most of the investment in this space seems to be
occurring at the private equity or venture capital level.
K-12 is the largest of the education sectors and continues to grow. While the 2002 No Child
Left Behind Act (NCLB) was a catalyst for spending on innovation and accountability, the
impact of the Great Recession - which significantly crimped state and local budgets - and its
lingering effects continue to create significant financial headwinds, though it appears the
worst has passed. Additionally, concerns over student outcomes and educational quality
continue to grow and put pressure on the sector.
Against this backdrop, we believe most recent investment opportunities have been centered on
finding solutions to help schools drive better performance under the new reality of tighter cost
constraints. To meet this demand, private equity, venture capital, and other endowments have
invested hundreds of millions of dollars in recent years into disruptive, technology-based
products that seek to help educators contend with these issues.
However, while we believe these pressures have increased educators willingness to try new
methods and products, we caution the K-12 sector remains a relatively sluggish animal
characterized by long sales cycles, dependence on government spending and a high
vulnerability to political pressures. We believe this, combined with a widespread resistance to
change, adds several layers of complexity for investors in this space.

Market Overview
Represents 4.5%
of US GDP

K-12 industry
growth rates have
slowed, and we
expect slow
stable growth to
continue

A member of BMO

The K-12 market consists of students in elementary (K-6th grade) and secondary (7th-12th
grade) schools. According to the US Department of Educations (ED) National Center for
Education Statistics (NCES), K-12 expenditures were about $700 billion in the 2011-2012
school year, a CAGR of about 6.9% since the 1969-1970 school year, and equivalent to about
4.5% of the US annual gross domestic product.
As shown in Exhibit 38, growth rates have generally slowed since the early 1970s, and turned
negative in the 2009-2010 school year owing to the Great Recessions impact. However, slow
growth has since resumed, and we expect this rate of growth to be relatively low as state
finances remain difficult, and the law of large numbers continues to have a bigger impact.
Applying a conservative annual growth rate of 3%, we project roughly $942 billion in
expenditures in the 2021-2022 school year.

Financial Group

44

September 2013

K-12 Education

BMO Capital Markets

Public

Private

25%

% chg y/y

20%

800

15%

600

10%
400

5%

200

0%
202122E

201718E

201314E

2009-10

2005-06

2001-02

1997-98

1993-94

1989-90

1985-86

1981-82

1977-78

-5%
1973-74

Note: Shaded areas represent US recessionary periods.


Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics.

Most funding is
provided by state
and local sources,
though recent
spending has
boosted the
federal portion

State and local funding is the largest portion of K-12 public school spending. According to the
NCES, in FY2011 (latest data available) states funded about 44% of public education, with
local funding representing about 43%; federal funding accounted for the remaining 12%. With
the passage of NCLB, federal spending increased from the 6% level in the 1990s to the 8%9% range in the mid 2000s, and stimulus spending following the Great Recession boosted this
to 12.5% in FY2010 an all-time high, by our records (see Exhibit 39). We expect the federal
share to slowly return to mid-2000s levels as state and local funding recovers.

2008-09

2004-05

2000-01

Federal

1996-97

1992-93

State

1988-89

1980-81

1984-85

Local

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1976-77

% of Total Spending

Exhibit 39. K-12 Funding by Source (FY1977FY2011)

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

Total spending
remains slightly
positive

A member of BMO

While, historically, total K-12 funding had increased at a 4%-8% annual rate, growth has
slowed in recent years. In fact, FY2009 was the first year on record when state funding
actually decreased (down roughly 2.2%), with this trend worsening in FY2010 (down 6.6%),
though the federal stimulus helped offset these declines and drove the slight spending
increases in both of those years. In FY2011, total spending was up 0.9%, driven by growth in
state funding the first increase since FY2008, though offset by a decline in local funding
(the first on record) and federal funding (see Exhibit 40). While we expect funding levels to
remain slightly positive, we believe it may be some time before funding growth returns to
more historical levels.

Financial Group

45

September 2013

y/y % change

$1,000

1969-70

Expenditures ($ in bil.)

Exhibit 38. K-12 Total Expenditures (19691970 to 20212022E)

K-12 Education

BMO Capital Markets

Exhibit 40. Annual Change in K-12 Funding by Source (FY1978 to FY2011)


State

Federal

Total y/y change

12%

15%

Annual % change in total

20%

10%

10%

8%

5%

6%

0%

4%

-5%

20
10
-1

8
20
07
-0

20
04
-0
5

2
20
01
-0

19
98
-9

6
19
95
-9

19
89
-9

7
19
86
-8

19
83
-8

19
77
-7

19
92
-9
3

0%
0

-15%
4

2%

19
80
-8
1

-10%

Annual % change by source

33%
Local

Note: Shaded areas represent recessionary periods. Source: BMO Capital Markets and US Department of Education National Center for
Education Statistics.

In FY2010, more than 53% of total expenditures went toward teacher salaries and benefits
with an additional 9% directed toward facilities and capital outlays. We believe the amount
spent on third-party expenditures (companies supplying goods and services to this sector)
represents a fraction perhaps only 6% - of total expenditures, although it is difficult to
document the exact amount.

Third-party
spending is only a
small portion of
K-12 expenditures

With that caveat (and based on projections from VSS, Gartner, and Eduventures), we estimate
for-profit K-12 education vendors will generate roughly $23.9 billion in revenues in 2013, up
2.7% from 2012 levels. We project that, as the slow recovery continues, spending will
increase to more than $27 billion in 2018, representing roughly 2.6% annual growth (see
Exhibit 41). We note this reflects only spending by institutions on educational material and
services and not the burgeoning direct-to-consumer market, which is estimated to be a market
of similar size.

Estimated K-12
for-profit growth:
2.6% CAGR
through 2018

Exhibit 41. K-12 For-Profit Education Industry (20052018E)


Technology

Other services

Total y/y change


5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%

Revenues (Billions)

9
6
3

20
18
E

20
17
E

20
16
E

20
15
E

20
14
E

20
13
E

20
12
E

20
11

20
10

20
09

20
08

20
07

20
06

20
05

Annual % change

Instructional media and services


$12

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates based on various forecasts including Veronis
Suhler Stevenson, Gartner and Eduventures.

A member of BMO

Financial Group

46

September 2013

K-12 Education

K-12 enrollment
increased in
FY2010 after three
years of declines,
with growth
expected to

BMO Capital Markets

Enrollment in K-12 schools has been almost entirely driven by demographics. As shown in
Exhibit 42, since bottoming at 44.9 million students in fall 1984, K-12 enrollment (both
public and private schools) grew to an estimated 55.1 million student in fall 2012 a roughly
0.7% CAGR over that time period, which includes three years of small declines from FY2007
through FY2009. The NCES projects the K-12 population will grow to 58.4 million students
by Fall 2021 which would represent a 0.6% CAGR from current levels.

continue

Exhibit 42. K-12 Enrollment (Fall 1969 to Fall 2021E)


3%

K-12
Enrollment
% chg y/y

55

2%
1%

50

0%
-1%

45
-2%
40

Annual % change

K-12 Students (Mil.)

60

-3%
1970

1975

1980

1985

1990

1995

2000

2005

2010E

2015E

2020E

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.
Note: Enrollment for fall of each year.

Impact of the Great Recession on K-12


State finances
improving . . .

The Great Recession and the ensuing decline in state tax revenues had a profound impact on
the K-12 industry and will likely shape its growth for years to come. While the worst appears
to be over, it still may be several years before many states are able to resume funding K-12
education at pre-recession levels.
According to The National Association of State Budget Offices (NASBO), total K-12
education funding increased by 1.5% in FY2011, driven by a 2.4% increase in federal funds
and 0.9% increase in state funds. However NASBO estimates K-12 funding decreased in
FY2012 by 1.9%, driven by a 19.7% decline in federal funds owing to the end of stimulus
spending, offset by a 2.9% increase in state funds. While total funding fell in FY2012, two
years of state-level increases is an encouraging sign, in our view.

. . . but K-12
funding still below
pre-recession
levels

School districts
forced to cut
programs and
services

A member of BMO

However, per-student funding remains at reduced levels. According to the Center on Budget
and Policy Priorities (CBPP), 26 states provided less funding per student in FY2013 than they
did in FY2012, and 35 states are providing less funding per student than they did five years
prior (FY2008). Additionally, 17 states had cut per-student funding by more than 10% from
FY2008 levels and three states had cut by more than 20%. While we believe trends are slowly
moving in the right direction, it may yet be several years before most states return to prerecession per-student funding levels.
In 2008, the American Association of School Administrators (AASA) began conducting a
survey of school administrators to gauge the impact of the Great Recession and stimulus
spending. The results of the latest survey conducted in February 2012 are shown in Exhibit
43. As shown, many schools continued to face tough spending decisions well after the Great
Recession had ended, and, given the continued challenges in state funding, we believe little
has changed over the past year.

Financial Group

47

September 2013

K-12 Education

BMO Capital Markets

Exhibit 43. Great Recession Impact on School Districts (FY2009


FY2012)
FY2009

FY2010

N.A.
N.A.
N.A.
4%
5%
9%
2%
8%
10%
8%
18%
9%
5%
14%
13%
11%
N.A.

43%
21%
68%
12%
12%
26%
2%
14%
20%
18%
36%
22%
20%
32%
29%
39%
N.A.

Percentage of schools districts that:


Cut budgets less than 10%
Cut budgets 11% to 25%
Reduced personnel
Furloughed employees
Reduced health benefits packages
Increased class size
Implemented 4-day school week
Eliminated summer school
Cut transportation
Cut extra-curricular activities
Deferred building maintenance
Delayed instructional improvement
Reduced academic programs
Delayed textbook purchases
Delayed technology purchases
Reduced professional development
Closed/consolidated schools

FY2011*
(Expected)
(Actual)
48%
30%
90%
34%
46%
62%
13%
34%
38%
52%
55%
50%
46%
52%
57%
62%
N.A.

48%
25%
48%
16%
16%
57%
6%
27%
30%
31%
52%
37%
29%
51%
44%
50%
8%

FY2012
(Expected)
N.A.
N.A.
66%
34%
30%
65%
17%
40%
41%
52%
60%
49%
45%
59%
56%
61%
15%

N.A. Not Available. (*) Results in the Expected column are from the April 2010 file, whereas the Actual
column contains the most recent December 2010 survey results. Source: American Association of School
Administrators and BMO Capital Markets

Stimulus helped
stem the tide
somewhat

While stimulus spending helped, this was only a temporary stop-gap. According to NASBO,
the American Recovery and Reinvestment Act of 2009 (ARRA) contributed roughly
$24 billion to states K-12 funds in FY2010 and an estimated $21.5 billion in FY2011 (before
winding down in FY2012). In addition, states also received money from the $10 billion
EduJobs bill passed in the summer of 2010.
These sums were a drop in the bucket compared to the roughly $700 billion in annual K-12
expenditures, and did not stem the tide of layoffs. According to the CBPP, from July 2008 to
July 2012, local government education employment declined by 328,000. Additionally, most
school districts said the EduJobs bill allowed them to save fewer than 25% of the jobs that
were already slated for elimination (see Exhibit 44).

A member of BMO

Financial Group

48

September 2013

K-12 Education

BMO Capital Markets

Exhibit 44. Stimulus Impact on School Districts (FY2010FY2011)


35%

% of School Districts

30%

FY2010

FY2011

25%
20%
15%
10%
5%
0%
0%

1%-25%

26%-50%

51%-75%

76%-99%

100%

% of Jobs Saved That Were Slated for Elimination

Source: American Association of School Administrators and BMO Capital Markets.

Federal funding
flat for past 10
years

A member of BMO

Excluding stimulus measures, federal funding has been essentially flat since the mid-2000s,
putting more pressure on states ability to meet funding needs and NCLB compliance. As
shown in Exhibit 45, federal spending on K-12 education (excluding stimulus funding) has
been roughly flat since the mid 2000s. While the FY2014 request calls for a 10.5% increase in
funding, the actual award will likely be below this.

Financial Group

49

September 2013

K-12 Education

BMO Capital Markets

Exhibit 45. K-12 Discretionary Spending in Federal Budget (FY2005FY2014E)


(dollars in millions)

FY2005CR
Request FY2014
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 CAGR

Program*

Elementary/Secondary Education (K-12)


Elementary and Secondary Education Act (ESEA)
Race to the Top
Investing in innovation
College and career-ready students (Title I)
Preschool development grants
School Turnaround Grants
Effective teaching and learning (ETL): literacy
STEM innovation networks
High school transformation
ETL for well-rounded education
College pathways and accelerated learning
Assessing achievement
Effective teachers and leaders State grants
Teacher and leader innovation fund
School leadership
Expanding educational options
Magnet schools assistance
Promise neighborhoods
Successful, safe, and healthy students
21st Century Community Learning Centers
English Learner Education
Impact Aid
Other ESEA
Education Technology State Grants
Striving Readers
Teacher Incentive Fund
Safe and Drug-Free Schools and Communities
Reading First State Grants
Math and Science Partnerships
State Assessments
Even Start
Advanced Placement
Subtotal, ESEA
y/y % change
Special Education (IDEA)
Grants to States (Part B)
Other IDEA
Subtotal, IDEA
y/y % change
Subtotal, ESEA and IDEA
State Fiscal Stabilization Fund
Career and Technical Education State Grants
Other K-12
Elementary/Secondary Education

0
0
0
0
0
0
0
0
0
0
0
0
$12,740 $12,713 $12,838 $13,899 $14,492 $14,492

$699
150
14,443

$549
149
14,516

$549
149
14,516

0
0
0

0
0
0

125
0
0

491
193
179

546
195
179

546
363
180

535
27
175

534
187
150

534
187
150

0
0
412
2,917
0
0
0
0
0
0
991
676
1,244
2,882
496
25
0
672
1,042
0
0
225
30

0
0
408
2,887
0
0
0
0
0
0
981
669
1,228
2,316
272
30
99
569
1,029
0
0
99
32

0
0
408
2,887
0
0
0
0
0
0
981
669
1,228
2,138
272
32
0
577
1,029
182
0
82
37

218
51
409
2,935
107
94
356
105
0
349
1,081
700
1,241
2,062
0
0
0
0
0
0
0
0
0

222
51
411
2,948
108
115
369
105
0
357
1,131
730
1,266
1,658
0
0
0
0
0
0
0
0
0

226
103
411
2,948
411
136
409
100
10
365
1,166
750
1,276
1,076
0
0
0
0
0
0
0
0
0

103
92
390
2,465
399
113
281
100
30
257
1,154
734
1,274
834
0
0
0
0
0
0
0
0
0

25
76
389
2,467
299
98
255
100
60
196
1,152
732
1,291
865
0
0
0
0
0
0
0
0
0

25
79
389
2,467
299
98
255
0
60
196
1,152
732
1,291
962
0
0
0
0
0
0
0
0
0

$1,000
215
14,516
750
659
187
415
300
75
102
389
2,467
400
98
295
0
300
280
1,252
732
1,224
967
0
0
0
0
0
0
0
0
0

24,350
0.2%

23,333
-4.2%

23,487
0.7%

24,470
4.2%

24,883
1.7%

24,969
0.3%

24,253
-2.9%

24,089
-0.7%

24,089
0.0%

26,622
10.5%

10,590
1,084

10,583
1,070

10,783
1,020

10,948
1,034

11,505
1,066

11,505
1,074

11,466
1,053

11,578
1,053

11,578
1,053

11,578
1,071

11,674
4.6%

11,653
-0.2%

11,803
1.3%

11,982
1.5%

12,572
4.9%

12,579
0.1%

12,519
-0.5%

12,631
0.9%

12,631
0.0%

12,649
0.1%

36,024

34,986

35,290

36,452

37,455

37,548

36,772

36,720

36,720

39,271

0
1,194
312

0
1,182
295

0
1,182
296

0
1,161
323

0
1,161
325

0
1,161
327

0
1,122
218

0
1,123
220

0
1,123
248

1,123
228

$37,530 $36,464 $36,768 $37,936 $38,941 $39,035 $38,112 $38,063 $38,091 $40,622

% Change y/y

1.6%

-2.8%

0.8%

3.2%

2.6%

0.2%

-2.4%

-0.1%

0.1%

1.0%

0.9%

0.9%

6.6%

Source: BMO Capital Markets and Department of Education. Note: Several spending programs have been eliminated or added in recent
years, making historical comparisons difficult; CR refers to the continuing resolution reached for the FY2011 budget year; CAGR excludes
stimulus spending.

Sequestration and
weak economy
cause added
pressure

A member of BMO

Given continued funding headwinds, we believe most schools will simply have to tough it out
until things get better. Additionally, schools must now negotiate the impact of sequestration,
which began in early 2013 and will cut $1.2 trillion from federal programs over 10 years.
Among the findings from an August 2013 survey released by the American Association of
School Administrators (AASA):

The cuts of sequestration would mean reducing professional development (59%), eliminating
personnel (53%), increasing class size (48%), and deferring technology purchases (46%).

85% of respondents replied that their state would be unable to absorb or offset the cuts of
sequestration, virtually identical to the 86% indicating that their district would be unable
to absorb the cuts.

Financial Group

50

September 2013

K-12 Education

BMO Capital Markets

Schools more
cost-conscious,
but open to new
methods

Competitive grant
funding spurs
continued
innovation

More than half (53%) of respondents reported that their budgets for the 2013-14 school
year built in cuts to offset sequestration.

Against this backdrop, we believe schools are scrutinizing costs more than ever before,
resulting in longer sales cycles, and higher expectations that products will do what they
promise. On the other hand, we believe districts are more open to innovation and new
technologies and products that have the potential to cut costs while delivering similar or better
results.
Competitive federal grants have become another source of federal K-12 funding aimed at
spurring innovation. This was initially introduced as part of the stimulus, with a $4.3 billion
Race to the Top (RTTT) program. The White House continues to fund these programs,
allocating $549 million toward RTTT in FY2013 with a request for $1 billion in FY2014.
RTTT funds are awarded to those schools that submit the best proposals to address the issues
they face, and can include implementing new data systems, personalized learning, reforming
low-performing schools, college preparation, and rewarding effective teachers.

ESEA (Formerly NCLB)


The federal education program initially established under the Elementary and Secondary
Education Act (ESEA) of 1965 became The No Child Left Behind Act (NCLB) when
President Bush signed it into law in January 2002. This act fundamentally shifted how states
directed K-12 education spending, resulting in faster and greater changes than any prior
federal K-12 education legislation. However, NCLBs rigid testing requirements and
proficiency mandates were extremely controversial, and, upon taking office, President Obama
vowed to reauthorize ESEA (which officially expired in 2007) in a way that removed some of
the more burdensome mandates.
As reauthorization
stalled, more
schools fail NCLB

Details of original
NCLB

A member of BMO

However, Congress has made little progress reauthorizing this bill. While Republicans in the
House passed a version of an education bill in early 2012, these bills were essentially dead on
arrival in the Senate as they sought to cut substantial funding from the ED something
Democrats have stated they will not support. We believe gridlock on this bill will likely
continue through the current session of Congress. However, we believe the current NCLB
waiver program (discussed in more detail below) appears to have satiated Democrats
somewhat as it has allowed a sort of back-door education reform without having to go through
Congress.
The main thrust of the original NCLB regulation was based on accountability and assessment,
and the legislation is technically still in effect pending reauthorization. We believe several
components of this will continue to be part of any reauthorization, and have summarized how
NCLB was supposed to work below.

Beginning in the 2005-2006 school year, NCLB required student assessments in math
and reading for every child in grades 3-8 and at least once during high school. As of the
2007-2008 school year, science assessments were added.

The state then sets the achievement level that a school must attain after two years to
continue to show adequate yearly progress (AYP). For a school to show AYP, all
students must meet or exceed that threshold.

Financial Group

51

September 2013

K-12 Education

Sanctions can be
very onerous

BMO Capital Markets

Subsequent thresholds must be raised at least once every three years, with the goal that
after 12 years (initially targeted as 2014), all students in the state achieve at the proficient
level on state assessments in reading/language arts and math.

NCLB also mandated that, by the end of the 2006-2007 school year, all teachers in all
states must be highly qualified teachers (HQT), which generally requires them to have
a bachelor's degree, full state certification, and prove knowledge of the subjects they
teach. In recent years, the number of teachers meeting HQT requirements has been in the
high 90% area.

The initial goal was for all K-12 students to attain reading and math proficiency by 2014,
for all K-12 students to be taught by highly qualified teachers by the end of the 20052006 school year (later extended to the end of the 2006-2007 school year), and for all K12 students to graduate from high school.

As shown in Exhibit 46, sanctions for failure to meet AYP can be very detrimental to schools
as students can transfer out, federal funding can be limited to only certain uses, and ultimately
entire schools can be restructured or transferred to private ownership.

Exhibit 46. NCLB Sanctions


Consecutive
Years of Missing
AYP
First Year

Sanctions
Placed on "watch" list.
Required to develop a school improvement plan.

Second Year

Listed as "needs improvement" school.


District must provide any student attending the "needs improvement" school
the option of attending another school that has met AYP. The district pays
transportation costs.

Third Year

Year 2 sanctions and the school district must offer "supplemental


educational services" to any student who qualifies for free or reduced lunch.
One option for supplemental services must be from an outside provider.

Fourth Year

Year 2 and 3 sanctions and the school must change its staffing or make a
"fundamental change" such as restructuring the school.

Fifth Year

Year 2-4 sanctions and the school must convert into a charter school, turn
management over to a private management company or be taken over by
the state.

Note: Comments in this exhibit do not include additional funding made available through the Stimulus Bill.
Source: BMO Capital Markets and the US Department of Education.

Has NCLB worked? We believe the impact of NCLB remains controversial. While test scores

have increased, the pace of this change has been very slow in recent years and well below the
rate of increase in costs. Additionally, the number of schools not meeting AYP continues to
grow.
After 10 years,
testing data is
mixed . . .

A member of BMO

Exhibit 47 compares per-student expenditures in K-12 public schools with average national
math and reading scores for children in Grades 4 and 8 (latest data available). Although
average per-student expenditures have increased about 38% from 1990 (to 2010; in constant
dollars), average test scores have shown only mild improvements over that time.

Financial Group

52

September 2013

K-12 Education

BMO Capital Markets

Exhibit 47. K-12 Per-Student Expenditures vs. NAEP Math and


Reading Scores (19902012)
$14,000
13,500
13,000
12,500
12,000
11,500
11,000
10,500
10,000
9,500
9,000
8,500
8,000

Pre-NCLB

Expenditure Per Student ($)

Expenditure Per Student


Reading Score
Math Score

270

Post-NCLB

260

240
230
220
210

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

200

Note: Per-student expenditures measured in constant 2009-2010 dollars, using expenditure per pupil in
average daily attendance.
Source: BMO Capital Markets analysis, US Department of Education National Center for Education
Statistics and National Association for Education Progress.

. . . and progress
goals arent being
met.

Additionally, the number of schools failing AYP goals has grown at an alarming rate. A May
2012 survey by the Center on Education Policy found that 48% of schools failed AYP in
FY2011 (latest data available), steadily increasing since FY2006 (see Exhibit 48). We believe
this has only increased since the last survey. Among states with the highest percentage of
schools failing to make AYP include Florida (91%); Washington, DC (87%); and New
Mexico (86%), whereas states with lowest percentage include Wyoming (7%); Wisconsin
(11%); and Kansas (16%).

Exhibit 48. Schools Not Making Annual Yearly Progress (AYP)


Schools Not Meeting AYP (%)
60%
48%

50%
39%

40%
30%

35%
29%

28%

2006

2007

33%

20%
10%
0%
2008

2009

2010

2011

Source: Center on Education Policy and BMO Capital Markets.

39 states and DC
obtained AYP
waivers

A member of BMO

In August 2011, Secretary Duncan announced a formal (though controversial) AYP waiver
program, which relaxes the consequences of non-compliance with NCLB so long as states are
willing to implement other school improvement measures, such as teacher evaluation systems
or transitioning to Common Core Standards (CCS). By the summer of 2013, 39 states and the
District of Columbia had received waivers and several others had submitted applications. In
some respects, the waiver program has functioned as an end-run around reauthorizing ESEA;
as states agree to make reforms to obtain waivers, they have essentially agreed to follow the
kinds of new regulations Democrats have not been able to get through congress.

Financial Group

53

September 2013

NAEP Scores

250

K-12 Education

BMO Capital Markets

Common

After NCLB Common Core Standards (CCS). We expect the focus on implementing CCS

standards could

could provide a spending catalyst for schools, albeit smaller than that provided by NCLB. By
the summer of 2013, 45 states and the District of Columbia had committed to the standards,
which, if fully implemented, could have a broad impact on instructional materials, assessment
methods, and professional development. However, we caution that CCS implementation will
likely not come without political struggles, as Republicans generally support local as opposed
to national standards.

provide a small
spending catalyst

Cost estimates of CCS implementation vary widely. A May 2012 Fordham study found that,
depending on the degree of implementation, states could spend from $3 billion to
$12.1 billion to fully implement CCS by the 2014-2015 deadline, depending on the states
ability to repurpose current materials. Netting out the current state expenditures on materials,
assessment and professional development, this range from savings of about $0.9 billion to a
cost of $8.2 billion. While these expenditures could be significant, we do not believe this is
the kind of spending tailwind that will create sustained industry growth.

Instructional Media and Services


The Instructional Media and Services market was hard hit by the Great Recession, while
ESEA reauthorization and CCS implementation are likely continued overhangs. Using the
Instructional Media and Services component of private equity firm Veronis Shuler
Stevensons (VSS) annual Communications Industry Forecast (2011 edition) and by removing
the K-12 tuition component of its forecast, we calculate that an estimated $8.3 billion will be
spent on this market in 2013. From 2004 through 2007, this spending grew at an 8.2% CAGR
peaking at $9.1 billion in 2007. But the Great Recession took its toll, as spending fell at a
6.9% CAGR before bottoming at $7.9 billion in 2009. Using VSS estimates, we project that
this spending will rebound slightly (assuming the economy cooperates) and reach roughly
$19 billion in 2018, growing at a 1.6% CAGR over that time (see Exhibit 49).

K-12 instructional
media and
services expected
to increase at a
1.6% CAGR
through 2018

Exhibit 49. K-12 Instructional Media and Services Market (20042018E)

Revenues (Billions)

Supplemental
Total y/y change

Testing and assessment


15%
12%
9%
6%
3%
0%
-3%
-6%
-9%
-12%

5
4
3
2
1

20
18
E

20
17
E

20
16
E

20
15
E

20
14
E

20
13
E

20
12
E

20
11

20
10

20
09

20
08

20
07

20
06

20
05

20
04

Annual % change

Basal
Digital-based materials

$6

Note: Shaded area represents recessionary period. Source: Veronis Suhler Stevenson Communications Industry Forecast (September
2012) and BMO Capital Markets.

A member of BMO

Financial Group

54

September 2013

K-12 Education

K-12 global
textbook market
expected to
increase 8.5%
CAGR through
2014

BMO Capital Markets

Another way to view this segment of the market is to measure textbook sales. Outsell pegs the
K-12 global textbook market at $13.2 billion in 2012, increasing 12.7% from 2011 levels. The
company expects the market to continue to grow, forecasting another 8.5% CAGR increase,
and reaching $15.6 billion in 2014 (see Exhibit 50).

Exhibit 50. K-12 Global Textbook Market (20102014E)


$18,000

K-12

14%

Annual % change

16,000

12%
10%

12,000
10,000

8%

8,000

6%

6,000

4%

Annual % Change

Market ($ mil.)

14,000

4,000
2%

2,000

0%
2009

2010

2011

2012E

2013E

2014E

Source: Outsell Incs Whats Next for Textbooks? (March 2012) and BMO Capital Markets.

Basal publishing. Historically, basal publishing has comprised between 75% and 80% of the

total K-12 publishing market and consists of core curricular materials typified by the
traditional textbook but increasingly including digital products. According to Eduventures,
basal spending represents roughly 20% of total annual spending by K-12 schools nationwide.
Textbook publishers compete for the lucrative, state-allocated budgets. Twenty states, known as
adoption states, which represent more than half the US K-12 population, approve and produce
new basal programs typically every five to seven years on a statewide basis before individual
schools or districts can schedule the purchase of materials. In the remaining states, known as
open states or territories, individual schools or districts can procure materials at any time, though
usually according to a five- to nine-year cycle. Nevertheless, this can lead to multi-million-dollar
opportunities in high-profile states, such as California, Florida, and Texas.
Three companies dominate the K-12 basal publishing market: Houghton Mifflin Harcourt
(Houghton Mifflin purchased Harcourt from Reed Elsevier in December 2007), McGraw-Hill
Education (taken private by Apollo Global Management in March 2013), and Pearson
Learning (PSO). These three companies were estimated to represent about 56% of the total
US K-12 publishing market in 2011, according to Simba Information.
While demand can be driven by secular spending needs, such as that provided by NCLB,
demand typically follows enrollment trends and new textbook adoption, with cyclicality
driven by local and federal budget levels. In the prior cycle, K-12 basal content revenues did
not trough until 2004 nearly three years after the end of the 2001 recession.
K-12 basal
publishing: fell
through 2009;
expected 1.6%
CAGR from 2013

We believe the basal content market has seen little growth in recent years, but is stabilizing.
Additionally, we believe ESEA and CCS remain overhangs. VSS estimates that the K-12
basal publishing segment will generate roughly an estimated $4.9 billion in spending in 2013
up 1.3% from the prior year, though the fastest growth since 2010. Using VSS estimates, we
project that this spending will reach over $5.3 billion in 2018, growing at a 1.6% CAGR over
that time (see Exhibit 51).

to 2018

A member of BMO

Financial Group

55

September 2013

K-12 Education

BMO Capital Markets

Exhibit 51. K-12 Basal Publishing Market (20042018E)


Basal Revenues ($ bil.)

20%

% y/y change

15%
5.5

10%
5%

5.0
0%
-5%

4.5

% y/y change

Revenues (Billions)

$6.0

-10%
4.0

-15%
2004

2005

2006

2007

2008

2009

2010

2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Note: Shaded area represents recessionary period. Source: Veronis Suhler Stevenson Communications
Industry Forecast (September 2012) and BMO Capital Markets.

We believe digital media is a disruptive force that poses a threat to the dominance of print
providers. While Outsell does not forecast the shift between digital and print within the K-12
sector, it does forecast that shift for the entire textbook market (including postsecondary). As
shown in Exhibit 52, print textbooks represented an estimated 80% of textbooks sold in 2012,
down from 96% in 2009. The remaining 20% includes digital textbooks (9%) and whole
course solutions (11%), which may include both print and digital mediums. Non-print
formats are expected to grow their share to 35% by 2014.
Digital and whole

Exhibit 52. Global Textbook Market by Type (20092014E)

course solutions

96%

100%

should continue

Digital Textbook Content

93%

Print Textbook Content

Whole Course Solutions

87%

90%

79%

to gain share

80%
69%

70%

65%

60%
50%
40%
30%
16%

20%
10%

2%

2%

4%

3%

8%

5%

9%

16%

17%

18%

12%

0%
2009

2010

2011

2012E

2013E

2014E

Note: Outsell Incs Whats Next for Textbooks? (March 2012) and BMO Capital Markets.

Several drivers of

Some drivers of digital textbook adoption include:

digital content

Increased investment in new digital content providers, and greater acceptance by users.
For example, in June 2013, Apple (AAPL) was award a $30 million deal to provide iPads
to the Los Angeles school district running Pearsons (PSO) common core curriculum.

State and federal initiatives encouraging the transition to e-texts (such as the FCCs
Digital Textbook Playbook initiative).

Private ventures to develop digital texts such as that between Apple and large publishers
including McGraw Hill and Pearson.

Schools preferring to self-author curricula through creation of proprietary digital texts.

A member of BMO

Financial Group

56

September 2013

K-12 Education

Digital textbooks
most sought
after app

BMO Capital Markets

We believe this shift will continue. In a July 2013 survey by researcher Interactive
Educational Systems Design, digital textbooks was by far the top-ranker app that school
district technology and media directors thought would most benefit student instruction (see
Exhibit 53).

Exhibit 53. Top-Ranked Student Instruction Apps (July 2013)


Digital textbooks

77%
54%

Student productivity
Creation tools

52%
35%

Special education
Research and reference

32%

Online "class page"

31%

Student response system/student polling

27%
25%

Educational games
Books and stories

24%
21%

Simulation software
0%

10% 20% 30% 40% 50% 60% 70% 80% 90%

Note: Interactive Educational Systems Design and BMO Capital Markets.

The expected benefits from digital curricula are vast, and include:
And many

Custom content. Digital content enables schools to create unique, customizable

educational solutions that meet specific needs of schools and teachers or standards
required by the district or state.

potential benefits

More content. Digital products increase access to a broader range of learning content

across skill levels and enable schools to offer online programs or courses that otherwise
couldnt be funded.

Price. Owing to their customizable features and digital delivery model, digital products

enable low-cost incremental purchases at the school and classroom level as opposed to
large and costly district-wide purchases of print products.

Mobility. Cloud-based and SaaS products can be used by students, parents, and teachers

at home and at school, and allows collaborative data sharing or lesson planning across
districts and schools.

Assessment capability. Digital products enable comprehensive student learning

analytics and give teachers the ability to drill down into the performance of individual
students and meet regulatory reporting requirements.

A member of BMO

Financial Group

57

September 2013

K-12 Education

BMO Capital Markets

District requirements and regulations. Morel states are passing laws and funding
initiatives to increase the use of digital content and online courses in schools. In addition,
the assessment arm of the EDs Common Core Standards will be all digital, requiring
schools to have this capability.

Greater access. Increased wiring of schools over the years and access to high-speed

Digital texts will


reshape
curriculum

internet have enabled more use of digital products. Government subsidy programs such
as the EDs E-Rate program (started in 1997) also help reduce costs.

industry

While we believe the new toy factor is also a component of this shift, there is growing
evidence at least anecdotally that technology and digital products have a positive impact
on student engagement.
Over the long term, we believe the economics of digital texts promise to reshape the business
of education curriculum. According to Global Equities Research, the cost benefits of selling
electronic books include:

Going digital still


requires a large
initial investment

A member of BMO

No used book market: 35% to 50% of the textbook sales are used books for which
publishers get zero revenue.

No supply chain markup: In the current model, textbooks go from the publisher to the
distributor to the wholesaler to the retailer and then to the end user (i.e., student). The
supply chain markup is between 8% to 15% at each step, totaling between 33% and 35%.

Zero distribution costs, thanks to the magic of the internet.

Cheaper production: iBook production costs are estimated to be 80% less than the cost of
producing a printed book.

Favorable supply/demand curves: At $14.99, publishers might sell 40%-60% more books
than they could at $125.

Nevertheless, we believe the demise of print-textbook is still a long way off. For one thing,
digital textbooks are relatively new and it will likely take several years before their impact on
student learning is better understood and accepted. Additionally, digital textbooks often
require a large initial investment. A February 2012 analysis by Lee Wilsons Education
Business Blog compared the cost of print textbooks versus Apples digital iTexts and found
that - when including the network, training, management and device costs - digital textbooks
were roughly five times more costly on a per-student basis compared to traditional print
textbooks (see Exhibit 54).

Financial Group

58

September 2013

K-12 Education

BMO Capital Markets

Exhibit 54. Textbook vs. iText Cost Per Student


$80

$71.55
70
60

Training

50

Network

40

Device

30

Management
Content

$14.26

20
10
0

Textbook

iText

Source: Education Business Blog and BMO Capital Markets.

ELL students also


represent sizeable
curriculum market

The English Language Learner (ELL) market has also represented a strong pocket of growth
for basal publishers, partly fueled by NCLB requirements. In the 2010-2011 school year, there
were 4.7 million ELL students. However, as shown in Exhibit 55, this population has leveled
off in recent years, and actually declined 2.6% in 2010-2011, though it remained relatively
steady at 9.5% of the total US K-12 public school enrollment.

Exhibit 55. English Language Learners as Percentage of Total K12


Enrollment (Fall 2003Fall 2011)
ELL Enrollment

10%

As % of K-12 Enrollment

9%

As % of Total K-12

ELL Students (Mil.)

8%
2003

2006

2007

2008

2009

2010

2011

Source: US Department of Education National Center for Education Statistics and National Clearinghouse
for English Language Acquisition and Language Instruction Educational Programs.

Supplemental publishing. This market consists of instructional workbooks, study aids,

K-12
supplemental
publishing:
declined through
2009; expected
1.1% CAGR from
2013 to 2018

A member of BMO

digital video products, e-learning, online, and other computer-based systems that augment
traditional in-school learning. Drivers of this market include cheap, easy to use products, and
schools with generally higher levels of technology infrastructure, often incentivized by
government initiatives such as the Common Core Standards and connectivity programs such
as the FCCs e-Rate.
While the K-12 supplemental publishing market shrunk in 2009, it has rebounded somewhat
since. VSS estimates that the K-12 supplemental publishing segment will generate more than
$1.62 billion in revenues in 2013, growing 1.5% from 2012 levels. Using VSS estimates, we
project that this spending will reach roughly $1.71 billion in 2017, growing at a 1.1% CAGR
over that time (see Exhibit 56). We note other estimates for this market are much larger.

Financial Group

59

September 2013

K-12 Education

BMO Capital Markets

Exhibit 56. K-12 Supplemental Publishing Market (20042018E)


Supplemental Revenues ($ bil.)

10%

% y/y change

1.8

5%

1.6

0%

1.4

-5%

1.2

-10%

1.0

% y/y change

Revenues (Billions)

$2.0

-15%
2004

2005

2006

2007

2008

2009

2010

2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Note: Shaded area represents recessionary period. Source: Veronis Suhler Stevenson Communications
Industry Forecast (September 2012) and BMO Capital Markets.

Digital
supplemental
products have
proliferated

Digital products are also making headway in supplemental publishing, and there are numerous
small businesses competing for this market share, including Achieve3000, DimensionU,
Edmentum, Autoskill, Cambium Learning (ABCD), Lexia Learning (purchased by Rosetta
Stone [RST] in July 2013), Scientific Learning (SCIL), and School Specialty (SCHS). This
market also includes the thousands of educational apps now available on mobile devices.
A list of recent transactions in the educational publishing space can be found in Exhibit 57.

A member of BMO

Financial Group

60

September 2013

K-12 Education

BMO Capital Markets

Exhibit 57. Educational Publishing Recent Transactions (20072013)


($ in millions)
Annc.
Date
Jul-13
Jul-13
Jul-13
Jun-13
Jun-13
Apr-13
Apr-13
Apr-13
Feb-13
Jan-13
Jan-13
Nov-12
Nov-12
Oct-12
Aug-12
May-12
Mar-12
Mar-12
Feb-12
Feb-12
Feb-12
Jan-12
Jan-12
Aug-11
Aug-11
Jun-11
Apr-11
Mar-11
Mar-11
Jan-11
Nov-10
Nov-10
Nov-10
Nov-10
Aug-11
Aug-10
Jul-10
Jul-10
Jun-10
Jun-10
Jun-10
Jun-10
Mar-10
Mar-10
Mar-10
Feb-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Aug-09
Jun-09
Apr-09
Apr-09
Mar-09
Mar-09
Mar-09
Jan-09
Jan-09
Jan-09
Dec-08
Dec-08
Dec-08
Oct-08
Oct-08
Aug-08
Aug-08
Jul-08
Jun-08
Jun-08
Jun-08
Apr-08
Feb-08
Feb-08
Dec-07
Nov-07
Aug-07
Jul-07
Jul-07
Jun-07
Jun-07
May-07
May-07
May-07
May-07
Mar-07
Mar-07
Jan-07
Jan-07
Jan-07

Target
Grockit Inc., Test Prep Assets and Social Learning Platform
National Transcript Center
TSL Education Limited
ALEKS Corporation
Springer Science+Business Media S.A.
Learning Catalytics
NewMindsets Inc.
Tribal Nova
Thomson Reuters, Law School Publishing Business
Groupe Modulo
School Specialty
McGraw-Hill Education
John Wiley & Sons Assets
Penguin Group
Key Curriculum Press
Harlan Davidson
Princeton Review (Assets)
GL Education Group
Inscape Holdings
Bendon Publishing International
Talaris Institute
Teaching Strategies, Inc
Learners Publishing
Stark Holding
Carnegie Learning
National Geographic School Publishing
BARBRI
Education Development International
Bookette Software Company
TutorVista Global (76% stake)
Wireless Generation, Inc.
The Administrative Assistants Ltd.
Electronics Blackboard Ltd
Starting Out, Inc.
Renaissance Learning
Fieldstone Alliance (Publishing Arm)
WSI International
Sistema Educacional Brasileiro (Learning Systems Division)
Numicon Ltd.
W3 Insights Ltd
Les Editions EDK
Educationcity Ltd
Plato Learning
Houghton Mifflin (Think Math! Curriculum product)
Editora Artes Mdicas
Atlantic Link Limited
Little Hare Books
Arah Pendidikan
Horwood Publishing
Wydawnictwa Szkolne i Pedagogiczne
Trinity ELL, LLC
Carson-Dellosa Publishing
Voyager Learning Company
Optionetics
Professional Development Software
Wordware Publishing
Bertram Group
DVP Media
Salem Press
Concept Media
Badger Publishing
Princeton Review (K-12 Division)
HighBeam Research
Kane/Miller Book Publishers
The Study Group
Medical Education Technologies
Interverbum Group
Scholastic , Direct-to-Home Business
Pro Lingus
Publications International (Childrens Publishing Division)
Beijing Yanyuan Rapido Education
Princeton Review of Orange County
Princeton Media Associates
Assessment Technologies Institute
Test Services
Houghton Mifflin College Division
Interwrite Learning
Power-Glide
Harcourt U.S. Schools Education Business
Thomson Prometric
Angeles Group
eInstruction
eCollege (including Datamark)
TSL Education
Thomson Learning and Nelson Canada
Harcourt Assessment, Harcourt Education
Wolters Kluwer Education
Learning Horizons
Cambium Learning
Study Island
Von Hoffmann

Acquiror
Kaplan, Inc.
Hobsons
TPG Capital
McGraw-Hill Education
BC Partners
Pearson
ClevrU Corp.
Houghton Mifflin Harcourt
Eureka Growth Capital
TC Media
Bayside Finance
Apollo Global Management
Houghton Mifflin Harcourt
Random House (Bertelsmann)
McGraw-Hill Education
John Wiley & Sons
Charlesbank Capital Partners
Investcorp
John Wiley & Sons
The Wicks Group of Companies
Teaching Strategies
Chicago Growth Partners
Scholastic
Pearson
Apollo Group
Cengage Learning
Leeds Equity
Pearson
CTB/McGraw-Hill
Pearson
News Corp
Pearson
TSL Education Ltd.
McGraw Hill Education
Permira Advisers
Turner Publishing Company
Pearson
Pearson
Oxford University Press
Granada Learning
EDP Sciences
Archipelago Learning
Thoma Bravo
School Specialty
Artmed Editora
Kaplan
Hardie Grant Egmont
Juasa Holdings
Woodhead Publishing
Pahoa Investments
Pearson
School Specialty
Cambium Learning
optionsXpress Holdings
Elsevier
Jones and Bartlett Publishers
Smith News
Jones and Bartlett Publishers
EBSCO Publishing
Cengage Learning
Pandora Books
CORE Education & Consulting Solutions
Cengage Learning
Educational Development
Kaplan
Baird Capital Partners
AAC Global, SanomaWSOY
Sandvik
Kaplan
Learning Curve Brands
Hartcourt Companies
Princeton Review
HMP Communications
Providence Equity Partners
Princeton Review
Cengage Learning
eInstruction
K12
HM Riverdeep
Educational Testing Service
Excelligence Learning
Leeds Equity Partners
Pearson
Charterhouse Group
Apax Partners and OMERS Capital Partners
Pearson
Bridgepoint Capital
Evolution Capital Partners
Veronis Suhler Stevenson
Providence Equity Partners
R.R. Donnelley

Note:
Mean and median data include proprietary information not publicly disclosed.

Transaction
Value
NA
NA
$598.0
NA
$4,422.0
NA
NA
NA
NA
NA
NA
$2,400.0
NA
NA
NA
NA
$33.0
NA
$85.0
NA
NA
NA
NA
NA
$75.0
NA
NA
$166.2
NA
$127.0
$390.0
NA
NA
NA
$0.0
NA
$92.0
$460.9
NA
NA
NA
$87.0
$109.1
$1.8
NA
NA
NA
NA
NA
$125.1
NA
NA
$130.6
$32.9
NA
NA
NA
NA
NA
NA
NA
$9.5
NA
NA
NA
NA
NA
NA
NA
$163.0
$3.5
$31.1
NA
NA
$39.4
$750.0
NA
$4.1
$4,000.0
$435.0
$10.0
NA
$518.0
NA
$7,750.0
$950.0
$1,031.7
NA
$325.0
NA
$412.5
Mean
Median

Transaction Value / LTM


Revenue
EBITDA
NA
NA
5.4 x
NA
3.4 x
NA
NA
NA
NA
NA
NA
1.1 x
NA
NA
NA
NA
0.3 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
3.5 x
NA
NA
NA
NA
NA
NA
0.0 x
NA
1.5 x
1.9 x
NA
NA
NA
9.7 x
1.7 x
NA
NA
NA
NA
NA
NA
1.6 x
NA
NA
1.3 x
NA
NA
NA
NA
NA
NA
NA
NA
0.3 x
NA
NA
NA
NA
NA
NA
NA
1.5 x
4.0 x
2.4 x
NA
NA
2.6 x
3.3 x
NA
NA
3.6 x
1.4 x
NA
NA
9.4 x
NA
NA
1.8 x
2.4 x
NA
3.3 x
NA
NA
2.8 x
2.1 x

NA
NA
12.1 x
NA
9.7 x
NA
NA
NA
NA
NA
NA
5.7 x
NA
NA
NA
NA
2.1 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
10.2 x
NA
NA
NA
NA
NA
NA
0.0 x
NA
NA
14.6 x
NA
NA
NA
14.5 x
7.0 x
NA
NA
NA
NA
NA
NA
14.0 x
NA
NA
NM
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
17.5 x
NA
NA
NA
23.0 x
NA
NA
NA
12.5 x
NA
NA
NA
NA
11.0 x
12.1 x

NA Not Available. Source: BMO Capital Markets and Capital IQ.

A member of BMO

Financial Group

61

September 2013

K-12 Education

BMO Capital Markets

NCLB drove

Testing and assessment. NCLB was the main catalyst for testing assessment demand in the

investments in

2000s. According to the EDs 2010 NCLB accountability report (final report in series), the
federal government spent roughly $2.8 billion from 2002 to 2008 on grants to states for
development of state assessments.

test development

While the initial investment in NCLB assessment has passed, administration and maintenance
expenses remain. According the EDs 2010 report, in 2006-2007 (latest data available), the
median cost that states reported for administering reading and mathematics tests in grades 38
and high school was about $7.5 million. On a per pupil basis, this amounted to a median of
roughly $25, ranging from a low of $3 (North Carolina) to $99 (Delaware).
Common
standards driving
new test
development

More students
taking AP Exams

CCS implementation will likely generate another catalyst for test development. As this
standard is expected to be in place by the 2014-2015 school year, schools that have signed on
will need to have revamped assessments in place that measure performance based on CCS.
One group using RTTT funds to develop a nationwide digital testing standard that complies
with CCS is known as the Partnership for Assessment of Readiness for College and Careers
(PARCC). Twenty-two states have signed on to PARCC, which plans to provide a
comprehensive K-12 assessment system to participating states by the 2014-2015 year.
Advanced Placement (AP) testing also drives assessment demand. According to the College
Board, about 950,000 seniors leaving US public high schools in 2012 took at least one AP
exam, about 32% of the total. This rate has steadily increased since 2000 (see Exhibit 58).

1,000,000

33%

AP test takers
% of total graduates

800,000

30%
27%

600,000
24%
400,000
21%
200,000

18%

15%
2000

2001

2002

2004

2005

2006

2008

2009

2010

2011

As % of Total Graduating Class

High School Students Taking AP


Exam

Exhibit 58. High School Graduates Taking AP Exam (Classes of


20002012)

2012

Note: Data for students at US public schools only. Data not available for 2003 and 2007 classes. Source:
College Board and BMO Capital Markets.

K-12 testing and


assessment:
declined through
2009; expected
1.7% CAGR
through 2018

A member of BMO

VSS estimates that the K-12 testing and assessment segment will generate roughly an
estimated $1.62 billion in revenues in 2013, growing 2% from 2012 levels. This segment was
a bit less volatile than the other two segments within this category, only seeing one down year
(2009) during the Great Recession and its aftermath. Using VSS estimates, we project that
this spending will exceed $1.76 billion in 2018, growing at a 1.7% CAGR over that time (see
Exhibit 59).

Financial Group

62

September 2013

K-12 Education

BMO Capital Markets

Exhibit 59. K-12 Testing and Assessment Market (20042018E)


Testing and Assessment Revenues ($ bil.)

16%

% y/y change

12%

1.5

8%
1.0
4%
0.5

0%

0.0

-4%
2004

2005

2006

2007

2008

2009

2010

2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E

Note: Shaded area represents recessionary period. Source: Veronis Suhler Stevenson Communications
Industry Forecast (September 2012) and BMO Capital Markets.

According to Simba Information, the state-level testing market has been declining in recent
years, and was roughly $1.1 billion in 2011, down from $1.2 billion in 2009. This is owing to
completion of much of the NCLB testing build-out, combined with tighter state budgets and
hesitancy to invest in new assessments owing to the overhangs of CCS and ESEA.
Digital
assessments
gaining ground

Investor risks

We believe digital assessments (like that being developed by PARCC) will continue to gain
ground. Not only does digital capability better comply with CCS, it enables educators to more
easily integrate digital curriculum, assessments, and learning management systems and
provides quicker, more standardized feedback about student performance.
Investment risks in assessment products include state and federal funding levels, commitment
to CCS or other standards, testing errors or other systematic failures, and test manipulation.
Fixing testing errors such as those that led Pearson to pay $15 million to Florida in 2010 to
settle a complaint over delays in reporting test results and led the Educational Testing Service
in 2006 to create an $11 million fund to pay teachers who were given the wrong scores on
licensing exams can hurt from both a financial and headline perspective.
A list of some of test providers can be found in Exhibit 60.

A member of BMO

Financial Group

63

September 2013

% y/y change

Revenues (Billions)

$2.0

K-12 Education

BMO Capital Markets

Exhibit 60. Leading Testing and Assessment Providers


Company (Parent)
ACT, Inc.

Ticker

Amplify (Wireless Generation; News Corp) NWSA


College Board
CompassLearning, Inc. (WRC Media, Inc.)
CTB/McGraw-Hill and The Grow Network
(McGraw-Hill Companies)
Data Recognition Corporation
Educational Media and Publishing Group,
LTD (Houghton Mifflin Harcourt)
Edmentum/PLATO Learning, Inc.

Educational Testing Service


Learning Express LLC
Learning.com
Measured Progress, Inc.
Northwest Evaluation Association
Pearson Educational Measurement,
Pearson Assessment, Pearson NCS, and
Pearson School Systems (Pearson plc)
Questar Assessment
Renaissance Learning, Inc. (Permira)
Scantron Corporation (subsidiary of
Harland Clarke Holdings Corp., wholly
owned by M&F Worldwide Corp.)
Study Island (Archipelago Learning)
The Princeton Review

PSO

Description
Non-profit organization that provides assessment services in the broad areas of education and workforce
development.
Provider of K12 educational software and assessment products to schools and school systems
Offers student assessment and standardized testing, and administers the SAT, the PSAT/NMSQT, and the
Advanced Placement Program (AP).
Products assess student performance, diagnose strengths and weaknesses, and prescribe specific instruction
targeting areas of non-mastery at the classroom, school, or district level.
Offers standardized and custom achievement and aptitude tests as well as assessment reporting for states and
large districts, including customized reports for teachers, parents, administrators, and students.
Provides customized services for large-scale statewide educational assessment programs.
Creates educational, cognitive, and developmental assessment products and offers platforms to help school
districts, administrators, teachers, and parents track student performance on state standards.
Markets web-based solutions that assist in student placement, progress monitoring, and accountability through
diagnostic and prescriptive tests, simulated high-stakes tests, lesson-progress tests, and standards-based and
cumulative tests.
Develops both off-the-shelf and customized tests for district, state, and national usage. Also partners with the
College Board to develop the SAT.
Provides customized test-preparation materials for students and adults to improve their performance on
academic, licensing, and certification exams.
Provides web based curriculum and assessment products through partnerships with schools.
Designs and implements customized large-scale and local assessments for both general and special education,
and offers resources to guide educators through assessment issues.
Develops Measures of Academic Progress (MAP), a computerized adaptive assessment program that provides
educators with information they can use to tailor teaching to the individual student for academic achievement.
Provides customized and off-the-shelf online and print assessments, data management and collection solutions,
and reporting solutions for districts and states.

QUSA.OB Implements large-scale assessment programs through its research, psychometric, and test-development
services.
Develops assessment systems for reading, math, language acquisition, writing, and standards mastery to help
districts satisfy state standards and achieve AYP objectives.
MFW
Offers a web-based assessment platform with a content-neutral structure and multiple delivery capabilities. Used
to manage tests, to develop new ones, to administer them online or on paper, and to report results.
Markets online, state standards-based learning programs
Delivers online and print formative-assessment programs in math, ELL/ESL, and reading, and will introduce
science and social studies assessments in the fall of 2006.
Provides scheduling, delivery, test content, scoring, and reporting tools for large-scale online assessments in
subjects such as math, reading, and writing. School management and student database management systems.
Offers services in development, implementation, and evaluation of assessments on the school, district, state, or
national level in subjects such as literacy, math, and science.

Vantage Learning
WestEd

Source: BMO Capital Markets and Eduventures.

Technology in the K-12 Sector


A 2011 report by Innosight Institute found that schools spent more than $60 billion equipping
students with computers over the past 20 years. Advancements in software, mobile
technologies, and cloud-based computing have prompted new companies to enter this market
with innovative, easy-to-use and affordable content and tools, such as online learning aids,
learning management systems, interactive whiteboards, tablets, e-readers, and course
management software.
K-12 ed-tech
estimated 3.6%
CAGR through
2018

A member of BMO

According to Gartner research, an estimated $9.2 billion will be spent on technology in the
US K-12 sector in 2013. Based on Gartner forecasts, we estimate this spending will grow at a
roughly 3.6% CAGR, reaching $11 billion in 2018, mostly led by increases in the software
and services segments (see Exhibit 61).

Financial Group

64

September 2013

K-12 Education

BMO Capital Markets

Exhibit 61. US K-12 Technology Revenues (20102018E)

Total Spending ($ in bil.)

$12

Software

Internal Services

Hardware

IT Services

Telecommunications

2010

2011

2012

2013E

2014E

2015E

2016E

2017E

2018E

Source: Gartner estimates.

Most of the K-12


ed-tech budget is
at the district level

A 2012 survey by Simba Information found that the primary source of technology funding for
most schools was at the district level, and is thus highly sensitive to economic fluctuations
(see Exhibit 62). We believe this has led to large discrepancies in technology spending across
districts; while some schools are purchasing new iPads for students, others still use computer
hardware purchased in the 1990s.

Exhibit 62. Sources of Technology Funding for US K-12 Schools


District budget
School general budget
Don't know
Federal funding
Other
District bond
State/regional agency grant
Private grant

33.5%
22.5%
15.2%
11.0%
5.5%
4.4%
4.2%
3.7%

Source: Simba Information.

We have provided details on the various component of K-12 ed-tech spending below.
Software is the

K-12 software market. Using Gartners definition, software is the largest component of US

fastest growing

K-12 technology spending, and is expected to reach an estimated $2.83 billion in 2013, or
about 31% of all K-12 technology spending. It is expected to be the fastest-growing
component of K-12 technology spending, increasing at an 8.1% CAGR to $4.2 billion in
2018. The Software & Industry Information Association (SIIA) pegs the K-12 software
market as being much larger, estimating that $7.76 billion was generated in K-12 software
and digital content/resources in 2011 up from $7.5 billion in 2010.

component of K12 ed-tech;


estimated 8.1%
CAGR through
2018
Learning
management
systems (LMS)
A member of BMO

We believe Learning Management Systems (LMS) are likely one of the largest software
expenditures for schools, and have been a core area of investment in education technology in
recent years. Originally designed as an administrative tool to help manage and organize the
Financial Group

65

September 2013

K-12 Education

BMO Capital Markets

classroom, LMS have evolved into virtual eco-systems that link students, teachers, and
parents in an online environment where all aspects of learning can be monitored, analyzed,
and managed.
LMS have many areas of focus, including course and assignment delivery, assessment
tracking and analytics, social and collaborative networking, and demographic and socioeconomics student information systems. Modern LMS increasingly utilize cloud-based
technologies and open source development to enable real-time access and easier installation
and configuration of content and user functions. While various LMS do exist as separate
systems, the lines between them are increasingly becoming blurred by hybrid systems that
incorporate several functions as single solutions.
While LMS have been around since the 1990s, adoption quickened following NCLB, which
required schools to report performance data in ways only supported by electronic data
systems. While these systems may have initially been geared more toward the managerial
functions of running a school and tracking student performance, recent growth has also been
driven by the increase in digital curriculum and virtual class initiatives. Additionally, the
move to CCS and the economic stimulus package in 2009 also incentivized investments in
LMS. We believe these drivers, along with improving technology and growing acceptance of
the benefits of LMS, have driven widespread adoption in recent years. According to a Simba
Information survey, the penetration rate of LMS in K-12 schools ranges from 68% to 88%,
depending on how LMS is defined.
As service offerings vary widely, the definitions of different kinds of LMS are constantly
changing. However, we have provided the three following categories of LMS as defined by
Simba Information. We note that many of these companies also provide LMS products to the
postsecondary education space, and believe these definitions are roughly consistent across
both K-12 and higher learning.
1.

Traditional LMS. These represent standalone learning management systems and include
leading commercial open-source products such as Blackboard, Desire2Learn, and
Moodle. Traditional LMS include the full suite of products that provide the infrastructure
for online course delivery, collaboration, and management functions. These are opensystems in that they can work with content and technology provided by outside
companies.

2.

LMS Lite. These are newer systems that offer alternatives to the traditional model and

allow more flexibility both in terms of price and customization. These systems generally
have fewer features but are more user-friendly and focus on specific functions such as
course supplements, data management, or augmenting a current LMS with a social
networking function. These products are sometimes available free online with costs
incurred at varying service levels. Companies providing these products include Edmodo,
Schoology, and Sophia.
3.

A member of BMO

Enterprise platforms. These are broad infrastructure solutions that integrate an LMS
with other enterprise functions such as student information systems or curriculum
management. They are often marketed by publishers and tied to proprietary products as is
the case with Houghton-Mifflin Harcourts Pinpoint.

Financial Group

66

September 2013

K-12 Education

BMO Capital Markets

PreK-12 LMS

Given these broad definitions, it is difficult to gauge the size of the LMS market. However, in
its estimate of market size, Simba Information defined an LMS as organization software that
enables the administration, tracking, and reporting of student information across all types of
education activities; the delivery of courses; and the facilitation of collaboration and
communication. As shown in Exhibit 63, Simba estimates the US PreK-12 market for LMS
amounted to roughly $305 million in 2011-2012, and forecasts it to grow to about
$377 million in 2014-2015, a CAGR of about 7.3%.

market expected
to grow at a 7.3%
CAGR through
2014-2015

Exhibit 63. US PreK-12 LMS Sales (20112012 to 20142015)


LMS Sales

$400

% change y/y

8.5%
8.0%

($ millions)

350
7.5%
300

7.0%
6.5%

250
6.0%
200

5.5%
2011-2012

2012-2013

2013-2014

2014-2015

Source: Simba Information and BMO Capital Markets.

Drivers of LMS adoptions in schools include:

States efforts to comply with data management requirements recommended by the ED


(this was part of the requirement for receiving stimulus aid following the Great
Recession).

The growing use of online virtual schools (fully online school) and blended learning (a
mix of online and classroom based learning). According to Innosight Institute, the
number of students taking online courses grew from 45,000 in 2000 to more than
4 million in 2010.

Potential educational benefits of using an LMS.

We believe cost remains a key barrier to LMS adoption. In a 2012 survey by Simba, more
than 43% of schools cited cost as the biggest impediment to LMS implementation. However,
we believe this may drive schools to experiment with lower-cost LMS Lite technologies,
which has helped drive innovation in the industry.
Most of the purchase decisions on LMS are still made at the district level, but we expect
cooperation at the state level to increase as states pursue common standards. According to
Simba Information, commercial LMS providers are the most common, accounting for 42.9%
of district systems; this is followed by 11.8% that are developed within the district and 4.7%
made available by the state. We expect district systems may gain traction as more schools
form cooperative consortiums to develop technology capabilities at lower costs.
PreK-12 LMS
market is very
fragmented
A member of BMO

The commercial LMS industry is very fragmented and competitive with many providers who
operate within different niches. According to a Simba survey (2012 latest available) Moodle
(open source) was the most common LMS provider, followed by Pearson (see Exhibit 64).
Financial Group

67

September 2013

K-12 Education

BMO Capital Markets

Exhibit 64. PreK-12 School Market Share of LMS Vendors (2012)


Other
Moodle (open source)
Pearsons Learning Studio
Blackboard (including Angel and Learning and Elluminate)
Houghton Mifflin Harcourt Pinpoint
Global Scholar Pnnacle Suite
STI Classroom
Desire2Learn
It's Learning

52.6%
18.5%
11.9%
6.6%
4.1%
2.9%
2.5%
0.6%
0.4%

Source: Simba Information.

Included in the Other category, which makes up more than half of this market, are
companies that provide some LMS capabilities but are not considered full LMS providers.
These include CompassLearnings Odyssey, Edmodo, Houghton Mifflins Data Director
McGraw Hill Educations ConnectED, Pearsons (PSO) Successmaker and Plato Learning
Environment. We believe this high level of fragmentation will continue to drive M&A in the
sector as companies seek to provide the full suite of technology offerings.
We believe states efforts to comply with national standards and guidelines have helped shape
how LMS have developed in recent years as schools implement systems that comply with
state standards. For example, in return for receiving stimulus money from the 2009 Recovery
Act, states were required to meet the 12 criteria established as part of the 2007 America
COMPETES Act that required various data management capabilities (see Exhibit 65).

Exhibit 65. America COMPETES Act Requirements


Criteria
1. Unique student identifier
2. Student-level information about transfers, dropouts, and grade completion
3. State data audit system
4. Data on students not tested, by grade and subject
5. Student-level transcript information
6. Student data on transitions to higher education, including remedial courses
7. Student-level demographic, program-participation data
8. Capacity to communicate with higher education data systems
9. Yearly testing data for individual students
10. Capacity to match student data to individual teachers
11. Student-level college-readiness test scores
12. Other data on student preparation for higher education
Source: Education Week, US Department of Education and BMO Capital Markets.

Additionally, to help states ensure that data systems met NCLB mandates, the Data Quality
Campaign (DQC) established a common road map for state information systems. Most states
have made significant progress on meeting these voluntary benchmarks (see Exhibit 66).

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68

September 2013

K-12 Education

BMO Capital Markets

Exhibit 66. States Progress Toward Meeting Data System Elements (2005 and 20092011)
Essential Element
1. A unique student identifier that connects student data across key databases across yea
2. Student-level enrollment, demographic and program participation information
3. The ability to match individual students' test records from year to year to measure acad
4. Information on untested students and the reasons they were not tested
5. A teacher identifier system with the ability to match teachers to students
6. Student-level transcript data, including information on courses completed and grades e
7. Student-level college readiness test scores
8. Student-level graduation and dropout data
9. The ability to match student records between P-12 and postsecondary systems
10. A state data audit system assessing quality, validity and reliability

2005
36
38
32
25
13
7
7
34
12
19

Number of States*
2009
2010
50
52
51
52
50
52
47
49
24
35
23
37
36
46
51
52
33
41
51
52

2011
52
52
52
51
44
41
50
52
49
52

Source: National Center for Education Statistics and BMO Capital Markets. (*) Includes the District of Columbia and Puerto Rico.

DQC also recommended 10 State Actions to ensure data can be linked across education
systems and is accessible to stakeholders. Exhibit 67 outlines states progress in meeting these
actions. We note attainment was the highest in 2012, but trends have been choppy.

Exhibit 67. States Progress Toward Meeting Data System Actions (20102012)
State Action
1. Link state K-12 data systems with early learning, postsecondary education, workforce,
social services and other critical agencies

2010
10

No. of states
2011
2012
11
14

2. Create stable, sustained support for robust state longitudinal data systems

32

27

35

3. Develop governance structures

40

36

40

4. Build state data repositories (e.g., data warehouses) that integrate student, staff,
financial and facility data

40

44

45

5. Implement systems to provide all stakeholders with timely access to the information
they need while protecting student privacy

6. Create progress reports with individual student data that provide information
educators, parents and students can use to improve student performance

23

29

36

7. Create reports that include longitudinal statistics on school systems and groups of
students to guide school-, district-, and state-level improvement efforts

27

36

42

8. Develop a purposeful research agenda and collaborate with universities, researchers


and intermediary groups to explore the data for useful information

28

31

38

9. Implement policies and promote practices, including professional development and


credentialing, to ensure educators know how to access, analyze and use data
appropriately

10. Promote strategies to raise awareness of available data and ensure that all key
stakeholders, including state policymakers, know how to access, analyze and use the
information

23

26

Source: National Center for Education Statistics and BMO Capital Markets. (*) Includes the District of Columbia and Puerto Rico.

K-12 hardware

K-12 hardware market. Using Gartners definition, hardware spending, and computers (e.g.,

sector estimated

networking equipment, PCs, notebooks, tablets and other electronic devices) is expected to
represent roughly 14% of total US K-12 technology spending in 2013, reaching roughly $1.31
billion. Using Gartner estimates, we forecast roughly 3% CAGR growth to $1.52 billion in 2018.

3% CAGR through
2018

These products are generally provided by the largest global computer companies including
Apple (AAPL), Dell (DELL), Hewlett-Packard (HPQ), Panasonic, Sony, and Samsung.
However, there are many niche companies with products serving the education market,

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September 2013

K-12 Education

BMO Capital Markets

including Amplify Education (part of News Corp.), Brainchild, Educad Learning Solutions,
EduMetry, and eInstruction Corp.
Almost all US
public schools
have computers
with internet

A May 2010 (latest available) report by the NCES found that 97% of US public schools have
instructional computers with internet access inside classrooms and that the average number of
computers per classroom was three. Using average class sizes per the OECD (2007-2008
school year), this amounts to roughly 7-8 students per computer (see Exhibit 68).

access

Exhibit 68. Technology Hardware Use and Penetration in K-12


Schools (Fall 2008)
Computing and Technology Hardware
Schools with fixed instructional computers in classroom
School with mobile laptop cart
Schools with available take-home computers
Average number of fixed computers per classroom
Average number of students per computer (including mobile laptops)
Technology Devices
Handheld device (i.e. blackberry) for teachers
Handheld device (i.e. blackberry) for students
LCD and DLP Projectors
Videoconference Units
Interactive Whiteboards
Classroom/student response systems
Digital cameras (still and video)
MP3 Players/iPods
Document cameras (image transferring devices)
Distribution of instructional computers
Laptops on carts
Classrooms
Computer labs
Library/Media centers
other

97%
58%
6%
3
3
% of schools
with device
15%
4%
97%
22%
73%
38%
93%
13%
52%

Students/Teachers
per device
4
21
32
308
65
144
74
69
59

% of computers
14%
51%
27%
6%
2%

Wireless Access
No access
Only from mobile laptops to cart
Access in part of school
Access in whole school

22%
9%
30%
39%
Disagree
23%
60%

Tech infrastructure is adequate


Funding for technology is adequate

Agree
77%
40%

Source: National Center for Education Statistics and BMO Capital Markets.

Younger students
have greater
access to
technology than
their older

According to the Simba Information survey, students at elementary schools generally had
more access to technology than those at middle and high schools. Among the most commonly
used products were computers, interactive whiteboards, and projectors, although tablets and ereaders have made significant inroads considering the short period of time schools have been
using them (see Exhibit 69).

counterparts

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Financial Group

70

September 2013

K-12 Education

BMO Capital Markets

Exhibit 69. Technology Hardware Use and Penetration in K-12


Schools (20112012)
Elementary
73.7%
79.5%
61.6%
82.3%
67.4%
36.3%
12.3%
19.8%
3.9%
43.9%

Interactive whiteboards
Projectors
Document camera
Desktop computers
Laptop/netbook computers
Tablet computers/iPads
Ereaders
MP3 players/iPods
Smartphones
Student ressponse systems/clickers

Middle/Jr.High
57.0%
63.2%
46.7%
63.2%
56.7%
25.4%
12.5%
16.0%
4.4%
37.4%

High School
53.9%
58.6%
44.4%
57.4%
53.9%
28.4%
13.9%
15.8%
9.3%
35.6%

Don't Know
1.1%
0.9%
6.5%
0.4%
1.6%
9.3%
19.1%
18.2%
21.1%
8.9%

Source: Simba Information and BMO Capital Markets.

However, despite the growing prevalence of in-school computing, we believe several


implementation hurdles remain, including:

Implementation, support, and infrastructure especially difficult for wireless


implementations and the increasing number of devices on a network.

Professional development mainly teacher and administrator training.

Integration and interoperability complicated by the existence of legacy systems and


platform-specific tools.

K-12 IT Systems Market. Another portion of K-12 technology spending includes systems that

help school districts manage and analyze back-office operations, as well as administrative and
transactional data. Traditionally, these enterprise-level applications were primarily operated in
isolation from instructional activities and were reserved for larger school districts with more
than 25,000 students. Recently the market among medium- to small-sized school districts has
grown as schools look to integrate human resources, finance, and procurement system
(HRFPS) and instructional data. This has reduced the deal size, which was typically in excess
of $1 million.
Future growth in the HRFPS segment is expected to be driven by the trend of connecting
entire districts through LMS, as well as the need for data-driven decision making. Still, these
complex business management systems have high switching costs, and therefore, we project
somewhat limited year-over-year growth. Leading providers in this segment include IBM
(IBM), Lawson Software, Oracle (ORCL), Pearson (PSO), and SunGard.
K-12 Online Schools. Online learning generally consists of two formats: (1) fully online

virtual schools (100% online); and (2) blended learning (combined online with in-class
learning).
Drivers of K-12 online learning include technological advancements, greater access, a need to
cut costs, and a robust market of new product development from new and existing players.
Additionally, we believe online learning has benefitted from an overall positive legislative
environment and greater public support.

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Financial Group

71

September 2013

K-12 Education

Various estimates
of the K-12 online
school market,

BMO Capital Markets

Some estimates of the size of this market include the following:

Evergreen estimates there were approximately 275,000 students enrolled in full-time


online schools in the 2011-2012 school-year - up from 250,000 in the prior year.
Additionally, there were 620,000 online course enrollments (one student on a onesemester-long course) in 28 state virtual schools.

The National Alliance for Public Charter Schools estimates that of the 4,921 charter
schools in 2009-2010, about 219 (4.5%) were virtual schools and 134 (2.7%) were hybrid
virtual schools. We note there were an estimated 6,000 charter schools in the 2012-13
school year, but the virtual school breakdown was not available.

According to the NCES, in the 2009-2010 school year (latest data available), there were
an estimated 1.82 million enrollments in distance education courses in K-12 school
districts, almost all of which were online courses, with about 74% at the high school
level.

In 2011, approximately 40 states operated or authorized online schools that students may
attend full or part time, with 30% of high school and 19% of middle school students
having taken at least one course either blended or fully online. In addition, 30 states and
Washington, D.C. have statewide full-time online schools, while 27 states have state
virtual schools.

but all show a


small but robust
segment

We provide some detail on differing models based on research provided by Evergreens


Keeping Pace with Online Learning below:

Single-district online programs are created by a district primarily for students within
that district. While they may be fully online, most provide supplemental online courses
for students enrolled full-time in the district and accessing most of their courses in a
physical school. Single district programs are the fastest-growing segment of both online
and blended learning.

Multi-district fully online schools are the main education providers for their students,
who do not need to go to a physical school to access any aspect of their education
(although they may do so). These schools focus on fully online schools that operate
across multiple school districts and often draw students from an entire state.

State virtual schools are created by legislation or by a state-level agency. They are

often, but not always, administered by a state education agency and funded by a state
appropriation or grant to provide online learning opportunities to students across the
state. They also may receive federal or private foundation grants, and they sometimes
charge course fees to help cover operating costs. Some of the largest state virtual
programs include:

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Florida Virtual School, founded 1997, with 303,329 course enrollments in 2012.

North Carolina Virtual Public School, founded in 2007, with 97,170 course
enrollments in 2012.

Alabama ACCESS, founded in 2005, with 44,332 course enrollments in 2012.

Financial Group

72

September 2013

K-12 Education

BMO Capital Markets

Consortium and online programs often are developed by districts, education service
agencies, or intermediate service units that wish to create efficiencies by combining
resources. They usually serve students from multiple districts that join the consortium.

Postsecondary programs include many private pay options, but this report focuses on
programs working with school districts to provide publicly funded options to students.

We believe the growth of public online schools represents an enormous opportunity for
vendors of educational technology products. According to the 2008 Sloan survey (latest
available), independent vendors were the third most common supplier of fully online content,
and the fourth most common supplier of blended programs (see Exhibit 70).

Exhibit 70. Online Content Providers to Public K-12 Schools (2008


Survey)
Instruction Providers
Postsecondary institution
State virtual school in state (i.e., state-centralized K-12 courses)
Independent vendor
Education service agences (e.g., BOCES, COE, IU)
Another local school district or other district in state
District (i.e., delivered centrally from the district)
State virtual school in another state
Cyber (i.e., online) charter school in district
Other schools in district
Districts or schools in other states (excluding virtual schools)
Other

% of Districts Using Provider


Fully Online
Blended
47%
27%
41%
15%
35%
18%
29%
15%
21%
19%
17%
35%
10%
2%
9%
7%
6%
5%
5%
2%
2%
2%

Source: Sloan Consortium and BMO Capital Markets.

K-12 online
schools more
prevalent at
higher grade

We believe online learning is more prevalent at the higher grade levels, where demand for
credit recovery, AP classes, and other alternative learning is higher, whereas lower grade
levels require more student/teacher interaction and supervision (see Exhibit 71; 2008 survey is
latest data available).

levels

Exhibit 71. Percentage of Students in Online Courses by Grade


Level (2008 Survey)
Grade
K-5
6-8
9-12
Other

Fully Online
21%
15%
64%
<1%
100%

Blended
1%
20%
78%
<1%
100%

Total
14%
17%
69%
<1%
100%

Source: Sloan Consortium and BMO Capital Markets.

Virtual schools
can be more
profitable than
brick-and-mortar
charter schools

A member of BMO

Virtual schools should generate larger profits than their brick-and-mortar charter peers. While
they typically receive the same amount of per-student funding (albeit less than that given to
traditional public schools), they have a lower cost structure (i.e., no buildings, fewer
teachers, etc.) An October 2006 report by consultants Augenblick, Palaich & Associates
estimates that start-up costs for a virtual school serving 500 students would be in the
$1.5 million range, and annual FTE costs were estimated at $7,200-$8,300 per full-time
student. However, we believe there are a number of scale benefits similar to most technologydriven businesses, allowing larger virtual school operators to generate sizeable margins,
despite being funded at lower rates than traditional bricks-and-mortar schools.
Financial Group

73

September 2013

K-12 Education

BMO Capital Markets

In Exhibit 72, we outline the cost similarities and differences between operating virtual and
brick-and-mortar schools.

Exhibit 72. Cost Types: Brick and Mortar vs. Virtual Schools
Brick-and-Mortar School Only
Buildings and grounds maintenance
Security
Transportation
Energy
Computer and internet access for
every teacher
Substitute-teacher costs (for sick
days or professional development)
Athletics
Music program (e.g., band)

Online School Only


Space for offices and computer lab
for students
Course-management system
Course content
Computer and Internet access for
every teacher and student
Mobile-communication device for
teachers (e.g., cellphone) and
network
Technology support (e.g., help desk,
course updating, server
maintenance)
Marketing and advertising

Nursing services

Both
Administration
Teachers
Students
Professional development
Student-information system

State testing system

Textbooks
Courses and course outlines
approved by governing board
Access to computers
Special education services
Student support (counseling, library)
Network infrastructure
Telephones and network

Source: Sloan Consortium and BMO Capital Markets.

In many instances, the virtual school model is similar to the charter school model, where a
not-for-profit entity receives the charter and hires an education management firm, or an EMO,
to operate the school. According to the National Education Policy Center, there were 104
EMO-operated virtual schools in 2011-2012 (latest available), with 95 of these operated by
for-profit EMOs. Of the schools operated by for-profit EMOs, the bulk were run by five largesized organizations: K12 Inc. (LRN), Leona Group, Mosaica Education, Pearsons (PSO)
Connections Academy, and White Hat Management.
K-12 online
schools growth
drivers and
headwinds

Unique drivers of K-12 online learning include:

Credit recovery and supplementary courses.

Parental choice or child need for an online or distance environment.

Higher quality of online offerings and improved access.

The increasing acceptance of charter schools and raising of enrollment caps.

The growth of district-led online schools and online consortium schools.

Philanthropic initiatives and grants such as the Bill and Melinda Gates Foundation and
the Dell Foundation.

Hurdles to growth include the following:

A member of BMO

Fiscal caps. While virtual schools may reduce per-student funding costs, funding models
where money does not follow the student are vulnerable to cuts in state and federal
spending programs.

Financial Group

74

September 2013

K-12 Education

BMO Capital Markets

Student outcomes. As of yet, there are no definitive studies on the outcomes of 100%
online education. In fact, recent EDs Annual Yearly Progress data (AYP) found that
many fully online for-profit EMO schools performed below their ground-based peers. We
believe this is driving more district-led online school models as parents, teachers, and
administrators seek non-profit, local alternatives that often have a ground-based
component.

Enrollment caps. Many states put limitations on virtual school enrollment, prohibit

cross-district enrollment, or require certain teacher certifications. We believe online


schools will continue to be subject to strong enrollment regulation.

Accreditation. As online school accreditation is relatively new and uncharted territory,

we believe substantial risk remains to both consumers and providers, as consumers may
enroll in unaccredited schools while providers may be subject to evolving accreditation
standards.

Ownership models. Online charter schools are often operated under a charter held by a

non-profit entity, which then hires a for-profit company to run and manage the school.
We believe this model has created some controversy among those who believe state
funding should not be funneled to for-profit schools.
We believe the relatively mixed M&A record in this space speaks to the difficulty the private
sector has had in building for-profit online schools. Except for K12 (LRN), the track record
for public company investment in this space has been subpar:

In January 2007, Apollo Group (APOL) acquired Insight Schools, which served roughly
600 students in Washington State, for $15.1 million. However, after continuing losses,
APOL sold the business in February 2011 to the Washington Posts (WPO) Kaplan unit.

In May 2011, K12 Inc. (LRN) purchased Kaplans K-12 assets including Insight Schools.

In October 2007, DeVry (DV) acquired Advanced Academics, which operated virtual
high schools in six states, for $27.5 million. Then, in August 2012, the company
announced it was taking a $19 million impairment charge at this unit in FY4Q12, owing
to disappointing revenue performance. In August 2013, DeVry announced plans to sell
the unit.

Recent notable technology deals in the K-12 space include:

A member of BMO

In March 2012, Plato Learning acquired Archipelago Learning for $291 million, a 23%
premium to the stocks prior closing price and EV/TTM EBITDA multiple of 14.3x.

In August 2011, Renaissance Learning announced plans to be taken private by private


equity firm Permira for $440 million. The price was a 26% premium over the stocks prior
close and implied an EV/TTM EBITDA multiple of roughly 10.9x EV/TTM EBITDA.

In August 2011, Apollo Group (APOL) announced the acquisition of Carnegie Learning,
a developer of learning tools for K-12 students, for $96.5 million. The rationale was to
de-emphasize Carnegies K-12 business while using the companys software for its
students at its own postsecondary schools.

Financial Group

75

September 2013

K-12 Education

BMO Capital Markets

In July 2011, Blackboard was taken private by Providence Equity Partners for
$1.64 billion, a 21% premium to the stocks close prior to the announcement and a
roughly 11.6x EV/TTM EBITDA multiple.

In November 2010, News Corporation (NWSA) acquired Wireless Generation, a K-12


provider of digital curriculum and student assessment and performance software, for
$360 million.

Other K-12 Services


Using prior Eduventures definitions, we have defined three categories in the Other K-12
Services segment within K-12 education:

Other K-12
services: declined
through 2010,
expected 2.5%
CAGR through
2018

1.

Professional development

2.

Tutoring and test preparation

3.

Outsourced school administration

It was difficult to accurately assess the size of this market owing to classification differences.
Nevertheless, using prior Eduventures estimates and more recent Outsell projections, we
estimate that roughly $6.9 billion in revenues will be generated from the Other K-12 services
market in 2013, increasing by roughly 2.9% from 2012. We are cautiously optimistic that
growth will continue and forecast revenues to increase 2.5% CAGR thereafter, reaching
roughly $7.7 billion in 2017 (see Exhibit 73). We believe professional development may
experience the highest growth rate as teachers transition to CCS-based curricula.

Exhibit 73a. Other K-12 Revenues: 20022018E

Revenues (Billions)

Tutoring/Test Prep
Total y/y change

10%

8%

6
6%

5
4

4%

2%

2
0%

20
18
E

20
17
E

20
16
E

20
15
E

20
14
E

20
13
E

20
12
E

20
11
E

20
10

20
09

20
08

20
07

20
06

20
05

20
04

-2%
20
03

20
02

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

Professional development. In recent years, more focus has been placed on improving

teaching quality as a means to improve student outcomes. While the initial impetus for this
stemmed in part from the original NCLB Act, which required schools to ensure that all
teachers were highly qualified (HQTs), we believe professional development has become a
more integral part of K-12 education as new teacher tracking and accountability systems
become more widespread, and as schools adopt CCS.
We believe the original HQT requirement was successful in raising awareness of teacher
quality and development issues, as this required all teachers have a bachelors degree and
state certification. In recent years, the percentage of schools reporting HQT compliance has

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Financial Group

76

September 2013

Annual % change

Professional Development
Outsourced School Administration

$8

K-12 Education

BMO Capital Markets

been in the high 90% area vs. the low 90% area in the early 2000s. We note this measure has
come under criticism as some believe the standards have been watered down.
While ensuring teacher quality standards in some form will likely remain a part of ESEA
reauthorization, the switch to the CCS may be the next catalyst for increased professional
development as compliance involves a new set of teaching standards. However, as CCS is
only voluntary at this point, the amount of investment schools choose to make in this area is
open to wide speculation at this point. However, we note several companies have started to
market CCS compliant development programs, including Achieve3000, Inspiration Software,
and McRel.
In addition to helping schools comply with standards, we believe professional development
also has the potential to improve retention. In a 2004 study published in the American
Teachers Journal, turnover for first-year teachers with comprehensive induction, which
includes targeted and ongoing professional development, was only 9% versus 20% for those
teachers with no induction.
Professional
development:
expected 3%
CAGR through
2018

It is very difficult to estimate the size of the K-12 professional development market. Using
prior Eduventures estimates, we estimate that roughly $3.77 billion will be spent on K-12
professional development in 2013, increasing roughly 3.3% from the prior year. We are
cautiously optimistic that growth will continue, and forecast 3% CAGR thereafter, reaching
roughly $4.36 billion in 2018 (see Exhibit 73).

Exhibit 73b. K-12 Professional Development Revenues: 2002


2018E
Prof. Dvlpmt. Revenues ($ bil.)

4%

% y/y change

3%

2%
3

1%

0%
-1%

% y/y change

Revenues (Billions)

$5

-2%

18
E
20

16
E

17
E
20

20

14
E

15
E
20

20

12
E

13
E
20

20

11
E
20

20
10

20
09

20
08

20
07

20
06

20
05

20
04

20
03

20
02

-3%

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

Most development
provided
internally

However, given historical trends, budget pressure, and cost-cutting we believe for-profit
businesses may likely capture only a small piece of this pie. Responding to the Great
Recession, several schools retained professional development in house as a means to save
jobs. In addition, many districts procure professional development locally or regionally, often
from former employees, universities, and smaller outfits whose people they know. According
to an article in Education Week, Pearson (PSO) estimated that in 2007 about half of
professional development was provided internally or by regional education service agencies, a
quarter by nonprofits such as universities, 15% by individuals from outside the district, and
just 10% by for-profit organizations.
Federal funding for teacher quality had remained relatively flat for much of the past decade
(see Exhibit 74).

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Financial Group

77

September 2013

K-12 Education

BMO Capital Markets

Exhibit 74. Teacher Development Budget Programs (FY2009


FY2014E)
($ in mil.)
Effective Teachers and Leaders State Grants
Improving Teacher Quality State Grants
Ready to Teach
Teacher and Leader Innovation Fund
Teacher Incentive Fund
Advanced Credentialing
Teacher and Leader Pathways
Transition to Teaching
Teacher Quality Partnership
Teachers for a Competitive Tomorrow
Baccalaureate STEM and Foreign Languages
Masters STEM and Foreign Languages
Teach for America
School Leadership
Total

CR
Request
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
0
0
$0
$0 $2,467 $2,467
$2,947 $2,947
2,465
2,467
0
0
0
0
0
0
0
0
0
0
0
0
400
400
97
400
399
299
0
0
11
11
0
0
0
0
0
0
0
0
0
0
44
44
41
26
0
0
50
43
43
43
0
0
0
0
0
0
0
0
1
1
0
0
0
0
1
1
0
0
0
0
0
18
0
0
0
0
19
29
29
29
0
0
$3,170

$3,494

$2,977

$2,864

$2,867

$2,867

Source: BMO Capital Markets and US Department of Education. Note: CR refers to the continuing
resolution reached for they FY2011 budget. FY2013 represents White Houses request.

The three funding programs are defined as follows:

Effective Teachers and Leaders State Grants promote and enhance the teaching profession

through recruitment, preparation, incentives, and retention. The grants are intended to increase
the effectiveness and improve the preparation of teachers and principals.

Online tools offer


affordable
development
options

The Teacher and Leader Innovation Fund makes competitive awards to states and Local
Education Authorities (LEAs) to improving the effectiveness of the education workforce in
high-need schools by creating the conditions needed to identify, reward, retain, and advance
effective teachers, principals, and school leadership teams in those schools.

We believe growth opportunities in this market exist in online professional development tools
as schools have sought less expensive alternatives to traditional in-class professional
development. Additionally, we believe teachers are increasingly using online professional
learning networks for advice, opinions, discussions, collaboration, and lesson planning. These
platforms generally resemble free social networking sites and include ASCD Edge, Classroom
2.0, Edmodo, and Edweb.net.
Market participants in the professional development segment typically fall into one of three
categories: content providers, consultancies, and professional development organizations.
Content providers offer professional development training that aligns with their core business
of educational content sales. Consultancies enter into contracts with the school, district, or
state to provide professional development services. Finally, professional development
organizations focus exclusively on providing development training.
Although the market remains highly fragmented, professional development providers include
a range of publishing companies (e.g., Houghton Mifflin, Pearson) and not-for-profit
providers (e.g., National Center on Education and the Economy, or NCEE). In addition, notfor-profit universities as well as certain for-profit schools (e.g., Laureate Educations Walden
University, Apollo Groups University of Phoenix, and Education Managements Argosy
University) serve this segment of the market. A list of selected K-12 professional
development providers can be found in Exhibit 75.

A member of BMO

Financial Group

78

September 2013

K-12 Education

BMO Capital Markets

Exhibit 75. Leading K-12 Professional Development Providers


Company (Parent)
AED (Academy for Educational Development)
Canter (Laureate Education)
Edvantia

Ticker

Houghton Mifflin Harcourt

Knowledge Delivery Systems


McREL (Mid-Continent Research for Education
and Learning)
Pearson Pearson Learning Teams, Assessment PSO
Training Institute
School Improvement Network
Solution Tree
Teachscape

Description
Non-profit agency
Provides online, self-guided, self-paced continuing education courses.
Not-for-profit corporation focused in six specialty areas: program evaluation, applied research,
data analytics, school coaching, district performance improvement, and state education
agency capacity building.
Offers online, on-campus, regional, and national workshops throughout the year where
educators can brainstorm, develop new strategies, and gain practical solutions to issues in
teaching and learning. Also trains teachers to become district-level coaches in math and
reading.
Online professional development
Nonprofit, nonpartisan education research laboratory where knowledge about what works in
education is turned into practical guidance for educators
Provides programs such as district professional development, distance and site-based
graduate courses, and master's degree programs.
Known for its Video Jounral of Education programs
Provides comprehensive, research-based professional development for K12 educators
Provides online courses, materials, and regional and national conferences for schools and
districts.
Focuses on professional development programs that helps teachers improve student literacy
rates, principally operating in the western United States.

WestEd Quality Teaching

Source: BMO Capital Markets and Education Week.

importance

A more emerging area of professional development includes teacher evaluation programs.


While controversial, several states and districts are pressing ahead with plans to find new
ways to evaluate teacher performance. States implementing teacher review systems include
Delaware, Georgia, New York, Rhode Island, and Tennessee, among others.

NCLB was early

Tutoring and test preparation. This market comprises third-party providers of test

catalyst, but

preparation and tutoring services for students, with revenues paid by schools and school
districts. In the early 2000s, NCLB was a catalyst for this industry as it required schools to
purchase supplemental education services (SES) from third-party providers. However, we
believe the SES market has struggled in recent years for several reasons including
underutilization, lack of funding to states, and increasing waivers granted to schools freeing
them from NCLB mandates. While we expect tutoring companies selling to private purchasers
will continue to have a niche, we expect the larger opportunity of selling directly to schools
will be difficult.

Teacher
evaluations
gaining

growth now
sluggish

While it is very difficult to estimate the size of the K-12 tutoring and test preparation market,
we have seen estimates as high as $5-$7 billion (Education Industry Association). Using prior
Eduventures estimates, we estimate that just under $1 billion will be spent on K-12 tutoring
and test preparation in 2013, down about 1.5% from the prior year. We are cautiously
optimistic that the sector will once again grow, though project it will take some time to get
back to its prior peak (see Exhibit 76).

A member of BMO

Financial Group

79

September 2013

K-12 Education

BMO Capital Markets

Exhibit 76. K-12 Tutoring and Test Preparation Revenues: 2002


2018E
Tutoring/Test Preparation Revenues ($ bil.)

30%

% y/y change

25%
20%

1.0

15%
10%
0.5

5%

% y/y change

Revenues (Billions)

$1.5

0%

8E

6E

7E

20
1

20
1

5E

20
1

3E

2E

4E

20
1

20
1

20
1

1E

20
1

20
1

20
10

20
09

20
08

20
07

20
06

20
05

20
04

20
03

-5%

20
02

0.0

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

We attribute the mid-2000s growth in this sector to NCLB. Under the original framework of
NCLB, schools not meeting AYP for two consecutive years were required to use a portion of
Title I funding to provide SES to students in the form of after-hours programs, in-school
tutoring, or online instruction. While this helped drive strong growth in this segment (an
estimated CAGR of 17% from 2002 to 2006, according to Eduventures), As shown in Exhibit
77, the total number of tutoring service providers more than tripled to 3,050 between 2003
and 2008 (latest data available), mostly attributed to private providers. Between May 2003
and May 2008 the share of private SES providers increased to 88% from 60%, while the share
of district and school providers decreased to 10% from 32%.

Exhibit 77. Approved Providers of Supplemental Education


Services (20032008)
3,000

Private providers

School districts and public schools

Other

Number of providers

2,500
2,000
1,500
1,000
500
0
2003

2004

2005

2006

2007

2008

Source: BMO Capital Markets estimates and US Department of Education.

Number of
providers has
fallen dramatically

A member of BMO

However, we believe demand for private SES has waned as school budgets have come under
pressure and NCLB waivers have enabled schools to provide SES themselves, as opposed to
outsourcing to third parties. In August 2013, the head of the Education Industry Association
was quoted in Education Week stating that he thought the number of providers has fallen 50%
form its peak. Additionally, we have some conflicting research as to the overall effectiveness
of SES programs.

Financial Group

80

September 2013

K-12 Education

Fraud, scandals
complicate SES
business

Large companies
and technology
products still
prevalent

BMO Capital Markets

Further complicating this industry are the allegations of fraud on behalf of some SES providers.
In May 2012, the Princeton Review was accused of fraudulently billing New York City schools
for millions of dollars in reimbursement for tutoring services over the period from 2006 to 2010
(we note the Princeton Review discontinued its SES business in 2010). Additionally, in March
2006, privately held Platform Learning and Newton Learning were accused of offering cash to
principals and gifts to students in New York City to boost attendance in their programs.
While the growth in this industry that followed NCLB is not likely to return, we believe the
larger providers not reliant on federal funds and that have achieved some scale represent
relatively more stable investments. These include Huntington Learning, Kaplan (a subsidiary
of Washington Post [WPO]), Kumon, and Sylvan Learning. We also believe continued
technology and online enabled products will continue to emerge, adding more investment
opportunities in this sector. Companies that specialize in online tutoring and test preparation
include domestic providers such as Tutor.com (acquired by IAC in January 2013) and
Smarthinking, and offshore providers such as Edcomp Solutions and TutorVista. We believe
websites such as Khan Academy would also fit into this description. We have provided a list
of companies providing K-12 tutoring and test preparation services in Exhibit 78.

Exhibit 78. Leading K-12 Tutoring and Test Preparation Providers


Provider
A to Z In-Home Tutoring
Brainfuse Inc.
Club Z! Inc.
EdisonLearning
Educateonline
Failure Free Reading
Huntington Learning Centers
Kaplan K12 Learning Services
Knowledge Learning Corp.
Kumon North America
Newton Learning - Edison Learning
PLATO Learning
Princeton Review
Sylvan Learning Systems
University Instructors Inc.

Ticker

Type

Types of Delivery

WPO

SES/private
SES
SES/private
SES/other public
SES
SES/private
SES/private
SES/other public
SES/other public
SES/private
SES/other public/private
SES
SES/other public/private
SES/other public/private
SES/other public/private

Individual tutoring; small-group instruction


Individual tutoring; small-group instruction
Individual tutoring; small-group instruction
Individual tutoring; small-group instruction
Individual and online tutoring
Individual and online tutoring; large- and small-group instruction
Individual tutoring; small-group instruction
Large-group instruction
Large- and small-group instruction
Individual instruction; large- and small-group instruction
Large-group instruction
Computerized instruction
Large- and small-group instruction
Individual tutoring; online courses; small-group instruction
Individual tutoring; small-group instruction

Source: BMO Capital Markets and Eduventures.

EMOs a

Outsourced school administration. Education management organizations (EMOs) were

flourishing part of

introduced in the early 1990s and manage traditional K-12 public schools on behalf of a
school district (contract schools) or manage charter schools as the charter holder (charter
schools) or under contract with the charter holder (contract charters). EMOs grew out of
widespread interest in market-based school reform, and, in the early years, were mostly
contract schools. However, with the rise of the school voucher system and charter schools
both models that allowed taxpayer funds to follow students to independent schools EMOs
have increasingly moved toward charter school management (typically managing schools for
another entity that held the charter) and contract charter management.

K-12 landscape

EMOs have been controversial as some view them as diverting funds from traditional schools,
while others do not support the for-profit motive. Nevertheless, they have flourished in recent
years owing to greater political acceptance and advances in technology that have created a
new market for online K-12 learners. While concerns over quality and outcomes remain, we
believe the EMO model will continue to grow. However, as shown in charts below, the nonA member of BMO

Financial Group

81

September 2013

K-12 Education

BMO Capital Markets

profit side of this business is growing faster than that of their for-profit peers - a trend we
expect to continue in the near- to mid-term.
Non-profit EMOs
outnumber forprofits, and
gaining share

According to data from the National Education Policy Center (NEPC), there were 296 EMOs
in the 2010-2011 school year, a roughly 30% CAGR from only six in 1995-96 (see Exhibit
79). However, much of this growth has come from non-profit EMOs, which represented
roughly 67% of the total in 2010-2011.

Exhibit 79. Number of For-Profit and Nonprofit EMOs (19962011


School Years)
250

For Profit EMOs

Nonprofit EMOs

200
150
100
50

2010-2011

2009-2010

2008-2009

2007-2008

2006-2007

2005-2006

2004-2005

2003-2004

2002-2003

2001-2002

2000-2001

1999-2000

1998-1999

1997-1998

1996-1997

1995-1996

Note: NEPCs Measurement methodology changes frequently and may not include some smaller EMOs.
Source: National Education Policy Center and BMO Capital Markets.

When looking at the number of EMO managed schools, the trend is somewhat similar. As
shown in Exhibit 80, for-profit EMO school growth outpaced that of non-profit schools early
in the 2000s, but has been stagnant in recent years, losing share to non-profit schools, which
represented about 61% of the total in 2010-2011.

Exhibit 80. Number of For-Profit and Nonprofit EMO Schools


(19962011 School Years)
1400

For-profit EMO schools

1200

Non-profit EMO schools

1000
800
600
400
200

2010-2011

2009-2010

2008-2009

2007-2008

2006-2007

2005-2006

2004-2005

2003-2004

2002-2003

2001-2002

2000-2001

1999-2000

1998-1999

1997-1998

1996-1997

1995-1996

Note: NEPCs Measurement methodology changes frequently and may not include some smaller EMOs.
Source: National Education Policy Center and BMO Capital Markets.

A member of BMO

Financial Group

82

September 2013

K-12 Education

BMO Capital Markets

But for-profit

Finally, when looking at students in EMO schools, for-profit student growth has largely
outpaced that of non-profit growth. However, as with the two charts above, for-profit student
growth appears to be flattening while non-profit student growth remains on an upswing (see
Exhibit 81). We note that, on average, for-profit EMO schools enroll considerably more
students, at 520 per school, versus 328 for non-profit schools in the 2010-2011 school year.
We attribute this to the greater scaling abilities of virtual schools, which skew toward the forprofits.

EMOs have
relatively larger
schools (in terms
of number of
students)

Exhibit 81. Number of For-Profit and Nonprofit EMO Students


(2002-2011 School Years)
450,000

For-profit EMO students


375,000

Non-profit EMO students

300,000
225,000
150,000
75,000

2010-2011

2009-2010

2008-2009

2007-2008

2006-2007

2005-2006

2004-2005

2003-2004

2002-2003

2001-2002

Note: NEPCs Measurement methodology changes frequently and may not include some smaller EMOs.
Source: National Education Policy Center and BMO Capital Markets.

We attribute non-profit EMO growth to several factors including better technology and virtual
offerings, and the emergence of non-profit consortiums that have formed in recent years to
help schools build virtual offerings through the sharing of resources, technology and best
practices. Additionally, given concerns over education quality and outcomes, we believe
consumers tend to prefer non-profit based education alternatives (if available) as they are
often viewed as having fewer conflicts of interest. Still, we note non-profit EMOs may still
purchase content from for-profit providers.
District
takeovers

Political
environment
becoming more
favorable to
EMO model

A member of BMO

We have also seen instances where for-profit EMOs have taken over entire schools districts
that have been underperforming. In July 2012, for-profit provider Leona Group LLC was
invited to take over the three schools in the Highland Park, Michigan school district after
years of academic underperformance and accusations of financial improprieties. This follows
Muskegon Heights, Michigans decision the same month to hire for-profit provider Mosaica
Education to run that districts four schools; that district faced some similar issues.
Despite the controversy, we believe the EMO model is here to stay. This has partly been
driven by growing dissatisfaction with traditional schools that has led to more support for
alternative models. Additionally, we believe the political environment is relatively favorable,
and note the current Secretary of Education, Arne Duncan, is on record as a strong supporter
of the charter school system. While a reauthorization of ESEA may lead to more regulation,
this may also bring more legitimacy and stability to the business model.

Financial Group

83

September 2013

K-12 Education

Quality concerns

Negative publicity

EMOs: expected
2.6% CAGR
through 2018

BMO Capital Markets

However, we believe fully online for-profit EMOs face the toughest criticism when it comes
to quality, as these outcomes are likely the hardest to measure. According to the NEPC, forprofit EMO schools were not far below the national rate, with 48% making AYP compared to
52% of all public schools in the 2010-2011 school year. But when looking only at for-profit
virtual schools, those making AYP fell to 27%. We note some of this may be skewed, as
virtual schools often cater to lower performing student groups.
A headwind for the sector remains the negative fallout from high-profile failures. For
example, in April 2012 the Missouri Board of Education voted to close six charter schools
operated by Imagine Schools, citing poor performance and allegations of financial
improprieties. In New Orleans, many of the charter schools that partnered with for-profit
operators following Hurricane Katrina in 2005 eventually severed those ties in ensuing years.
In 2002, Pennsylvania took over the Philadelphia school district and gave 45 schools to forprofit and non-profit EMOs to manage; however, by 2010, the district had taken many of
those schools back owing to poor results. This has resulted in some negative legislation, such
as in New York, where although the charter school cap was raised in May 2010, the state
banned operators from hiring for-profit entities to manage schools.
It is very difficult to estimate the size of the K-12 outsourced school administration market.
Using prior Eduventures estimates, we estimate that just over $2 billion will be spent on K12 outsourced school administration in 2013, increasing about 3% from the prior year. We are
cautiously optimistic that annual growth will continue and forecast 2.6% CAGR, reaching just
over $2.3 billion in 2018 (see Exhibit 82).

Revenues (Billions)

$2.5

Outsourced School Admin. Revenues ($ bil.)

40%
35%
30%
25%
20%
15%
10%
5%
0%
-5%

% y/y change

2.0
1.5
1.0
0.5

20
17
E
20
18
E

20
15
E
20
16
E

20
13
E
20
14
E

09

08

07

06

05

04

10
20
11
E
20
12
E

20

20

20

20

20

20

20

03
20

20

02

0.0

% y/y change

Exhibit 82. K-12 Outsourced School Administration Revenues


(20022018E)

Note: Shaded area represents recessionary period. Source: BMO Capital Markets estimates and
Eduventures.

The EMO segment has a number of different components:


Charter schools are independent publicly funded schools typically governed by a group or

organization under a legislative contract or charter with the state or jurisdiction. The charter
exempts the school from having to comply with state or local regulations. In return, the school
must meet accountability standards articulated in its charter, which is reviewed periodically
(typically three to five years). Often highly politicized, charter schools are widely viewed as a
disruptive movement within education, as these schools are often formed by groups that are
unsatisfied with current educational options and seek to create something that provides an
educational alternative or challenges the status quo. Additionally, as charter holders often
contract with private companies to run all or part of the schools, charter schools have become
a key component of market-based education models.

A member of BMO

Financial Group

84

September 2013

K-12 Education

BMO Capital Markets

Charter schools are often formed with a more pointed mission than traditional schools, and
often have specific goals to teach certain curricula, appeal to specific demographics or attain
certain academic goals. As a result, governance systems vary widely, but often include a blend
of non-profit and for-profit agencies. A typical example may be a non-profit group that holds the
charter, but contracts with a for-profit company to operate the school or provide curricula. In
recent years there has been an increase in the number of not-for-profit Charter Management
Organizations (CMO) such as Aspire Schools and Knowledge Is Power Program (KIPP). We
believe growth drivers of this industry include favorable regulatory policies, poor performance
of traditional schools, greater public acceptance of charters, and the rise of virtual learning.
Industry has
shown solid
growth

The first charter school was approved in Minnesota in 1992 and the industry has shown
impressive growth since. According to the National Alliance for Public Charter Schools
(NAPCS), there were nearly 6,000 K-12 charter schools serving nearly 2.3 million students in
the 2012-2013 school year. Since the 1999-2000 school year, the number of charter schools
has grown on average by roughly 11% annually, while charter school enrollment has
increased at roughly 15,5% annually, clearly outpacing the less than 1% average K-12
enrollment growth over the same period (see Exhibit 83). According to the NAPCS, for the
2010-2011 school year (latest data available), roughly 68% of all charter schools were
freestanding organizations, 12% were run by EMOs, and 20% run by CMOs.

Schools

2,500,000

6,000

Students

2,000,000

5,000
4,000

1,500,000

3,000

1,000,000

2,000
500,000

1,000
2012-13

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

0
1993-94

No. of Students

7,000

1992-93

No. of Charter Schools

Exhibit 83. K-12 Charter Schools and Enrollment (19921993 to


20122013)

Note: Number of students prior to 1995-96 school year was not available.
Source: BMO Capital Markets, National Alliance for Public Charter Schools, Charter School Leadership
Council and Center for Education Reform.

Charter schools
represent about
3% of total K-12
enrollment . . .

Data from NCES varies slightly, but it estimates that in the 2010-2011 school year (latest data
available), there were 5,274 charter schools operating in the US (roughly 3.3% of all K-12
schools), serving about 1.8 million students (roughly 3% of total enrollment; see Exhibit 84).

Exhibit 84. K-12 Market by Segment: Number of Schools and


Enrollment (20102011 School Year)
Public
Private
Charter
Total

Schools
# of schools
93,543
33,366
5,274
132,183

total %
72.3%
25.8%
4.1%
102.1%

Enrollment
(x1000)
total %
47,391
87.0%
5,391
9.9%
1,787
3.3%
54,569
100.2%

Students
Per School
507
162
339
336

Source: Center for Education Reform, BMO Capital Markets and US Department of Education National
Center for Education Statistics.

A member of BMO

Financial Group

85

September 2013

K-12 Education

State regulations
limit growth

But acceptance
growing

High waitlists at
charter schools

BMO Capital Markets

The growth of charter schools is highly dependent on state and local regulation. Currently,
according to the NCES, the nine states that do not have any charter programs include
Alabama, Kentucky, Montana, Nebraska, North Dakota, South Dakota, Vermont,
Washington, and West Virginia. However, even states that allow charters do so at varying
degrees, and often impose limitations on enrollment and growth. According to the NAPCS, 23
states had some type of caps on charter schools and enrollment in the 2009-2010 school year
(latest available). This results in different charter penetration rates across the country.
Nevertheless, while states and districts continue to tussle on charter regulations, we believe
the environment for charters schools has generally become more favorable over time. In 2009,
President Obama called on states to lift charter caps, and, in recent years, several states
including Arkansas, Louisiana, Massachusetts, Michigan, New Hampshire, and Oregon have
lifted (though not always removed) charter caps, with others, such as Texas, considering
similar action. In general, we attribute this change to states desires to save costs while
addressing the issue of perpetually underperforming schools. But public perception of charters
has also been turning more positive. According to a September 2011 Kappan/Gallup poll,
70% of Americans approved of the concept of charter schools.
Another indicator of growing demand for charters is the high level of students on wait lists.
According to the NAPCS, 610,000 students were on wait lists to attend charter schools in the
fall of 2011 (latest available) - up dramatically from 365,000 students in the fall of 2008, the
first year of the survey (see Exhibit 85). According to the survey, 64% of charter schools
reported having children on their waiting list, with an average list of 228 students per school.
We believe waiting lists continue to grow and note a quick web search turns up many stories
providing anecdotal evidence.

Exhibit 85. Total Charter School Demand (20082009 to 20112012


School Years)
3,000,000

Charter school enrollment

Charter school demand

2,500,000

Students

2,000,000
1,500,000
1,000,000
500,000
0
2008-09

2009-10

2010-11

2011-12

Source: National Alliance for Public Charter Schools and BMO Capital Markets. Note: Charter school
demand data only tracked back to 2008-09. 2011-12 demand data is BMO estimate.

Virtual education
driving growth

A member of BMO

We attributed some of this increase in demand to the growth of online learning and virtual schools.
While states are increasingly offering their own virtual school options, the private sector has led
this growth. According to NEPC, students enrolled in EMO-operated virtual schools had grown to
115,000 in the 2010-2011 school year (latest available) from 11,500 in 2003-2004.
Financial Group

86

September 2013

K-12 Education

BMO Capital Markets

Private school

The growth in charter school enrollment coincides with a decline in private school enrollment.
According to NCES, enrollment in private schools of roughly 5.39 million in the 2010-2011
school year (latest available) was down nearly 15% from a peak of 6.32 million in the 20012002 school year (see Exhibit 86). As of percentage of total K-12 enrollment, private schools
represented 9.8% in the 2010-2011 school year down from a peak of 12.7% in the mid1980s.

enrollment
declining as
charter school
enrollment rises

Private school enrollment (millions)

Private School Enrollment (in millions)

% of total K-12 enrollment

13%

12%
6
11%
5
10%

9%

19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10

Percentage of total K-12 enrollment

Exhibit 86. K-12 Private School Enrollment and Percentage of


Total K-12 Enrollment (Fall 1970 to Fall 2010)

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.
Note: Enrollment for fall of each year, not all years available. Tuition data for 2001-2002 and 2005-2006
are BMO estimates.

Financial hurdles

One impediment to the charter schools sector is the lack of funding relative to traditional
schools. Typically, charter school operators must fund real estate, facility, and other start-up
costs on their own; preliminary data from an April 2013 survey by the NEPC shows that charter
schools that rent their facility from a private organization spend more (10.2%) than schools that
own their facility (9.4%) and those that rent the facility from a school district (2%).
Additionally, charter schools typically receive less funding overall; according to the Center
for Education Reform, funding is about 27% less at roughly $7,600 per student versus
$10,400 for traditional public schools (2010-2011 school year; latest available). This requires
charters to find alternate funding sources, either private lenders or bank loans. Additionally,
we believe this has helped drive the growth of consortiums of charter groups and management
organizations, which often make it easier to source funding initial costs.

Growth has not


been without
controversy

Research is mixed

A member of BMO

Charter schools remain somewhat controversial, however. What was originally intended as an
experimental arm for traditional schools where new ideas could be tested has evolved into an
industry that is sometimes viewed as more of an adversary than a partner. While advocates of
the industry view charters as a healthy dose of market-based stimulus for a failing system,
detractors view charters as not providing any better outcomes while luring students and
funding away from already struggling traditional schools.
Part of the controversy stems from the mixed research on charter school outcomes. Given the
high degree in variability of charter schools (demographics, mission, teaching style), it is
difficult to compare results to traditional schools or even other charters. While there are
dozens of studies on the subject, two high profile examples of recent (and somewhat mixed)
research include:
Financial Group

87

September 2013

K-12 Education

BMO Capital Markets

A June 2009 report by Stanfords Center for Research on Education Outcomes (CREDO)
analyzed data on more than 70% of the nations charter school students in 15 states and the
District of Columbia. The study found that 46% of charter school students had math gains
that were statistically indistinguishable from their public school peers, while 17% of
charter students exceeded traditional students and 37% fell below. However, the study
found much variation across states.

A June 2010 report by Mathematica examined the performance of students who were
admitted to charter middle schools through a randomized lottery process against those who
were not. On average, the research found the charter school students performed no better or
worse than traditional public schools. However, charter schools were more effective for
lower-income and lower-achieving students and less effective for higher-income and
higher-achieving students. In addition, the study found charter schools in large urban
districts had a positive impact on math achievement, while charter schools outside large
urban districts had a negative impact.

There are many other issues that confront this sector as well. For one, there have been several
highly publicized incidents of charters being closed owing to financial mismanagement.
Additionally, the sector is often criticized for being unwelcoming of teacher unions, having
selective student enrollments, and creating political tensions among state and local regulators.
Contract schools

While not as common as they once were, contract schools are public schools operated by
private organizations, typically under management agreements with local school boards.
Unlike charter schools, contract schools do not require specific statutory authority but are
created through a contract between a school management company and a school board.
However, like charter schools, contract schools are accountable for student performance and
may lose contracts if they fail to meet specified standards. In addition, contract schools are
typically less expensive to fund as they often use existing facilities and therefore do not
require real-estate-related financing as do charter school operators. In addition, both
organizations are almost exclusively funded through taxpayer dollars and operate under a
profit motive that encourages efficiencies not found in public schools.

Top EMOs

With the exception of K12 (LRN) and Connections Academy (owned by Pearson [PSO]), all
of the major EMOs (charter and contract school operators) are privately held, although not all
are for-profit (e.g., KIPP). A list of the top 20 for-profit and not-for-profit EMOs (ranked by
enrollment) can be found in Exhibits 87 and 88.

A member of BMO

Financial Group

88

September 2013

K-12 Education

BMO Capital Markets

Exhibit 87. Top 20 For-Profit Educational Management Organizations (ranked by


students in 20102011 school year)
Rank
1
8
2
3
4
5
6
7
9
10
11
12
13
14
15
16
17
18
19
20

Company
K12, Inc. (LRN)
Charter Schools USA*
National Heritage Academies
Imagine Schools
EdisonLearning (formerly Edison Schools)
Academica
Connections Academy (PSO)
The Leona Group, LLC
White Hat Management LLC
Mosaica Education
Altair Learning Management
Insight Schools
SABIS Educational Systems
Victory Schools
Constellation Schools
OmniVest Properties Management, LLC
The Romine Group
CS Partners, LLC
Cambridge Education LLC
Global Educational Excellence

Location
Herndon, VA
Fort Lauderdale, FL
Grand Rapids, MI
Arlington, VA
New York, NY
Miami, FL
Baltimore, MD
Phoenix, AZ
Akron, OH
New York, NY
Columbus, OH
Portland, OR
Eden Prairie, MN
New York, NY
Parma, OH
Newtown, PA
Utica, MI
Hartland, MI
Westwood, MA
Ann Arbor, MI

Public Schools
Under
Management
49
58
67
83
49
56
14
61
46
33
1
8
9
15
18
8
5
13
6
9

That are
Charter
Schools
37
48
67
83
33
56
11
61
45
32
1
8
9
14
18
8
5
13
0
9

Students in
Managed
Schools
65,396
50,000
42,503
38,656
28,863
23,424
20,403
17,947
15,245
10,520
8,361
8,049
6,735
5,829
3,925
3,843
3,665
3,626
3,067
3,003

Note: Charter Schools USA data obtained from company and website. Source: BMO Capital Markets based on information compiled by the
National Education Policy Center, University of Colorado at Boulder.

Exhibit 88. Top 20 Not-For-Profit Educational Management Organizations (ranked by


students in 20102011 school year)
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Organization
Knowledge is Power Program (KIPP Foundation)
Partnership for Los Angeles Schools
Cosmos Foundation, Inc.
Academy for Urban School Leadership
Aspire Public Schools
Green Dot Public Schools
Concept Schools
Options for Youth
American Quality Schools
Responsive Education Solutions
Alliance for College-Ready Public Schools
IDEA Public Schools
Uncommon Schools
PPEP and Affiliates
UNO Charter School Network
Achievement First
Uplift Education
ICEF Public Schools
Lighthouse Academies
YES Prep Public Schools

Location
San Francisco, CA
Los Angeles, CA
Houston, TX
Chicago, IL
Oakland, CA
Los Angeles, CA
Rosemont, IL
Hesperia, CA
Chicago, IL
Lewisville, TX
Los Angeles, CA
Weslaco, TX
New York, NY
Tucson, AZ
Chicago, IL
New Haven, CT
Irving, TX
Los Angeles, CA
Framington, MA
Houston, TX

Public Schools
Under That are Charter
Management
Schools
102
102
21
0
33
33
19
0
30
30
18
18
25
25
8
8
13
13
38
38
18
18
16
16
16
16
12
12
13
13
20
20
17
17
15
15
12
12
8
8

Enrollment
28,261
18,815
16,711
9,843
9,816
8,943
8,384
8,308
7,576
7,324
6,873
6,855
5,568
5,554
5,404
5,293
4,681
4,473
4,469
4,286

Source: BMO Capital Markets based on information compiled by the National Education Policy Center, University of Colorado at Boulder.

A member of BMO

Financial Group

89

September 2013

K-12 Education

BMO Capital Markets

Special education schools are specialty schools that serve children with special education

needs (e.g., autism, learning disabilities). Most of these students are eligible for public
funding under the Individuals with Disabilities Education Act (IDEA) that was reauthorized
in December 2004 with most provisions taking effect in July 2005. We believe this market is
relatively more stable during difficult times as government is generally very reluctant to
reduce this funding owing to political pressures.
Roughly 13% of
US public school
population gets
special education
services provided

According to the ED, in the 2010-2011 school year (latest data available) nearly 6.4 million
school-age children in the US roughly 13% of the total US public school enrollment
received IDEA funding; this is down from the peak of 6.7 million in 2006-2007 (see Exhibit
89). We believe this decline is not necessarily owing to fewer students needing these services,
but rather to more stringent eligibility requirements owing to budget constraints.

by ED

Students served under IDEA (in mil.)

15%

% of total public school enrollment

14%
13%

12%
4
11%
3
10%
2

9%

2008-09

200405

200001

199697

199293

7%
198889

0
198485

8%

198081

197677

Total Served Under IDEA (mil.)

% of Public School Enrollment

Exhibit 89. Students Served Under IDEA (19761997 to 20102011


School Years)

Source: BMO Capital Markets and National Center for Education Statistics.

$78.3 billion spent


on special
education
students in 19992000 school year;
likely now well
above $100 billion

Post-stimulus
spending returns
to more historical
levels

A member of BMO

The latest estimate we have for the size of the special education market is from a 2004 study
by the American Institute for Research Special Education Expenditure Project (SEEP). In the
1999-2000 school year, approximately $50 billion was spent on special education services in
the US or roughly $8,080 per special education student. Another $27.3 billion was spent on
regular education services for these students, while an additional $1 billion was spent on other
special needs programs (e.g., Title I, English language learners), for a grand total of
$78.3 billion, or about $12,369 per student. Given inflation along with the continued increase
in the special needs population, it is likely that total spending is now well above the
$100 billion level.
The current IDEA expired in June 2010 and has yet to be reauthorized, though funding has
continued to be provided. The budget proposal for annual funding has remained relatively flat
at around $12 billion since FY2005 (excluding a $12.2 billion stimulus boost in FY2010; see
Exhibit 90). We note federal funding is normally will below the 40% (i.e., full funding)
levels promised in the original 1975 IDEA.

Financial Group

90

September 2013

K-12 Education

BMO Capital Markets

Exhibit 90. IDEA Funding; (Excluding Stimulus; FY2001FY2014E)


IDEA Funding ($ bil.)

25%

y/y change

20%
15%

10

10%
5%
5

0%

% y/y change

Funding (Billions)

$15

-5%

FY

FY

20
01
20
0
FY 2
20
0
FY 3
20
0
FY 4
20
0
FY 5
20
0
FY 6
20
0
FY 7
20
0
FY 8
20
0
FY 9
20
1
FY 0
20
1
FY 1
20
1
FY 2
20
1
FY 3
20
14

-10%

Source: BMO Capital Markets and Department of Education. Note: FY2010 excludes $12.2 billion in ARRA
funds. FY2012 represents White Houses request.

States may lower


special education
funding under
recent guidance

Voucher funding
reaches
$533 million

Companies
serving special
education market

Traditionally, states were required to maintain special education budgets at current funding
levels to comply with the federal maintenance of effort rule, which requires such funding be
either flat or up year to year, with violations risking the loss of federal funding. However, ED
guidance in mid-2011 allowed states to reduce special education funding in one year, then be
in compliance the following year as long as they met the new reduced level (vs. the prior
formula, which penalized states until they spent at the previous maximum level). While this
may provide more flexibility to states, it could allow special education funding levels to
decrease somewhat.
Over recent years, dissatisfaction with the level of special education provided by public
schools has led to the development of state programs to provide vouchers for special
education students to attend private schools, potentially providing new types of government
funding for providers of these programs. While controversial, these programs are slowly
making headway. According to the Alliance for School Choice, nine states, the District of
Columbia, and one county in Colorado had voucher programs in 2012-2013, enrolling nearly
98,000 students via $533 million in state and federal funding. This compares to just 25,000
students in five states with about $168 million in funding in the 2009-2010 school year. We
believe voucher programs will continue to grow, but note the system remains controversial.
We believe the escalating costs of special education also present opportunities for businesses
that can provide consulting services. Additionally, we note the use of virtual technologies for
special education has also started finding a niche. Some businesses in this space include the
following:

A member of BMO

Operators of alternative or special education schools, such as privately


Education Group, Camelot Schools, Community Education Partners,
Services of America, Specialized Education Services, Inc (ESA) and
Managements LifeSkills Centers and publicly held Providence Service
(PRSC) and Universal Health Services (UHS).

Financial Group

91

held Aspen
Educational
White Hat
Corporation

September 2013

K-12 Education

BMO Capital Markets

Product and service companies that have offerings specifically designed for specialeducation students, including publicly held Cambium Learning Group (ABCD), Catapult
Learning, Futures Education, Renaissance Learning, Scientific Learning (SCIL) School
Specialty (SCHS), and GlobalScholar.

A list of recent transactions of K-12 schools and behavioral healthcare schools (i.e.,
therapeutic) can be found in Exhibits 91 and 92, respectively.

A member of BMO

Financial Group

92

September 2013

K-12 Education

BMO Capital Markets

Exhibit 91. K-12 Schools Recent Transactions (20062013)


($ in millions)
Annc.

Transaction

Date
Jul-13
Jun-13
Jun-13
May-13
May-13
Apr-13
Apr-13
Feb-13
Jan-13
Jan-13
Nov-12
Sep-12
Jul-12
Jun-12
Mar-12
Mar-12
Feb-12
Jan-12
Oct-11
Oct-11
Oct-11
Oct-11
Sep-11
Sep-11
Aug-11
Jul-11
Jul-11
May-11
May-11
Apr-11
Apr-11
Apr-11
Feb-11
Jan-11
Nov-10
Jul-10
May-10
May-10
Apr-10
Mar-10
Feb-10
Feb-10
Jan-10
Jan-10
Sep-09
Sep-09
Sep-09
Sep-09
Sep-09
Jul-09
Jun-09
May-09
May-09
Jan-09
Dec-08
Oct-08
Aug-08
Jul-08
Jul-08
Jul-08
Jul-08
Jun-08
Jun-08
Jun-08
May-08
Apr-08
Apr-08
Apr-08
Mar-08
Mar-08
Mar-08
Mar-08
Mar-08
Mar-08
Mar-08
Feb-08
Feb-08
Jan-08
Oct-07
Aug-07
Jun-07
May-07
May-07
Apr-07
Apr-07
Feb-07
Feb-07
Jan-07
Dec-06
Sep-06
Sep-06
Aug-06
Aug-06
Jun-06
Jun-06
May-06
Apr-06

Target
Lexia Learning Systems, Inc.
Subtext Media, Inc.
Clubhouse Child Care Center, Inc.
Urban International School
WCL Group
Linkman International Language Institute
Cognita Schools, Ltd. (49% stake)
TutorVista Global Pvt. Ltd. (20% stake)
School Specialty
Tutor.com
McGraw-Hill Education
Editure Professional Development & JBHM Education Group
South Hill Academy
NonPublic Educational Services
Moodlerooms and NetSpot
Archipelago Learning
PrepMe
UP Inc
Windsor Management Group
School-Link Technologies
Edline Holdings
Literacy First
Class.com
Connections Education
Fredericksburg Children's Academy
PrepMe
C2 Educational Systems
Kaplan Virtual Education
Nobel Learning
K12 Inc. (13% stake)
Youth & Family Centered Services
International School of Berne
Insight Schools
Camelot Schools (Education Services Division)
American Education Corporation
Sistema Educacional Brasileiro (School Learning Systems Division)
KC Distance Learning
Pine Crest Private School
AcadeMedia AB
Plato Learning
Imagine Schools (7 Charter Schools)
Oriental University City (10%)
Imagine Schools (5 Charter Schools)
Acorn Care & Education
The Rhoades School
Kent Lep 1 (64%)
Imagine Schools (22 Charter Schools)
Laurel Springs School
Bradford Schools (34%)
Pysslingen Frskolor Och Skolor
Specialized Education Services
Crayon Campus
Netmedia Education
SoftTouch
Fusion Academy
Goalview Performance Information Systems
Southern Highlands Preparatory School
Cambridge Education
Shreiner Academy
Nord Anglia Education
Theducation (16%)
Provost Systems
Sandcastle Private School
11 Charter Schools
Learning.com (51%)
Bearfoot Lodge
Didaktus Skolor
World Class Learning Schools & Systems
UVS Gymnasium (Two Schools in Malm & Kristianstad)
Camelback Desert School
Jardines Vitamina (40%)
Nackademin (Two Schools)
Catapult Learning
ABC Learning Centres Learning Care Group Division (60%)
Little Sprouts
Justin Craig Education
IvyGlen Schools
Bright Horizons Family Solutions
Advanced Academics
Power-Glide
eInstruction
ABC Learning Centres (12%)
Barnstable Academy
Sagemont Virtual (University of Miami Online High School)
Virtual Sage
Nobel Learning Communities (One School)
Forward Steps Holdings
Insight Schools
La Petite Academy
Aspen Education Group
Educate
College Coach
Education Station (Catapult Learning Division)
Honor Roll School
Nobel Learning Communities (Six Schools)
Child Development Schools
Camelot Schools

Acquiror
Rosetta Stone, Inc.
Renaissance Learning
Little Jewels Learning Center, Inc.
Loyalist Group Limited
Nord Anglia Education
CIBT Education Group Inc.
KKR
Pearson
Bayside Finance
IAC
Apollo Global Management
Weld North & KKR
The Indian Public School
Catapult Learning, LLC
Blackboard
PLATO Learning
DMG (Naviance)
Benesse Holdings
Tyler Technologies
Heartland School Solutions
Blackboard
Catapult Learning
Cambium Learning
Pearson
Phoenix Children's Academy (Audax)
Ascend Learning
Serent Capital
K-12
Leeds Equity Partners
Technology Crossover Ventures
Acadia Healthcare
K12 Inc.
Kaplan
The Riverside Company
K-12
Pearson
K-12
Phoenix Children's Academy
EQT Partners
Thoma Bravo
Inland Public Properties Development
Khazanah Nasional Berhad
Entertainment Properties Trust
Teachers Private Capital
Nobel Learning Communities
Kier Group
Entertainment Properties Trust
Nobel Learning Communities
HSBC Infrastructure Company
Polaris
CGP, Prairie Capital & Twin Bridge Capital
Mini-Skool
Its Learning
AbleNet
American Education Group
Public Consulting Group
Nobel Learning Communities
Knowledge Learning
American Education Group
Barings Private Equity (Asia)
Skanditek Industrifrvaltning
Edison Schools
Mini-Skool Early Learning Centres
Imagine Schools
Educomp Solutions
Mini-Skool Early Learning Centers (Audax Group)
Anew Learning
Sovereign Capital Partners
Framtidsgymnasiet i Gteborg
Nobel Learning Communities
AXA & South Cone Administradora General de Fondos
Medstrms Invest & Spinn Investment
JMI Equity
Morgan Stanley Private Equity
American Education Group
Piper Private Equity
Nobel Learning Communities
Bain Capital
DeVry
K12
Leeds Equity Partners
Everitt Investments (Temasek Holdings)
American Education Group
Kaplan
Kaplan
Private Preschool Provider
ABC Learning Centres
Apollo Group
ABC Learning Centres
CRC Health (Bain Capital)
Citigroup, Sterling
Bright Horizons Family Solutions
Knowledge Learning
Nobel Learning Communities
Private Preschool Provider
Glencoe Capital
Charterhouse Group

Value
$22.5
NA
NA
$0.3
$237.0
NA
NA
$128.4
NA
NA
$2,400.0
NA
$10.0
NA
NA
$324.3
NA
$118.6
$23.5
NA
$14.9
NA
$4.5
$400.0
NA
NA
NA
NA
$149.0
$125.8
NA
$2.0
NA
NA
$39.3
$460.9
$63.1
NA
$440.1
$109.1
$61.2
$43.9
$44.1
NA
NA
$5.6
$170.0
$12.0
NA
NA
NA
NA
NA
NA
NA
NA
$1.6
$30.0
NA
$357.4
NA
NA
NA
$82.0
$24.5
NA
$7.5
$75.0
NA
$0.4
NA
NA
$100.0
$420.0
NA
NA
$2.1
$1,274.8
$27.5
$4.1
NA
$344.2
NA
NA
NA
$1.9
$48.1
$15.5
$339.4
NA
$535.0
NA
$6.0
$3.0
$2.0
NA
NA
Mean:
Median:

Transaction Value / LTM


Revenue
NA
NA
NA
0.5 x
NA
NA
NA
NA
NA
NA
1.1 x
NA
NA
NA
NA
4.4 x
NA
1.1 x
2.0 x
NA
NA
NA
1.0 x
2.1 x
NA
NA
NA
NA
0.6 x
2.2 x
NA
NA
NA
NA
1.9 x
1.9 x
1.7 x
NA
1.5 x
1.7 x
NA
NA
NA
NA
NA
NA
NA
1.5 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2.3 x
NA
NA
NA
NA
NA
NA
0.5 x
2.3 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
1.7 x
NA
NA
NA
4.0 x
NA
NA
NA
NA
NA
4.3 x
0.8 x
NA
1.6 x
NA
0.2 x
NA
NA
NA
NA
2.1 x
1.5 x

EBITDA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
5.7 x
NA
NA
NA
NA
12.7 x
NA
7.8 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
8.7 x
14.6 x
NA
NA
NA
NA
9.9 x
14.6 x
25.4 x
NA
14.0 x
7.0 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
12.8 x
NA
NA
NA
NA
NA
NA
NA
11.9 x
NA
NA
NA
NA
NA
12.7 x
NA
NA
NA
12.1 x
NA
NA
NA
16.6 x
NA
NA
NA
NA
NA
NA
10.1 x
NA
15.2 x
NA
NA
NA
NA
NA
NA
11.9 x
11.2 x

Source: BMO Capital Markets and Capital IQ.

A member of BMO

Financial Group

93

September 2013

K-12 Education

BMO Capital Markets

Exhibit 92. Behavioral Healthcare Schools Recent Transactions (20052013)


($ in millions)
Annc.
Date
Mar-13
Jan-13
Dec-12
Nov-12
Nov-12
Oct-12
Sep-12
Jun-12
Mar-12
Nov-11
Apr-11
Jan-11
Apr-10
Jan-10
Jan-10
Jan-10
Oct-09
Jun-09
Mar-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Mar-08
Aug-07
Jun-07
May-07
Mar-07
Mar-07
Oct-06
Sep-06
Sep-06
Sep-06
Sep-06
Jul-06
Jul-06
Jul-06
May-06
Apr-06
Feb-06
Feb-06
Feb-06
Jan-06
Dec-05
Dec-05
Dec-05
Nov-05
Oct-05
Oct-05
Sep-05
Sep-05
Sep-05
Jul-05
Jul-05
Jun-05
May-05
Feb-05

Target
Peak Behavioral Health Services
Eating Recovery Centers
Monte Nido
Behavioral Centers of America
AmiCare Behavioral Centers
Foundations Recovery Network
Timberline Knolls
Ascend
Essential Learning
Crisis Prevention Institute
Youth & Family Centered Services
Camelot Schools (Education Services Division)
Positive Options
Acorn Care & Education
Baggium Ab
Stubbs House Children's Care
SRK Konsultation AB
Specialized Education Services
Dementia Care Specialists
SoftTouch
Psychiatric Solutions (5.7%)
Care Resources
Family and Children's Services
Structure House
United Medical (5 Inpatient Facilities in Florida & Kentucky)
Bayside Marin Recovery Center
Community Education Centers (Investment)
CiviGenics
Camp Huntington
Residential Youth Treatment Facility
Crisis Prevention Institute
Aspen Education Group
National Treatment Network (Five clinics)
Sober Living by Sea
Kids Behavioral Health
Senad Group
Remuda Ranch
National Deaf Academy
Alternative Behavioral Sciences
Hometown Opportunities
Family Based Strategies
CRC Health (North Castle, DLJ)
A to Z In-Home Tutoring
CorSolutions
Kids Behavioral Health of Utah
Corphealth
SageWalk
Ombudsman
Keystone Education and Youth Services
Drawbridges Counseling Services and Oasis Comprehensive Foster Care
AlphaCare Resources
ChildrenFirst
Alternative Behavioral Counseling Services
Priory Group Limited (Doughty Hanson)
Ardent Health Services (20 Facilities)
Children's Behavioral Health
Tregynon Hall and Aran Hall
Gateway Learning

Acquiror
Universal Health Services
Lee Equity
Centre Partners
Acadia Healthcare
Acadia Healthcare
Nick Pritzker
Acadia Healthcare
Universal Health Services
Vista Equity Partners
Brockway Moran and Partners
Acadia Healthcare
The Riverside Company
Crisis Prevention Institute
Teachers Private Capital
FSN Capital Partners
Bettercare Keys
CapMan Oyj
CGP, Prairie Capital & Twin Bridge Capital
Crisis Prevention Institute
AbleNet
Daniel Alonso Grupo
Res-Care
Children's Behavioral Health
CRC Health
Psychiatric Solutions
CRC Health
LLR Partners, Primus Capital Funds
Community Education Centers
Aspen Education Group
CRC Health
Riverside
CRC Health (Bain Capital)
CRC Health
CRC Health
Acadia Healthcare
Three Delta
Haven Behavioral Healthcare (Thoma Cressey)
Psychiatric Solutions
Psychiatric Solutions
ResCare
Providence Service
Bain Capital
Providence Service
Matria Healthcare
Horizon Health
Humana
Aspen Education (Warburg Pincus, Frazier, Sprout)
Educational Services of America (Trimaran Capital Partners)
Universal Health Services
Providence Service
Providence Service
Bright Horizons Family Solutions
ResCare
ABN AMRO
Psychiatric Solutions
Providence Service
Senad Group
Educate

Transaction
Value
NA
$135.0
NA
$149.9
$113.0
NA
$90.0
$517.0
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
$103.0
NA
$10.0
NA
$120.0
NA
$53.0
$100.0
NA
$1.1
NA
$331.6
NA
NA
NA
$240.5
NA
NA
$250.0
NA
$0.4
$720.0
$1.6
$445.0
$9.9
$54.0
NA
NA
NA
$0.5
$4.7
$61.0
NA
$1,537.3
$566.7
$14.5
$22.9
$8.0
Mean
Median

Transaction Value / LTM


Revenue
EBITDA
NA
NA
NA
2.5 x
1.8 x
NA
2.7 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2.2 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2.3 x
NA
NA
NA
NA
NA
NA
1.3 x
NA
NA
3.1 x
0.4 x
3.7 x
0.8 x
NA
NA
NA
NA
NA
1.4 x
2.0 x
NA
5.6 x
1.9 x
1.6 x
NA
NA
2.1 x
1.9 x

NA
NA
NA
13.5 x
9.0 x
NA
8.0 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
13.7 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
14.8 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
11.7 x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
4.8 x
NA
NA
10.2 x
10.1 x

Source: BMO Capital Markets and Capital IQ.

A member of BMO

Financial Group

94

September 2013

Postsecondary Education

BMO Capital Markets

Postsecondary Education: Tough Near


Term, but Solid Long Term
Many companies
proactively
slowing their own
growth

The postsecondary education sector has over a dozen companies trading in US equity markets and is
the most developed sector in the education industry from an investment perspective, in our opinion.
However, the stocks in this sector have been extremely volatile over the past decade, reacting to
changes in enrollment growth trends and other operating fundamentals, as well as regulatory and
funding-related concerns. Recent regulatory changes have caused a number of providers to alter
aspects of their business models, proactively slowing their own growth, with many companies
shrinking in size as the focus shifts to outputs (e.g., graduation rates) from inputs (e.g., enrollment
growth). While we believe this will make the industry stronger from an operational, regulatory and
public perception perspective, the transition period has been painful for the sector and its investors.

Postsecondary School Market Overview


Postsecondary education (commonly referred to as higher education) includes programs
offered by colleges, universities, and similar facilities. The schools tend to be grouped under
three distinct categories:

Public not-for-profit schools (e.g., Penn State University).

Private not-for-profit schools (e.g., University of Pennsylvania).

Private for-profit schools (e.g., Apollo Groups University of Phoenix).

We have used data for degree-granting postsecondary institutions from the US Department of
Educations (ED) National Center for Education Statistics (NCES) for most of our analysis, as this
data series goes the farthest back historically. This data excludes those attending institutions that
are not eligible for Title IV (i.e., federal financial aid) and therefore likely understates the size of
the market.
Per the NCES, just under 21 million students enrolled in degree-granting postsecondary
institutions during the 2011-2012 school year (latest data available). Enrollment fell roughly 0.1%
from the prior school year. While minor, this was the first annual decline since the 1995-1996
school year. While the NCES had projected that enrollment in degree-granting postsecondary
institutions would grow at roughly a 1.2% annual rate from the 2010-2011 to 2021-2022 school
years, it had assumed some growth (1.3%) in that first year something that did not occur.
Parthenon Group
projects relatively
stagnant
enrollments over
the next five years

A member of BMO

Although not faulting the NCES, we are using projections for the next five school years as
provided by the Parthenon Group, which uses a detailed model based on changes in population,
unemployment, length of unemployment and marketing spending among other factors, to estimate
postsecondary enrollment. Using this data, postsecondary enrollment is expected to remain
somewhat stagnant through the 2016-2017 school year, actually decreasing at an 0.7% rate
reaching 20.2 million students that year (see Exhibit 97). After that period, we project some
improvement, although do not expect total enrollments to increase significantly.

Financial Group

95

September 2013

Postsecondary Education

BMO Capital Markets

24

10%

21

8%

18

6%

15
4%
12
2%
9
0%

-2%

3
0

Annual Percentage Change

Enrollment (in mil.)

Exhibit 97. Postsecondary Degree Granting Enrollment (1967-1968


to 2021-2022E School Years)

-4%
1967- 1971- 1975- 1979- 1983- 1987- 1991- 1995- 1999- 2003- 2007- 2011- 2015- 201968
72
76
80
84
88
92
96
00
04
08
12 16E 20E
Total Enrollment

Percentage Change

Note: Shaded areas represent US recessionary periods. Source: BMO Capital Markets estimates based on
projections from The Parthenon Group and US Department of Education National Center for Education
Statistics.

Four-year schools
enroll the bulk of
degree-seeking
students

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We were only able to obtain NCES projections for enrollment growth for four-year schools
(i.e., those that provide mostly bachelors degrees and above) and two-year schools (i.e., those
that specialize in associates degrees, such as community colleges); projections for less than
two-year schools (i.e., typically non-degree programs such as vocational institutions) were
unavailable. As shown in Exhibit 98, the bulk of students (about 13.3 million, or roughly
63%) attending degree-granting postsecondary institutions during the 2011-2012 school year
were enrolled at four-year schools, with the remaining 7.7 million (roughly 37%) enrolled at
two-year schools (e.g., community colleges). The NCES projects relatively similar growth
rates for enrollment at each school type (1.2% CAGR) through the 2021-2022 school year.

Financial Group

96

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 98. Postsecondary Degree Granting Enrollment by School


Type (1965-1966 to 2021-2022E School Years)
24
4-year

2-year

21

Enrollment (mil.)

18
15
12
9
6
3
0
1965-66

1970-71

1975-76

1980-81

1985-86

1990-91

1995-96

2000-01

2005-06

2010-11

2015-16E 2020-21E

Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics.

Bulk of students
in undergraduate
programs, though
postbaccalaureate
enrollment
expected to grow
at faster rate

Another way to segment the NCES enrollment projections is via those enrolled at degreegranting undergraduate programs (i.e., associates and bachelors), versus those enrolled at
degree-granting postbaccalaureate programs (i.e., masters and above, including first
professional degrees). As shown in Exhibit 99, the bulk of students (about 18.1 million, or
86%) attending degree-granting postsecondary institutions during the 2011-2012 school year
(latest data available) were enrolled in undergraduate programs, with roughly 2.9 million
students (14%) in postbaccalaureate programs. NCES projects postbaccalaureate students to
grow at a faster rate relative to their undergraduate counterparts (1.6% vs. 1.2% CAGR)
through the 2021-2022 school year, boding well, in our view, for companies such as Capella
Education (CPLA) that specialize in higher-end degreed programs.

Exhibit 99. Postsecondary Degree Granting Enrollment by Degree


Type (1967-1968 to 2021-2022E School Years)
24
Undegraduate

Postbaccalaurate

21

Enrollment (mil.)

18
15
12
9
6
3
0
1967-68

1973-74

1979-80

1985-86

1991-92

1997-98

2003-04

2009-10

2015-16E

2021-22E

Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics.

A member of BMO

Financial Group

97

September 2013

Postsecondary Education

Postsecondary
expenditures have
sustained 7.7%
annual growth for
more than 40
years, though

BMO Capital Markets

Postsecondary is the second largest of the countrys four education segments (behind K-12); it
generated roughly $483 billion in revenue in the 2011-2012 school year (latest data available),
according to the NCES. This level of spending represented roughly 3% of the US annual
gross domestic product that year. Since the 1969-1970 school year, the amount spent on
postsecondary education has increased at a 7.7% average annual rate, although the rate has
slowed to low single digits in recent years.

slower in recent
years

We conservatively
forecast 3%
annual growth in
expenditures
through 2021-

When expected annual enrollment increases are coupled with increases in annual tuition
(assumed to be in the 2%+ range), we project total postsecondary expenditures should grow
roughly 3% annually, reaching an estimated $649 billion in the 2021-2022 school year (see
Exhibit 100). This is much slower than the sectors historical average annual growth rate -- a
rate we believe benefited from a strong increase in college participation, especially in the
1980s. In addition, we believe annual growth will be somewhat sluggish early in this period,
as it typically lags in an economic recovery.

2022, slower than


average

Exhibit 100. US Postsecondary Expenditures (1969-1970 to 20212022E School Years)


$700

Total Expenditures

16%

y/y % change

14%

Expenditures ($ in bil.)

600

12%

500

10%
400
8%
300
6%
200

y/y % change

the 8% historical

4%

100

2%

0
0%
1969- 1973- 1977- 1981- 1985- 1989- 1993- 1997- 2001- 2005- 2009- 2013- 2017- 202170
74
78
82
86
90
94
98
02
06
10
14E
18E
22E

Note: Shaded areas represent US recessionary periods.


Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics.

Long-Term Drivers for Postsecondary Education Growth


We believe a number of longer-term drivers exist for continued growth in postsecondary
education:

A member of BMO

Increasing employer-driven demand for skilled professionals;

Increasing employee-driven demand as a result of the potential earnings premium;

Increased participation of non-traditional (i.e., older) students;

Increased acceptance of online degrees (discussed in detail separately).

Financial Group

98

September 2013

Postsecondary Education

Unemployment
rate for those with
less than a high
school diploma
skyrocketed
during Great
Recession and

BMO Capital Markets

Increasing demand for skilled professionals. While apparent before, the Great
Recession had a more significant impact on the job prospects for the lesser educated. As
shown in Exhibit 101, unemployment rates for those with less than a high school diploma
skyrocketed well above historical rates. While this rate has fallen from the 15.9% record high
reached in November 2010, the 11% rate as of July 2013 was well above the rates for high
school graduates with no college (7.6%), those with less than a bachelors degree (6%) and
for college graduates (3.8%).

remains high

Exhibit 101. Unemployment Rate by Education Type (19922013YTD)


Unemployment Rate

16%
12%

College graduate

Less than a bachelor's degree

High school graduate, no college

Less than a high school diploma

8%
4%
0%
1992

1993

1995

1996

1998

1999

2001

2002

2004

2005

2007

2008

2010

2011

2013

Note: Data are seasonally adjusted. Shaded area represents recessionary period. Source: Bureau of Labor
Statistics, National Bureau of Economic Research, and BMO Capital Markets.

Another way of looking at this is by analyzing rates of employment growth by education levels.
As shown in Exhibit 102, from 1990 through 2010, employment for those with a bachelor's
degree and higher grew in each of the five-year periods - which included three recessions and
continued to grow so far this decade. The same cannot be said for those with lower education
levels.

Exhibit 102. Percentage Change in Workforce by Education Level


(1990-2013YTD)
1990-1995

4%

1995-2000

2000-2005

2005-2010

2010-2012
3.3% 3.2%

3.2%

2%

1.7%

2.5% 1.9% 2.0%

1.4%
1%

0.6%
0.8% 0.2%

-1%
-1.4%

-0.2%

Bachelor's
degree or
higher

-0.1%

Some college
or Associate's
degree

0%
High school
diploma or less

% annual change in employment

3%

-2%
-2.0%
-3%

Source: Georgetown University Center on Education and the Workforce based on Bureau of Labor Statistics
data.

A member of BMO

Financial Group

99

September 2013

Postsecondary Education

Employers need
more educated
workers; jobs
requiring a
graduate degree
among the
fastest-growing
categories

BMO Capital Markets

As a result of technological advances and the continued globalization of the economy, we


believe higher levels of education have become, and will continue to be, a prerequisite for many
positions. The Bureau of Labor Statistics (BLS) projects that by 2020, roughly 20.5% of those
employed will be required to have a bachelors degree or higher, up from 20% in 2010. Jobs for
this segment of the population are expected to increase by 17.5% over this period (1.6% CAGR)
faster than the overall employment market, which is expected to increase at a 14.3% rate
(1.3% CAGR). Jobs requiring graduate education are projected to be among the fastest-growing
categories (e.g., jobs requiring a masters degree; up 21.7% or 2% CAGR). Interestingly, jobs
requiring a minimum of an associates degree (up 16.7% or 1.6% CAGR) are expected to rise at
a faster rate than those requiring a bachelors degree (up 18% or 1.7% CAGR; see Exhibit 103).

Exhibit 103. Employment by Education and Training Category


(2010-2020E)
Education Level
Doctoral or professional degree
Master's degree
Bachelor's degree
Bachelor's degree or higher
Associate degree
Postsecondary nondegree award
Some postsecondary (below bachelor's)
Some college, no degree
High school diploma or equivalent
Less than high school
Total

Number (in 000's) 2010-2020E


% Chg.
2010
2020E
4,410
5,286
19.9%
1,986
2,417
21.7%
22,171
25,872
16.7%
28,567
33,576
17.5%
7,995
9,435
18.0%
6,524
7,625
16.9%
14,519
17,060
17.5%
812
954
17.5%
62,090
69,666
14.1%
37,082
42,327
14.1%
143,068 163,582
14.3%

% of workforce
2010
2020E
3.1%
3.2%
1.4%
1.5%
15.5%
15.8%
20.0%
20.5%
5.6%
5.8%
4.6%
4.7%
10.1%
10.4%
0.6%
0.6%
25.9%
25.9%
25.9%
25.9%
100.0% 100.0%

Source: BMO Capital Markets and Bureau of Labor Statistics Employment Outlook, 2010-2020.

College degree
has high return
on investment

Potential earnings premium. The income premium associated with a postsecondary education

has been widely documented, and we believe it has not gone unnoticed by the public. According
to economists at the Federal Reserve Bank of Chicago, for each additional year of completed
schooling, an individuals earnings increase, on average, by roughly 11%. This correlation
between education and income is highlighted in Exhibit 104; in 2012, the median weekly
earnings of US employees with a bachelors degree was significantly higher than the median
weekly earnings for those with only a high school education ($1,066 versus $652).

Exhibit 104. Median Weekly Earnings by Education Category


(2012)
$1,500

$1,373
$1,066

1,000
$652
500

$749

$471

0
Less than a high
school diploma

High school
graduate, no
college

Some college or
associates
degree

Bachelors
degree only

Advanced
degree

Source: BMO Capital Markets and Bureau of Labor Statistics.

A member of BMO

Financial Group

100

September 2013

Postsecondary Education

Income gap has,


for the most part,
expanded over
time

BMO Capital Markets

The income gap between high school graduates and those with additional education has, for
the most part, been expanding over time, especially for workers who have obtained a
bachelors degree or higher. In 2011 (latest data available), the average annual earnings (per
Census Bureau data) for an individual with a bachelors degree and one with an advanced
degree were, respectively, 83% and 171% higher than a person with only a high school
diploma. By comparison, the same ratios were only 57% and 113% in 1975 (see Exhibit 105).

Earnings Relative to HS Grad.

Exhibit 105. Average Annual Earnings Relative to Average Annual


Earnings of High School Graduates (1975-2011)
Not a High School Graduate
Some College/Associate Degree
Bachelor's Degree
Advanced Degree

3.0x
2.5x
2.0x
1.5x
1.0x
0.5x

1978

1982

1986

1990

1994

1998

2002

2006

2010

Source: BMO Capital Markets and US Census Bureau.

Over ones lifetime, education can make a meaningful difference. In a Georgetown University
Center on Education and the Workforce report Projections of Jobs and Education Requirements
Through 2018 (June 2010), the authors calculate lifetime earnings by educational level. As
shown in Exhibit 106, the return on an investment in education appears to more than pay off.

Exhibit 106. Estimated Average Lifetime Earnings by Education


Level
$5,000,000

$4,650,588

4,500,000
$4,029,948
$3,837,239

4,000,000
$3,380,060

3,500,000
3,000,000
2,500,000

$2,239,548

2,000,000
1,500,000

$2,254,765

$1,767,025
$1,198,447

1,000,000
500,000
0
High school
dropout

High school Some college Associate's


graduate
degree

Bachelor's
degree

Master's
degree

Professional
degree

PhD

Source: Georgetown University Center on Education and the Workforce.

A member of BMO

Financial Group

101

September 2013

Postsecondary Education

Students age 25
or older have
grown at faster
rate than
traditional
students; that
trend is expected
to continue, albeit
at slower rates

BMO Capital Markets

Influx of older students. While thoughts of postsecondary education may bring back
memories of a leafy campus and fraternity initiations, much of the growth in the sector in
recent years has been driven by non-traditional students. As shown in Exhibit 107, according
to the NCES, the number of 25- to 44-year-old students grew from 4.9 million in fall 1987 to
8.4 million in fall 2009 (latest data available), a total increase of roughly 73% (2.4% CAGR),
above the roughly 62.5% increase (2.1% CAGR) in the total number of postsecondary
students over that timeframe. The NCES forecasts that, in the future, an increasing percentage
of this age cohort will attend college, as more working adults see the benefits of
postsecondary education. Students age 25-44 are expected to increase 22% (1.8% CAGR),
reaching 10.2 million in fall 2021, relative to the expected 12.3% increase (1.1% CAGR) for
all postsecondary students. Roughly 11.5% of all 25- to 44-year-olds are expected to be
enrolled in postsecondary institutions by fall 2021, up from about 10.2% in fall 2010 (latest
data available).

11
10
9
8
7
6
5
4
3
2
1
0

Number of enrollees

12%

% of population

10%
8%
6%
4%
2%
0%
1987

1990

1993

1996

1999

2002

2005

2008

2011

% Attending Postsecondary

No. of Enrollees (Millions)

Exhibit 107. Number of 25- to 44-Year-Old Students and as


Percentage of Population (Fall 1987-2021E)

2014E 2017E 2020E

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

Market is still far


from saturated:
just under 31% of
US population
older than 25
holds a bachelors

Despite this increase, we believe the market is far from saturated. As shown in Exhibit 108, in
2012 (latest data available), only 30.9% of the US population older than 25 had a bachelors
degree or more. This percentage has increased significantly from 9.1% in 1964 (roughly 50
bps annually). The percentage of the US population with an associates degree or higher has
risen to 40.6% from 18% over the same period. While we by no means believe these
percentages will approach 100%, they should continue higher from here.

degree or higher

Exhibit 108. Percentage of US Population Older Than 25 with


Bachelors Degree or More (1964-2012)
32%

Percentage

1.2%

y/y change

1.0%

24%

0.6%

16%
0.4%

12%

0.2%

8%
4%

0.0%

0%

-0.2%

Source: BMO Capital Markets and Postsecondary Education Opportunity from data compiled by the US
Census Bureau.

A member of BMO

Financial Group

102

September 2013

y/y change

0.8%

20%

19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12

% with Bachelors

28%

Postsecondary Education

BMO Capital Markets

Unfortunately, the postsecondary sector faces some potential headwinds:


Number of 18- to

Unfavorable demographics. While the non-traditional student gets a lot of press and focus, most

24-year-olds to

postsecondary students are still in the traditional 18- to 24-year-old range; in the 2011-2012
school year (latest data available), roughly 11.9 million in this age group were enrolled in US
degree-granting granting institutions, representing nearly 57% of all students and nearly 72% of
full-time students, according to the NCES.

peak in 2013, and


not trough until
2021

This traditional age cohort is expected to reach its peak in 2013 at just over 31.4 million just
above its prior peak (30.5 million in 1981). This age group is expected to decline thereafter, not
reaching its trough until 2021 at just over 30 million (see Exhibit 109).

Exhibit 109. US Population: Age 18- to 24-Years Old (1981-2021E)


Total: 18-24 Years

% y/y chg

3%
2%

24
1%
16

0%
-1%

8
-2%
0

Annual % Change

Population (Millions)

32

-3%
1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014E 2017E 2020E

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

College

Declining college continuation rate. While the percentage of high school students enrolled in

continuation rate

college peaked with the fall 2009 entering class (70.1%), it has fallen thereafter, reaching 66.2% in
fall 2012. We believe this may reflect some aspect of countercyclicality (i.e., improving job market
attracting recent high school graduates), as this rate peaked just after the end of the Great
Recession. Over the long term, the percentage of high school students enrolling in college will
likely not go much beyond the 70% level for the foreseeable future, as it has become the norm
for most students to continue their education beyond high school (see Exhibit 110).

hit all-time high in


fall 2009, showing
impact of Great
Recession, but
has fallen
thereafter

Exhibit 110. Percentage of High School Students Entering College


(Fall 1960 to Fall 2012)
Percentage Attending College

75%

% y/y change

5%

60%

3%
2%

45%

1%
0%

30%

% y/y change

Percentage Attending College

4%

-1%
-2%

15%

-3%
-4%

0%

-5%
1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Note: Shaded areas represent recessionary periods. Source: BMO Capital Markets, US Department of
Education National Center for Education Statistics, and Postsecondary Education Opportunity.

A member of BMO

Financial Group

103

September 2013

Postsecondary Education

Two-year schools
continuation rates
has increased to
the detriment of
the rate at fouryear schools

BMO Capital Markets

When segmenting by school type, there have been some diverging trends. While the
continuation rate for students entering two-year schools has continued to climb reaching an
all time high of 28.8% in fall 2012 the rate of students going to four-year schools has been
choppier, falling to 37.% in fall 2012, its lowest since fall 1991 (see Exhibit 111). We believe
this is indicative of students questioning the value proposition of higher education, with many
shifting to less costly schooling of two-year schools. We discuss this theme further later in our
report.

Exhibit 111. Percentage of High School Students Entering College


By School Type (Fall 1975 to Fall 2012)
Two-year schools (left axis)

Four-year schools (right axis)


46%

30%

44%
27%
42%
24%

40%

21%

38%
36%

18%
34%

20
1
20 1
12
E

09
10
20

20

07
08
20

20

05
06
20

20

03
04
20

20

01
02
20

20

99
00
20

19

97
98
19

19

95
96
19

19

19

19

19

19

93
94

32%

91
92

15%

Note: Shaded areas represent recessionary periods. Source: BMO Capital Markets, US Department of
Education National Center for Education Statistics, and Postsecondary Education Opportunity.

For-Profit Postsecondary School Market Overview


Recent headlines
revived memories
of a checkered
past

For-profit market
share: estimated
peak of 5.9% of
postsecondary
revenues in 20112012 school year

A member of BMO

The most significant component within the for-profit postsecondary sector is the schools
market, formed of companies that run for-profit (also called proprietary) schools. In its early
days, this sector developed an unpleasant reputation, owing to allegations of fraudulent
activities regarding government funding at certain correspondence and back-of-thematchbook schools. Although recent headlines may have brought reminders of those days,
we believe the migration of most of the publicly held companies beyond their original
vocationally oriented roots (e.g., Career Education, DeVry), the introduction of more
professional management -- often through private equity involvement, as well as regulatory
changes, have helped, for the most part, to clean up the reputation of the for-profit sector.
Per the NCES, for-profit postsecondary schools generated $28.2 billion in revenues in the
2010-2011 school year (latest data available), or roughly 5.9% of the $476 billion in the US
postsecondary sector that year. Although this percentage appears small, it should be noted that
for-profit postsecondary revenues have increased at roughly a 19.5% CAGR since the 19971998 school year, when only $2.8 billion were generated (about 1.3% of the total). We believe
that year represented the peak market share for the sector (in terms of revenues).

Financial Group

104

September 2013

Postsecondary Education

For-profit market
share likely to
shrink in near- to
intermediate term,
with estimated
1.6% CAGR
growth in
revenues through
2017-2018 school
year

BMO Capital Markets

Given issues facing the industry as it transitions to the new normal under proposed
regulatory changes, as well as the headwinds as the economy expands, we project the forprofit sector will shrink in the near- to intermediate term, with revenues falling to just under
$27 billion in the 2013-2014 school year (5.4% share). While the final impact of any new
gainful employment regulations is still unknown, we believe sector revenues will then
stabilize and begin to grow thereafter, albeit at slower than historical rates. We forecast forprofit postsecondary will reach roughly $31.6 billion in the 2017-2018 school year, capturing
approximately 5.6% of the roughly $566 billion in postsecondary expenditures expected in
that year. This equates to a 1.6% CAGR in revenues from the 2010-2011 school year (see
Exhibit 112). The estimated 6% growth expected in the 2017-2018 school year is closer to the
long-term run rate in the mid- to high-single digits we expect for the sector.

Spending (in $bil.)

$35
28

7%
6%
5%
4%
3%
2%
1%
0%

For-Profit Revs. (in $bil.)


Market Share

21
14
7

FY
19
FY 98
19
FY 99
20
FY 00
20
FY 01
20
FY 02
20
FY 03
20
FY 04
20
FY 05
20
FY 06
20
FY 07
20
FY 08
20
FY 09
20
FY 10
2
FY 011
20
FY 12E
20
FY 13E
20
FY 14E
20
FY 15E
20
FY 16E
20
FY 17E
20
18
E

Market Share

Exhibit 112. For-Profit Postsecondary School Revenues (19971998 to 2017-2018E School Years)

Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics.

For-profit
enrollment
represents 10.9%
of the total;
schools are
typically small

A member of BMO

According to the NCES, just under 2.4 million students enrolled in the 3,393 for-profit
postsecondary institutions (both degree-granting and non-degree granting) eligible for Title
IV (i.e., federally funded financial aid) in the US as of fall 2011 (2011-2012 school year). A
February 2012 working paper by the National Bureau of Economic Research estimates that
three are as many as 670,000 additional students attending institutions not eligible for Title IV
funding, bringing the size of the market to more than three million students. Although the forprofit sector represented roughly 46.9% of all institutions as of fall 2011, it only served 10.9%
of all postsecondary students, as for-profit schools tend to be much smaller than their not-forprofit counterparts. The average size of a for-profit institution was roughly 695 students,
relative to the typical public institution at nearly 7,600 students and private not-for-profit
institutions which average nearly 2,400 students (see Exhibit 113).

Financial Group

105

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 113. For-Profit as Percentage of Total Institutions and


Enrollment (Fall 2011)
Institutions
Number % of Total
2,011
27.8%
1,830
25.3%
3,393
46.9%
7,234
100.0%

Public
Private not-for-profit
Private-for-profit
Total

Students (in 000's)


Number % of Total
15,244
70.7%
3,955
18.3%
2,358
10.9%
21,557
100.0%

Avg. Size
7,580
2,161
695
2,980

Note: Degree and non-degree granting institutions. Source: BMO Capital Markets and US Department of
Education National Center for Education Statistics (NCES 2012-174rev).

Market share fell


in fall 2011 school
year; likely
continued to
decline in fall
2012

We have historical data for for-profit sector at degree granting institutions since the fall 1976
school year. As shown in Exhibit 114, the sector has gained a considerable amount of share over
that period, rising from 0.4% of total enrollment in the fall 1976 school year to 9.6% in the fall
2010 school year. However, enrollment at degree granting institutions in the for-profit sector fell
roughly 3% in the fall 2011 school year the first annual increase since the fall 1990 school
year with the sectors market share declining to 9.3%. We believe this trend continued in the
fall 2012 school year.

Exhibit 114. For-Profit as Percentage of Total Enrollment (Fall


1976 - Fall 2011)
For-profit enrollment

For-profit market share

10%
9%

1.8
Enrollment (in mil.)

8%
1.5

7%
6%

1.2

5%
0.9

4%
3%

0.6

2%
0.3
0.0
1976-77

For-profit market share

2.1

1%
0%
1981-82

1986-87

1991-92

1996-97

2001-02

2006-07

2011-12

Note: Shaded area represents recessionary period. Degree granting institutions only. Source: BMO Capital
Markets and US Department of Education National Center for Education Statistics

For-profit
enrollment
represented 13%
of unduplicated
headcount in the
2011-2012 school

A sizable number of for-profit schools likely do not participate in Title IV programs, although
the data is difficult to access. In addition, as many for-profit schools accept students on a rolling
basis throughout the year, this fall snapshot may underrepresent the for-profits share of the
market. Under an unduplicated headcount measurement, the sector served roughly 13% of
enrollment in the 2011-2012 school year down from the 13.5% record high in the prior year
(latest data available; see Exhibit 115).

year down from


13% in prior year

A member of BMO

Financial Group

106

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 115. For-Profit as Percentage of Total Enrollment


Unduplicated Headcount (2011-2012 School Year)
Institution Type
Students (in 000s):
Public not-for-profit
4-year
2-year
Less than 2-year
Subtotal
Private not-for-profit
4-year
2-year
Less than 2-year
Subtotal
Private for-profit
4-year
2-year
Less than 2-year
Subtotal
All institutions

Undergraduate

As % of total:
Public not-for-profit
4-year
2-year
Less than 2-year
Subtotal
Private not-for-profit
4-year
2-year
Less than 2-year
Subtotal
Private for-profit
4-year
2-year
Less than 2-year
Subtotal
All institutions

Graduate

Total

7,919
10,626
91
18,636

1,813
0
0
1,813

9,732
10,626
91
20,449

3,178
71
21
3,270

1,561
0
0
1,561

4,738
71
21
4,830

2,047
735
517
3,300
25,206

462
0
0
462
3,836

2,509
735
517
3,762
29,042

27.3%
36.6%
0.3%
64.2%

6.2%
0.0%
0.0%
6.2%

33.5%
36.6%
0.3%
70.4%

10.9%
0.2%
0.1%
11.3%

5.4%
0.0%
0.0%
5.4%

16.3%
0.2%
0.1%
16.6%

7.0%
2.5%
1.8%
11.4%
86.8%

1.6%
0.0%
0.0%
1.6%
13.2%

8.6%
2.5%
1.8%
13.0%
100.0%

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics
(NCES 2013-289).

Most for-profit
students attend
degree-granting
institutions

A member of BMO

Although the bulk of for-profit institutions are non-degree granting (i.e., they focus on
diploma and certificate programs and not on providing degrees, such as associates and
bachelors degrees), the majority of for-profit students are enrolled in degree-granting
institutions. As shown in Exhibit 116, most of the students at for-profit schools (nearly 81%)
attend programs at degree-granting institutions, with an average size of just under 1,500
students per institution.

Financial Group

107

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 116. For-Profit Institutions and Enrollment by Degree Type


(Spring and Fall 2011)
Degree granting
Non-degree granting
Total

Institutions
Number % of Total
1,311
41.1%
1,878
58.9%
3,189
100.0%

Students (in 000's)


Number % of Total
1,957
80.7%
402
16.6%
2,358
97.2%

Avg. Size
1,493
214
740

Note: Institutional data as of spring 2011; enrollment data as of fall 2011. Source: BMO Capital Markets and
US Department of Education National Center for Education Statistics (NCES 2012-280).

Most for-profit
students attend
four-year
institutions

The largest portion of for-profit students attend four-year institutions (e.g., bachelors
programs), even though those represent the smallest number of for-profit institutions. As
shown in Exhibit 117, as of fall 2011, over 64% of for-profit students attended school at fouryear institutions, even though those institutions represented just over 20% of all Title IV
eligible for-profit institutions.

Exhibit 117. For-Profit Institutions and Enrollment by School Type


(Spring and Fall 2011)
4-year
2-year
Less than 2-year
Total

Institutions
Number % of Total
648
20.3%
1,017
31.9%
47.8%
1,524
3,189
100.0%

Students (in 000's)


Number % of Total
1,559
64.3%
486
20.0%
313
12.9%
2,358
97.2%

Avg. Size
2,406
478
205
740

Note: Degree and non-degree granting institutions. Institutional data as of spring 2011; enrollment data as of
fall 2011. Source: BMO Capital Markets and US Department of Education National Center for Education
Statistics (NCES 2012-280).

Public not-forprofits dominate


higher ed,

A further breakdown of enrollment by school type can be found Exhibit 118. Public not-profit
schools tend to enroll the bulk of students across all school types, except at less-than-two-year
schools, where for-profits dominate, with over 78% of all enrollments.

although forprofits dominate


at less-than-twoyear schools

A member of BMO

Financial Group

108

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 118. Enrollment by School Type and Market Share (Fall 2011)
Public not-for-profit
Private not-for-profit
No. (000's)
% No. (000's)
%
Four-year schools:
Undergraduate
Graduate
Subtotal
Two-year schools
Less than two-year schools
Total
Market share by school type:
Four-year schools:
Undergraduate
Graduate
Subtotal
Two-year schools
Less than two-year schools
Total

6,626
1,421
8,048
7,126
71
15,244

62.7%
48.5%
59.6%
93.0%
17.7%
70.7%

43.5%
9.3%
52.8%
46.7%
0.5%
100.0%

2,679
1,209
3,888
51
16
3,955

25.4%
41.2%
28.8%
0.7%
4.0%
18.3%

67.7%
30.6%
98.3%
1.3%
0.4%
100.0%

Private for-profit
No. (000's)
%
1,258
301
1,559
486
313
2,358

11.9%
10.3%
11.6%
6.3%
78.3%
10.9%

53.3%
12.8%
66.1%
20.6%
13.3%
100.0%

Total
No. (000's)
10,563
2,932
13,495
7,663
400
21,557

%
49.0%
13.6%
62.6%
35.5%
1.9%
100.0%

100.0%
100.0%
100.0%
100.0%
100.0%
100.0%

Note: Degree and non-degree granting institutions. Source: BMO Capital Markets and US Department of Education National Center for
Education Statistics (NCES 2012-2174rev).

For-profit
demographics:
skewed toward
female, older, and
minority with
lower academic
performance prior
to enrolling

A member of BMO

A typical student at a for-profit postsecondary school is somewhat different from one who
attends a not-for-profit institution. For-profit programs tend to enroll more females (especially
for non-degree programs, i.e., less than two-year schools), older students, and non-white
students, though this can be largely dependent on program type and other factors. For
example, Corinthian Colleges (COCO) Everest schools have a predominantly female
population, likely owing to their focus on allied healthcare programs, while Universal
Technical Institutes (UTI) skews more heavily toward male students, owing to its focus on
automotive repair and the like. In addition, for-profit students tend to be more broadly
distributed among all three program types (i.e., diploma/certificate, two-year schools, and
four-year schools), skew more toward attending full time (likely because they favor shorter
duration programs) and have a lower academic performance prior to enrolling (see Exhibit
119).

Financial Group

109

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 119. Student Demographics: For-Profit vs. Not-For-Profit

Distribution (1)

Type (1)

Gender (1)

Race/ethnicity (1)

Attendance (1)

Age (2)

A member of BMO

For-Profit

Public Not-for-Profit

Private Not-For-Profit

4-year school: 66%

4-year school: 53%

4-year school: 98%

2-year school: 21%

2-year school: 47%

2-year school: 1%

Less than 2-year school: 13%

Less than 2-year school: 0%

Less than 2-year school: 0%

Undergraduate: 87%

Undergraduate: 91%

Undergraduate: 69%

Graduate: 13%

Graduate: 9%

Graduate: 31%

Total: 35% male, 65% female

Total: 44% male, 56% female

Total: 42% male, 58% female

4-year school: 37% male, 63%

4-year school: 45% male, 55%

4-year school: 42% male, 58%

female

female

female

2-year school: 35% male,

2-year school: 43% male,

2-year school: 33% male,

65% female

57% female

67% female

Less than 2-year school: 23% male,

Less than 2-year school: 43% male,

Less than 2-year school: 33% male,

77% female

57% female

67% female

Total: 39% white, 42% non-white,

Total: 56% white, 34% non-white,

Total: 58% white, 25% non-white,

18% multi-race/ unknown/

10% multi-race/unknown/

17% multi-race/unknown/

nonresident alien

nonresident alien

nonresident alien

4-year school: 39% white, 38% non-

4-year school: 59% white, 30% non-

4-year school: 59% white, 25% non-

white, 21% multi-race/unknown/

white, 9% multi-race/unknown/

white, 15% multi-race/unknown/

nonresident alien

nonresident alien

nonresident alien

2-year school: 39% white,

2-year school: 52% white,

2-year school: 51% white,

49% non-white, 10% multi-race/

40% non-white, 7% multi-race/

43% non-white, 5% multi-race/

unknown/nonresident alien

unknown/nonresident alien

unknown/nonresident alien

Less than 2-year school: 37% white,

Less than 2-year school: 50% white,

Less than 2-year school: 32% white,

57% non-white, 5% multi-race/

46% non-white, 3% multi-race/

53% non-white, 13% multi-race/

unknown/nonresident alien

unknown/nonresident alien

unknown/nonresident alien

Total: 74% full-time, 26% part-time

Total: 57% full-time, 43% part-time

Total: 75% full-time, 25% part-time

4-year school: 67% full-time, 33%

4-year school: 73% full-time, 27%

4-year school: 75% full-time, 25%

part-time

part-time

part-time

2-year school: 89% full-time,

2-year school: 39% full-time,

2-year school: 79% full-time,

11% part-time

61% part-time

21% part-time

Less than 2-year school: 83% full-

Less than 2-year school: 55% full-

Less than 2-year school: 61% full-

time, 17% part-time

time, 45% part-time

time, 39% part-time

Average age (est.): 32 years

Average age (est.): 26 years

Average age (est.): 26 years

Younger than 18: 0%

Younger than 18: 5%

Younger than 18: 2%

18-24 years old: 27%

18-24 years old: 60%

18-24 years old: 58%

25-39 years old: 49%

25-39 years old: 25%

25-39 years old: 28%

40 and older: 24%

40 and older: 10%

40 and older: 12%

Financial Group

110

September 2013

Postsecondary Education

Annual income
(3)

BMO Capital Markets

For-Profit

Public Not-for-Profit

Private Not-For-Profit

Dependent students:

Dependent students:

Dependent students:

Under $20,000:

Under $20,000:

Under $20,000:

24%

performance (4)

8%

$20,000-$39,000: 17%

$20,000-$39,000: 12%

$40,000-$59,000: 17%

$40,000-$59,000: 18%

$40,000-$59,000: 14%

$60,000-$79,000: 12%

$60,000-$79,000: 15%

$60,000-$79,000: 13%

$80,000-$99,000:

$80,000-$99,000: 13%

$80,000-$99,000: 14%

$100,000 and over: 10%

$100,000 and over: 26%

$100,000 and over: 39%

Independent students:

Independent students:

Independent students:

Under $20,000:

Under $20,000:

Under $20,000:

7%

51%

39%

36%

$20,000-$39,000: 30%

$20,000-$39,000: 28%

$20,000-$39,000: 26%

$40,000-$59,000: 11%

$40,000-$59,000: 15%

$40,000-$59,000: 16%

$60,000-$79,000:

5%

$60,000-$79,000:

7%

$60,000-$79,000:

9%

$80,000-$99,000:

2%

$80,000-$99,000:

7%

$80,000-$99,000:

6%

$100,000 and over: 2%


Prior academic

12%

$20,000-$39,000: 30%

Average SAT scores prior to

$100,000 and over: 6%

$100,000 and over: 7%

Average SAT scores prior to enrolling: 538 (math); 549 (reading)*

enrolling: 433 (math); 413 (reading)

Average ACT composite score prior to enrolling: 23.4*

Average ACT composite score prior

Average grade point average: 3.33*

to enrolling: 20.6
Average grade point average: 3.03
Note: Totals may not add to 100 owing to rounding. Sources: (1) National Center for Education Statistics Report 2012-174rev; Enrollment in
Postsecondary Institutions, fall 2011 data; (2) National Center for Education Statistics Digest of Education Statistics 2012 Table 226, fall 2011 data;
(3) Career College Association Fact Book 2013 using NCES data for 2007-2008 school year (4) FastWeb survey fall 2009 entering class. *Not-forprofit data applies to all seniors and was not segmented between public and private not-for-profit attendees.

Given the profile of its student base, the sector has often been tagged as serving a lower
quality demographic, which unfortunately skews comparisons to its traditional peers on
many outcome measures (as shown later in this section).

A member of BMO

Financial Group

111

September 2013

Postsecondary Education

BMO Capital Markets

Advantages of For-Profit Schools


Advantages of
for-profit schools

We believe the for-profit sector both degree-granting (e.g., associates, bachelors) and nondegree granting (e.g., diploma, certificate) is highly attractive to students owing to its
pragmatic, student-centered, and job-oriented focus. In our view, for-profit postsecondary
providers capture an underserved market by offering job opportunities and career
development for those who may not be interested in the more traditional higher-education,
white-collar path but have the ability to earn a solid income. In addition, they tend to serve
populations that are less focused on by traditional schools, i.e., lower-income and/or working
adults. However, the landscape has gotten more competitive as a number of progressive notfor-profit institutions and third parties have entered this space.
Specifically, we believe for-profit programs are more attractive to the lower-income and
working adult population versus their closest competition, community colleges, for a variety
of reasons:

Future
employment
opportunities
most important
reason why
student choose
for-profit schools

A member of BMO

Greater focus on providing students with practical skills that are crucial to employers.

Ability to more quickly create and roll out new programs to better serve current market
demand.

Better customer service and support systems (i.e., we believe quality customer service is
a key differentiating factor in attracting students).

Larger budgets to support more expensive programs (e.g., equipment needed for
instruction in auto repair courses).

Greater ability to create alliances with corporations through advisory boards and other
programs (fewer conflicts of interest), thus potentially improving job placement rates and
establishing positive endorsements for their products.

The opportunity to offer stock options to faculty and staff, potentially providing a
competitive recruiting advantage.

Ability to finish programs at an accelerated pace (see details on Program Trends later in
this report).

Enrollment management advisor Noel Levitz conducts an annual survey of college students
called the National Student Satisfaction and Priorities Report, in which it determines the level
of importance that students place on various aspects of their student experience. As part of
this survey, the company asks students to rank the factors that drove their enrollment decision
and then segments that response by school type. For the past nine years, the top three factors
for students attending all types of not-for-profit institutions (public four-year, private fouryear, and public two-year) have ranked cost, academic reputation, and financial aid as their
top three factors (in various order). Interestingly, students attending for-profit schools have
rated future career/employment opportunities as the top factor over the same period (see
Exhibit 120) a factor that was not even in the top nine factors for students at not-for-profit
institutions. Given the recent economic crisis, financial aid has narrowed the gap as a close
number two factor.

Financial Group

112

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 120. Survey: Important Enrollment Factors for Students Attending For-Profit
Postsecondary Institutions (Fall 2004 to Fall 2012)
Rank
1
2
3
4
5
6
7
8
9

Factor
Future career/employment opportunities
Financial aid
Academic reputation
Cost
Personalized attention prior to enrollment
School appearance
Geographic setting
Size of institution
Recommendations from family/friends

2004
6.47
6.27
6.16
6.05
5.95
5.64
5.64
5.49
5.30

2005
6.48
6.32
6.18
6.09
5.99
5.68
5.66
5.56
5.35

2006
6.50
6.36
6.19
6.12
6.02
5.68
5.66
5.58
5.39

2007
6.51
6.37
6.22
6.14
6.05
5.69
5.67
5.59
5.45

2008
6.44
6.30
6.16
6.10
5.98
5.61
5.62
5.54
5.43

2009
6.42
6.31
6.16
6.11
5.97
5.63
5.63
5.56
5.43

2010
6.40
6.35
6.17
6.14
6.04
5.81
5.69
5.64
5.46

2011
6.43
6.39
6.22
6.18
6.10
5.93
5.76
5.71
5.53

2012
6.45
6.39
6.24
6.18
6.12
5.94
5.79
5.73
5.56

Note: Ranking based on a 1-7 scale, with 7 being very important and 1 being not important. Data ranked by latest survey. Source: Annual
National Student Satisfaction and Priorities Report survey conducted by Noel Levitz.

Referral was top


reason for
inquiring about a
school across all
age groups; older
students value

A 2010 survey of students at both for-profit and not-for-profit schools by InsideTrack, a


provider of student coaching services, found some differences in inquiry reasons (i.e., why
potential students look at certain schools) when segmented by age group (under 25, 25-39,
and 40 and over). While referral was the top reason for all three age groups, program
availability was bit more important for older students, likely owing to trying to fit time for
class work within their busy schedules (see Exhibit 121).

program
availability

Exhibit 121. Reasons for Inquiring About a Postsecondary School


(2010)
Inquiry reason
Referral
Reputation
Availability of program
Location
Class format
Flexible scheduling
Admission requirements
Ease of admissions process
Finances
Customer service

Under 25
Rank
Percent
1
49.7%
2
14.3%
3
12.0%
4
10.9%
5
8.0%
6
1.7%
7
1.1%
7
1.1%
9
0.6%
10
0.0%

25 - 39
Rank
Percent
1
40.8%
4
10.8%
2
17.1%
3
12.2%
5
7.7%
8
2.1%
6
3.6%
7
3.4%
9
1.6%
10
0.7%

40 and Over
Rank
Percent
1
37.2%
5
8.1%
2
17.0%
3
14.9%
4
8.4%
9
1.6%
7
3.4%
7
3.4%
6
5.0%
10
0.6%

Source: InsideTrack 2010 survey.

Availability of
online courses
and innovation
also important

A member of BMO

Another survey of recent college graduates was conducted in December 2010 by Inavero in
partnership with CareerBuilder. When asked why they chose their school instead of another,
for-profit (or private sector as asked in this survey) schools stood out for their offering of
online courses and innovation. However, the schools also stood out negatively for their cost
(see Exhibit 122).

Financial Group

113

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 122. Survey Results Why Recent Graduates Chose Their


College
Private Sector 2-Yr. Degree
Traditional University

Private Sector 4-Yr. Degree


Community College 2-Yr. Degree

School was relatively inexpensive


School was innovative in my area of study
Knew I could get into the school
Attendee recommendation
Offered online courses
Campus was close to home
Strong program area I wanted to study
0%

10%

20%

30%

40%

50%

60%

Source: Inavero/CareerBuilder December 2010 survey.

In the same survey, hiring managers and HR-decision makers were asked to determine what
they believed to be the strengths and weaknesses of graduates from for-profit (private
sector) schools. While strengths included the flexibility and quality of the education,
weaknesses included their poor reputation and lower quality (see Exhibit 123). This shows, in
our view, the continued difficulty the sector has in improving its reputation in the market.

Quality of
education cited
as both a pro and
con of for-profit
schools by hiring
managers

Exhibit 123. Hiring Manager Survey Results Pros and Cons of Private Sector Colleges
Cons of Private Sector Colleges

Pros of Private Sector Colleges

50%

Flexibility of education

Poor reputation of schools

37%

Quality of education
25%

Online classes

50%

Lower quality of education

43%

Negative environment

25%

24%

Cost/Access to financial aid

Cost is too high

25%

18%

Good environment

Low quality instruction

12%

15%

Easy to get accepted

Online classes aren't as good

11%

11%

Strong reputation within specific programs


7%

Close proximity to students

Poor job placement statistics

2%

Quality of professors

0%

3%
2%

Inconvenient locations at times

2%

Job placement assistance

10%

Quality of students is low

10%

20%

30%

40%

50%

0%

60%

10%

20%

30%

40%

50%

60%

Source: Inavero/CareerBuilder December 2010 survey.

A member of BMO

Financial Group

114

September 2013

Postsecondary Education

BMO Capital Markets

Military and

Military Market

veterans market

The military and veterans market is another area where we believe the for-profit sector has made
greater inroads than its not-for-profit counterparts. According to a September 2011, NCES
report entitled Military Services Members and Veterans, in the 2007-2008 school year (latest
data available), there were just over one million active duty military, reservists, and veterans
enrolled in US postsecondary institutions, representing just over 4% of the total. Of those, the
bulk (3.1% of the total) were veterans (see Exhibit 124).

prime opportunity
for for-profit
sector

Exhibit 124. Military Service Members and Veterans Enrolled in


Postsecondary Institutions (2007-2008 School Year)
Undergraduates
Graduates
Total
No. (in 000s) % of total No. (in 000s) % of total No. (in 000s) % of total
Military students:
Veterans
Military service members
Active duty
Reserves
Total
Non-military students
Total
Among military students:
Received GI Bill education benefits

657

3.1%

107

3.1%

764

3.1%

139
76
872
20,055
20,927

0.7%
0.4%
4.2%
95.8%
100.0%

29
9
145
3,312
3,457

0.8%
0.3%
4.2%
95.8%
100.0%

168
85
1,017
23,367
24,384

0.7%
0.3%
4.2%
95.8%
100.0%

329

37.7%

29

20.0%

358

35.2%

Source: National Center for Educational Statistics.

It is likely that this population has grown in size since then. In July 2012, The American Council
on Education released From Soldier to Student II: Assessing Campus Programs for Veterans
and Services Members an update from its 2009 study. In that three-year period, the institutions
surveyed saw sizable increases across military-related enrollments, including active duty
students (up 125%), veterans (up 137%), and dependents (up 224%).
We have segmented our discussion between active duty/reservists and veterans.
Active duty military and reservists. According to the US Department of Defense (DoD), as
of July 31, 2013, there were nearly 1.4 million personnel on active duty in the US armed
forces and another nearly 1.1 million members in the reserves and National Guard (see
Exhibit 125).

A member of BMO

Financial Group

115

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 125. Active Duty Military and Reserve Personnel (as of


July 31, 2013)
Army
Active Duty:
Officers
Enlisted
Cadets-midshipmen
Total

99,374
430,497
4,545
534,416

Navy
54,168
264,677
4,802
323,647

Marine
Corps Air Force
21,810
172,417
0
194,227

65,125
240,477
263,757 1,131,348
4,216
13,563
333,098 1,385,388

Reserves
As % of total
Active Duty:
Officers
Enlisted
Cadets-midshipmen
Total

Total

1,086,055

7.2%
31.1%
0.3%
38.6%

3.9%
19.1%
0.3%
23.4%

1.6%
12.4%
0.0%
14.0%

4.7%
19.0%
0.3%
24.0%

17.4%
81.7%
1.0%
100.0%

Note: Reserves data as of May 31, 2013. Source: US Department of Defense.

Each year, about 300,000 new service members are enlisted or commissioned to replace
retiring or separating members. However, this number is likely to decrease if, as expected, the
military continues to downsize.
Active military
market
underpenetrated

Most for-profit
schools provide
discount to
military students

Over $660 million


spent in FY2012 in
tuition assistance
to over 286,000
troops

A member of BMO

A relatively small portion of the military-enlisted population (i.e., non-officers) are college
educated; according to the DoD, in FY2012, just over 13% of them held only an associate's
degree and another 6% of them held a bachelors degree or higher. Furthermore, just under
58% of military officers do not have a graduate degree. In addition, military servicemen and
women are now encouraged to gain either associate degrees or bachelor degrees for
consideration in promotions to the next rank (and pay raises) in their military career. As such,
we believe this market is relatively underpenetrated. In addition, we believe the demanding
work schedules, along with the geographic distribution of this population is ideal for an online
delivery format (discussed in greater detail later in this section).
Each year, the DoD allocates funding for voluntary education whereby military personnel
receive tuition assistance for roughly 100% of students costs through its Uniform Tuition
Assistance program. For postsecondary classes, the limit is currently $250 per credit hour, with
a maximum annual benefit of $4,500. This rate was increased in FY2003 as an enticement to
increase military enlistment. As the per-credit rate is below the price points of most for-profit
providers at least at the undergraduate level - many offer military discounts to serve this
sector.
In FY2012, the DoD spent more than $568 million for tuition assistance for over 874,000
courses taken, an estimated additional $90+ million was spent on operational costs bringing to
the total to over $660 million in total costs for this program. More than 286,000 troops
enrolled in postsecondary courses, with nearly 49,000 degrees and nearly 1,800
certificates/licensures awarded during the year. The bulk (roughly 76%) of courses were taken
online, up from 76% in the prior year. The Army and Air Force are the biggest users of this
program, though growth has slowed across most branches (see Exhibit 126).

Financial Group

116

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 126. Department of Defense Tuition Assistance Courses


Taken and Cost (FY2004- FY2012)
Courses Taken
FY2008
FY2009

FY2004

FY2006

FY2007

(000s)
Army
Navy
Air Force
Marine Corps
DoD Total

375.7
199.7
317.7
74.9
968.0

277.4
208.6
269.6
74.6
830.2

275.2
186.2
276.3
67.7
805.4

306.8
153.4
284.4
71.2
815.7

As % of total
Army
Navy
Air Force
Marine Corps
DoD Total

38.8%
20.6%
32.8%
7.7%
100.0%

33.4%
25.1%
32.5%
9.0%
100.0%

34.2%
23.1%
34.3%
8.4%
100.0%

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

-0.8%
-10.7%
2.5%
-9.2%
-3.0%

FY2004

FY2006

FY2007

% annual change
Army
Navy
Air Force
Marine Corps
DoD Total

FY2010

FY2011

FY2012

321.5
162.0
278.7
72.4
834.6

365.7
144.7
270.6
76.8
857.8

377.2
136.9
273.9
78.8
866.8

380.2
134.5
282.3
77.2
874.1

37.6%
18.8%
34.9%
8.7%
100.0%

38.5%
19.4%
33.4%
8.7%
100.0%

42.6%
16.9%
31.5%
9.0%
100.0%

43.5%
15.8%
31.6%
9.1%
100.0%

43.5%
15.4%
32.3%
8.8%
100.0%

11.5%
-17.6%
2.9%
5.1%
1.3%

4.8%
5.6%
-2.0%
1.7%
2.3%

13.8%
-10.7%
-2.9%
6.1%
2.8%

3.1%
-5.4%
1.2%
2.5%
1.0%

0.8%
-1.8%
3.1%
-2.0%
0.8%

Total Cost
FY2008
FY2009

FY2010

FY2011

FY2012

$224.1
90.4
189.6
58.2
$562.3

$224.7
89.5
197.6
56.3
$568.1

($ 000s)
Army
Navy
Air Force
Marine Corps
DoD Total
As % of total
Army
Navy
Air Force
Marine Corps
DoD Total

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

39.9%
16.1%
33.7%
10.4%
100.0%

39.6%
15.8%
34.8%
9.9%
100.0%

% annual change
Army
Navy
Air Force
Marine Corps
DoD Total

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

0.3%
-1.0%
4.2%
-3.3%
1.0%

FY2004
N.A.
N.A.
N.A.
N.A.
N.A.

FY2006
N.A.
N.A.
N.A.
N.A.
N.A.

FY2010
N.A.
N.A.
N.A.
N.A.
N.A.

FY2011
$594
660
692
739
$649

FY2012
$591
666
700
730
$650

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

-0.5%
0.8%
1.1%
-1.3%
0.2%

Army
Navy
Air Force
Marine Corps
DoD Total
% annual change
Army
Navy
Air Force
Marine Corps
DoD Total

Average Cost per Course


FY2007
FY2008
FY2009
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.
N.A.

Note: FY2005 data not available. N.A. Not Available. Source: BMO Capital Markets and Council of
College and Military Educators (CCME).

A member of BMO

Financial Group

117

September 2013

Postsecondary Education

Average cost
roughly $650 per
course

BMO Capital Markets

While the total cost per course (excluding operational costs) is limited based on reimbursement
rates, the average cost per undergraduate course has remained below this limit (typically $750 or
three credits at $250 per credit). However, the pace of recent tuition hikes has brought it closer
to these levels. In FY2012, the average cost was roughly $650 per course -- $638 for
undergraduate courses and $750 for graduate courses (see Exhibit 127).

Exhibit 127. Department of Defense Tuition Assistance Average


Costs per Course (FY2002- FY2012)
Undergraduate

Graduate

Average Cost per Course

$750

600

450

300

150

0
FY2004

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

Source: BMO Capital Markets and Council of College and Military Educators (CCME).

Potential
reduction in DoD

In recent years, there have been a number of threats to this tuition assistance program owing to
budgetary pressures:

tuition assistance

Options available
if tuition

In October 2011, the Marine Corps announced new tuition assistance rules that cut the
maximum benefit for its service members from $4,500 per year to $875 per year and
reduced the tuition assistance from $250 per credit hour to $175 per credit hour. After much
pressure, these cuts were rescinded.

Effective March 1, 2013, the federal government instituted across-the-board budget cuts
known as sequestration at 8.2% for most discretionary programs, including those
overseen by the Department of Education (ED), after Congress was unable to reach a longterm deal on deficit reduction. Shortly thereafter, the Army, Air Force, Marine Corps, and
Coast Guard suspended new applications for their tuition assistance programs; (the Navy
did not take action but did considered making sailors pay for about 25% of their education
benefits). On March 26, 2013, President Obama signed into law the FY2013 federal
funding bill (H.R. 933) which restored these programs, although many education providers
cited some hiccups in enrolling military students during this period.

Even if future cuts to this program occur, military students would have other funding options
such as the following:

assistance is cut

A member of BMO

Title IV (federal financial aid) programs like Pell Grants. This would be most attractive for
younger or recently enlisted military members who most likely will be at annual income
levels that are Pell Grant-eligible.

Financial Group

118

September 2013

Postsecondary Education

BMO Capital Markets

Tapping into G.I. Bill benefits while still enlisted through an option known as the Top-Up
Program. Under this program, enlisted members with two years of services can use up to
$17,000 of these benefits, allowing them to use these funds for 36-months (measured by
enrollment) over a 15-year period.

Cash or loans.

The previously cited NCES report on military and veterans education analyzed the types of
postsecondary institutions that military undergraduates attend. Despite conventional wisdom to
the contrary, in the 2007-2008 school year, for-profit institutions enrolled only 12% of military
undergraduates smaller than the 15% of total nonmilitary independent undergraduates they
serve (see Exhibit 128). However, given the accelerated attention the sector has paid to these
students in recent years, we believe that gap has been erased and potentially surpassed.

Exhibit 128. Where Military Undergraduates Attend (2007-2008


School Year)

Public two-year institutions


Public four-year institutions
Private not-for-profit four-year institution
For-profit institution
Others/attended more than one institution

Military
Undergraduates
43%
21%
13%
12%
9%

Nonmilitary
Independent
Undergraduates
49%
19%
9%
15%
8%

Source: National Center for Educational Statistics.

Students at forprofit schools are


large users of
military tuition
assistance; helps
stay below 90/10
threshold

In fact, according to the Senate Health, Education, Labor and Pensions (HELP) Committee
report released in July 2012, in FY2011, students at for-profit colleges used nearly half of the
total TA funding available -- $280 million of the $563 million disbursed during the year. That
is up from roughly 42% ($218 million of $515 million in benefits) in FY2009. One of the
main reasons for this increased penetration was that many for-profit schools targeted this
funding source to stay below the 90/10 threshold, which limits Title IV as a percentage of
cash-basis revenue to 90%, as DoD tuition assistance is excluded from the numerator. This
practice has created some controversy (see more details in the Regulatory Trends section later
in this document).
A list of the largest providers with students using the DoD tuition assistance program in
FY2012 (latest data available) can be found in Exhibit 129. As shown, six of the top 10
providers are for-profit schools, including American Public Educations (APEI) American
Military University, Bridgepoint Educations (BPI) Ashford University and Apollo Groups
(APOL) University of Phoenix. APEI is by far the largest provider to this sector across all
metrics and we believe serves the largest share of students in three of the five armed forces
(air force, coast guard, and marine corps).

A member of BMO

Financial Group

119

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 129. Top 50 Users of Department of Defense Tuition Assistance (Ranked by


FY2012 Students)
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

School
American Military University (APEI)
University Of Maryland University College
Central Texas College
Ashford University (BPI)
University Of Phoenix (APOL)
Columbia Southern University
Embry Riddle Aeronautical University
Trident University International
Grantham University
Park University
Liberty University
Excelsior College
Columbia College
Coastline Community College
Pierce College
Saint Leo University
Fayetteville Technical Community College
Kaplan Higher Education Corporation (WPO)
Thomas Edison State College
DeVry University Inc. (DV)
Troy University
Webster University
Allied American University
Tidewater Community College
Colorado Technical University (CECO)
Minnesota State Colleges And Universities
Post University
University System Of Georgia
Vincennes University
Wayland Baptist University
The State University And Community College System Of Tennessee
North Dakota University System
National University System
Hawaii Pacific University
International Sports Sciences Association
South University - Montgomery (EDMC)
University Of North Carolina
Strayer Education Inc. (STRA)
State University Of New York System
University Of Oklahoma
Mississippi Institutions Of Higher Learning
Grand Canyon University (LOPE)
Inter American University of Puerto Rico
Pikes Peak Community College
Southwestern College - Kansas
Northwest Florida State College
Dlorah Inc. (NAUH)
Maricopa Community College District
Barton County Community College
Bellevue University

School Type
Private for-profit
Public not-for-profit
Public not-for-profit
Private for-profit
Private for-profit
Private for-profit
Private not-for-profit
Private for-profit
Private for-profit
Private not-for-profit
Private not-for-profit
Private not-for-profit
Private not-for-profit
Public not-for-profit
Public not-for-profit
Private not-for-profit
Public not-for-profit
Private for-profit
Public not-for-profit
Private for-profit
Public not-for-profit
Private not-for-profit
Private for-profit
Public not-for-profit
Private for-profit
Public not-for-profit
Private for-profit
Public not-for-profit
Public not-for-profit
Private not-for-profit
Public not-for-profit
Public not-for-profit
Private not-for-profit
Private not-for-profit
Private for-profit
Private for-profit
Public not-for-profit
Private for-profit
Public not-for-profit
Public not-for-profit
Public not-for-profit
Private for-profit
Private not-for-profit
Public not-for-profit
Private not-for-profit
Public not-for-profit
Private for-profit
Public not-for-profit
Public not-for-profit
Private not-for-profit

Highest
Degree
Master's
Doctoral
Associate
Master's
Doctoral
Doctoral
Doctoral
Doctoral
Master's
Master's
Doctoral
Post-master's
Master's
Associate
Associate
Master's
Associate
Master's
Post-master's
Bachelor's
Doctoral
Doctoral
Bachelor's
Associate
Doctoral
Doctoral
Master's
Doctoral
Bachelor's
Master's
Post-master's
Post-master's
Master's
Post-master's
Associate
Master's
Doctoral
Master's
Doctoral
Doctoral
Doctoral
Doctoral
Doctoral
Associate
Master's
Bachelor's
Bachelor's
Associate
Associate
Doctoral

Students Courses
56,952 150,833
35,118
82,604
23,417
54,697
21,313
69,828
16,105
53,090
11,108
33,050
10,193
27,080
9,873
27,669
9,544
36,549
8,966
22,449
6,410
21,577
6,021
16,289
5,649
16,563
4,897
11,193
4,489
11,659
4,278
12,339
3,990
11,821
3,919
12,534
3,771
8,828
3,737
11,522
3,444
11,730
3,295
9,636
3,174
9,599
2,905
7,718
2,877
11,532
2,541
11,803
2,525
7,464
2,471
11,226
2,422
5,723
2,272
6,652
2,264
10,367
2,174
8,377
2,046
5,790
1,938
5,604
1,869
3,633
1,843
5,404
1,719
8,412
1,709
5,476
1,592
4,483
1,521
4,701
1,279
6,715
1,246
3,747
1,242
6,362
1,235
2,901
1,213
3,883
1,156
2,779
1,154
3,087
1,143
2,429
1,109
2,845
1,103
3,675

TA Funds
($ mil.)
$114.2
54.3
25.2
51.5
38.7
20.0
19.8
25.8
25.6
15.6
15.5
10.8
10.3
4.8
6.4
7.9
2.4
10.0
6.7
9.4
7.7
7.1
7.1
2.9
7.4
6.5
5.5
5.3
3.3
4.5
5.3
4.2
3.8
3.3
3.4
3.4
3.8
3.9
2.6
3.2
4.0
3.4
3.4
1.5
2.7
0.9
2.2
0.8
1.1
3.0

Source: Military Times Edge Magazine.

Veterans market

Veterans. According to the US Department of Veterans Affairs (VA), there were roughly 22.2

underpenetrated

million veterans in the US as of September 2011 (latest data available). According to a January
2011, VA report entitled Educational Attainment of Veterans: 2000 to 2009, during that
period, a higher percentage of veterans than non-veterans had completed some college, though
not a degree. Nevertheless, there was a significant increase in the percentage of veterans with a
bachelors degree from 14.9% in 2000 to 16.7% in 2009 (see Exhibit 130). However, the share
of veterans with a bachelor's degree still lagged well behind the percentage of the general
population. We still believe that this market is underpenetrated especially as recent and
expected troop reductions should increase the number of newly minted veterans.

A member of BMO

Financial Group

120

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 130. Bachelor's Degree Educational Attainment: Veterans


vs. Non-Veterans (FY2000- FY2009)
% of Population with Bachelors Degree

19%

Veterans

Non-Veterans
17.9%

18%

18.1%

18.1%

17.4%
17.0%

17.0%

16.1%

16.3%

16.2%
15.8%

16%

15%

17.0%

16.7%

17%

14.9%

15.0%

16.0%

16.4%

16.5%

16.7%

16.1%

15.0%

14%

13%

12%
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: BMO Capital Markets and Department of Veterans Affairs.

Montgomery GI
Bill

Historically, veterans have been eligible for education benefits mainly through the GI bill, first
enacted in 1944 as the Servicemens Readjustment Act and then expanded in 1984 under the
Veterans' Educational Assistance Act (the Montgomery GI Bill). The maximum amount
awarded in the 2012-2013 academic year was just over $1,500 per month for living and
education expenses likely not enough to support seeking higher education without additional
assistance.. Nevertheless, very few of those eligible take advantage of these programs.
According to a 2009 analysis by the US Veterans Administration, less than 6% of veterans used
the complete amount available, and, on average, benefits are used for only 17 months of the 36
months of eligibility.
A 2008 analysis of US Department of Veterans Affairs data conducted by the Chronicle of
Higher Education shows a disproportionate number of students eligible for this funding attend
for-profit schools; while roughly 8% of postsecondary students attended for-profit institutions in
the 2006-2007 school year, 19% of those using GI bill benefits did the same (see Exhibit 131).

Exhibit 131. Where Students Use GI Bill Benefits (2006-2007


School Year)

Community college
Four-year public institution
For-profit institution
Private institution
Undetermined

Where Students Use


GI Bill Benefits
38%
36%
19%
6%
1%

Where Students
Attend
34%
38%
8%
19%
0%

Source: Chronicle of Higher Education and National Center of Education Statistics.

Exhibit 132 shows the top 10 schools attended by students using the GI Bill for FY2007 (latest
data available). As shown, seven of these schools are for-profit providers.

A member of BMO

Financial Group

121

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 132. Top 10 Schools for GI Bill Recipients (FY2007)


Rank
1
2
3
4
5
6
7
8
9
10

School
University of Phoenix (APOL)
American Intercontinental University (CECO)
American Public University (APEI)
University of Maryland
Central Texas College
Colorado Technical University (CECO)
Kaplan University (WPO)
Strayer University (STRA)
Grantham University
Florida Community College

Type
Private for-profit
Private for-profit
Private for-profit
Public not-for-profit
Public not-for-profit
Private for-profit
Private for-profit
Private for-profit
Private for-profit
Public not-for-profit

Students
17,221
3,698
3,668
3,359
3,024
2,738
2,460
2,348
2,029
1,764

Source: US Department of Veterans Affairs.

Post 9/11 GI Bill


offers another
growth
opportunity

In recent years, more funding for veterans education has become available, likely spurring
growth in this segment. On June 30, 2008, President Bush signed the Post-9/11 Veterans
Educational Assistance Act of 2008, the so-called new or Post-9/11 GI Bill, expanding
education benefits for veterans who have served at least 90 days on active duty since September
11, 2001, including reservists and members of the National Guard; these benefits became
available effective August 1, 2009. According to the American Council on Education, this group
has roughly two million members. On January 4, 2011, President Obama signed into law the
Post-9/11 Veterans Educational Assistance Improvements Act of 2010 (Improvements Act),
which altered these benefits somewhat.
This program works as follows:

A member of BMO

The initial bill only funded programs at degree-granting schools (i.e., associate's degree or
higher). Effective October 1, 2011, non-degree programs were also included as the revised
bill funds programs at all accredited institutions.

Effective August 1, 2011, a single national cap of $17,500 applied for students at nonpublic and foreign institutions (initially there was a cap of up to the cost of in-state tuition at
the most expensive public institution of higher education in the state where the veteran is
enrolled). For students at public institutions, the benefit in effect is capped at in-state tuition
and fees for the program in which the student is enrolled. This maximum amount is set
annually; effective August 1, 2013, the rate is $19,198.31 for the 2013-14 academic year
up 6.2% from the prior year.

The benefit for tuition and fees is based on the net cost to the student after accounting for
state and federal aid, scholarships, institutional aid, fee waivers, and similar assistance,
rather than the total charges established by the institution under the initial bill.

Private institutions that participate in the Yellow Ribbon Program can waive up to half of
the remaining charges and receive the same amount from the federal government (per the
Veterans Administration, in the 2011-2012 school year, more than 2,600 schools were
participating in this program).

Students receive up to $1,000 per academic year for books and other education costs.

Financial Group

122

September 2013

Postsecondary Education

BMO Capital Markets

The monies are available for 15 years after the last release of active duty of 90 consecutive
(or 30 days if released for disability). Individuals may receive up to 36 months worth of
benefits, depending on the length of active-duty service.

Effective October 1, 2011, students enrolled in distance learning were entitled to a housing
stipend, albeit in an amount less than the housing stipend available to students who enroll in
classroom-based and blended programs. Initially, such students did not receive monthly
housing stipends.

Service members may transfer these education benefits to family members (e.g., spouses
and children) under certain restrictions.

Initial Congressional Budget Office estimates were that the Post 9/11 GI Bill would cost US
taxpayers roughly $100 billion in the first 10 years up 170% from $37.2 billion, which had
been budgeted under the old GI bill as the average monthly cost will likely be more than the
monthly allotment of $1,321 that had been provided to veterans with at least three years of
active duty and were now full-time students. While there were some initial glitches in the first
year of implementation (e.g., processing delays), in the first three and a half years of the
program (through January 2013), the VA has provided $27 billion in Post-9/11 GI Bill benefits
to approximately 938,000 people under this program.
For-profit sector
capturing
disproportionate
amount of new
GI students

While these benefits are available across the postsecondary spectrum, we believe the for-profit
sector will capture relatively more of this funding, given their current disproportionate
penetration of this market. This has been true so far: in a March 2012 article in the Chronicle of
Higher Education, the authors cited data that in the first three years of the program (FY2009FY2011), students at for-profit schools received roughly 37% of the $4.4 billion paid out under
this program (see Exhibit 133). We noted earlier that students at for-profit schools represented
roughly 10.9% of total enrollment in the 2011-2012 school year (latest data available).

Exhibit 133. Post 9/11 GI Bill Recipients by School Type


(FY2009 - FY2011)

Public
Private not-for-profit
Private-for-profit
Total

Amount Paid
In $bil. % of Total
$1.68
38%
$1.08
24%
$1.65
37%
$4.41
100%

Source: Chronicle of Higher Education from data provided by the US Department of Veterans Affairs.

According to the Senate HELP Committee, eight of the top ten recipients of Post-9/11 GI Bill
funds during FY2009-FY2011 were for-profit institutions (see Exhibit 134); we note that the
students actually receive the funding, not the institutions.

A member of BMO

Financial Group

123

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 134. Top 10 Schools for Post 9/11 GI Bill Funding


(FY2010-FY2011)
Company/Ticker
Apollo Group (APOL)
Education Management (EDMC)
ITT Technical Institutes (ESI)
DeVry (DV)
Career Education (CECO)
Strayer Education (STRA)
Corinthian Colleges (COCO)
University of Maryland System
Kaplan University (WPO)
University of Texas System

($ in mil.)
FY2010
FY2011 % change
$77
$133
73%
60
113
88%
79
99
25%
48
96
100%
58
71
22%
32
49
53%
22
39
77%
20
31
55%
17
27
59%
20
25
25%

Note: Ranked by FY2011 funding. Source: Senate HELP Committee.

The Improving Transparency of Education Opportunities for Veterans Act of 2012, which was
introduced by Rep. Bilirakis (R-FL) and became law on January 10, 2013, requires colleges to
be more transparent about how they serve veterans and tighten rules regarding which institutions
may be eligible to have students participate in VA programs.
Unfortunately, the disproportionate amount of both DoD and VA funding at for-profit
institutions has attracted a lot of unwanted attention. Both the House and the Senate have
proposals on the floor to change the 90/10 calculation (which limits the amount of Title IV
funding at for-profit institutions to 90% of their annual cash-basis receipts) to include military
and veterans' education benefits on the 90% side. We have summarized the more pertinent bills
in Exhibit 135.

A member of BMO

Financial Group

124

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 135. Bills in 113th Congress Affecting Military and Veterans Education Benefits
DATE
BILL NUMBER & TITLE
INTRODUCED

SUMMARY

MEMBER OF
CONGRESS

8/1/2013

Military and Education Bill

The bill prohibits the use of any revenues derived from educational
assistance funds provided in any form under any Federal law for
advertising, marketing or student recruitment activities other than those
specifically authorized under title IV of the HEA or by the Secretary of Sen. Durbin
Defense. The bill also changes the current 90/10 calculation to prohibit
the inclusion of funds from voluntary military education programs as
part of the 10% in the 90/10 calculation.

4/26/2013

H.R. 1796: Troop Talent Act


of 2013

This bill seeks to ensure that the education and training provided to
members of the Armed Forces and veterans better assists members
and veterans in obtaining civilian certifications and licenses, and for
other purposes.

3/21/2013

S. 634: Service Members


Student Loan Relief Act

A bill to allow members of the Armed Forces and National Guard to


defer principal on Federal student loans for a certain period in
connection with receipt of orders for mobilization for war or national
emergency, and for other purposes.

PARTY &
COMMITTEE
STATE

D-IL

Rep. Duckworth,
Cosponsors: 83

D-IL

Veterans'
Affairs/Armed
Services

Sen. Tester,
Cosponsors: 2

D-MT

HELP

Sen. Lautenberg,
Cosponsors: 3

D-NJ

HELP

2/28/2013

S. 406: Students First Act

A bill to provide for new annual program review requirements of each


institution of higher education that meet certain criteria such as a
cohort default rate that exceeds the national average, a proprietary
institution that received more than 85 percent of the institution's
revenue from Federal funds, the institution has engaged in default
manipulation to name a few of on the list within the bill text.

2/7/2013

S. 257: GI Bill Tuition


Fairness Act of 2013

A bill to amend title 38, United States Code, to require courses of


education provided by public institutions of higher education that are
approved for purposes of the educational assistance programs
administered by the Secretary of Veterans' Affairs to charge veterans'
tuition and fees at the in-state tuition rate, and for other purposes.

Sen. Boozman,
Cosponsors: 3

R-AR

Senate
Veterans' Affairs
Committee

1/23/2013

H.R. 357" GI Bill Tuition


Fairness Act

To amend title 38, United States Code, to require courses of education


provided by public institutions of higher education that are approved for
Rep. Miller,
purposes of the educational assistance programs administered by the
Cosponsors: 42
Secretary of Veterans' Affairs and who is enrolled before August 1,
2014, to charge veterans' tuition and fees at the in-State tuition rate.

R-FL

Veterans' Affairs

1/23/2013

H.R. 331: To direct the


Secretary of Veterans Affairs
to permit the centralized
reporting of veteran
enrollment by certain groups

R-CA

Veteran Affairs

Amends veterans' educational assistance program reporting


requirements under which enrolled veterans (or eligible persons) and
educational institutions must report enrollment information to the
Rep. Calvert,
Secretary of Veterans Affairs (VA). Requires individuals and
Cosponsors: 5
educational institutions participating in the post-Vietnam era and post9/11 veterans' educational assistance programs to report to the
Secretary such enrollment and any updates on interruption or
termination of the education.

Note: Updated as of August 1, 2013. Source: APSCUs legislative matrix..

Should any of these bills pass, we believe they would impact several schools that serve this
demographic. Senator Harkin has released data regarding military-sourced funding of
educational expenses for the publicly held for-profit providers. The latest data (released in July
2012) is summarized in Exhibit 136. As shown, those with the most exposure (as a percentage
of revenues) include APEI, BPI, ESI, and STRA. (Senator Harkins committee appears to be
continuously tracking military tuition data, but only releases information sporadically and often
with revisions; hence, we caution this data may not be 100% accurate.)

A member of BMO

Financial Group

125

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 136. Total Revenues From Military and Veterans Education


Benefits for Selected For-Profit Education Companies (FY2010)
TOTAL MILITARY REVENUES - FY2010

DoD Tuition
Total
Assistance/
Military and
MYCAA
Post GI-Bill
Veterans
FYE

Company

Ticker

American Public Education

APEI

12

$92.2

$9.4

$101.6

Apollo Group

APOL

62.8

81.6

144.4

Bridgepoint Education

BPI

12

38.4

12.0

50.4

Career Education

CECO

12

7.7

63.7

71.5
21.2

Corinthian Colleges

COCO

1.3

19.9

Capella Education

CPLA

12

2.1

8.9

11.1

DeVry

DV

9.0

43.9

53.0
58.5

Education Management

EDMC

3.0

55.4

Grand Canyon Education

LOPE

12

2.3

5.0

7.3

ITT Educational Services

ESI

12

0.3

87.5

87.8

Lincoln Educational Services

LINC

12

0.0

7.4

7.4

National Amer. Univ. Holdings

NAUH

1.6

1.4

3.0

Strayer Education

STRA

12

4.5

38.7

43.2

Universal Technical Institute

UTI

0.0

10.9

10.9

Washington Post

WPO

12

12.5

21.2

33.7

$238.0

$466.8

$704.8

Total
AS % OF REVENUES
Company

Ticker

American Public Education

APEI

FYE
12

49.7%

5.0%

Apollo Group

APOL

1.3%

1.7%

2.9%

Bridgepoint Education

BPI

12

5.9%

1.8%

7.7%

Career Education

CECO

12

0.4%

3.1%

3.5%

Corinthian Colleges

COCO

0.1%

1.1%

1.2%

Capella Education

CPLA

12

0.5%

2.2%

2.7%

DeVry

DV

0.5%

2.2%

2.6%

Education Management

EDMC

0.1%

2.1%

2.2%

Grand Canyon Education

LOPE

12

0.6%

1.4%

2.0%

54.7%

ITT Educational Services

ESI

12

0.0%

5.6%

5.6%

Lincoln Educational Services

LINC

12

0.0%

1.2%

1.2%

National Amer. Univ. Holdings

NAUH

1.7%

1.4%

3.1%

Strayer Education

STRA

12

0.7%

6.3%

7.1%

Universal Technical Institute

UTI

0.0%

2.5%

2.5%

Washington Post

WPO

12

0.7%

1.1%

1.8%

1.2%

2.3%

3.5%

Total

Note: For purposes of this calculation, we have used revenues for the 12 months ended September 30, 2010 or the
closest period thereof. Source: Based on data collected by the Senate Health Education Labor and Pension
Committee (HELP) released in July 2012, BMO Capital Markets and Thomson.

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Financial Group

126

September 2013

Postsecondary Education

BMO Capital Markets

Growth Components for For-Profit Postsecondary Schools


Why is for-profit
enrollment

It is no secret that enrollment in the for-profit sector has been shrinking. Among the
components:

declining?

Students questioning the value proposition of higher education;

Increasing competition for higher-degree-level students across the for-profit landscape


and a growing threat of not-for-profit online alternatives;

Less aggressive recruitment policies, owing to the incentive compensation ban (effective
July 1, 2011);

A shift toward recruiting "higher-quality students, including a number of initiatives


(e.g., orientation programs) limiting new student inflow (i.e., focus on outputs, not
inputs);

Financial aid limitations as Title IV funds become more restrictive (e.g., ATB students no
longer eligible);

Slowing demographic trends as growth in the traditional student cohort slows and will
soon decline;

Negative publicity, which has tainted the for-profit sector;

The counter-cyclical impact of a slowly improving economy leading to fewer potential


students returning to school as job opportunities improve;

Increasing student acquisition costs as schools are much more selective in marketing to a
very specific potential student base, while advertising costs have generally increased
along with strengthening economy.

We address most of these issues in detail throughout various sections in this report.
Long-term growth
rates in the new
normal: 6%-9%
revenues; 8%-12%
earnings

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While this sector has been and will likely continue to be under pressure for some time, we
believe eventually, trends will stabilize and the sector will once again begin to grow. However,
it is unlikely that the sector will ever again return to its double-digit top-line growth rates it
enjoyed for much of the prior two decades. Our long-term growth expectations can be found in
Exhibit 137, with the specific underlying components of each of these factors in the body of this
section.

Financial Group

127

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 137. For-Profit Postsecondary Long-Term Annual Growth Expectations


Item

Annual Growth

Same school enrollment growth (includes


impact of program transplants)
New campus openings, facility expansions,
relocations

3%-4%

Roughly 2x the rate of the not-for-profit sector


Fewer campus openings; law of large numbers; each
new school has a lesser impact

0%-1%

Retention improvements
Subtotal (enrollment growth)

0%-1%
4%-6%

Tuition increases
Subtotal (revenue growth)

Comments

Greater focus on retention


Tuition at all-time highs; consumers still very price
sensitive. Competitive and regulatory pressures could
cap price increases

2%-3%
6%-9%

1.25x-1.5x revenue Each 1% increase in incremental revenues increases


growth
operating profits by roughly 1.25%-1.5%
8%-12%

Operating margin expansion


Total (earnings growth)
Source: BMO Capital Markets estimates.

Postsecondary Schools Enrollment Growth Trends


Enrollment at forprofit degreegranting
institutions has
increased 11.4%
CAGR since fall
1976 versus the
1.9% rate at all
degree granting
institutions

Longer-term historical enrollment data for the for-profit sector only exists for degree-granting
programs, which enrolled roughly 1.96 million students in the 1,311 institutions as of fall 2011
(roughly 2.36 million students were enrolled in the 3,189 for-profit postsecondary institutions
eligible for Title IV funding, including non-degree granting programs as cited previously). Even
including a decline in fall 2011, the 11.4% average annual increase in for-profit students at
degree-granting institutions since fall 1976 is significantly larger than the 1.9% average annual
increase for all postsecondary students in degree-granting institutions over the same period. This
has allowed the for-profit sector to significantly increase its market share since that time, when it
taught only 0.4% of all students at US degree-granting institutions versus the 9.3% penetration
reached as of fall 2011, though down from fall 2010s 9.6% rate (see Exhibit 138).

Exhibit 138. US For-Profit Enrollment at Degree-Granting


Postsecondary Institutions (Fall 1976 to Fall 2017E)
2,000
1,750

10%
Enrollment
Market share

8%

1,500
6%

1,250
1,000

4%

750
500

2%

250
0
1976-77

1981-82

1986-87

1991-92

1996-97

2001-02

2006-07

0%
2011-12 2016-17E

Source: BMO Capital Markets estimates and US Department of Education National Center for Education
Statistics.

A member of BMO

Financial Group

128

September 2013

Market Share

For-Profit Enrollment (000s)

2,250

Postsecondary Education

BMO Capital Markets

Our longer-term forecast assumes continued enrollment declines before bottoming in fall 2014,
with the sector growing thereafter reaching just over two million students (9.8% share) in fall
2017. By that time, for-profit enrollments should be growing near their low-single-digits
projected long-term growth rates.

We expect forprofit enrollments


to bottom in fall
2014

The bulk of the sectors share gains have come since fall 1997, when for-profit market share
increased from 3.5% in fall 1997 to 11.2% by fall 2010. Much of these gains were driven by
strong growth in degree-granting institutions, most specifically four-year institutions, as the
sector moved upscale from its vocational roots. While all major components within the forprofit sector saw enrollment declines in fall 2011, the sharpest drop (6.4%) was felt by two-year
schools (see Exhibit 139).

The sector has


moved upscale
from its
vocational roots

Exhibit 139. Postsecondary Enrollment Market Share Analysis (Fall 1997 to Fall 2011)
2005

2006

2007

2008

2009

2010

2011

CAGR
1997-2011

For Profits
1,187
1,323

1,380

1,480

1,798

2,239

2,426

2,358

11.4%

1,066
314

1,186
294

1,469
328

1,852
387

2,018
408

1,957
402

13.6%
5.5%

812
319
250

926
321
233

1,173
361
263

1,467
468
305

1,588
519
318

1,559
486
313

17.9%
6.2%
5.3%

1997

1998

1999

2000

2001

2002

2003

Total

518

553

629

673

766

853

984

Degree granting
Non-degree granting

329
189

364
189

430
198

450
223

528
238

594
259

712
281

880
307

1,011
312

4 years and above


At least 2 years, but less than 4 yea
Less than 2 years

156
210
152

188
216
150

240
229
160

258
229
186

321
242
203

383
250
220

461
285
238

620
317
252

751
319
253

Annual % change:
Total

6.8%

13.7%

7.0%

13.8%

11.4%

15.3%

20.7%

11.4%

4.4%

7.2%

21.5%

24.6%

8.3%

-2.8%

Degree granting
Non-degree granting

10.9%
-0.2%

18.1%
5.2%

4.6%
12.3%

17.2%
6.9%

12.7%
8.6%

19.8%
8.6%

23.7%
9.2%

14.8%
1.6%

5.4%
0.9%

11.3%
-6.6%

23.9%
11.8%

26.1%
17.8%

9.0%
5.3%

-3.1%
-1.4%

4 years and above


At least 2, but less than 4 years
Less than 2 years

20.5%
3.0%
-1.2%

27.5%
6.1%
6.4%

7.8%
-0.3%
16.4%

24.4%
5.7%
9.0%

19.0%
3.5%
8.7%

20.6%
13.8%
7.9%

34.5%
11.3%
5.9%

21.0%
0.6%
0.6%

8.1%
0.1%
-1.4%

14.1%
0.7%
-6.7%

26.7%
12.4%
12.9%

25.0%
29.5%
15.8%

8.3%
11.1%
4.5%

-1.8%
-6.4%
-1.6%

(in 000's)

2004

Total

14,383

14,413

14,577

15,029

15,568

16,182

16,346

Not For Profits


16,524 16,599 16,825

17,191

17,777

18,728

19,162

19,199

2.1%

Degree granting
Non-degree granting

14,174
209

14,185
228

14,361
216

14,862
166

15,400
168

16,017
195

16,189
148

16,392
132

16,477
123

16,693
132

17,062
129

17,634
143

18,575
152

18,998
164

19,037
161

2.1%
-1.8%

8,743
5,542
98

8,846
5,472
94

8,960
5,533
84

9,107
5,833
88

9,357
6,111
101

9,701
6,391
91

9,947
6,321
78

10,106
6,339
76

10,249
6,295
55

10,429
6,332
64

10,705
6,419
67

10,958
6,740
79

10,630
7,207
81

11,747
7,329
86

11,936
7,177
87

2.2%
1.9%
-0.9%

4 years and above


At least 2, but less than 4 years
Less than 2 years
Annual % change:
Total

0.2%

1.1%

3.1%

3.6%

3.9%

1.0%

1.1%

0.5%

1.4%

2.2%

3.4%

5.3%

2.3%

0.2%

Degree granting
Non-degree granting

0.1%
9.2%

1.2%
-5.6%

3.5%
-22.8%

3.6%
1.0%

4.0%
15.9%

1.1%
-23.9%

1.3%
-10.8%

0.5%
-7.2%

1.3%
7.7%

2.2%
-2.3%

3.4%
10.9%

5.3%
6.2%

2.3%
8.1%

0.2%
-1.8%

1.2%
-1.3%
-3.9%

1.3%
1.1%
-11.0%

1.6%
5.4%
4.7%

2.7%
4.8%
14.8%

3.7%
4.6%
-9.8%

2.5%
-1.1%
-13.9%

1.6%
0.3%
-2.7%

1.4%
-0.7%
-27.9%

1.8%
0.6%
16.8%

2.6%
1.4%
4.3%

2.4%
5.0%
17.8%

-3.0%
6.9%
2.2%

10.5%
1.7%
6.6%

1.6%
-2.1%
0.7%

3.5%

3.7%

4.1%

4.3%

4.7%

5.0%

7.6%

7.9%

9.2%

10.7%

11.2%

10.9%

Degree granting
Non-degree granting

2.3%
47.5%

2.5%
45.2%

2.9%
47.9%

2.9%
57.2%

3.3%
58.6%

3.6%
57.1%

4.2%
65.5%

5.1%
69.9%

5.8%
71.8%

6.0%
70.4%

6.5%
69.5%

7.7%
69.6%

9.1%
71.8%

9.6%
71.2%

9.3%
71.3%

4 years and above


At least 2, but less than 4 years
Less than 2 years

1.8%
3.6%
60.8%

2.1%
3.8%
61.4%

2.6%
4.0%
65.5%

2.8%
3.8%
67.9%

3.3%
3.8%
66.8%

3.8%
3.8%
70.8%

4.4%
4.3%
75.2%

5.8%
4.8%
76.8%

6.8%
4.8%
82.2%

7.2%
4.8%
79.5%

8.0%
4.8%
77.7%

9.7%
5.1%
76.9%

12.1%
6.1%
79.1%

11.9%
6.6%
78.7%

11.6%
6.3%
78.3%

32.2x

12.1x

2.3x

3.8x

2.9x

15.1x

19.0x

25.1x

3.2x

3.3x

6.3x

4.6x

3.6x

-14.6x

4 years and above


At least 2, but less than 4 years
Less than 2 years

Total

For-profit vs. not-for-profit annual chg.

For Profits as % of Total


5.7%
6.7%
7.4%

5.5x

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

However, much of
the share lost in
fall 2011 was at
the undergraduate

Using a different data series, one can see that the sector gained share last decade across all
three major schools types two-year, undergraduate and graduate (see Exhibit 140).
Interestingly, much of the lost share in fall 2011 came at the undergraduate level, while
enrollment at for-profit graduate schools continued to gain some share.

level

A member of BMO

Financial Group

129

September 2013

Postsecondary Education

BMO Capital Markets

Private-for-profit

500

Market share
4.8%

6.1%

4.8%

4.8%

4.8%

6.6%

8%
6.3%

5%

400

4%

350

3%

300

2%

250

1%

200

0%

Enrollment (000s)

2004

2005

1,500

Private-for-profit

1,250

Market share

1,000
750

6.9%

2006

2007

2008

Undergraduate Schools

2009

2010

2011

11.9%

12.4%

11.9%

7.3%

10%
8%

5.8%

6%
4%

250

2%

0%
2004

325
300
275
250
225
200
175
150
125
100

14%
12%

10.0%
8.2%

500

Enrollment (000s)

7%
6%

5.1%

% of total Enrollment

450

2-Year Schools

% of total Enrollment

550

2005

2006

Private-for-profit

2007

2008

2009

Graduate Schools

Market share

9.2%
7.8%

2010

2011

10.1%

10.3%

11%
10%

9.3%

9%

8.2%

7.4%

8%

6.4%

7%
6%
5%

2004

2005

2006

2007

2008

2009

2010

2011

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

However, forprofit enrollments


have declined
over the last two
years

A member of BMO

More up-to-date enrollment data has been compiled by the National Student Clearinghouse
Research Center, although data is only available for for-profit four-year schools. As shown in
Exhibit 141, enrollment trends have been deteriorating for every sector within higher education,
but have been most profound in the for-profit sector, where enrollments have declined in each of
the last four major intake periods. We assume trends at for-profit two-year schools have been
fairly similar. Anecdotally, trends at less-than-two-year schools (mostly certificate programs)
have been less worse as students migrate toward these shorter-term programs, to minimize
student loan debt, among others reasons.

Financial Group

130

September 2013

% of total Enrollment

Enrollment (000s)

Exhibit 140. Student Enrollment Private For-Profit Schools


Market Share by Type (Fall 2004 Fall 2011)

Postsecondary Education

BMO Capital Markets

Exhibit 141. Annual Change in Enrollment (Fall 2010 to Spring


2013)
Fall
2010
Public not-for-profit
Two-year schools
Four-year schools
Private not-for-profit four-year schools
Private for-profit four-year schools
All schools

0.3%
1.6%
2.7%
14.8%
2.3%

Spring
2011
-3.9%
2.0%
1.8%
9.0%
0.2%

Fall
2011
-1.6%
1.4%
3.3%
-3.8%
0.2%

Spring
2012
-1.1%
-0.1%
3.8%
-9.3%
-0.3%

Fall
2012

Spring
2013

-3.1%
-0.6%
0.5%
-7.2%
-1.8%

-3.6%
-1.1%
0.5%
-8.7%
-2.3%

Source: BMO Capital Markets and National Student Clearinghouse Research Center.

Has the sectors

In March 2012, The Parthenon Group published a study questioning whether the sectors

addressable

addressable market had been tapped. Specifically, the report cites that the sectors rapid growth
in the latter half of last decade caused schools to start many more students than can be replaced
by population growth and other demand factors. The firm calculates that the addressable market
-- US population age 18-44, household income below $50,000, no college degree and not
currently enrolled -- increases by roughly 800,000 students annually. According to the firm,
private sector schools (as they refer to this group) added 7 million students from the same
demographic from 2006 to 2010, including 1.8 million in 2010 alone. When including another
500,000 students enrolled at not-for-profit institutions, Parthenon estimates the addressable
market has shrunk from roughly 38 million to 30.5 million a roughly 20% decline (see Exhibit
142). In addition, the exclusion of Ability-to-Benefit (ATB) students, who are no longer eligible
to receive Title IV funds effective July 1, 2012, removes another 9 million students from the
target market, likely limiting any expected rebound in enrollment trends. Anecdotally, the
closure of a handful of for-profit schools in 2013 (e.g., American Career Institute, Sawyer
Schools, and Butler Business School) have been blamed to some extent on the exclusion of ATB
students form Title IV funding.

market been
tapped?

Exhibit 142. Parthenon Group Estimate of Addressable Market


Change (2006-2010)
Demographic Target Population
Growth of Non-Profit Students Enrolled
Private Sector Starts (5-year Cumulative)
Addressable Market

38.0
(0.5)
(7.0)
30.5

Note: Parthenon believes that roughly 90% of private sector school students come from household
incomes of less than $50,000. Source: Parthenon Group.

Postsecondary
education may
have some
counter-cyclical
trends

A member of BMO

Impact of economic cycles on total enrollment. We believe one of the most widely debated
matters for investors in postsecondary education stocks is their economic sensitivity. A 2003
study conducted by economists Harris Dellas and Plutarchos Sakellaris (using BLS data from
1968 to 1988) found that a 1% increase in the US unemployment rate led to roughly a 2%
increase in enrollments at US postsecondary institutions. This made intuitive sense (at least to
us), as enrollment growth should accelerate as the economy contracts (and labor markets loosen)
as the opportunity cost of enrolling in higher education is lower.

Financial Group

131

September 2013

Postsecondary Education

Enrollment
growth rates:
inversely
correlated with
economic growth

BMO Capital Markets

The NCES data appear to corroborate that thesis. As shown in Exhibit 143, while the trends
vary, for the most part, overall enrollment growth in postsecondary schools begins to accelerate
in the year just before a recession. Growth remains somewhat strong during the recession year,
as well as in the year following the recession, before beginning to slow as the economy expands.
A similar pattern appears to be true for the Great Recession (December 2007 June 2009) as
enrollment growth accelerated in the 2007-2008 school year and continued thereafter before
slowing and then declining.

Exhibit 143. Economic Sensitivity: All Postsecondary Degree-Granting Schools Total


Enrollment Growth
Prior Recessionary Periods
Oct. 1969 - Mar. 1970
July 1974 - Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 - Mar. 1982
July 1990 - Mar. 1991
Mar. 2001 - Nov. 2001
Average

Annual Enrollment Growth - All Postsecondary Degree-Granting Schools


4 Years Prior 3 Years Prior 2 Years Prior
Year Prior
Year Of
Year After 2 Years After 3 Years After 4 Years After
N.A.
N.A.
8.2%
8.7%
6.5%
7.2%
4.3%
3.0%
4.2%
7.2%
4.3%
3.0%
4.2%
6.5%
9.4%
-1.5%
2.5%
-0.2%
-1.5%
2.5%
-0.2%
2.8%
4.6%
2.3%
0.4%
0.3%
-1.8%
2.5%
-0.2%
2.8%
4.6%
2.3%
0.4%
0.3%
-1.8%
0.0%
2.1%
2.1%
2.3%
3.7%
2.1%
3.9%
0.9%
-1.3%
-0.2%
0.9%
0.0%
2.0%
3.5%
4.0%
4.3%
1.8%
2.1%
1.2%
2.2%
1.7%
3.0%
4.6%
4.3%
4.6%
1.0%
0.8%
0.5%

Recent Recession
Dec. 2007 - June 2009

4 Years Prior 3 Years Prior 2 Years Prior


2004-2005
2005-2006
2006-2007
2.1%
1.2%
1.6%

Year Prior
2007-2008
2.8%

Year Of
2008-2009
4.7%

Year After 2 Years After 3 Years After 4 Years After


2009-2010
2010-2011
2011-2012 2012-2013E
6.9%
2.9%
-0.1%
N.A.

Note: N.A. Not Available.


Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and National Bureau of Economic Research.

Enrollment
growth rates:
more correlated to
unemployment
rate

This relationship was confirmed by noted industry researcher Mark Kantrowitz (when he was at
www.finaid.org) in an August 2010 paper entitled Countercyclicality of College Enrollment
Trends. He compares annual fall enrollments with the US unemployment rate in the June of that
year. As shown in Exhibit 144, there appears to be a strong correlation in the annual changes of
both these metrics i.e., as the unemployment rate increases, so follows changes in enrollments
(and vice versa).

Exhibit 144. Comparison of Annual Changes in Total Enrollment


at All Postsecondary Degree-Granting Schools and
Unemployment Rate (1970-2011)
4%
3%

8%

2%
6%

1%

4%

0%
-1%

2%

-2%
0%
1970
-2%

1975

1980

1985

1990

1995

2000

% y/y change in total enrollment


% y/y change in unemployment rate

2005

2010

-3%

y/y % change in unemployment rate

y/y % change in total enrollment

10%

-4%

Note: Data represents annual change in fall enrollment compared to June unemployment rate each year.
Shaded area represents recessionary period. Source: www.finaid.org and BMO Capital Markets,

A member of BMO

Financial Group

132

September 2013

Postsecondary Education

BMO Capital Markets

impact in for-

A 2003 paper by Dr. Sarah Turner at the University of Virginia focused on the same impact at
for-profit institutions, concluding that for-profit institutions may generate a greater

profit sector

enrollment response to cyclical fluctuations than counterparts in the not-for-profit and

Even stronger

public sectors, citing evidence that shows these schools can be more flexible than their not-

for-profit peers in responding to economic shocks (e.g., as demand increases they can more
easily add classroom space and do not face budget constraints from lower tax revenues as the
not-for-profit sector does).
As the historical data for the for-profit sector was not available prior to the 1976-1977 school
year, a similar analysis for changes in total enrollment for-profit sector alone is somewhat
limited (historical data for new enrollment growth was even more limited). Nevertheless, we
believe, even with the data available, one can see an analogous, and perhaps even stronger,
pattern just before and after a recession including the Great Recession (see Exhibit 145).

Exhibit 145. Economic Sensitivity: For-Profit Postsecondary Degree-Granting Schools


Total Enrollment Growth
Prior Recessionary Periods
Apr. 1980- Sept. 1980
Oct. 1981 - Mar. 1982
July 1990 - Mar. 1991
Mar. 2001 - Nov. 2001
Average

Annual Enrollment Growth - For-Profit Degree Granting Schools


4 Years Prior 3 Years Prior 2 Years Prior
Year Prior
Year Of
Year After 2 Years After 3 Years After 4 Years After
N.A.
17.5%
26.3%
8.3%
56.7%
36.3%
16.2%
8.9%
-1.3%
17.5%
26.3%
8.3%
56.7%
36.3%
16.2%
8.9%
-1.3%
3.1%
10.8%
-12.0%
15.4%
4.1%
-6.9%
7.8%
0.0%
-1.5%
3.6%
7.9%
10.9%
18.1%
4.6%
17.2%
12.7%
19.8%
23.7%
14.8%
12.1%
10.7%
17.0%
18.4%
25.8%
18.2%
11.2%
7.4%
5.0%

Recent Recession
Dec. 2007 - June 2009

4 Years Prior 3 Years Prior 2 Years Prior


2004-2005
2005-2006
2006-2007
23.7%
14.8%
5.4%

Year Prior
2007-2008
11.3%

Year Of
2008-2009
23.9%

Year After 2 Years After 3 Years After 4 Years After


2009-2010
2010-2011
2011-2012 2012-2013E
26.1%
9.0%
-3.1%
N.A.

N.A. Not Available.


Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and National Bureau of Economic Research.

We have long opined that enrollment trends at schools with shorter programs (i.e., less than two
year and two year) are more sensitive to economic cycles than trends at four-year schools. Given
the lower-quality student base, students at less than two-year and two-year programs would
likely be less serious in pursuing their education in a strong economic environment.
Conversely, in a weaker economic environment, enrollment trends should improve at a greater
rate at these schools relative to their four-year counterparts.
Countercyclicality is
stronger at
schools with
shorter programs;
this cycle, shorter
programs doing
less worse

A member of BMO

We believe the data bear this out. As shown in Exhibit 146, while enrollment growth
accelerates, on average, during the three-year period encompassing a recession (i.e., before,
during, and after), the rate of acceleration appears a bit stronger the more one moves down the
food chain, i.e., at both two-year schools and less than two-year schools. However, this
volatility also extends to the period thereafter and the rate of decelerating growth is strongest at
those schools that grew the fastest over the recessionary period. We believe that less than two
year schools are doing slightly less worse than their two-year school counterparts, as students
are drawn to the formers less expensive shorter certificate programs. We believe this trend
holds true whether these schools are for-profit or not-for-profit.

Financial Group

133

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 146. Economic Sensitivity: Annual Total Enrollment Growth by School Type
Prior Recessionary Periods
Oct. 1969 - Mar. 1970
July 1974 - Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 - Mar. 1982
July 1990 - Mar. 1991
Mar. 2001 - Nov. 2001
Average

Annual Enrollment Growth - 4 Year Schools


4 Years Prior 3 Years Prior 2 Years Prior Year Prior
Year Of Year After 2 Years After 3 Years After 4 Years After
10.6%
6.7%
6.6%
6.0%
3.8%
5.5%
1.7%
1.4%
2.0%
5.5%
1.7%
1.4%
2.0%
3.5%
5.8%
-1.2%
1.6%
-0.2%
-1.2%
1.6%
-0.2%
1.7%
3.0%
1.1%
0.0%
1.1%
-0.4%
1.6%
-0.2%
1.7%
3.0%
1.1%
0.0%
1.1%
-0.4%
0.1%
1.4%
2.1%
2.4%
2.5%
2.3%
1.5%
0.7%
-0.3%
0.1%
1.1%
1.4%
2.0%
1.8%
3.3%
4.2%
3.3%
3.0%
2.5%
3.2%
2.2%
2.3%
2.8%
2.8%
3.0%
0.9%
1.1%
0.7%

Recent Recession
Dec. 2007 - June 2009

4 Years Prior 3 Years Prior 2 Years Prior Year Prior


2004-2005
2005-2006
2006-2007 2007-2008
3.0%
2.5%
2.2%
3.5%

Prior Recessionary Periods


Oct. 1969 - Mar. 1970
July 1974 - Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 - Mar. 1982
July 1990 - Mar. 1991
Mar. 2001 - Nov. 2001
Average

Annual Enrollment Growth - 2 Year Schools


4 Years Prior 3 Years Prior 2 Years Prior Year Prior
Year Of Year After 2 Years After 3 Years After 4 Years After
18.6%
13.0%
14.1%
18.5%
15.3%
12.2%
11.2%
6.9%
9.3%
12.2%
11.2%
6.9%
9.3%
13.0%
16.6%
-2.2%
4.1%
-0.4%
-2.2%
4.1%
-0.4%
4.7%
7.3%
4.2%
1.2%
-1.0%
-4.1%
4.1%
-0.4%
4.7%
7.3%
4.2%
1.2%
-1.0%
-4.1%
0.0%
3.3%
2.1%
2.1%
5.7%
1.7%
7.9%
1.2%
-2.7%
-0.6%
0.8%
-2.1%
1.9%
6.4%
5.1%
4.5%
-0.5%
0.8%
-0.9%
6.1%
4.7%
4.9%
8.6%
7.8%
7.8%
1.6%
0.7%
0.6%

Recent Recession
Dec. 2007 - June 2009

4 Years Prior 3 Years Prior 2 Years Prior Year Prior


2004-2005
2005-2006
2006-2007 2007-2008
0.8%
-0.9%
0.5%
1.5%

Prior Recessionary Periods


Oct. 1969 - Mar. 1970
July 1974 - Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 - Mar. 1982
July 1990 - Mar. 1991
Mar. 2001 - Nov. 2001
Average

Annual Enrollment Growth - Less than 2 Year Schools


4 Years Prior 3 Years Prior 2 Years Prior Year Prior
Year Of Year After 2 Years After 3 Years After 4 Years After
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
-2.3%
-0.3%
12.4%
10.9%
2.6%
1.5%
3.8%
-6.0%
N.A.
-2.3%
-0.3%
12.4%
10.9%
2.6%
1.5%
3.8%
-6.0%

Recent Recession
Dec. 2007 - June 2009

4 Years Prior 3 Years Prior 2 Years Prior Year Prior


2004-2005
2005-2006
2006-2007 2007-2008
3.8%
-6.0%
1.8%
-4.5%

Year Of
2008-2009
4.3%

Year Of
2008-2009
5.3%

Year Of
2008-2009
14.0%

Year After 2 Years After 3 Years After 4 Years After


2009-2010
2010-2011
2011-2012 2012-2013E
6.4%
3.3%
1.2%
N.A.

Year After 2 Years After 3 Years After 4 Years After


2009-2010
2010-2011
2011-2012 2012-2013E
7.9%
2.1%
-2.4%
N.A.

Year After 2 Years After 3 Years After 4 Years After


2009-2010
2010-2011
2011-2012 2012-2013E
12.7%
4.9%
-1.1%
N.A.

Note: Data measures enrollments at degree-granting institutions. Source: BMO Capital Markets, US Department of Education National Center
for Education Statistics, and National Bureau of Economic Research.

Enrollment trends
for lower-skilled
programs tend to
be most volatile in
and around a
recession

A member of BMO

Given concerns regarding the impact of an economic recovery on enrollment trends, we


analyzed recent trends for three of the publicly held companies Corinthian Colleges (COCO),
Lincoln Educational Services (LINC), and Universal Technical Institutes (UTI) that specialize
in non-degreed programs, the area likely to be most affected by economic cycles. We note that it
was difficult to measure annual changes in enrollment just following the 2001 recession owing
to lack of data and restatements. Nevertheless, as shown in Exhibit 147, annual enrollment
growth for these three companies has been among the most volatile in the sector in and around
the Great Recession.

Financial Group

134

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 147. Annual Changes in Ending Enrollment for COCO,


LINC, and UTI (March 31, 2005 June 30, 2013)
40%
30%

10%

Mar-13

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Mar-06

-10%

Sep-05

0%
Mar-05

% annual change

20%

-20%
-30%

Corinthian Colleges (COCO)


Lincoln Educational Services (LINC)

-40%

Universal Technical Institutes (UTI)

Note: Measures annual change in ending enrollment excluding acquisitions. Shaded area represents
recessionary period. COCO and LINC data restated for continuing operations where available. Source: BMO
Capital Markets and company reports.

Demand for
working-adultfocused programs
may actually be
cyclical

Companies with a larger working-adult student population, such as Apollo Group (APOL),
Capella Education (CPLA), and Strayer Education (STRA), complicate the debate about the
effect of economic cycles on for-profit enrollment trends. During the prior economic expansion,
when many for-profit publicly held companies began to see enrollment growth slow (mid- to
late 2004), these companies were somewhat less affected. We believe this reflects the nature of
their older students, who may take a longer-term perspective on the benefits of advanced
schooling than the younger generation. In addition, many of these students may have been
required by their companies to gain more skills for their current jobs, thereby providing a
support level for continued demand, even as the hiring markets picked up. As an economic
recovery matures and the labor market tightens, employer-sponsored tuition reimbursement
programs typically increase, potentially boosting enrollment growth rates. Therefore, we believe
programs aimed at working adults could be considered somewhat cyclical, or at least not as
counter-cyclical as other programs in the sector. However, we acknowledge that this component
of the sector is not necessarily immune from the current adverse environment.

Recent recession

Impact of economic cycles on new enrollment. Unfortunately, the data are not as illuminating

had sizable

(and available) for analyzing the impact of economic cycles on new enrollment. Though not as
apparent in prior cycles, the Great Recession certainly had an impact on growth in freshman
enrollment, a proxy for new enrollment. As shown in Exhibit 148, new enrollment increased
7.5% (CAGR) in fall 2009 from fall 2007 the fastest two-year CAGR increase since fall 1967
fall 1969. While comparable data were not available for new enrollment growth at for-profit
schools, a June 2010 report by the Pew Research Center cited an 11% annual increase for first
time, full time freshmen at for-profit schools for the fall 2009 class faster than the 6% and 2%
annual increases at public not-for-profit schools and private not-for-profit schools, respectively.
Interestingly, new enrollments have actually fallen in five of the last seven post-recession
periods (including following the Great Recession) in the second year after the recession ended
(fall 2010 for the post-Great Recession period). Trends worsened this time in the third year after
the Great Recession, with new enrollments falling another 2%.

impact on new
enrollment; new
enrollment tends
to fall two years
afterwards

A member of BMO

Financial Group

135

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 148. Economic Sensitivity: All Postsecondary Degree-Granting Schools New


Enrollment Growth
Prior Recessionary Periods
Oct. 1969 - Mar. 1970
July 1974 - Mar. 1975
Apr. 1980- Sept. 1980
Oct. 1981 - Mar. 1982
July 1990 - Mar. 1991
Mar. 2001 - Nov. 2001
Average

Annual New Enrollment Growth - All Postsecondary Degree-Granting Schools


4 Years Prior 3 Years Prior 2 Years Prior
Year Prior
Year Of
Year After 2 Years After 3 Years After 4 Years After
17.7%
7.8%
5.6%
15.4%
3.9%
4.9%
2.7%
1.6%
3.4%
4.9%
2.7%
1.6%
3.4%
6.3%
6.3%
-6.7%
2.0%
-0.2%
-6.7%
2.0%
-0.2%
4.7%
3.4%
0.3%
-3.5%
-2.5%
-3.6%
2.0%
-0.2%
4.7%
3.4%
0.3%
-3.5%
-2.5%
-3.6%
-2.7%
-3.2%
1.2%
5.9%
-1.6%
-3.6%
0.9%
-4.1%
-1.1%
-1.3%
-2.4%
-0.3%
6.3%
3.2%
2.9%
2.9%
0.8%
1.5%
1.0%
2.1%
2.2%
4.0%
4.8%
2.2%
2.0%
-2.2%
-0.3%
-0.6%

Recent Recession
Dec. 2007 - June 2009

4 Years Prior 3 Years Prior 2 Years Prior


2004-2005
2005-2006
2006-2007
1.5%
1.0%
1.9%

Year Prior
2007-2008
2.5%

Year Of
2008-2009
9.0%

Year After 2 Years After 3 Years After 4 Years After


2009-2010
2010-2011
2011-2012 2012-2013E
6.1%
-1.7%
-2.0%
N.A.

Note: N.A. Not Available.


Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and National Bureau of Economic Research.

Using the aforementioned Kantrowitz analysis and comparing annual changes in new fall
enrollment to changes in the US unemployment rate the prior June shows some impact of
counter-cyclicality as well, though not as strong as the trend in total enrollment (see Exhibit
149).

10%

4%

8%

3%

6%

2%

4%

1%

2%
0%
0%
-2%

1970

1975

1980

1985

1990

1995

2000

2010

-1%
-2%

-4%

-3%

-6%
-8%

2005

% y/y change in new enrollment

y/y % change in unemployment rate

y/y % change in new enrollment

Exhibit 149. Comparison of Annual Changes in New Enrollment at


All Postsecondary Degree-Granting Schools and Unemployment
Rate (1970-2011)

-4%

% y/y change in unemployment rate

Note: Data represents annual change in fall enrollment compared with June unemployment rate each year.
Shaded area represents recessionary period. Source: www.finaid.org and BMO Capital Markets.

Two-year schools
experienced
greater volatility
in new
enrollments

A member of BMO

When drilling down by school type, it can be seen that much of the accelerating growth during
the Great Recession came from two-year schools, at both public not-for-profit (i.e., community
colleges) and private two-year schools (see Exhibit 150). However, those groups have also
experienced the larger declines in the post-Great Recession period. Unfortunately, we were
unable to segment the private-school growth between for-profit and not-for-profit schools.

Financial Group

136

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 150. Economic Sensitivity: Annual New Enrollment Growth by School Type
Annual New Enrollment Growth - By School Type
4 Years Prior 3 Years Prior 2 Years Prior
Year Prior
Year Of
Year After 2 Years After 3 Years After 4 Years After
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
2011-2012 2012-2013E

Most Recent Recession


Public Not-for-Profit:
Four-Year Schools
Two-Year Schools
Private (Not-for-Profit and For-Profit):
Four-Year Schools
Two-Year Schools

0.7%
0.5%

3.1%
-3.2%

3.8%
3.7%

3.4%
0.3%

3.0%
16.8%

3.5%
7.5%

1.8%
-3.1%

1.9%
-3.3%

N.A.
N.A.

4.6%
1.9%

7.9%
-10.4%

-1.4%
-11.7%

5.8%
-2.3%

6.4%
7.4%

5.9%
17.9%

-5.2%
2.5%

-2.8%
-18.5%

N.A.
N.A.

Note: N.A. Not Available. Source: BMO Capital Markets, US Department of Education National Center for Education Statistics, and National
Bureau of Economic Research.

Economic
expansion likely
means slower
growth

A member of BMO

We have summarized what we believe are the effects of economic cycles beyond enrollment on
this group in Exhibit 151. On the whole, we believe an improving economy has a detrimental
effect on the for-profit sector in terms of potentially slower growth rates and margin expansion,
although these changes tend to lag behind changes in economic cycles (i.e., enrollment growth
for many for-profit providers did not begin to accelerate until the second half of 2008, well after
the recession began in December 2007). Conversely, a slowing economy could benefit many
companies, specifically those specializing in non-degreed programs. However, we still believe
these companies can continue to show both solid top-line and bottom-line growth even during
an economic expansion, owing to the many secular growth attributes cited earlier.

Financial Group

137

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 151. Analysis of Cyclical Affect on For-Profit Postsecondary Companies


Impact of Improving Economy

Impact of Worsening Economy

Acyclical Considerations

Negative: Rate of enrollment growth


decelerates, as opportunity cost of attending
school (i.e., working) increases

Positive: Rate of enrollment growth


accelerates, as opportunity cost of attending
school (i.e., working) declines (school
becomes safe haven in the face of a
challenging economy)

Sizable financial aid remains an attractive


option for students in both good and bad
economic times

Negative: Higher attrition (drop-out) rate as


students find it easier to find work without
higher education

Positive: Lower attrition (drop-out) rate


owing to fewer job alternatives

Continued education is advantageous:


in good economic times it is valuable in
pursuing promotions and crucial to
getting hired in a bad economic
environment

Negative: Competition from not-for-profits


intensifies as improving state tax revenues
result in budgetary increases and potentially
smaller annual tuition increases

Positive: Competition from not-for-profits


weaken as lower state tax revenues result
in budgetary cuts and hikes in tuition

High barriers to entry created through


grueling accreditation process

Negative: Tightening labor markets make it


more difficult to recruit faculty members

Positive: Loosening labor markets make it


easier to recruit faculty members

Negative: More expensive real estate


market and higher interest rates for
opening/expanding campuses (although
could lag changes in economic cycle)

Positive: Cheaper real estate market and


interest rates for opening/expanding
campuses (although could lag changes in
economic cycle)

Positive: Completion rates may actually


improve, as fewer students are forced to
work part-time owing to need

Negative: Completion rates may decline as


more students are forced to work part time
owing to need

Positive: Job placement rates and graduate


starting salaries improve, providing a positive
datapoint for marketing to new students and
retaining current ones

Negative: Job placement rates decline and


graduate starting salaries stagnate,
providing a negative data point for
marketing to new students and retaining
current ones

Positive: Tighter labor markets spur


Negative: Looser labor markets slow
increases in tuition reimbursement programs growth in tuition reimbursement programs
(benefits working-adult focused programs
(hurts working-adult focused programs)
such as those run by APOL and STRA)
Positive: Lower default rates on student
loans (although data is published on a
lagged basis)

Negative: Increased default rates on


student loans (although data is published on
a lagged basis)

Source: BMO Capital Markets.

While there are a number of large privately-held schools such as Alta Colleges, Bryant and
Stratton College, Concorde Career Colleges, The Keiser School and Rasmussen Colleges, we
have provided a summary of recent enrollment growth statistics for the publicly-held for-profit
companies (where data is more easily available), including the following:

A member of BMO

Total enrollments (Exhibit 152),

Year-over-year total enrollment growth (Exhibit 153),

Year-over-year new student enrollment (i.e., starts) growth (Exhibit 154), which would
include the impact of recent acquisitions, but is nevertheless a good leading indicator of
future changes in total enrollment, in our view.

Financial Group

138

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 152. Select For-Profit Postsecondary School Operators Total Enrollment


(Fall 2003 - FY2013 YTD)
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
TOTAL

Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI
WPO

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

2003
N.A.
211,265
N.A.
81,900
57,580
7,923
53,525
58,828
N.A.
36,947
N.A.
N.A.
20,138
12,561
N.A.
540,667

2004
N.A.
248,200
N.A.
99,467
66,831
11,086
51,497
66,179
N.A.
42,183
N.A.
N.A.
23,539
15,212
N.A.
624,194

2005
N.A.
269,400
N.A.
96,200
62,960
13,308
50,320
72,471
N.A.
44,331
19,824
N.A.
27,305
17,368
66,400
739,887

2006
14,794
291,800
N.A.
99,600
62,352
16,374
53,174
80,324
10,216
48,155
18,556
N.A.
31,372
17,523
69,800
814,040

Fall enrollment (CY)


2007
2008
25,290
38,900
325,000
384,900
12,716
30,547
118,600
85,200
66,719
74,265
20,268
24,063
66,745
94,058
95,868
110,825
13,448
21,957
53,675
61,556
19,463
22,404
N.A.
5,594
36,082
44,564
16,882
16,481
67,000
81,400
937,756
1,096,714

2009
55,300
455,600
54,894
102,100
87,966
30,738
112,615
136,000
34,218
79,208
31,509
7,773
54,317
18,802
103,849
1,364,889

2010
66,000
438,100
77,179
118,235
108,885
38,634
130,375
158,300
42,286
88,004
33,157
8,225
60,711
21,000
112,141
1,501,232

2011
87,300
373,100
90,597
104,400
91,107
35,755
134,582
151,200
44,486
79,219
22,526
9,390
54,233
18,500
79,657
1,376,052

2012
103,000
319,700
91,358
81,300
92,070
34,989
126,345
132,000
52,253
65,662
19,028
10,350
51,727
17,000
73,261
1,270,043

'03-12
CAGR
N.A.
4.7%
N.A.
-0.1%
5.4%
N.A.
10.0%
9.4%
N.A.
6.6%
N.A.
N.A.
11.1%
N.A.
N.A.
6.6%

'07-12
CAGR
32.4%
-0.3%
48.3%
-7.3%
6.7%
11.5%
13.6%
6.6%
31.2%
4.1%
-0.5%
N.A.
7.5%
0.1%
1.8%
6.6%

YTD
FY2012
96,950
358,400
93,742
85,900
91,608
36,945
127,825
138,325
45,357
68,760
18,001
10,619
47,566
16,033
71,795
1,307,824

YTD
FY2013
104,600
302,667
75,234
66,300
87,455
36,204
120,068
124,580
52,380
59,828
15,166
11,249
42,379
14,200
64,694
1,177,002

YTD '12-13
% chg.
7.9%
-15.6%
-19.7%
-22.8%
-4.5%
-2.0%
-6.1%
-9.9%
15.5%
-13.0%
-15.7%
5.9%
-10.9%
-11.4%
-9.9%
-10.0%

Note: Enrollments are headcount provided for the periods closest to fall of each calendar year. Some historical comparisons may be misleading
owing to restatements. Year-to-date enrollment represents quarterly averages for fiscal year. Net course registrations used for APEI. N.A. Not
Available. Source: BMO Capital Markets and company reports.

Exhibit 153. Select For-Profit Postsecondary School Operators Y-O-Y Change in Total
Enrollment (Fall 2003 - Fall 2012; YTD FY2012-FY2013)
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI
WPO

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

2003
N.A.
28.3%
N.A.
N.A.
46.0%
N.A.
-2.7%
34.4%
N.A.
9.3%
N.A.
N.A.
21.8%
N.A.
N.A.
25.0%

2004
N.A.
17.5%
N.A.
21.4%
16.1%
39.9%
-3.8%
12.5%
N.A.
14.2%
N.A.
N.A.
16.9%
21.1%
N.A.
16.9%

2005
N.A.
8.5%
N.A.
-3.3%
-5.8%
20.0%
-2.3%
9.5%
N.A.
5.1%
N.A.
N.A.
16.0%
14.2%
N.A.
8.5%

2006
N.A.
8.3%
N.A.
3.5%
-1.0%
23.0%
5.7%
10.8%
N.A.
8.6%
-6.4%
N.A.
14.9%
0.9%
5.1%
5.7%

Fall enrollment (CY)


2007
2008
70.9%
53.8%
11.4%
18.4%
N.A.
140.2%
19.1%
-28.2%
7.0%
11.3%
23.8%
18.7%
25.5%
40.9%
19.4%
15.6%
31.6%
63.3%
11.5%
14.7%
4.9%
15.1%
N.A.
N.A.
15.0%
23.5%
-3.7%
-2.4%
-4.0%
21.5%
15.0%
18.6%

2009
42.2%
18.4%
79.7%
19.8%
18.4%
27.7%
19.7%
22.7%
55.8%
28.7%
40.6%
39.0%
21.9%
14.1%
27.6%
27.6%

2010
19.3%
-3.8%
40.6%
15.8%
23.8%
25.7%
15.8%
16.4%
23.6%
11.1%
5.2%
5.8%
11.8%
11.7%
8.0%
15.8%

2011
32.3%
-14.8%
17.4%
-11.7%
-16.3%
-7.5%
3.2%
-4.5%
5.2%
-10.0%
-32.1%
14.2%
-10.7%
-11.9%
-29.0%
-10.0%

2012
18.0%
-14.3%
0.8%
-22.1%
1.1%
-2.1%
-6.1%
-12.7%
17.5%
-17.1%
-15.5%
10.2%
-4.6%
-8.1%
-8.0%
-6.1%

'03-12
CAGR
N.A.
4.7%
N.A.
-0.1%
5.4%
N.A.
N.A.
N.A.
N.A.
6.6%
N.A.
N.A.
11.1%
N.A.
N.A.
5.4%

'07-12
CAGR
32.4%
-0.3%
48.3%
-7.3%
6.7%
11.5%
N.A.
N.A.
31.2%
4.1%
-0.5%
N.A.
7.5%
0.1%
1.8%
5.4%

Avg. YTD
FY2012
FY2013
21.6%
7.9%
-13.4%
-15.6%
8.5%
-19.7%
-21.5%
-22.8%
-16.3%
-4.5%
-5.2%
-2.0%
3.2%
-6.1%
-4.5%
-9.9%
10.6%
15.5%
-15.5%
-13.0%
-26.4%
-15.7%
14.2%
5.9%
-8.3%
-10.9%
-10.8%
-11.4%
-14.7%
-9.9%
-8.3%
-9.9%

Note: Enrollments are headcount provided for the periods closest to fall of each calendar year. Year-over-year change includes acquisitions. Some
historical comparisons may be misleading owing to restatements. YTD change measures average of annual change for quarters reported in
current fiscal year over same period in prior fiscal year. Change in net course registrations used for APEI. N.A. Not Available.
Source: BMO Capital Markets and company reports.

A member of BMO

Financial Group

139

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 154. Select For-Profit Postsecondary School Operators Y-O-Y Change in New
Student Enrollment (FY2003-FY2013 YTD)
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
ITT Educational Services
Lincoln Educational Services
Strayer Education
Universal Technical Institute
MEDIAN

FY2003
N.A.
N.A.
N.A.
N.A.
30.8%
N.A.
-3.8%
14.3%
16.6%
38.9%
23.0%
N.A.
19.8%

FY2004
N.A.
N.A.
N.A.
N.A.
55.4%
N.A.
2.2%
65.9%
16.9%
21.1%
16.0%
N.A.
19.0%

FY2005
N.A.
N.A.
N.A.
N.A.
4.0%
N.A.
0.6%
11.6%
7.4%
4.5%
15.0%
N.A.
5.9%

FY2006
N.A.
N.A.
N.A.
N.A.
-5.7%
N.A.
11.7%
5.5%
10.8%
-7.4%
10.0%
-3.2%
5.5%

Fall enrollment (CY)


FY2007
FY2008
71.3%
48.8%
19.3%
11.5%
171.2%
142.9%
N.A.
4.4%
2.5%
13.0%
N.A.
N.A.
17.2%
34.9%
22.9%
26.0%
9.3%
19.6%
7.1%
12.4%
16.0%
29.0%
-3.4%
-2.1%
16.6%
19.6%

FY2009
36.3%
23.5%
67.8%
17.1%
5.5%
N.A.
-19.7%
27.4%
31.6%
37.2%
20.0%
16.6%
23.5%

FY2010
16.4%
4.5%
33.9%
11.1%
18.9%
20.0%
15.2%
28.1%
3.7%
-0.9%
-2.0%
11.1%
13.2%

FY2011
46.1%
-40.3%
-0.3%
-18.4%
-9.3%
-36.0%
-2.5%
11.8%
-13.4%
-39.6%
-15.0%
-17.8%
-14.2%

FY2012
1.8%
-2.3%
-10.7%
-28.1%
-4.5%
10.5%
-3.3%
-15.2%
-13.9%
-10.5%
4.0%
-2.5%
-3.9%

FY2013
-8.3%
-20.5%
-37.0%
-22.2%
-2.4%
0.6%
-1.2%
-15.0%
-48.4%
-17.1%
-5.0%
-6.2%
-11.7%

'03-12
CAGR
N.A.
N.A.
N.A.
N.A.
7.5%
N.A.
5.2%
18.7%
7.1%
0.4%
11.6%
N.A.
7.3%

'07-12
CAGR
28.5%
-3.5%
37.2%
N.A.
4.2%
N.A.
N.A.
N.A.
4.0%
-3.8%
8.7%
0.3%
4.2%

Avg. YTD
FY2012
FY2013
9.3%
-7.7%
2.0%
-19.5%
-6.5%
-45.2%
-32.9%
-26.1%
-4.5%
-2.4%
-5.5%
10.5%
-3.3%
-1.2%
-15.2%
-15.0%
-13.7%
1.6%
-0.2%
-23.2%
10.5%
-15.5%
-2.1%
-13.8%
-3.9%
-14.4%

Note: Data for American Public Education represents change in new student net course registrations (company does not disclose new students).
Some historical comparisons may be misleading owing to restatements. YTD change measures average of annual change for quarters reported in
current fiscal year over same period in prior fiscal year. N.A. Not Available.
Source: BMO Capital Markets and company reports.

A listing of key enrollment metrics can be found in Exhibit 155.

Exhibit 155. Key Enrollment Metrics to Watch


Term

Definition

Postsecondary Norms

For-Profit Norms

Annual new student


enrollment
(starts) growth

Measures the annual change in the


number of new students entering
the school. Perhaps the metric most
closely watched by the investment
community, as it is the best
indication of the school's demand
and near- to medium-term outlook

All Institutions (1): 2.8%


Public 2-Year Institutions (1): 4.2%
Public 4-Year Institutions (1): 2.5%
Private 2-Year Institutions (1): 4.2%

CAGR change for select forprofit providers (including


acquisitions) (3) 7.3%

Annual change in total students

All Institutions: 2.6% (2)

All institutions: 11.4% (4)

Public Institutions: 2.6% (2)

Degree-granting institutions:
13.6% (4)

Annual enrollment
growth

Private 4-Year Institutions (1): 1.8%

Private Institutions: 2.4% (2)


Non-degree-granting
institutions: 5.5% (4)
Sources: (1) US Department of Education NCES, Digest of Education Statistics, 2012 Table 232 (CAGR from 1955-1956 to 2011-2012 for firsttime freshmen at degree-granting institutions). (2) US Department of Education (CAGR from 1967-1968 to 2011-2012 for total enrollment at
degree-granting institutions) (3) CAGR for median of publicly held companies fall 2003 to fall 2012.(4) US Department of Education NCES, Digest
of Education Statistics various tables; data available from 1996-1997.

A member of BMO

Financial Group

140

September 2013

Postsecondary Education

BMO Capital Markets

Postsecondary Schools Funding Sources and Tuition Rate Trends


We believe the economics of for-profit postsecondary schools are very favorable. On the whole,
these schools are cash flow positive as most students prepay their tuition prior to the start of
their coursework, or at least early on. In addition, as the bulk of financing for most of these
schools comes from federally funded financial aid (i.e., Title IV), the credit risks, for the most
part, are minimal.

Favorable cash
flow dynamics

An analysis of revenue trends for a select group of for-profit providers can be found in Exhibit
156.

Exhibit 156. Select For-Profit Postsecondary School Operators Revenues (FY2003FY2013 to Date)
REVENUES - FISCAL YEAR
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
Total

Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI
WPO

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI
WPO

12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

FY2003
$17.8
1,339.5
0.7
1,178.0
511.4
81.8
679.6
640.0
N.A.
522.9
187.5
N.A.
147.0
196.5
368.3
$5,871.0

FY2004
$23.1
1,800.0
1.2
1,472.5
775.2
117.7
784.9
853.0
25.6
617.8
248.5
N.A.
183.2
255.1
559.9
$7,717.9

FY2005
$28.2
2,251.1
8.0
1,832.0
929.0
149.2
780.7
1,019.3
51.8
688.0
287.4
36.3
220.5
310.8
721.6
$9,313.9

FY2006
$40.0
2,477.5
28.6
1,789.3
907.8
179.9
839.5
1,170.2
72.1
757.8
310.6
40.3
263.6
347.1
855.8
$10,080.2

FY2007
$69.1
2,721.8
85.7
1,668.3
919.2
226.2
933.5
1,363.7
99.3
869.5
327.8
44.4
318.0
353.4
933.3
$10,933.2

FY2008
$107.1
3,133.4
218.3
1,660.6
1,068.7
272.3
1,091.8
1,684.2
161.3
1,015.3
376.9
49.5
396.3
343.5
1,160.6
$12,739.8

FY2009
$149.0
3,953.6
454.3
1,834.3
1,185.3
334.6
1,461.5
2,011.5
261.9
1,319.2
552.5
62.6
512.0
366.6
1,539.6
$15,998.4

FY2010
$198.2
4,925.8
713.2
2,088.7
1,617.1
426.1
1,915.2
2,508.6
385.8
1,596.5
639.5
89.8
636.7
435.9
1,913.1
$20,090.3

FY2011
$260.4
4,733.0
933.3
1,883.0
1,750.7
430.0
2,182.4
2,887.6
426.7
1,499.9
508.8
104.8
627.4
451.9
1,399.6
$20,079.8

FY2012
$313.5
4,253.3
968.2
1,480.3
1,581.9
421.9
2,085.9
2,761.0
511.3
1,287.1
404.8
115.0
562.0
413.6
1,149.4
$18,309.0

FY2003
67%
33%
N.A.
114%
51%
65%
5%
28%
N.A.
15%
42%
N.A.
26%
36%
47%
39%

FY2004
30%
34%
70%
25%
52%
44%
15%
33%
N.A.
18%
33%
N.A.
25%
30%
52%
33%

FY2005
22%
25%
541%
24%
20%
27%
-1%
19%
102%
11%
16%
N.A.
20%
22%
29%
22%

FY2006
42%
10%
260%
-2%
-2%
21%
8%
15%
39%
10%
8%
11%
20%
12%
19%
12%

FY2007
73%
10%
199%
-7%
1%
26%
11%
17%
38%
15%
6%
10%
21%
2%
9%
11%

FY2008
55%
15%
155%
0%
16%
20%
17%
24%
62%
17%
15%
11%
25%
-3%
24%
17%

FY2009
39%
26%
108%
10%
11%
23%
34%
19%
62%
30%
47%
27%
29%
7%
33%
29%

FY2010
33%
25%
57%
14%
36%
27%
31%
25%
47%
21%
16%
43%
24%
19%
24%
25%

FY2011
31%
-4%
31%
-10%
8%
1%
14%
15%
11%
-6%
-20%
17%
-1%
4%
-27%
4%

FY2012
20%
-10%
4%
-21%
-10%
-2%
-4%
-4%
20%
-14%
-20%
10%
-10%
-8%
-18%
-8%

'03-12
CAGR
37.6%
13.7%
122.3%
2.6%
13.4%
20.0%
13.3%
17.6%
N.A.
10.5%
8.9%
N.A.
16.1%
8.6%
13.5%
13.5%

'07-12
CAGR
35.3%
9.3%
62.4%
-2.4%
11.5%
13.3%
17.4%
15.2%
38.8%
8.2%
4.3%
20.9%
12.1%
3.2%
4.3%
12.1%

YTD
FY2012
$150.4
3,256.8
506.7
795.6
1,581.9
215.6
2,085.9
2,761.0
236.4
671.6
198.2
115.0
295.8
312.3
599.2
$13,782.3

YTD
FY2013
$164.8
2,836.3
419.6
635.3
1,600.2
208.9
1,976.7
2,498.6
283.5
547.6
175.3
129.2
269.5
284.5
545.0
$12,574.9

YTD '12-13
% chg.
9.6%
-12.9%
-17.2%
-20.1%
1.2%
-3.1%
-5.2%
-9.5%
19.9%
-18.5%
-11.5%
12.4%
-8.9%
-8.9%
-9.1%
-8.9%

Y/Y CHANGE IN REVENUES


Fiscal years
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
Median

YTD
'12-'13
10%
-13%
-17%
-20%
1%
-3%
-5%
-10%
20%
-18%
-12%
12%
-9%
-9%
-9%
-9%

Note: Data includes acquisitions. Some historical comparisons may be misleading owing to restatements. N.A. Not Available. Source: BMO
Capital Markets and company reports.

Funding sources
for higher
education

Funding for all types of higher education comes from numerous sources, including, but not
limited to, the following:

Student tuition and fees (most of which comes from Title IV financial aid)

Federal government funds (beyond Title IV financial aid)

State and local government funds

Endowments funds, gifts, and grants

Auxiliary funds and other income (e.g., businesses run by schools, such as medical
imaging centers)

Tuition reimbursement programs (usually corporate sponsored)

We have summarized the funding sources for the publicly held providers in Exhibit 157 based
on both disclosed data and our estimates. A number of companies with high percentages of
private lending, specifically ITT Educational Services (ESI), have reduced their exposure to
this funding source since the funding crisis hit in the latter part of the prior decade.
A member of BMO

Financial Group

141

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 157. Funding Sources for Publicly Held For-Profit Postsecondary School
Operators
Company
Ticker
Period covered
Title IV
Grants (mostly Pell)
Stafford Loans
FDL
PLUS Loans
Other Title IV
Private Loan Exposure
Other sources (incl. cash)
Cash
Internally/externally funded
Military tuition assistance
Employers
Scholarships/State grants

Natl.
Lincoln
Educ. American Strayer
Univ.
Educ.
Services
LINC
NAUH
STRA
FY2012
FY2013 FY2011

Kaplan
Bridge
Amer.
Higher
point
Career Corinthian Capella
Education Grand ITT Educ.
Public Apollo
DeVry
Mgmt.
Canyon Services Education
Educ. Group Educ. Education Colleges Educ.
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
WPO
FY2012 FY2012 FY2012 FY2012
FY2013 FY2012 FY2012 FY2013 FY2012 FY2012
FY2012
36.0%

84.8%

79.0%

19.3%

28.0%

3.0%

64.7%

84.0%

86.4%

91.0%

54.5%
52.3%

69.0%

76.0%

2.2%

64.0%

15.0%

13.6%

9.0%

80.3%

80.0%

14.1%

22.0%

22.0%

58.0%

57.0%

56.0%

58.0%

57.0%

56.0%

48.5%

81.0%

89.7%

76.0%

75.0%

17.0%

18.0%

7.7%

< 1%
1.0%

73.4%
14.5%
56.2%

80.0%

Univ.
Tech.
Inst.
UTI
FY2012

2.7%

N.A.

<1%

1.0%

N.A.

21.0%

29.0%

13.0%

< 2%

2.2%

< 1%

0.0%

1.0%

0.0%

24.4%

18.7%

20.0%

19.0%

19.0%

16.0%

4.0%

6.6%

16.0%

12%

< 2%
3.0%
10.3%

21.0%

25.0%

51.0%

9.0%

10-15%

20-25%
1%

1.8%

Source: BMO Capital Markets and company reports.

In the rest of this section, we discuss the various revenue and funding sources for the
postsecondary sector.
Annual tuition

Tuition and fees. For most of their history, for-profit schools have had significant pricing

increases handily

power, in our opinion, as they typically are protected by the umbrella of tuition rate trends at
not-for-profit schools. As shown in Exhibit 158, according to the College Board, the cost of
higher education has increased significantly since the 1976-1977 school year with tuition, room,
and board rising 7% annually at private institutions and 7.6% at public four-year schools and
6.9% at public two-year schools. This is much higher than the 3.9% annual increase in inflation
over that period. We note that in recent years, however, the annual increases have slowed.

outpace inflation,
though annual
increases have
slowed in recent
years

Exhibit 158. Index of Not-For-Profit Postsecondary Institution Tuition vs. Inflation (19761977 to 2012-2013 School Years)

Index: 1976-77 = 100

1,500
1,300
1,100
900
700
500
300

Private 4-Year

Public 4-Year

Public 2-Year

2012-2013

2008-2009

2004-2005

2000-2001

1996-1997

1992-1993

1988-1989

1984-1985

1980-1981

1976-1977

100

Inflation

Note: Shaded areas represent US recessionary periods.


Source: BMO Capital Markets analysis based on data from College Boards Trends in College Pricing and Bureau of Labor Statistics.

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142

September 2013

Postsecondary Education

For-profit tuition;
increased at
relatively slower
rates, but among
most expensive,
especially for
shorter duration
programs

BMO Capital Markets

While comparable historical data was not available for for-profit schools, we believe the trends
have been fairly similar. Since the 1995-1996 school year (and using a different data source
[ED]), average tuition at for-profit institutions has increased roughly 4.5% (two-year schools)
and 4.4% (four-year schools) annually below the annual increases in the private not-for-profit
sector and at most public institutions (see Exhibit 159). Tuition and fees at for-profit schools
tend to be much more expensive than at not-for-profit schools for shorter-duration programs
(i.e., non-degreed programs at less than two-year schools, associate degrees). However, for the
longer programs (i.e., four-year schools offering bachelors and graduate programs), for-profit
tuition tends to be less expensive than at private not-for-profit institutions, although more
expensive than at most public not-for-profit schools. That trend appears to have been fairly
consistent over this time period.

Exhibit 159. Average Annual Tuition and Fees by School Type (1995-1996 to 2012-2013
School Years)
1995-1996 School Year
Less than
2-year
Public:
In-district
In-state
Out-of-state
Private not-for-profit
Private for-profit
As % of Private for-profit
Public:
In-district
In-state
Out-of-state
Private not-for-profit

$2,411
2,492
2,868
N.A.
N.A.

N.A.
N.A.
N.A.
N.A.

2-year
$1,265
1,525
3,517
4,470
$6,727

19%
23%
52%
66%

2012-2013 School Year

Less than
4-year
2-year
$2,801
2,802
7,185
9,528
$7,412

38%
38%
97%
129%

$6,786
6,787
7,303
11,411
$13,924

49%
49%
52%
82%

2-year
$3,030
3,521
7,106
13,307
$14,331

21%
25%
50%
93%

4-year
$7,519
7,526
17,040
24,256
$15,386

CAGR: 1995-1996 to 2012-2013


Less than
2-year

2-year

4-year

6.3%
6.1%
5.7%
N.A.
N.A.

5.3%
5.0%
4.2%
6.6%
4.5%

6.0%
6.0%
5.2%
5.7%
4.4%

49%
49%
111%
158%

N.A. Not Available. Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

Since 2007, the College Board has included data for for-profit schools in its annual Trends in
College Pricing reports. As shown in Exhibit 160, the data differ a bit from that published by
NCES (e.g., it is enrollment weighted, different categories are used). Nevertheless, the trends are
similar, i.e., tuition and fees at for-profit schools are more expensive than those at most public
not-for-profit schools, but less expensive than those at private not-for-profit schools. Average
annual tuition increases at for-profits have also been slightly below that of most of their not-forprofit peers.

A member of BMO

Financial Group

143

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 160. Average Published Charges (Tuition and Fees) by School Type (2006-2007
to 2011-2012 School Years)
Average published charges:
Public not for-profit:
Two-year
Four-year in-state
Four-year out-of-state
Private not-for-profit
Four-year
Private for-profit

School Year
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
$2,266
5,804
15,778

$2,294
6,191
16,586

$2,372
6,591
17,460

$2,558
7,050
18,484

$2,727
7,613
19,648

$2,959
8,256
20,823

$3,131
8,655
21,706

22,308
$11,386

23,745
$12,489

25,177
$13,315

26,129
$13,256

27,265
$14,040

27,883
$14,737

29,056
$15,172

% annual change:
Public not for-profit:
Two-year
Four-year in-state
Four-year out-of-state
Private not-for-profit
Four-year
Private for-profit

CAGR

As % of private for-profit:
Public not for-profit:
Two-year
Four-year in-state
Four-year out-of-state
Private not-for-profit
Four-year

1.2%
6.7%
5.1%

3.4%
6.5%
5.3%

7.8%
7.0%
5.9%

6.6%
8.0%
6.3%

8.5%
8.4%
6.0%

5.8%
4.8%
4.2%

5.5%
6.9%
5.5%

6.4%
9.7%

6.0%
6.6%

3.8%
-0.4%

4.3%
5.9%

2.3%
5.0%

4.2%
3.0%

4.5%
4.9%

20%
51%
139%

18%
50%
133%

18%
50%
131%

19%
53%
139%

19%
54%
140%

20%
56%
141%

21%
57%
143%

Average
19%
53%
138%

196%

190%

189%

197%

194%

189%

192%

192%

N.A. Not Available. Note: Initial data in report is restated the following year. We have used the restated data where available. Source: BMO
Capital Markets and College Boards annual Trends in College Pricing reports.

Most and least


expensive
schools (tuition)

A member of BMO

The ED has recently started to publish the most expensive (top 5%) and least expensive (bottom
10%) schools in its College Affordability and Transparency Center. We have listed the data for
the 2011-2012 academic year by school type in Exhibits 161 and 162. Not surprisingly, private
not-for-profit and private for-profit providers dominate the list of most expensive schools, while
public not-for-profit providers dominate the list of the least expensive schools as they are
typically subsidized by state and local tax revenues.

Financial Group

144

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 161. Highest Annual Tuition (2011-2012 School Year)


Institution
Four-year institutions:
1 Columbia University in the City of New York
2 Sarah Lawrence College
3 Vassar College
4 George Washington University
5 Trinity College
6 Carnegie Mellon University
7 Connecticut College
8 Wesleyan University
8 Bucknell University
10 Bard College at Simon's Rock
Two-year institutions:
1 Aviator College of Aeronautical Science and Technology
2 Landmark College
3 Virginia College-Richmond
4 West Coast Ultrasound Institute
5 Northwest Aviation College
6 Bryan College-Topeka
7 American Academy of Dramatic Arts-Los Angeles
7 American Academy of Dramatic Arts-New York
8 The Collective School Of Music
10 Lawrence Memorial Hospital School of Nursing
Less than two-year institutions:
1 Aerosim Flight Academy
2 Northeast Technical Institute
3 Marian Health Careers Center-Van Nuys Campus
4 Northwestern Institute of Health and Technology
5 Porter and Chester Institute of Branford
6 Porter and Chester Institute of Stratford
7 Michigan Career and Technical Institute
8 J Everett Light Career Center

State Institution Type

Tuition

NY
NY
NY
DC
CT
PA
CT
CT
PA
MA

Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, not-for-profit

$45,290
$45,212
$44,705
$44,148
$44,070
$44,010
$43,990
$43,974
$43,866
$43,840

FL
VT
VA
CA
WA
KS
CA
NY
NY
MA

Private, for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Private, not-for-profit
Private, not-for-profit
Private, for-profit
Private, not-for-profit

$59,850
$48,710
$35,140
$33,350
$32,540
$31,014
$30,500
$30,500
$30,250
$29,300

FL
ME
CA
IL
CT
CT
MI
IN

Private, for-profit
Private, for-profit
Private, for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit
Public, not-for-profit
Public, not-for-profit

$70,024
$28,200
$24,000
$21,825
$18,910
$18,910
$16,200
$14,600

Source: BMO Capital Markets and US Department of Education College Affordability and Transparency Center.

A member of BMO

Financial Group

145

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 162. Lowest Annual Tuition (2011-2012 School Year)


Institution
Four-year institutions:
1 Haskell Indian Nations University
2 Dine College
3 Berea College
4 Colorado Mountain College
5 Brazosport College
6 Navajo Technical College
7 Turtle Mountain Community College
8 West Virginia University at Parkersburg
9 Curtis Institute of Music
10 Palm Beach State College
Two-year institutions:
1 Southwestern Indian Polytechnic Institute
2 Cuesta College
3 Saddleback College
4 Antelope Valley College
5 Cabrillo College
6 San Bernardino Valley College
7 College of the Sequoias
8 Eastern New Mexico University-Ruidoso Campus
9 Moorpark College
9 Oxnard College
9 Ventura College
Less than two-year institutions:
1 Crowleys Ridge Technical Institute
2 Northwest Technical Institute
3 Monongalia County Technical Education Center
4 EDP School of Computer Programming
5 Trinity College of Puerto Rico
6 South Texas Training Center
7 New Age Training
8 United Beauty College
9 Future-Tech Institute
10 American Educational College

State Type
KS
AZ
KY
CO
TX
NM
ND
WV
PA
FL

Public, not-for-profit
Public, not-for-profit
Private, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Private, not-for-profit
Public, not-for-profit
Private, not-for-profit
Public, not-for-profit

NM
CA
CA
CA
CA
CA
CA
NM
CA
CA
CA

Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit

AR
AR
WV
NY
PR
TX
NY
CO
FL
PR

Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Private, not-for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Private, for-profit
Private, for-profit

Tuition
$182
$805
$910
$1,770
$1,977
$2,120
$2,250
$2,268
$2,300
$2,324
$675
$742
$762
$780
$790
$795
$798
$812
$818
$818
$818
$1,350
$2,321
$2,370
$4,250
$6,147
$5,080
$5,575
$5,700
$6,200
$6,274

Source: BMO Capital Markets and US Department of Education College Affordability and Transparency Center.

When including
all costs, forprofits are fairly
expensive, though
rates have
increased at
slower rates than

The analyses above excludes other costs beyond tuition, such as books and supplies, room, and
board, and transportation, which in many cases equal roughly the cost of tuition, especially for
those students not living with family. As shown in Exhibit 163, when including other costs, the
average annual price of attendance at for-profit schools ranks high for virtually all types of
programs and living arrangements. Annual rates of increases at the for-profit schools have been
slightly below most of their not-for-profit counterparts since the 2001-2002 school year (earliest
data available).

at most not-forprofits

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146

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 163. Average Annual Price of Attendance by School Type (2001-2002 to 20122013 School Years)
2001-2002 School Year
Less than
2-Year
Public not-for-profit:
On campus:
In-district
In-state
Out-of-state
Off campus (not with family):
In-district
In-state
Out-of-state
Off campus (with family):
In-district
In-state
Out-of-state
Private not-for-profit:
On campus
Off campus (not with family)
Off campus (with family)
Private for-profit:
On campus
Off campus (not with family)
Off campus (with family)

N.A.
N.A.
N.A.

2-Year

2012-2013 School Year

Less than
4-Year
2-Year

2-Year

4-Year

CAGR: 2001-2002 to 2012-2013


Less than
2-Year

2-Year

4-Year

$7,877
8,003
10,077

$11,704
11,700
17,576

$12,263
12,264
12,780

$13,237
13,728
17,313

$20,702
20,516
30,030

N.A.
N.A.
N.A.

4.8%
5.0%
5.0%

5.3%
5.2%
5.0%

$11,661
11,747
12,081

10,150
10,486
13,081

12,746
12,744
18,470

17,052
17,053
17,569

15,953
16,444
20,029

21,488
21,495
31,009

3.5%
3.4%
3.5%

4.2%
4.2%
3.9%

4.9%
4.9%
4.8%

7,229
7,315
7,649

5,118
5,454
8,049

7,224
7,222
12,948

11,041
11,042
11,558

8,316
8,807
12,392

12,713
12,720
22,234

3.9%
3.8%
3.8%

4.5%
4.5%
4.0%

5.3%
5.3%
5.0%

N.A.
17,692
12,050

15,487
17,141
10,839

22,606
22,814
17,262

19,580
25,036
16,328

25,278
28,422
19,191

37,120
37,639
28,971

N.A.
3.2%
2.8%

4.6%
4.7%
5.3%

4.6%
4.7%
4.8%

N.A.
17,423
12,179

18,952
19,038
13,982

23,192
20,860
15,504

14,847
28,523
18,450

27,329
27,886
19,913

30,541
29,394
22,413

N.A.
4.6%
3.8%

3.4%
3.5%
3.3%

2.5%
3.2%
3.4%

N.A. Not Available. Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

Most students pay less than the sticker price, owing to grant and scholarship aid. As shown in
Exhibit 164, in the 2010-2011 school year (latest data available), students at public-not-forprofit schools typically pay 58%-66% of the total price of attendance, those at their private notfor-profit peers pay 58%-78%, while those attending for-profit institutions pay 79%-83%. A
number of for-profit providers have begun providing scholarships, an issue we discuss later in
this report.

For-profits
provide relatively
less in grants and
scholarships,
though that is
changing

Exhibit 164. Net Price as Percentage of Total Price of Attendance (2010-2011 School
Year)
Sticker Price
Less than
2-Year
Public not-for-profit:
Students receving any grant aid
Students receving Title IV aid
Private not-for-profit:
Students receving any grant aid
Students receving Title IV aid
Private for-profit:
Students receving any grant aid
Students receving Title IV aid

2-Year

Net Price
Less than
4-Year
2-Year

2-Year

Net as % of Sticker Price


Less than
4-Year
2-Year
2-Year
4-Year

$12,741
12,778

$11,396
11,430

$17,563
17,574

7,723
8,043

6,763
6,676

10,971
11,646

61%
63%

59%
58%

62%
66%

19,861
19,665

23,141
23,151

33,969
33,988

14,218
14,127

17,259
17,944

19,770
19,806

72%
72%

75%
78%

58%
58%

23,117
23,041

24,485
24,391

27,854
27,809

18,400
18,797

19,339
19,884

22,537
23,187

80%
82%

79%
82%

81%
83%

N.A. Not Available. Source: BMO Capital Markets and US Department of Education National Center for Education Statistics (NCES 2012156).

A member of BMO

Financial Group

147

September 2013

Postsecondary Education

Most and least


expensive
schools (net
price)

BMO Capital Markets

Using the aforementioned analysis by the College Affordability and Transparency Center, we
have listed the most expensive (top 5%) and least expensive (bottom 10%) for the 2011-2012
academic year in terms of net price (total cost of attendance less scholarships and grants) by
school type in Exhibits 165 and 166. Not surprisingly, the list of most expensive schools are
dominated by private not-for-profit and private for-profit providers, while the least expensive
schools are dominated by public not-for-profit providers, as they are typically subsidized by
state and local tax revenues. The net price may actually be negative for those schools where
students get substantial amounts of scholarships and grants.

Exhibit 165. Highest Annual Net Price (2011-2012 School Year)


Institution
Four-year institutions:
1 American University of Health Sciences
2 Pacific College of Oriental Medicine-New York
3 School of the Art Institute of Chicago
4 Southwest University of Visual Arts-Albuquerque
5 Southwest University of Visual Arts-Tucson
6 Ringling College of Art and Design
7 The Boston Conservatory
8 Berklee College of Music
8 California Institute of the Arts
10 School of Visual Arts
Two-year institutions:
1 Aviator College of Aeronautical Science and Technology
2 New York Conservatory for Dramatic Arts
3 New York Methodist Hospital Center for Allied Health Education
4 Landmark College
5 New England School of Photography
6 Tri-State Institute
7 Florida Career College-Clearwater
8 St Paul's School of Nursing-Queens
9 Daymar College-Madisonville
10 Institute of Production and Recording
Less than two-year institutions:
1 Dover Business College
2 Marian Health Careers Center-Van Nuys Campus
3 Porter and Chester Institute of Stratford
4 Ross Medical Education Center-Canton
5 Bridgeport Hospital School of Nursing
6 Four Rivers Career Center
7 J Everett Light Career Center

State

Percent
Receiving
Grant Aid

Tuition Institution Type

CA
NY
IL
NM
AZ
FL
MA
MA
CA
NY

100%
67%
100%
67%
74%
77%
65%
63%
77%
48%

$64,465 Private, for-profit


$49,670 Private, for-profit
$42,882 Private, not-for-profit
$40,904 Private, for-profit
$40,332 Private, for-profit
$40,222 Private, not-for-profit
$39,602 Private, not-for-profit
$38,814 Private, not-for-profit
$38,802 Private, not-for-profit
$37,884 Private, for-profit

FL
NY
NY
VT
MA
AL
FL
NY
KY
MN

8%
84%
13%
71%
55%
86%
84%
52%
92%
49%

$70,675 Private, for-profit


$41,048 Private, for-profit
$40,291 Private, not-for-profit
$40,159 Private, not-for-profit
$39,393 Private, for-profit
$37,223 Private, for-profit
$35,025 Private, for-profit
$34,060 Private, for-profit
$33,161 Private, for-profit
$33,105 Private, for-profit

NJ
CA
CT
MI
CT
MO
IN

87%
73%
66%
82%
56%
94%
50%

$29,738 Private, for-profit


$29,561 Private, for-profit
$27,781 Private, for-profit
$27,462 Private, for-profit
$21,820 Private, not-for-profit
$16,828 Public, not-for-profit
$16,133 Public, not-for-profit

Note: Average net price is generated by subtracting the average amount of federal, state/local government, or institutional grant or scholarship
aid from the total cost of attendance. Total cost of attendance is the sum of published tuition and required fees (lower of in-district or in-state,
where applicable), books and supplies, and the weighted average for room and board and other expenses. Source: BMO Capital Markets and
US Department of Education College Affordability and Transparency Center.

A member of BMO

Financial Group

148

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 166. Lowest Annual Net Price (2011-2012 School Year)


Institution
Four-year institutions:
1 Berea College
2 Family of Faith College
3 The University of Texas-Pan American
4 South Texas College
5 University of Puerto Rico-Bayamon
6 University of Puerto Rico-Aguadilla
7 Elizabeth City State University
8 Indian River State College
9 Sitting Bull College
10 Caribbean University-Bayamon
Two-year institutions:
1 Instituto Tecnologico de Puerto Rico-Recinto de San Juan
2 Cleveland Community College
3 Chattahoochee Valley Community College
4 Escuela De Troqueleria Y Herramentaje
5 Roxbury Community College
6 American Samoa Community College
7 Victory Trade School
8 Middle Georgia Technical College
9 Chief Dull Knife College
10 Coahoma Community College
Less than two-year institutions:
1 Rosslyn Training Academy of Cosmetology
2 Columbiana County Career and Technical Center
3 Lake Career and Technical Center
4 New Age Training
5 Seattle Vocational Institute
6 South Texas Training Center
7 Industrial Technical College
8 Trinity College of Puerto Rico
9 Bayamon Community College
10 Liceo de Arte-Dise-O y Comercio

State

Percent
Receiving
Grant Aid

Tuition Institution Type

KY
OK
TX
TX
PR
PR
NC
FL
ND
PR

100% ($20,746) Private, not-for-profit


67% ($5,585) Private, not-for-profit
($95) Public, not-for-profit
87%
($85) Public, not-for-profit
87%
$220 Public, not-for-profit
79%
$487 Public, not-for-profit
89%
$909 Public, not-for-profit
94%
$1,440 Public, not-for-profit
72%
$1,694 Public, not-for-profit
91%
$1,798 Private, not-for-profit
98%

PR
NC
AL
PR
MA
AS
MO
GA
MT
MS

98%
81%
90%
67%
81%
71%
100%
55%
92%
94%

($1,155)
($517)
($335)
($122)
($85)
($61)
$0
$142
$432
$661

Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit
Private, not-for-profit
Public, not-for-profit
Public, not-for-profit
Public, not-for-profit

PR
OH
MO
NY
WA
TX
PR
PR
PR
PR

100%
75%
73%
100%
85%
100%
100%
95%
90%
100%

($158)
$150
$369
$1,781
$2,224
$2,953
$3,038
$3,255
$3,404
$3,582

Private, for-profit
Public, not-for-profit
Public, not-for-profit
Private, for-profit
Public, not-for-profit
Private, for-profit
Private, for-profit
Private, not-for-profit
Private, for-profit
Private, for-profit

Note: Average net price is generated by subtracting the average amount of federal, state/local government, or institutional grant or scholarship
aid from the total cost of attendance. Total cost of attendance is the sum of published tuition and required fees (lower of in-district or in-state,
where applicable), books and supplies, and the weighted average for room and board and other expenses. Source: BMO Capital Markets and
US Department of Education College Affordability and Transparency Center.

In its annual Trends in College Pricing, the College Board breaks down the annual cost of
attendance for undergraduate students (two-year and four-year not-for-profit schools) by their
components (similar data was not available for for-profit schools). While tuition is the largest
component at both private four-year schools and public four-year schools for out-of-town
students, room and board are actually the larger costs for students at two-year schools and instate students at four-year schools (see Exhibit 167). For the most part, tuition and fees have
been the fastest-growing component in the total cost of attendance for undergraduates since the
2008-2009 school year.

A member of BMO

Financial Group

149

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 167. Average Undergraduate Budgets (2012-2013 School


Year)
Public Two- Public FourYear Year In-State
Commuter On-Campus
Average cost:
Tuition and fees
Room and board
Books and supplies
Transportation
Other expenses
Total

$3,131
7,419
1,229
1,648
2,157
$15,584

CAGR since 2008:


Tuition and fees
Room and board
Books and supplies
Transportation
Other expenses
Total

6.9%
0.3%
4.4%
4.5%
3.3%
2.6%

$8,655
9,205
1,200
1,110
2,091
$22,261

7.1%
4.4%
2.7%
2.4%
2.3%
5.0%

Private
Public FourNonprofit
Year Out-ofState On- Four-Year OnCampus
Campus
$21,706
9,205
1,200
1,110
2,091
$35,312

$29,056
10,462
1,244
957
1,570
$43,289

5.6%
4.4%
2.7%
2.4%
2.3%
4.9%

3.7%
3.9%
4.2%
4.4%
3.0%
3.7%

Source: College Boards Trends in College Pricing 2012.

We have provided revenue per student data for a select group of for-profit providers in Exhibit
168. While there are many ways to calculate this, we use trailing-12-month (TTM) revenues
divided by the average enrollments over that period, using five enrollment data points
(beginning enrollments for each quarter plus ending enrollments for the last quarter).
Unfortunately, there was limited data available. Nevertheless, the 2.9% CAGR for increases in
average revenue per student for this group from FY2003 to FY2012 is below the roughly 4%5% average annual increase for for-profit institutions as measured by the ED. Revenues per
student vary widely, with American Public Education as the lowest (military focus, more parttime students) and Universal Technical Institutes as the highest (auto technician programs are
heavily capital intensive and therefore more expensive). In addition, schools that focus on
working adults, such as those owned by Apollo Group (APOL), Bridgepoint Education (BPI),
Grand Canyon Education (LOPE), and Strayer Education, tend to have lower annual revenue
per student given that many students attend part time. In addition, changes in mix shift (i.e.,
degree type, program type) can have an impact on this calculation.

A member of BMO

Financial Group

150

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 168. Select For-Profit Postsecondary School Operators Revenue per Student
(FY2003-FY2013 to Date)
TTM Revenues/Student (5 qtr. avg.)
Company
Ticker
American Public Education
APEI
Apollo Group
APOL
Bridgepoint Education
BPI
Career Education
CECO
Corinthian Colleges
COCO
Capella Education
CPLA
DeVry
DV
Education Management
EDMC
Grand Canyon Education
LOPE
ITT Educational Services
ESI
Lincoln Educational Services
LINC
National Amer. Univ. Holdings NAUH
Strayer Education
STRA
Universal Technical Institute
UTI
Washington Post
WPO
MEDIAN

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

Fiscal Year
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
N.A.
N.A.
N.A.
N.A.
$3,087
$3,062
$2,984
$3,122
$3,152
$3,148
$7,554
$7,929
$8,658
9,035
9,096
9,369
9,843
10,687
11,305
11,918
N.A.
N.A.
N.A.
N.A.
9,453
9,341
9,978
10,419
10,905
10,823
N.A.
N.A.
N.A.
N.A.
18,753
18,533
19,296
18,729
17,540
17,302
12,765
13,806
14,237
14,597
14,910
15,881
17,076
17,857
17,817
17,413
10,824
11,115
11,249
11,127
11,351
11,299
11,227
11,337
11,263
11,533
11,855
14,291
14,369
15,183
15,326
14,261
14,780
15,986
16,308
15,322
15,858
15,916
16,480
17,221
17,605
18,367
18,509
18,819
19,435
19,918
N.A.
N.A.
N.A.
7,750
8,196
8,459
8,583
9,811
10,069
10,688
15,179
15,703
16,291
16,770
17,268
17,778
18,491
18,897
18,974
19,309
N.A.
N.A.
16,257
18,095
18,797
18,982
20,596
20,891
21,223
22,372
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
12,116
11,248
10,950
8,401
8,709
8,947
9,260
9,598
9,932
10,505
11,305
11,792
11,459
N.A.
19,654
20,337
21,239
22,055
22,628
22,887
23,338
24,192
24,734
N.A.
N.A.
N.A.
14,205
15,538
16,430
17,543
16,694
16,104
N.A.
$11,855 $14,048 $14,369 $14,890 $14,558 $14,899 $15,605 $15,986 $16,308 $15,322

y/y change
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

'03-12
CAGR
N.A.
5.2%
N.A.
N.A.
3.5%
0.7%
2.9%
2.6%
N.A.
2.7%
N.A.
N.A.
3.5%
N.A.
N.A.
2.9%

'07-12
CAGR
0.4%
5.6%
2.7%
-1.6%
3.2%
0.3%
0.0%
2.5%
5.5%
2.3%
3.5%
N.A.
3.6%
2.3%
2.5%
2.5%

Avg. YTD
FY2012 FY2013
3,163
3,176
11,673
12,083
10,765
10,637
17,333
17,608
17,350
17,769
11,432
11,516
15,458
14,705
19,543
19,807
10,341
10,888
18,933
18,773
21,481
22,781
11,047
11,287
11,765
11,564
25,042
25,587
16,673
16,115
$15,458 $14,705

Fiscal Year
Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI
WPO

12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

2003
N.A.
4.6%
N.A.
N.A.
12.6%
N.A.
3.4%
3.3%
N.A.
6.8%
N.A.
N.A.
4.6%
N.A.
N.A.
4.6%

2004
N.A.
5.0%
N.A.
N.A.
8.2%
2.7%
20.5%
0.4%
N.A.
3.5%
N.A.
N.A.
3.7%
N.A.
N.A.
3.7%

2005
N.A.
9.2%
N.A.
N.A.
3.1%
1.2%
0.5%
3.5%
N.A.
3.7%
N.A.
N.A.
2.7%
3.5%
N.A.
3.3%

2006
N.A.
4.4%
N.A.
N.A.
2.5%
-1.1%
5.7%
4.5%
N.A.
2.9%
11.3%
N.A.
3.5%
4.4%
N.A.
4.4%

2007
N.A.
0.7%
N.A.
N.A.
2.1%
2.0%
0.9%
2.2%
5.8%
3.0%
3.9%
N.A.
3.7%
3.8%
N.A.
2.6%

2008
-0.8%
3.0%
-1.2%
-1.2%
6.5%
-0.5%
-7.0%
4.3%
3.2%
3.0%
1.0%
N.A.
3.5%
2.6%
9.4%
2.8%

2009
-2.6%
5.1%
6.8%
4.1%
7.5%
-0.6%
3.6%
0.8%
1.5%
4.0%
8.5%
N.A.
5.8%
1.1%
5.7%
4.1%

2010
4.6%
8.6%
4.4%
-2.9%
4.6%
1.0%
N.A.
1.7%
14.3%
2.2%
1.4%
N.A.
7.6%
2.0%
6.8%
4.4%

2011
1.0%
5.8%
4.7%
-6.3%
-0.2%
-0.7%
2.0%
3.3%
2.6%
0.4%
1.6%
-7.2%
4.3%
3.7%
-4.8%
1.8%

2012
-0.1%
5.4%
-0.8%
-1.4%
-2.3%
2.4%
-6.0%
2.5%
6.2%
1.8%
5.4%
-2.6%
-2.8%
2.2%
-3.5%
0.8%

YTD
'12-'13
0.4%
3.5%
-1.2%
1.6%
2.4%
0.7%
-4.9%
1.3%
5.3%
-0.8%
6.0%
2.2%
-1.7%
2.2%
-3.3%
1.0%

N.A. Not Available. Note: Revenue per student calculated using TTM revenues divided by enrollments over that period (five data points). Some
historical comparisons may be misleading owing to restatements.. Source: BMO Capital Markets and company reports.

It is difficult to compare program costs across the for-profit providers, even when measured on a
standard credit hour basis, as they tend to vary geographically, by program type (i.e., bachelor's
programs are typically more expensive on a per credit hour basis when compared with associates
programs) as well as by delivery method (i.e., campus-based versus online). Nevertheless, we
have attempted to compile average program tuition costs for the publicly held for-profit providers
(see Exhibit 169).

A member of BMO

Financial Group

151

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 169. Average Program Costs for Select For-Profit Postsecondary Companies
Company/Ticker
American Public Education (APEI)
Apollo Group (APOL; Univ. of Phoenix)
Bridgepoint Education (BPI)
Capella Education (CPLA)
Career Education (CECO)
Corinthian Colleges (COCO)
DeVry (DV; DeVry University)
Education Management (EDMC)
Grand Canyon Education (LOPE)
ITT Educational Services (ESI; ITT Technical Institutes)
Lincoln Educational Services (LINC)
National American University (NAUH)
Strayer Education (STRA)
Universal Technical Institutes (UTI)
Washington Post Company (WPO; Kaplan)
MEDIAN

Full Program Cost


Certificate/
Diploma Associates Bachelors
N.A.
$16,050
$32,100
N.A.
25,000
53,000
N.A.
27,000
48,240
N.A.
N.A.
56,000
$21,000
33,000
64,000
21,000
37,000
N.A.
N.A.
36,000
54,000
15,000
39,000
71,000
N.A.
N.A.
54,000
N.A.
48,000
93,000
20,000
28,000
N.A.
20,000
31,000
62,000
N.A.
33,000
66,000
31,000
33,000
N.A.
7,056
33,390
66,780
$20,000
$33,000
$59,000

Masters
$14,200
23,000
20,475
24,000
26,000
N.A.
25,000
28,000
22,000
N.A.
N.A.
N.A.
45,000
N.A.
33,516
$24,500

Doctoral
N.A.
$54,750
N.A.
58,000
57,000
N.A.
N.A.
60,000
13,000
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
$57,000

N.A. Not Available. Source: BMO Capital Markets and company reports.

For-profits:
Tuition and fees
and key revenue
source

A member of BMO

As most for-profit postsecondary schools are eligible for only limited direct federal and state/local
funding (outside of Title IV funding for their students), they tend to rely mostly on student tuition
and fees to fund current operations and growth. As shown in Exhibit 170, for-profit schools
received over 89% of their revenues in the 2010-2011 school year (latest available) from tuition
and fees. By contrast, the public not-for-profit schools and private not-for-profit schools
generated roughly 26% and 29% of their revenues, respectively, from that source.

Financial Group

152

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 170. Funding Sources for by Institution Type (2010-2011 School Year)
Public Not-for-Profit

Tuition and fees


Federal funding
State/local funding
Endowments, investment income, gifts and grants
Auxiliary and other income
Total

2-Year Schools
Revenues % of Total
$9,222.3
17.7%
14,775.9
28.4%
26,844.2
51.6%
1,155.7
2.2%
5,878.1
11.3%
$57,876.3
100.0%

Tuition and fees


Federal funding
State/local funding
Endowments, investment income, gifts and grants
Auxiliary and other income
Total

2-Year Schools
Revenues % of Total
$464.6
70.5%
60.6
9.2%
15.5
2.4%
55.9
8.5%
62.6
9.5%
$659.2
100.0%

4-Year Schools
Revenues
% of Total
$59,582.5
28.8%
24,274.1
11.8%
2,150.5
1.0%
75,616.6
36.6%
44,953.5
21.8%
$206,577.1
100.0%

Tuition and fees


Federal funding
State/local funding
Endowments, investment income, gifts and grants
Auxiliary and other income
Total

2-Year Schools
Revenues % of Total
$5,675.5
86.9%
470.0
7.2%
39.2
0.6%
6.0
0.1%
340.9
5.2%
$6,531.6
100.0%

4-Year Schools
Revenues
% of Total
$19,480.3
89.8%
1,113.2
5.1%
118.0
0.5%
58.1
0.3%
920.2
4.2%
$21,689.8
100.0%

($ in millions)

4-Year Schools
Revenues
% of Total
$51,018.4
27.8%
41,346.0
22.6%
66,910.6
36.5%
24,026.0
13.1%
82,640.7
45.1%
$265,941.6
100.0%

All Schools
Revenues % of Total
$60,240.7
25.6%
56,121.9
23.9%
93,754.8
39.8%
25,181.7
10.7%
88,518.8
37.6%
$323,817.8
100.0%

Private Not-for-Profit
All Schools
Revenues % of Total
$60,047.0
29.0%
24,334.7
11.7%
2,166.0
1.0%
75,672.5
36.5%
45,016.1
21.7%
$207,236.3
100.0%

For-Profit
All Schools
Revenues % of Total
$25,155.8
89.1%
1,583.1
5.6%
157.3
0.6%
64.1
0.2%
1,261.1
4.5%
$28,221.4
100.0%

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

For-profits
generate less per
FTE student
relative to their
not-for-profit

Private for-profit institutions generate relatively less revenue per FTE student when compared
with their not-for-profit counterparts. As shown in Exhibit 171, in the 2010-2011 school year
(latest data available) private for-profit institutions generated $17,632 per FTE student much
lower than the $31,627 and $64,924 generated at public not-for-profit and private not-for-profit
institutions, respectively.

counterparts

A member of BMO

Financial Group

153

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 171. Funding Sources per FTE Student (2010-2011 School Year)

Tuition and fees


Federal funding
State/local funding
Endowments, investment income, gifts and grants
Auxiliary and other income
Total
As % of total:
Tuition and fees
Federal funding
State/local funding
Endowments, investment income, gifts and grants
Auxiliary and other income
Total

Public-Not-For-Profit
Two-year Four-year
Schools
Schools
All Schools
$2,253
$8,302
$5,884
3,610
6,728
5,481
6,559
10,889
9,158
282
3,910
2,459
13,447
8,646
1,436
$14,140
$43,275
$31,627

15.9%
25.5%
46.4%
2.0%
10.2%
100.0%

19.2%
15.5%
25.2%
9.0%
31.1%
100.0%

18.6%
17.3%
29.0%
7.8%
27.3%
100.0%

Private-Not-For-Profit
Two-year
Four-year
All
Schools
Schools
Schools
$13,718
$18,867
$18,812
1,790
7,686
7,624
459
681
679
1,652
23,944
23,707
1,848
14,234
14,103
$19,468
$65,412
$64,924

70.5%
9.2%
2.4%
8.5%
9.5%
100.0%

28.8%
11.8%
1.0%
36.6%
21.8%
100.0%

29.0%
11.7%
1.0%
36.5%
21.7%
100.0%

Private-For-Profit
Two-year Four-year
All
Schools
Schools
Schools
$14,854
$15,987
$15,716
1,230
914
989
103
97
98
16
48
41
893
756
787
$17,094
$17,800
$17,632

86.9%
7.2%
0.6%
0.1%
5.2%
100.0%

89.8%
5.1%
0.5%
0.3%
4.2%
100.0%

89.1%
5.6%
0.6%
0.2%
4.5%
100.0%

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

Financial aid biggest variable in


driving enrollment
growth

More families
using Title IV,
current income
and grants to pay
for college in
recent years

A member of BMO

Very few students at for-profit institutions pay the entire amount of tuition and fees themselves,
owing to a combination of the myriad financial aid sources and rising tuition costs. A 2001
study by Professor David Morgan at the University of Oklahoma concluded that the variable
with the biggest impact on enrollment is the amount of financial aid available to students. As
such, we believe it is in a schools best interest to maximize the amount of potential financial aid
its students can access.
In recent years, Sallie Mae has produced an annual study entitled How America Pays for
College, which included a Gallup survey of college-going students and their parents to
determine as to how they funded their college education. As shown in Exhibit 172 the bulk of
funding comes from borrowed sources including both federal (i.e., Title IV) and private loans,
although a sizable portion comes from savings as well. Interestingly, over the past four years,
there has been a substantial increase in the amount and percentage of student using Title IV
loans, along with non-borrowed sources (e.g., current income), and grants.

Financial Group

154

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 172. How America Pays for College (2008-2009 versus 2012-2013 School Years)
Source
Borrowed Sources:
Parent borrowing:
Federal PLUS loan (Title IV)
Private education loan
Home equity/line of credit
Parent credit cards
Retirement account loan
Parent/Other loans

2008-2009 School Year 2012-2013 School Year


% of Total
Average % of Total
Average
Families
Amount
Families
Amount

Dif.
% of Total
Families

CAGR
Average
Amount

15%
8%
5%
3%
5%
1%
3%

$7,664
8,401
8,028
3,886
5,471
5,762

12%
7%
2%
1%
3%
1%
5%

$9,887
7,316
4,602
4,681
3,952
11,817

-3%
-1%
-3%
-2%
-2%
0%
2%

6.6%
-3.4%
-13.0%
4.8%
-7.8%
19.7%

29%
25%
12%
5%
2%

5,327
7,516
2,812
5,819

32%
29%
9%
3%
5%

8,815
9,324
3,156
6,927

3%
4%
-3%
-2%
3%

13.4%
5.5%
2.9%
4.5%

Non-borrowed Sources:
Parent income and savings:
Current income
College savings plans
Retirement savings withdrawal
Other savings/investments

59%
55%
11%
3%
14%

$7,175
7,312
5,318
7,776

60%
52%
17%
5%
11%

$6,896
7,959
2,710
4,249

1%
-3%
6%
2%
-3%

-1.0%
2.1%
-15.5%
-14.0%

Student income and savings:


Current income
Savings
Federal work-study
Other savings/investments

42%
26%
25%
5%
2%

$2,639
3,791
1,893
5,749

51%
34%
27%
5%
8%

$3,130
2,764
1,605
2,618

9%
8%
2%
0%
6%

4.4%
-7.6%
-4.0%
-17.9%

Scholarships and grants:


Scholarships
Grants

51%
40%
30%

6,907
5,109

65%
39%
45%

8,349
6,538

14%
-1%
15%

4.9%
6.4%

17%

5,496

18%

5,244

1%

-1.2%

Student borrowing:
Federal loans (Title IV)
Private education loan
Student credit cards
Student other loans

Relatives and friends

Note: Total and subtotals do not add up to 100% as respondents could answer more than one category.
Source: BMO Capital Markets and Sallie Mae.

Students at forprofit institutions


have highest
percentage of
those receiving
financial aid

A member of BMO

While the Sallie Mae survey did not distinguish between students attending for-profit and notfor-profit institutions, students attending for-profit schools are likely heavier borrowers, owing
to the relatively higher cost of attendance and their relatively lower-income levels. This is
supported by data at the undergraduate level and is likely to be true at the graduate level as well,
albeit to a lesser extent. As shown in Exhibit 173, in the 2011-2012 school year (latest data
available), across all school types, undergraduates attending for-profit institutions had the
highest percentage receiving financial aid (though we note those attending private not-for-profit
schools have narrowed this gap in recent years). Specifically, for the most part, a relatively
larger portion of students at these schools received federal grants (most likely Pell Grants),
Veterans benefits and student loans. This data are for first year, full-time undergraduates a
typically disproportionately smaller population at for-profit institutions.

Financial Group

155

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 173. Percentage of Undergraduates Using Financial Aid


(2011-2012 School Year)

Institution Type
All undergraduates
Public:
Less than 2-year
2 year
4 year (non-doctorate)
4 year (doctorate)
Private not-for-profit:
2 year
4 year (non-doctorate)
4 year (doctorate)
Private for-profit:
Less than 2-year
2 year
4 year
More than one institution

Any aid Any grant


70.7%
59.1%

Any
student
loan
41.8%

Work- Veterans
study benefits
5.9%
3.7%

Direct
PLUS
loan
(parent)
4.5%

69.9%
57.0%
68.5%
76.8%

64.6%
50.5%
55.3%
59.9%

21.7%
17.6%
39.4%
55.5%

0.9%
1.9%
5.3%
6.2%

1.1%
2.9%
3.2%
2.8%

N.A.
0.1%
4.1%
8.5%

80.2%
87.4%
84.9%

71.4%
78.1%
74.7%

49.9%
64.0%
60.7%

N.A.
24.4%
24.8%

3.6%
3.7%
2.7%

7.0%
11.8%
12.0%

88.5%
82.2%
90.4%

77.5%
64.7%
70.7%

76.0%
64.3%
75.3%

0.3%
2.6%
1.1%

1.7%
6.2%
10.1%

4.6%
7.4%
3.5%

73.5%

58.8%

48.7%

5.7%

4.9%

5.9%

Note: Data for full-time, first-time undergraduates. N.A. Not Available. Source: BMO Capital Markets and US
Department of Education National Center for Education Statistics.

Students at forprofit institutions


also take on more
loans at least

In addition, these students tend to receive greater amounts of financial aid at least relative to
those attending public not-for-profit institutions though it skews more toward loans and
Veterans benefits (see Exhibit 174). This makes sense, in our view, given the relatively higher
price points at for-profit institutions.

when compared
to those at public
institutions

Exhibit 174. Average Amount of Undergraduate Financial Aid


(2011-2012 School Year)

Institution Type
All undergraduates
Public:
Less than 2-year
2 year
4 year (non-doctorate)
4 year (doctorate)
Private not-for-profit:
2 year
4 year (non-doctorate)
4 year (doctorate)
Private for-profit:
Less than 2-year
2 year
4 year
More than one institution

Any aid Any grant


$10,800
$6,200

Any
student
loan
$7,100

Work- Veterans
study benefits
$2,300
$7,500
N.A.
5,600
5,600
7,500

Direct
PLUS
loan
(parent)
$12,100

5,400
4,700
8,800
12,400

3,800
3,200
4,900
6,800

5,100
4,700
6,600
7,300

N.A.
2,700
2,000
2,400

N.A.
5,700
9,600
11,500

11,500
21,100
23,800

5,300
13,500
16,100

7,300
8,400
8,600

2,700
1,900
2,300

15,700
9,800
9,500

12,200
13,300
16,200

10,000
10,600
11,600

4,100
3,800
4,000

6,700
7,200
8,300

N.A.
3,600
3,100

11,600
11,900
8,500

6,300
8,900
12,500

11,100

5,900

7,100

2,100

7,500

11,200

Note: Data for first full-time undergraduates. N.A. Not Available. Source: BMO Capital Markets and US
Department of Education National Center for Education Statistics.

A member of BMO

Financial Group

156

September 2013

Postsecondary Education

Percentage of
students with
loans has
increased
particularly for
for-profit schools

BMO Capital Markets

The amount of student loans, specifically, has been increasing in recent years especially
among students attending for-profit institutions. A July 2009 report by Education Sector
highlights this trend. From the 1992-1993 school year to the 2007-2008 school year (latest data
available), the percentage of full-time, full-year undergraduate students who received any
student loans (both private and Title IV) increased from 32.4% to 52.9%. For those attending
for-profit institutions, that percentage increased from 52.5% to 91.6%, which was the highest
across the survey period across all school types (see Exhibit 175).

Exhibit 175. Percentage of Full-Time Full-Year Undergraduates


with Student Loans (1992-1993 to 2007-2008 School Years)
1992-1993

100%

1995-1996

1999-2000

2003-2004

2007-2008

91.6%

% Receiving Student Loans

90%
80%
65.0%

70%
60%

52.7%

52.5%
45.8%

50%
40%

31.5%

30%

22.5%

20%

11.7%

10%
0%
Public 2-year

Public 4-year

Private not-for-profit 4year

Private for-profit

Source: BMO Capital Markets and Education Sector

Amount of
average loans has
increased as well;
3% CAGR since
1992-1993 in

In addition, the amount of annual loans has increased. When measured in constant dollars (2007),
from the 1992-1993 school year to the 2007-2008 school year (latest data available), average
amount of loans (both private and Title IV) received by full-time, full-year undergraduate
students increased from $5,161 to $7,987 (3% CAGR). For those attending for-profit institutions,
that amount increased from $6,138 to $9,611 also 3% CAGR (see Exhibit 176).

constant dollars

Average Annual Loan

Exhibit 176. Annual Average Undergraduate Student Loans in


Constant 2007 Dollars (1992-1993 to 2007-2008 School Years)
$10,000

1992-93

1995-96

9,000

2003-04

2007-08

8,000

1999-2000

$9,766

$7,053

7,000
$5,751

6,000
$4,873

5,000
4,000

$9,611

$6,138

$4,732

$3,449

3,000
2,000
1,000
0
Public 2-year

Public 4-year

Private not-for-profit 4year

Private for-profit

Source: BMO Capital Markets and Education Sector

A member of BMO

Financial Group

157

September 2013

Postsecondary Education

Student loan debt


at roughly $1.2
trillion

Students
attending forprofit institutions
typically have

BMO Capital Markets

Much media attention has been paid to the escalating rates of outstanding student loans. In July
2013, the Consumer Finance Protection Bureau noted that cumulative student loan debt (from
both federal and private sources) was roughly $1.2 trillion, including over $1 trillion on federal
loans. This would make it the second largest component of consumer debt in the US, behind
home mortgages.
Students from for-profit schools tend to have proportionately more debt when graduating.
According to an August 2009 report by Mark Kantrowitz (when he was at www.finaid.org),
students from for-profit institutions have the highest debt levels when compared with their peers
when finishing their respective programs (see Exhibit 177).

more debt when


graduating

Exhibit 177. Cumulative Education Debt By Degree Type (20032004 and 2007-2008 School Years)

Bachelor's Degree
Public Not-For-Profit
Private Not-For-Profit
Private For-Profit
Associate Degree
Public Not-For-Profit
Private Not-For-Profit
Private For-Profit
Certificate
Public Not-For-Profit
For-Profit

2003-2004 School Year


Cumulative
%
Debt at
Graduating
Graduation
With Debt
64.5%
$18,630
61.0%
16,874
70.8%
21,281
83.8%
26,849

2007-2008 School Year


Cumulative
%
Debt at
Graduating
Graduation
With Debt
65.6%
$23,186
61.7%
20,092
70.5%
27,542
96.1%
32,906

% CAGR
5.6%
4.5%
6.7%
5.2%

33.5%
30.2%
61.9%
91.2%

9,404
8,662
11,459
13,799

43.4%
38.2%
67.8%
98.2%

12,206
10,329
15,035
20,188

6.7%
4.5%
7.0%
10.0%

N.A.
N.A.
N.A.

7,503
4,531
7,503

N.A.
N.A.
N.A.

9,000
6,534
9,744

4.7%
9.6%
6.8%

N.A. Not Available. Source: BMO Capital Markets, www.finaid.org and The College Board (certificate data).

Students at forprofit schools


have
disproportionate
unmet needs,
somewhat owing
to low expected"
family
contribution

A member of BMO

Despite this, a separate study shows that students at for-profit institutions tend to still have the
largest amount of unmet need. Dr. Tom Mortenson, a postsecondary researcher, calculated the
average unmet need by institutional type for full-time, dependent, single institution
undergraduate students in the 2007-2008 school year (latest data available). As shown in Exhibit
178, the average unmet need percentage for students at for-profit schools was $5,632, or roughly
20.4% of the average cost of attendance in that school year. This was the highest across all
school types. This analysis may be a bit misleading given the largest driver of this variance is
the students expected family contribution (EFC), calculated based largely on available income,
given that students at for-profit institutions tend to skew more toward lower income.

Financial Group

158

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 178. Funding Gap Analysis by School Type (2007-2008


School Year)

Average cost of attendance

Public 4-Year
Schools
$18,931

Expected family contribution


Financial aid:
Grants
Loans
Work-Study
Other financial aid
Total financial aid
Total available funding
Average unmet need/(surplus)
As % of average cost of attendance:
Average cost of attendance
Expected family contribution
Financial aid:
Grants
Loans
Work-Study
Other financial aid
Total financial aid
Total available funding
Average unmet need/(surplus)

Public 2-Year Private 4-Year


Schools
Schools
$11,961
$36,646

Private Less
Than 4-Year
Schools
$21,378

For-Profit
Schools
$27,564

15,700

10,150

18,529

8,666

7,447

3,611
3,431
253
1,031
8,326
24,026
($5,095)

1,765
855
188
72
2,880
13,030
($1,069)

10,531
6,090
713
2,113
19,447
37,976
($1,330)

3,564
4,254
140
2,165
10,123
18,789
$2,589

2,615
9,070
115
2,685
14,485
21,932
$5,632

100.0%

100.0%

100.0%

100.0%

100.0%

82.9%

84.9%

50.6%

40.5%

27.0%

19.1%
18.1%
1.3%
5.4%
44.0%
126.9%
-26.9%

14.8%
7.1%
1.6%
0.6%
24.1%
108.9%
-8.9%

28.7%
16.6%
1.9%
5.8%
53.1%
103.6%
-3.6%

16.7%
19.9%
0.7%
10.1%
47.4%
87.9%
12.1%

9.5%
32.9%
0.4%
9.7%
52.6%
79.6%
20.4%

Source: Postsecondary Education Opportunity Report 203 (June 2009).

A discussion of the various types of funding sources follows.


Federal financial

Federal funds. The most well known of the many types of financial aid available are federally

aid for higher

funded student loans and grants, the bulk of which are regulated by Title IV of the Higher
Education Act, overseen by the US Department of Education (ED). According to the College
Board, the federal government provided a record $154.6 billion in financial aid for higher
education in the 2011-2012 school year up 1% from the $153.1 billion available in the prior
year -- under the programs described in Exhibit 179 (this excludes any education-related tax
benefits). Of that, roughly $140.3 billion was through various programs regulated by Title IV
(e.g., excludes veterans and military funding) roughly flat with the prior year.

education has hit


record high
though funding
has stabilized

A member of BMO

Financial Group

159

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 179. Types of Financial Aid Available for Postsecondary Students

Program

Name

Type of Aid Other Information

Annual Award Limits (20132014 School Year)

Disbursement

Federal Grants

Pell Grant

Grant; does
not have to
be repaid

Undergraduates
only

Up to $5,645

School acts as the agent for


the US Dept. of Education

Federal Supplemental
Educational Opportunity
Grant (FSEOG)

Grant; does
not have to
be repaid

Undergraduates
Up to $4,000
only; not all schools
can participate

Other Federal Grants (e.g., Grant; does


LEAP, ACG and SMART) not have to
be repaid

Various

Veterans

Various
loans and
grants

Military/Other

Federal Perkins Loans

Other
Loans/Grants

Direct Loan
Programs

Total Available (20112012 School Year)


($ bil.)
% of total
$34.5

15.2%

School disburses funds to


students

0.7

0.3%

Various

Various

0.0

0.0%

N.A.

Various

N.A.

12.2

5.4%

Various
loans and
grants

N.A.

Various

N.A.

1.9

0.8%

Loan; must
be repaid

Undergraduates and
graduates; not all
schools can
participate

Undergraduate: up to $5,500
School disburses funds to
annually and $27,500 lifetime. students
Graduate: up to $8,000 annually
and $60,000 lifetime (including
undergraduate loans).

1.0

0.4%

Subsidized Stafford Loans Loan; must


be repaid

Dept. of Education Undergraduate: $3,500-$5,500;


pays interest while depending on grade level
student is in school (lowest for first year
undergrads) with lifetime limit of
$23,000. Graduate:$8,500 with
lifetime limit of $65,500.

School disburses funds to


students, funds provided by
federal government (direct
loans)

40.0

17.6%

Unsubsidized Stafford
Loans

Loan; must
be repaid

Borrower is
responsible for
interest for life of
loan

Undergraduate: $2,000-$7,000;
depending on grade level
(lowest for first year
undergrads) with lifetime limit of
$57,500. Graduate:$12,00 with
lifetime limit of $138,500.

School disburses funds to


students, funds provided by
federal government (direct
loans)

45.9

20.2%

PLUS Loans

Loan; must
be repaid

Borrower is
responsible for
interest for life of
loan

Cost of attendance minus any


other financial aid received

School disburses funds to


students, funds provided by
federal government (direct
loans)

18.2

8.0%

Other Loans

Loan; must
be repaid
Money is
earned; does
not have to
be repaid

Various

Various

Various

0.2

0.1%

Undergraduates and No annual limit


graduates; not all
schools can
participate

School disburses funds to


students

1.0

0.4%

Work Study

Federal Work Study


(FWS)

Other Grants

State Programs

Grant; does
not have to
be repaid

Various

Various

Various

9.9

4.4%

Institutional (i.e., school)


Grants

Grant; does
not have to
be repaid

Various

Various

Various

42.1

18.6%

Private/Employer Grants

Grant; does
not have to
be repaid

Various

Various

Various

11.0

4.9%

State Sponsored

Loan; must
be repaid
Loan; must
be repaid

Various

Various

Various

1.7

0.8%

Various

Various

Various

6.4

2.8%

Total

$226.7

100.0%

Total Federal funding

$154.6

68.2%

Total Title IV

$140.3

61.9%

Non-Federal
Loans

Private Sector

Sources: US Department of Education Federal Student Aid Information Center and College Boards Trends in Student Aid 2012

A member of BMO

Financial Group

160

September 2013

Postsecondary Education

Federal financial
aid for higher
education had
increased
dramatically
before falling in
FY2012

BMO Capital Markets

Title IV funding had increased significantly in recent years, as more students attended higher
education, the price of attendance had increased, and more students become eligible for grants
targeted at lower income and other special programs. According to the ED (data differs from
that compiled by the College Board), Title IV funding increased at a 12% to $148.1 billion in
FY2011 from $60 billion in FY2003. However, funding fell 4.2% to $141.9 billion in FY2012.
(see Exhibit 180). The White Houses budget calls for a 1% and 8% increase in Title IV funding
in FY2013 and FY2014, respectively. Given the current fiscal state of the federal government,
we are pessimistic that the latter proposal will become reality.

Exhibit 180. Title IV Financial Aid (FY2003 FY2014E)


$160

Loans

Grants

Other

35%

y/y % change

30%
25%

120

20%

100

15%
80
10%
60

5%

40

0%

20

-5%

-10%
2003

2005

2006

2007

2008

2009

2010

2011

2012

2013E

2014E

Note: FY2004 data was not available. Estimates are based on White House proposals. Source: BMO Capital
Markets and US Department of Education.

For-profit
students rely
more on Title IV
federal financial
aid

A member of BMO

Usage of Title IV financial aid by school type was only available for undergraduate students.
However, as they represent the bulk of students attending institutions of higher education, we
believe this analysis applies to the entire sector. As shown in Exhibit 181, in the 2011-2012
school year (latest data available), a greater percentage of undergraduates attending for-profit
institutions received Title IV financial aid when compared with their counterparts at not-forprofit institutions.

Financial Group

161

September 2013

Annual % Change

Title IV Funding ($ in bil.)

140

Postsecondary Education

BMO Capital Markets

Exhibit 181. Percentage of Undergraduates Using Title IV


Financial Aid (2011-2012 School Year)

Institution Type
All undergraduates
Public:
Less than 2-year
2 year
4 year (non-doctorate)
4 year (doctorate)
Private not-for-profit:
2 year
4 year (non-doctorate)
4 year (doctorate)
Private for-profit:
Less than 2 year
2 year
4 year
More than one institution

Federal Direct Loans


Federal
campusSubsiUnsubbased aid Any loan
dized
sidized
11.3%
40.1%
35.9%
33.5%

Any Title
IV aid
57.2%

Federal
Pell
Grants
41.3%

61.3%
43.5%
56.4%
62.5%

56.2%
37.7%
40.5%
36.7%

N.A.
4.9%
9.0%
11.6%

20.1%
16.7%
37.4%
53.4%

16.8%
14.6%
31.9%
45.8%

15.4%
11.3%
29.9%
44.5%

67.5%
69.6%
65.5%

53.0%
39.3%
32.7%

22.1%
29.0%
28.7%

48.6%
61.3%
57.8%

44.2%
54.1%
51.1%

40.9%
54.6%
51.4%

86.7%
75.5%
79.5%

75.5%
60.1%
63.0%

22.1%
21.2%
13.4%

74.5%
61.3%
73.1%

73.1%
58.9%
71.4%

68.1%
55.0%
68.8%

59.9%

39.4%

10.1%

47.0%

41.7%

39.0%

N.A. Not Available. Source: BMO Capital Markets and US Department of Education National Center for
Education Statistics.

For-profit
students receive
relatively more
Title IV funding

In addition, as shown in Exhibit 182, in the 2011-2012 school year (latest data available),
students attending for-profit schools received more Title IV financial relative to their peers at
public not-for-profit schools, while receiving relatively the same as students at private not-forprofit schools.

than students at
public not-forprofit schools

Exhibit 182. Average Amount of Undergraduate Title IV Financial


Aid (2011-2012 School Year)

Institution Type
All undergraduates
Public:
Less than 2-year
2 year
4 year (non-doctorate)
4 year (doctorate)
Private not-for-profit:
2 year
4 year (non-doctorate)
4 year (doctorate)
Private for-profit:
Less than 2 year
2 year
4 year
More than one institution

Any Title
IV aid
$8,200

Federal
Pell
Grants
$3,400

Federal Direct Loans


Federal
campusSubsiUnsubbased aid Any loan
dized
sidized
$1,700
$6,400
$3,500
$3,900

4,900
4,600
7,600
9,900

3,500
3,000
3,600
3,900

N.A.
1,300
1,700
2,000

5,200
4,700
6,200
6,600

2,800
2,800
3,600
3,900

3,800
3,300
3,900
3,900

8,800
11,300
12,100

3,600
3,700
3,700

700
1,900
2,700

6,400
6,900
6,900

3,100
3,800
4,000

3,900
3,900
3,800

8,800
8,900
10,200

3,600
3,400
3,400

200
700
1,000

6,100
6,400
7,400

2,800
3,000
3,300

3,700
3,900
4,500

8,800

3,600

1,700

6,400

3,500

4,000

N.A. Not Available. Source: BMO Capital Markets and US Department of Education National Center for
Education Statistics.

A member of BMO

Financial Group

162

September 2013

Postsecondary Education

BMO Capital Markets

We believe there are a number of reasons for these differences, including the following:

For-profits are
more proactive in
making financial
aid available

The relatively poorer demographics of students attending for-profit schools as previously


discussed (e.g., lower income)

The relatively higher price of for-profit programs

In addition, the for-profit sector does a better job in educating its students about the availability
of such aid, in our view. In October 2009, Mark Kantrowitz (when he was at www.finaid.org)
published a study showing that not only do a relatively greater percentage of students at forprofit students file a Free Application for Federal Student Aid (FAFSA) form to apply for Title
IV funds, but those percentages have been increasing, relative to declining rates at most not-forprofit institutions (see Exhibit 183). The recent simplification of the FAFSA form (effective
with the 2010-2011 school year) should increase these percentages, specifically at not-for-profit
schools, in our view, although we believe they will still lag results at their for-profit peers.

Exhibit 183. Percentage of Students Filing FAFSA (2003-2004 vs.


2007-2008 School Years)
Institution
Public, not-for-profit
4-year institutions
2-year institutions
Less than 2-year institutions
Private, not-for-profit
4-year institutions
2-year institutions
Less than 2-year institutions
Private, for-profit
4-year institutions
2-year institutions
Less than 2-year institutions

2003-04
52.9%
64.2%
44.9%
38.2%
73.2%
72.9%
79.7%
81.8%
88.8%
86.2%
94.5%
87.0%

2007-08
52.1%
63.2%
43.9%
48.6%
71.7%
71.5%
77.7%
81.9%
95.4%
96.5%
98.9%
88.3%

Change
1.3%
-1.0%
-1.0%
10.4%
-1.3%
-1.4%
-2.0%
0.1%
1.3%
10.3%
4.4%
1.3%

Source: BMO Capital Markets and www.finaid.org.

As such, students
at these schools
rank among the
highest users of
Title IV funds

A member of BMO

Whatever the reasons, students at for-profit institutions rank among the largest users of Title IV
funds, as shown in Exhibit 184. Each year, the ED complies a list of Title IV financial aid used
by student attending proprietary (i.e., for-profit) institutions to determine their compliance with
the 90/10 regulation. This data were accumulated by OPE-ID number, not by school system; if
the entire school system were used, schools such as Corinthian Colleges (COCO) Everest
schools and Education Managements (EDMC) Art Institutes schools would have been listed
higher here. In addition, changes to OPE-ID numbers over this period (e.g., ITT Technical
Institutes [ESI] consolidating OPE-id numbers) may skew any comparisons.

Financial Group

163

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 184. Proprietary Institutions Ranked by Title IV Funds (2008-2009 through 20102011 School Years)
2008-09 Title IV Funds
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

OPE-ID
02098800
01072700
00188100
00458600
00732900
00145900
02504200
02179900
03267300
00107400
01014800
02113600
02075400
01303900
02362100
04051300
03010600
02151900
00747000
00869400
00267800
00753100
02246000
00822100
01019800
02559300
02100500
00927000
03031400
02233300
00638500
00405700
3819300
02116000
03072700
02120700
02599700
00723600
01258400
00367400
02217100
01049000
0'0962100
03210300
00464600
01212800
02569300
00974800
01111200
02362000

School Name
University of Phoenix
DeVry University
Ashford University
Kaplan University
ITT Technical Institute
Strayer University
Walden University
Argosy University
Capella University
Grand Canyon University
Colorado Technical University
American InterContinental University
Keller Graduate School of Management
South University
Full Sail University
Art Institute of Phoenix (The)
Virginia College
Keiser University
Art Institute of Pittsburgh (The)
Rasmussen College
Bryant & Stratton College
Academy of Art University
Ross University, School of Medicine
Universal Technical Institute
ECPI College of Technology
United Education Institute
Universal Technical Institute
Art Institute of Atlanta (The)
Intl. Academy of Design and Technology
St. George's University, School of Medicine
Chamberlain College of Nursing
National American University
American Public University System
Sanford-Brown College
Westwood College - Los Angeles
San Joaquin Valley College
Vatterott College
Art Institute of California - Los Angeles (The)
Illinois Institute of Art (The)
Stevens Henager College
Pima Medical Institute
Regency Beauty Institute
Herzing University
Le Cordon Bleu College of Culinary Arts
Minnesota School of Business
Lincoln College of Technology
Le Cordon Bleu College of Culinary Arts
Carrington College California
Fashion Institute of Design & Merchandising
Universal Technical Institute
Top 50 OPE-IDs
All Other Proprietary OPE-IDs
All Proprietary OPE-IDs
Non-Proprietary OPE-IDs
Total

Ticker/Owner
APOL
DV
BPI
WPO
ESI
STRA
Private (Laureate Ed.)
EDMC
CPLA
LOPE
CECO
CECO
DV
EDMC
Private
EDMC
CECO
Private
EDMC
Private
Private
Private
DV
UTI
EDMC
Private
UTI
EDMC
CECO
Private
DV
NAUH
APEI
CECO
Private
Private
Private
EDMC
EDMC
Private
Private
Private
Private
CECO
Private
LINC
CECO
DV
Private
UTI

($ in mil.)
$4,713.6
867.7
482.4
753.7
94.8
591.9
531.6
386.4
379.2
362.0
328.0
358.4
249.8
189.3
128.3
21.4
204.1
192.0
173.2
33.8
144.0
149.3
165.3
125.1
117.3
65.9
114.2
97.1
96.7
125.4
48.9
57.2
38.0
93.0
61.3
60.8
76.5
81.5
70.0
47.0
74.9
43.3
33.8
27.1
70.5
57.1
41.6
69.7
75.4
53.1
13,422.6
9,262.7
22,685.3
80,760.7
$103,446.0

% of total
4.6%
0.8%
0.5%
0.7%
0.1%
0.6%
0.5%
0.4%
0.4%
0.3%
0.3%
0.3%
0.2%
0.2%
0.1%
0.0%
0.2%
0.2%
0.2%
0.0%
0.1%
0.1%
0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.1%
0.0%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.1%
0.0%
0.0%
0.0%
0.1%
0.1%
0.0%
0.1%
0.1%
0.1%
13.0%
9.0%
21.9%
78.1%
100.0%

2009-10 Title IV Funds


($ in mil.)
$5,422.5
1,138.9
782.2
1,130.7
158.8
785.1
650.7
549.1
522.3
480.1
492.9
458.3
341.4
308.0
206.6
30.7
291.5
245.1
246.6
153.7
184.8
197.6
203.5
165.6
167.2
127.4
155.1
133.2
144.3
148.7
91.5
88.8
71.9
125.7
168.3
98.7
118.7
104.3
96.3
88.6
96.3
75.8
63.5
48.6
92.2
95.9
80.7
93.7
75.2
70.3
17,867.3
10,725.9
28,593.2
98,005.8
$126,599.0

% of total
4.3%
0.9%
0.6%
0.9%
0.1%
0.6%
0.5%
0.4%
0.4%
0.4%
0.4%
0.4%
0.3%
0.2%
0.2%
0.0%
0.2%
0.2%
0.2%
0.1%
0.1%
0.2%
0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
14.1%
8.5%
22.6%
77.4%
100.0%

2010-11 Title IV Funds


($ in mil.)
$5,036.8
1,274.4
1,145.1
1,108.3
918.6
847.1
744.9
658.6
609.9
564.2
535.9
440.7
390.9
378.8
337.7
300.1
286.9
257.6
251.6
240.8
229.7
218.4
196.5
190.1
164.4
164.3
160.3
159.2
158.6
152.5
137.5
137.5
136.8
130.9
128.4
125.0
120.8
114.1
109.4
109.0
103.6
101.6
101.4
92.4
91.8
90.4
86.2
85.7
82.4
81.4
20,289.5
11,723.2
32,012.6
108,367.4
$140,380.0

% of total
3.6%
0.9%
0.8%
0.8%
0.7%
0.6%
0.5%
0.5%
0.4%
0.4%
0.4%
0.3%
0.3%
0.3%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
14.5%
8.4%
22.8%
77.2%
100.0%

CAGR
3.4%
21.2%
54.1%
21.3%
211.3%
19.6%
18.4%
30.6%
26.8%
24.8%
27.8%
10.9%
25.1%
41.5%
62.3%
274.1%
18.6%
15.8%
20.5%
167.0%
26.3%
20.9%
9.0%
23.3%
18.4%
57.9%
18.5%
28.1%
28.1%
10.3%
67.7%
55.0%
89.8%
18.6%
44.7%
43.4%
25.7%
18.4%
25.0%
52.3%
17.6%
53.2%
73.2%
84.7%
14.1%
25.9%
44.0%
10.9%
4.6%
23.9%
22.9%
12.5%
18.8%
15.8%
16.5%

Note: Data provided by OPE-ID number and may not reflect the entire school system. Ranked by 2010-2011 school year. Source: Federal Student
Aid Data Center, College Board (total Title IV funds) and BMO Capital Markets.

Obama proposes
using Title IV
funding as a
carrot to
improve student
outcomes

A member of BMO

On August 22, 2013, President Obama unveiled his Plan to Make College More Affordable: A
Better Bargain for the Middle Class (see Exhibit 185). He proposes using Title IV funding as a
carrot to improve student outcomes. Among the components are tying financial aid to
outcome metrics, providing incentives to use technology more effectively and push the incomebased repayment plan; his would apply students at both not-for-profit and for-profit schools.
Given that many organizations representing the not-for-profit sector came out against many of
these proposals, with their strong ties to Congress (who would have to approve most proposals),
chances are limited this plan will not become law in its current format. Nevertheless, we believe
proposals like these will be included in the upcoming Higher Education Act renewal
discussions.

Financial Group

164

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 185. President Obamas Plan to Make College More Affordable


Topic
Pay Colleges and
Students for
Performance

Item
Tie financial aid to
college value

Engage states with a


Race to the Top for
Higher Education that
has higher value and
lower costs

Reward colleges for


results with a Pell
bonus and higher
accountability:

Demand student
responsibility for
academic
performance
Promote Innovation
and Competition

Award credits based


on learning, not seat
time
Use technology to
redesign courses

Use technology for


student services

Details
The Department of Education (ED) will develop and publish a new college ratings system that would be
available for students and families before the 2015 college year. In the upcoming Higher Education Act
reauthorization, the President will seek legislation allocating financial aid based upon these college
ratings by 2018. Students can continue to choose whichever college they want, but taxpayer dollars will
be steered toward high-performing colleges that provide the best value.
The President requested $1 billion in Race to the Top funding to spur state higher education reforms
and reshape the federal-state partnership by ensuring that states maintain funding for public higher
education. The Race to the Top competition will have a special focus on promoting paying for value as
opposed to enrollment or just seat time. While most states typically fund colleges based on enrollment,
there are notable exceptions, like Tennessee, Indiana and Ohio, which fund colleges based on
performance. The Presidents plan would also encourage states to provide accelerated learning
opportunities, smooth the transition from high school to college and between two- and four-year
colleges, and strengthen collaboration between high schools and colleges
To encourage colleges to enroll and graduate low- and moderate-income students, the President will
propose legislation to give colleges a bonus based upon the number of Pell students they graduate. The
Administration will also prevent the waste of Pell dollars by requiring colleges with high dropout rates to
disburse student aid over the course of the semester as students face expenses, rather than in a lump
sum at the beginning of the semester, so students who drop out do not receive Pell Grants for time they
are not in school.
To ensure students are making progress toward their degrees, the President will also propose
legislation strengthening academic progress requirements of student aid programs, such as requiring
students to complete a certain percentage of their classes before receiving continued funding. These
changes would encourage students to complete their studies on time, thereby reducing their debt, and
will be designed to ensure that disadvantaged students have every opportunity to succeed.
Western Governors University is a competency-based online university serving more than 40,000
students with relatively low costs about $6,000 per year for most degrees with an average time to a
bachelors degree of only 30 months. Other institutions with competency-based programs include
Southern New Hampshire University and the University of Wisconsin system.
Redesigned courses that integrate online platforms (like MOOCs) or blend in-person and online
experiences can accelerate the pace of student learning. The National Center for Academic
Transformation has shown the effectiveness of the thoughtful use of technology can improve learning
outcomes for students while reducing costs by nearly 40% on average. Examples include: Carnegie
Mellon Universitys Open Learning Initiative; Arizona State Universitys interactive algebra lessons; The
University of Maryland's introductory psychology course; and New Yorks Open SUNY initiative.
Online learning communities and e-advising tools encourage persistence and alert instructors when
additional help is needed. Technology is enabling students from across campuses and across the world
to collaborate through online study groups and in-person meet-ups. Examples include: MOOC-provider
Coursera's online forums; and Austin Peay State University's Degree Compass system.

Recognize prior
Colleges can also award credit for prior learning experiences, similar to current Administration efforts to
learning and promote recognize the skills of returning veterans. Dual-enrollment opportunities let high school students earn
dual enrollment
credits before arriving at college, which can save money by accelerating their time to degree.
Empower students
New college ratings will help students compare the value offered by different colleges. The ED will enlist
with information
entrepreneurs and technology leaders with a Datapalooza to catalyze new private-sector tools,
services, and apps to help students evaluate and select colleges. The effort will be complemented by
earnings information by college that will be released for the first time on Administrations College
Scorecard in fall 2013.
Seed innovation and To demonstrate what works, President Obama has proposed a new $260 million First in the World fund
measure what works to test and evaluate innovative approaches to higher education that yield dramatically better outcomes,
and to develop new ways for colleges to demonstrate that they are helping their students learn. In
addition, the Department of Labor is planning to grant an additional $500 million to community colleges
and eligible four-year colleges and universities in FY2014. A portion of these resources will be used to
promote accelerated degree paths and credentials that would drive more high-quality and affordable
options for adult workers and students.
Reduce regulatory
barriers
The ED will use its authority to issue regulatory waivers for experimental sites that promote highquality, low-cost innovations in higher education, such as making it possible for students to get financial
aid based on how much they learn, rather than the amount of time they spend in class. Pilot
opportunities could include enabling colleges to offer Pell grants to high school students taking college
courses, allowing federal financial aid to be used to pay test fees when students seek academic credit
for prior learning, and combining traditional and competency-based courses into a single program of
study. The ED will also support efforts to remove state regulatory barriers to distance education.
Ensure Student Debt Make all borrowers
To make sure that students and families have an easy-to-understand insurance policy against
Is Affordable
eligible for Pay As
unmanageable debt now and in the future, the President has proposed allowing all student borrowers to
You Earn
cap their federal student loan payments at 10% of their monthly income. Currently, students who first
borrowed before 2008 or have not borrowed since 2011 are not eligible for the Presidents Pay As You
Earn plan. In addition, the Administration will work with Congress to ensure that the benefits are targeted
to the neediest borrowers.
Launching an
Beginning in fall 2013, the ED will contact borrowers who have fallen behind on their student loan
enrollment campaign payments, undergraduate borrowers with higher-than-average debts, and borrowers in deferment or
for Pay As You Earn forbearance because of financial hardship or unemployment to ensure they have the information they
need to choose the right repayment option for them. Starting in 2014, the ED and the Department of
Treasury will work to help borrowers learn about and enroll in Pay As You Earn and Income-Based
Repayment plans when they file their taxes. To assist guidance counselors and other advisers who
guide students through the process of selecting and financing their higher education, the Administration
will launch a one-stop shop that will include important resources for choosing among various incomedriven repayment options.

Source: The White House.

A member of BMO

Financial Group

165

September 2013

Postsecondary Education

BMO Capital Markets

We have provided historical Title IV percentages for a select group for for-profit providers in
Exhibit 186. As shown, the median percentage has increased over the past decade from the mid60% range to the low-80% range. Where the data are available, we have included the impact on
this ratio of recent increases in annual Pell Grant and unsubsidized Stafford loan limits effective
July 1, 2008, as they are excluded from Title IV calculations for 90/10 measurement purposes
(with HEOA). This ratio is measured by institution (i.e., OPEID), not by the company as a
whole, so the company percentages may not necessarily reflect the risk of institutions breaking
the 90/10 threshold (more details later in this report).

Title IV exposure
for for-profits has
increased

Exhibit 186. Title IV Contribution for Select For-Profit Providers (FY2002-FY2012)


Company

Ticker

2002

2003

2004

2005

2006

2007

American Public Education


Apollo Group (Univ. of Phoenix)
Bridgepoint Education (Ashford Univ.)
Career Education
Corinthian Colleges
Capella Education
DeVry (undergraduate only)
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services (avg.)
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI
WPO

N.A.
52%
N.A.
53%
82%
N.A.
65%
65%
N.A.
65%
74%
42%
55%
65%
N.A.
65%

N.A.
62%
N.A.
58%
82%
N.A.
64%
66%
N.A.
68%
79%
41%
63%
68%
80%
66%

N.A.
61%
N.A.
58%
81%
N.A.
63%
68%
N.A.
66%
81%
55%
67%
72%
81%
67%

N.A.
63%
N.A.
61%
79%
67%
70%
67%
N.A.
61%
80%
50%
72%
70%
83%
69%

1%
64%
N.A.
62%
75.3%
71%
75%
68%
72%
57%
80.1%
62%
72%
73%
81%
72%

14%
69%
83.9%
62.7%
75.2%
74%
70%
57%
74%
63%
80%
63%
72%
68%
80%
70%

2008
2009
2010
2011
2012
W/out
With
W/out
With
W/out
With
W/out
With
W/out
With
HEOA HEOA HEOA HEOA HEOA HEOA HEOA HEOA HEOA HEOA
19%
N.A.
N.A.
19%
N.A.
26%
N.A.
42%
N.A.
N.A.
82%
N.A.
86%
83%
88%
85%
86%
N.A.
84%
N.A.
86.8%
N.A. 82.5%
N.A.
85%
N.A. 86.8%
N.A. 86.4%
N.A.
69.2%
N.A. 80.1%
N.A.
82%
N.A.
83%
N.A.
80%
N.A.
81.0%
N.A. 88.9% 81.3% 89.8% 81.9% 88.5% 80.2% 85.9%
N.A.
75%
N.A.
78%
N.A.
78%
N.A.
79%
N.A.
79%
N.A.
75%
N.A.
77%
N.A.
77%
N.A.
81%
N.A.
75%
N.A.
65%
N.A.
N.A.
70%
N.A.
77%
N.A.
78%
N.A.
79%
78.6%
N.A. 82.5%
N.A. 84.9%
N.A. 80.2%
N.A. 80.3%
N.A.
72%
N.A.
70%
N.A.
75%
N.A.
75%
N.A.
80%
N.A.
79%
N.A.
81%
N.A.
83%
N.A.
84%
N.A.
83%
N.A.
68%
N.A.
72%
N.A.
76%
N.A.
79%
N.A.
85%
N.A.
N.A.
77%
N.A.
78%
N.A.
78%
N.A.
76%
N.A.
N.A.
72%
N.A.
73%
N.A.
73%
N.A.
75%
N.A.
75%
N.A.
71%
N.A. 87.5%
N.A. 91.7% 88.7% 82.4%
82%
80%
N.A.
74%
N.A.
81%
78%
83%
80%
82%
78%
80%
N.A.

Note: Data reflects school or fiscal years and measures percentage of cash receipts. We have provided two calculations where available: Without
HEOA excludes the benefit of removing the increase in Pell Grant and Stafford Loans under HEOA from the 90% portion of the calculation; With
HEOA includes that benefit. N.A. Not Available. Source: BMO Capital Markets and company reports.

We have provided additional information on the three largest types of Title IV funding Pell
Grants, Stafford loans, and PLUS Loans.
Pell Grants. In the 2011-2012 school year, roughly $49.3 billion in federal grants, i.e., aid that

does not have to be repaid, was provided by the federal government to students attending Title
IV eligible schools. The best known and largest is the Pell Grant, which provides grants to lowincome undergraduate and certain post-baccalaureate students based on financial need
(calculated using the Expected Family Contribution from the FAFSA application). During the
2011-2012 year (latest data available), roughly 92% of Pell Grant recipients had a family
adjusted gross income of under $50,000.
The amount of
Pell Grants has
risen significantly
in recent years
until recently

A member of BMO

The amount of Pell Grants provided annually had increased significantly before peaking in the
2004-2005 school year at $13.1 billion, up from $5.8 billion in the 1996-1997 school year
(10.8% CAGR). While it fell thereafter, it rose again in the 2007-2008 school year as the US
government responded to the credit crisis and shortage of private lenders. Pell Grant funding has
continued to rise since then owing to an increase in annual limits in the 2008-2009 school year
and an increase in usage as more students attended higher education and more met the lowincome qualifications owing to the Great Recession. The estimated $34.8 billion in Pell Grants
provided in the 2010-2011 school year represented 22.5% of total Title IV dollars spent that year
and was by far an all-time high. However, Pell Grants fell slightly to $34.5 billion in the 20112012 (22.2% of Title IV dollars) owing to changes in distribution limits, among other reasons
(see Exhibit 187).

Financial Group

166

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 187. Pell Grant in Dollars and Percentage of Title IV Funds


(1996-1997 to 2011-2012 School Years)
Pell Grants (in $bil.)

25%

% of Title IV

30

20%

25
20

15%

15

10%

10

% of Title IV

Pell Grants ($ in bil.)

$35

5%

5
0

0%
1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 201197
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and College Boards
Trends in Student Aid.

Recent legislative
changes have
increased
maximum Pell

In theory, the maximum annual Pell Grant award per student can change each July 1 the
beginning of the new fiscal year for Title IV purposes. After being raised to $4,050 for the 20032004 school year, the maximum annual award remained flat for three years until the following
changes were made:

Grant limits

A member of BMO

It was raised to $4,310 for the 2007-2008 school year as part of the Revised Continuing
Appropriations Resolution, 2007, (P.L. 110-5), signed into law by President Bush on
February 15, 2007.

A combination of two laws -- the Consolidated Appropriations Act, 2008, (P.L. 110-161)
signed into law on December 26, 2007, which established the maximum award for the
2008-2009 school year at $4,241 and the College Cost Reduction and Access Act
(CCRAA) (P.L. 110-84), enacted on September 27, 2007 -- raised the limit for the 20082009 school year, by $490 for students enrolled full time. Another $119 from the FY2009
Omnibus Appropriations brought the maximum grant to $4,850 ($4,241 plus $490 plus
$119).

As part of the American Recovery and Reinvestment Act (ARRA) of 2009 (Recovery Act),
the annual maximum Pell Grant limit was raised by $500 to $5,350 for the 2009-2010
school year, with another $200 increase (to $5,550) effective for the 2010-2011 school year.

The Healthcare and Education Reconciliation Act of 2010 (H.R. 4872) most notable as
the Obama Healthcare Reform Act and signed into law on March 30, 2010 included a
provision that was modeled after The Student Aid and Fiscal Responsibility Act (SAFRA).
While somewhat tempered from prior versions of the legislation, the annual maximum Pell
Grant limit remained steady at $5,550 through the FY2012-2013 school year, increasing to
$5,645 for the FY2013-2014 school year on its way to $5,975 for the FY2019-2020 school
year (see Exhibit 188).

Financial Group

167

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 188. Annual Maximum Pell Grant Limit (2010-2011 to 20192020 School Years)
School Year
FY2010-2011
FY2011-2012
FY2012-2013
FY2013-2014
FY2014-2015
FY2015-2016
FY2016-2017
FY2017-2018
FY2018-2019
FY2019-2020

Annual Maximum Limt


$5,550
$5,550
$5,550
$5,645
$5,680
$5,760
$5,860
$5,975
$5,975
$5,975

Source: BMO Capital Markets and Association of Community College Trustees.

Average Pell
Grants have been
increasing but
still below
maximum level

The limits cited above are for the maximum award for full-time students. The average actual
annual Pell Grant award has been trending well below this maximum, although it did increase to
$3,833 in the 2010-2011 school year as the annual maximum limit increased; the average fell to
$2,555 in the 2011-2012 school year, owing to changes in distribution limits. Since the 19731974 school year, the average annual Pell Grant awarded was roughly 60% of the maximum
annual limit, though the percentages have increased in recent years, reaching 69.3% in the 20092010 school year an all-time high; the rate fell to 64.1% in the 2011-2012 school year as the
average Pell Grant fell to $3,555 (see Exhibit 189).

Exhibit 189. Pell Grant Appropriated vs. Average (1973-1974 to


2011-2012 School Years)
$6,000

Maximum Appropriated (left-axis)

80%

Average Pell Grant (left-axis)

Actual as % of Maximum (right-axis)


70%
5,000

Annual Pell Grant

4,000
50%

3,000

40%

30%
2,000

Actual as % of Maximum

60%

20%
1,000
10%

0
1973-74

0%
1977-78

1981-82

1985-86

1989-90

1993-94

1997-98

2001-02

2005-06

2009-10

Source: BMO Capital Markets and www.finaid.org.

A member of BMO

Financial Group

168

September 2013

Postsecondary Education

Recent legislative
changes have
affected Pell
Grants even

BMO Capital Markets

In the past two tears, there have been two major changes to Pell Grants that have affected its
distribution:

FY2011 budget: On April 15, 2011 -- roughly halfway into the fiscal year -- the FY2011

(year ending September 30, 2011) federal budget was released, eliminating year-round
Pell Grants (though funding was still available for summer 2011 courses from the 20102011 funding year). These type of grants began in FY2009 and had allowed students in
accelerated programs to obtain two Pell Grants in a single year. Most of the publicly held
companies have stated this change had little impact on student enrollment, given year-round
Pell Grants represented a relatively small percentage of total funding and that they believe
other funding sources would fill the missing gap.

without changing
maximum limits

FY2012 budget: On December 23, 2011, after much consternation, President Obama

signed the Consolidated Appropriations Act of 2012 (Public Law 112-74), i.e., the FY2012
budget into law. While the maximum amount was maintained, the programs eligibility
criteria was not, making as many as 100,000 of its 9 million recipients ineligible, according
to media reports. The changes include the following:
1.

Reduction in length of stay: Effective July 1, 2012, Pell Grants were available for a

total of 12 semesters, down from the prior 18 semesters -- a change that will affect an
estimated 62,000 beneficiaries, according to reports cited by Inside Higher Ed and
The Chronicle of Higher Education. According to Mark Kantrowitz (when he was at
www.finaid.org), semesters are counted based on the portion of a full-time
equivalent, so that half-time enrollment is counted as half a semester toward the 12semester limit.
2.

Reduction in income limits: The maximum amount families could earn and
automatically contribute nothing toward an undergraduate education (students
meeting an auto-zero-EFC threshold) would decrease from $32,000 to $23,000. This
applies only to dependent students as well as independent students with a dependent
other than a spouse. Mr. Kantrowitz calculates this would reduce the average Pell
Grant for those students in this income threshold by $1,350 and affect 13.5% of all
Pell Grant recipients. Students studying at for-profit schools would be affected to a
lesser extent per Kantrowitz, as only 10.6% of those students meet this threshold and
their average Pell Grant would be reduced by $1,130. In essence, this reduces the
maximum Pell Grant for student at for-profit schools by roughly $123, or 2.2% of
the $5,550 maximum.

3.

Lower minimum Pell Grant: The minimum Pell Grant is now 5% of the overall
maximum Pell Grant. Previously, students who qualified for a Pell Grant that was
greater than or equal to 5% of the maximum but less than 10% had their Pell Grants
set at 10% of the maximum Pell Grant. This rounding up of the Pell Grant has been
repealed.

4.

Removal of ATB students: Students without a high school diploma or the

equivalent will no longer be eligible for Pell Grants. This would also exclude those
who pass "ability to benefit" (ATB) exams or complete six credit hours. The loss of
aid eligibility applies only to students who first enroll in a program of study on or
after July 1, 2012.

A member of BMO

Financial Group

169

September 2013

Postsecondary Education

FY2014 budget
proposal for Pell
Grants

Students at forprofits get a


disproportionately
higher amount of
Pell Grants;
however, that
percentage
declined in the

BMO Capital Markets

Pell Grant funding was spared from the sequestration (automatic budget cuts effective in March
2013). The Presidents FY2014 budget (year ending September 30, 2014) calls for an increase
of the maximum Pell Grant to $5,725 in the 2014-2015 school year (up to $4,860 from the
discretionary award and an additional $925 from the mandatory add-on to help pay for
postsecondary education). The House and Senate were working through their budget proposals
at the time of this publication, though in March 2013, the House Budget Committee, led by Rep.
Paul Ryan (D-WI), proposed capping the Pell Grant at $5,645 for the next 10 years.
For-profit providers have been among the largest beneficiaries of Pell Grants given that they
cater relatively more toward lower-income students when compared with their not-for-profit
peers. While the bulk of Pell Grants still go to students attending public not-for-profit
institutions (over 66% in the 2011-2012 school year; latest data available), grants to students
attending for-profit school made up 21% of all Pell Grants provided that year (see Exhibit 190).
While down from its all-time high (25.2% in the 2009-2010 school year), this is
disproportionately higher than for-profits percentage of enrollments (10.9% of students at
degree-granting institutions in the 2011-2012 school year).

2011-2012 school
year

Exhibit 190. Pell Grant Distribution by School Type (1995-1996 to


2011-2012 School Years)
70% 69%

65%

% of Pell Grant funding

60%

1995-96
1999-00
2003-04
2007-08
2011-12

50%
40%

1996-97
2000-01
2004-05
2008-09

1997-98
2001-02
2005-06
2009-10

1998-99
2002-03
2006-07
2010-11

30%
21%

19%

20%

13% 13%

10%
0%
Public Not-for-Profit

Private Not-for-Profit

For-Profit

Source: BMO Capital Markets and College Boards Trends in Student Aid.

The average grant


per for-profit
student is
relatively lower

We were able to obtain the percentage of undergraduates that used Pell Grants and their average
amount by institution type for the 2007-2008 school year (latest data available). As shown in
Exhibit 191, while a greater percentage of students at for-profit institutions use Pell Grants, their
average amounts are actually slightly below those at most other institution types.

than at other
institutions

A member of BMO

Financial Group

170

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 191. Pell Grant Percentage Usage and Average Amount by


School Type (2007-2008 School Year)
% Using
27.3%

All institutions
Public not-for-profit:
Less than 2-year
2-year
4-year
Non-doctorate granting
Doctorate granting
Private not-for-profit:
Less than 4-year
4-year
Non-doctorate granting
Doctorate granting
For-profit
More than one institution

Average $
amount
2,600

33.8%
21.0%
25.3%
29.6%
23.0%

2,500
2,300
2,800
2,800
2,900

48.0%
25.6%
29.7%
21.1%
62.7%
27.8%

2,600
2,900
2,800
2,900
2,500
2,600

Source: BMO Capital Markets and National Center of Education Statistics.

We have provided a list of the Pell Grant exposure (as percentage of revenues) for select forprofit providers in Exhibit 192. The companies that have a greater percentage of non-degreed
programs (e.g., medical assistant) that cater to lower-income students, such as Corinthian
Colleges (COCO) and Lincoln Educational Services (LINC) tend to have the greatest Pell Grant
exposure among this group, though the exposure has increased for virtually all providers as
more students have become Pell Grant eligible in the current environment.

The lower the


program, the
higher the Pell
Grant exposure

Exhibit 192. Pell Grant Exposure for Select For-Profit Providers (FY2002-FY2012)
Company
Apollo Group
Career Education (Title IV grants)
Corinthian Colleges
Capella Education
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
Strayer Education
Universal Technical Institute
MEDIAN

Ticker
APOL
CECO
COCO
CPLA
EDMC
LOPE
ESI
LINC
STRA
UTI

FYE
8
12
6
12
6
12
12
12
12
9

2002
N.A.
N.A.
24.8%
N.A.
7.0%
N.A.
12%
N.A.
<10%
N.A.
12%

2003
N.A.
N.A.
24.5%
N.A.
7.0%
N.A.
13%
N.A.
10%
N.A.
12%

2004
N.A.
9.2%
22.7%
1.0%
9.0%
N.A.
13%
<20%
9%
N.A.
9%

2005
N.A.
9.0%
20.7%
0.4%
8.0%
N.A.
11%
<20%
8%
25%
9%

2006
5.3%
9.6%
18.7%
0.4%
8.0%
N.A.
11%
16%
8%
21%
10%

2007
6.5%
11.5%
19.4%
0.3%
8.0%
N.A.
12%
17%
5%
22%
12%

2008
9%
13.8%
22.7%
0.5%
6.6%
N.A.
13%
19%
9%
18%
13%

2009
14%
18.8%
23.3%
1.0%
8.1%
N.A.
18%
22%
12%
25%
18%

2010
18%
N.A.
29.2%
2.3%
11.8%
11.8%
20%
26%
17%
18%
18%

2011
20%
N.A.
28.9%
2%
13.5%
10.3%
21%
24%
17%
21%
20%

2012
19%
N.A.
27.1%
3%
13.6%
14.1%
22%
22%
17%
18%
18%

Note: Reflects Pell Grant as a percentage of cash receipts or cash basis revenues except for APOL, ESI, and UTI where data is measured as a
percentage of reported revenues. All data reflects school or fiscal years. Companies not listed do not disclose their Pell Grant exposure. N.A.
Not Available. Source: BMO Capital Markets and company reports.

Stafford loans. In the 2011-2012 school year, an estimated $85.9 billion in Stafford loans were
provided by the federal government to students attending Title IV eligible schools. Nearly all
students that are US citizens and attending eligible schools are entitled to Stafford loans,
regardless of their credit history.

A member of BMO

Financial Group

171

September 2013

Postsecondary Education

BMO Capital Markets

unsubsidized

There are two types of Stafford loans subsidized and unsubsidized. To receive a subsidized
Stafford Loan, students must be able to demonstrate financial need. According to ww.finaid.org,
about two-thirds of subsidized Stafford loans are awarded to students with family AGI of under
$50,000, one-fourth to students with family AGI of $50,000 to $100,000, and a little less than
one-tenth to students with family AGI over $100,000. The primary difference is that students
obtaining subsidized loans do not pay any interest, while they are in school (or during any loan
deferment period).

Annual limits for

As with Pell Grants, recent regulatory changes have increased annual Stafford Loan limits.

Two types of
Stafford loans subsidized and

Stafford loans
have been

Effective July 1, 2007 (2007-2008 school year), as part of the Higher Education
Reconciliation Act (HERA) of 2005, first-year students became able to borrow $3,500 in
both subsidized and unsubsidized Stafford loans (up from $2,625), while second-year
students became able to borrow $4,500 (up from $3,500). In addition, the annual
unsubsidized loan limit for graduate students was increase to $12,000 from $10,000.

Effective July 1, 2008 (2008-2009 school year), as part of the Ensuring Continued Access
to Student Loans 2008 (HR 5715) that passed on May 7, 2008, the annual loan limit for
unsubsidized Stafford loans was increased by $2,000 for both dependent and independent
undergraduate students. Aggregate loan limits for undergraduates were increased as well.

increasing

The Stafford Loan limits effective in the 2013-2014 school year can be found in Exhibit 193.

Exhibit 193. Stafford Loans Limits (2013-2014 School Year)


Dependent Students
First Year
Second Year
Third Year and Beyond
Preparatory Coursework (undergraduate)
Preparatory Coursework (graduate/professional)
Teacher Certification Coursework

Annual Loan Limits


$5,500 (up to $3,500 may be subsidized)
$6,500 (up to $4,500 may be subsidized)
$7,500 (up to $5,500 may be subsidized)
$2,625 (up to $2,625 may be subsidized)
$5,500 (up to $5,500 may be subsidized)
$5,500 (up to $5,500 may be subsidized)

Independent Students
First Year
Second Year
Third Year and Beyond
Preparatory Coursework (undergraduate)
Preparatory Coursework (graduate/professional)
Teacher Certification Coursework

Annual Loan Limits


$9,500 (up to $3,500 may be subsidized)
$10,500 (up to $4,500 may be subsidized)
$12,500 (up to $5,500 may be subsidized)
$8,625 (up to $2,625 may be subsidized)
$12,500 (up to $5,500 may be subsidized)
$12,500 (up to $5,500 may be subsidized)

Other Type of Students


Graduate or Professional School
Medical School

Annual Loan Limits


$20,500 (up to $8,500 may be subsidized)
$40,500 (up to $8,500 may be subsidized)

Lifetime Limits
Undergraduate Dependent
Undergraduate Independent
Graduate or Professional School
Medical School

$31,000 (up to $23,000 may be subsidized)


$57,500 (up to $23,000 may be subsidized)
$138,500 (up to $65,000 may be subsidized)
$224,000 (up to $65,000 may be subsidized)

Source: BMO Capital Markets and Student Loan Network.

A member of BMO

Financial Group

172

September 2013

Postsecondary Education

New interest rates


for Stafford loans

Stafford loans are


largest Title IV
funding source

BMO Capital Markets

While historically interest rates on both types of Stafford loans were the same (6.8% since July
1, 2006), subsidized Stafford loans for undergraduate students had lower interest rates for loans
first disbursed on or after July 1, 2008, through June 30, 2012 6% in 2008-2009, 5.6% in
2009-2010, 4.5% in 2010-2011, and 3.4% in 2011-2012; Congress kept the 3.4% rate for the
2012-2013 school year as part of the Surface Transportation Extension Act of 2012 (i.e.,
transportation bill) enacted on June 29, 2012. After a long battle that extended past the June 30,
2013 deadline, President Obama signed the Bipartisan Student Loan Certainty Act of 2013
(H.R. 1911) on August 9, 2013, which set Stafford loan rates as follows:

Each July, interest rates will be reset based on the previous May's auction of 10-year
Treasury bills (T-bill); in May 2013, the rate was 1.81%.

Undergraduate loans -- both subsidized and unsubsidized -- would be set at the T-bill rate
plus 2.05 percentage points, up to a maximum of 8.25%.

Loans for graduate students would be set at 3.6 points above the T-bill rate, up to a
maximum of 9.5%.

Loans for parents at 4.6 percentage points over the T-bill rate, up to a maximum of 10.5%.

Stafford loans have consistently been the largest component of Title IV funding, representing
over 55% of the total in the 2011-2012 school year, although down from prior years, owing to
aforementioned spike in Pell Grants (see Exhibit 194).

Exhibit 194. Stafford Loans in Dollars and Percentage of Title IV


Funds (1996-1997 to 2011-2012 School Years)
70%
Stafford Loans (in $bil.)

% of Title IV

75
65%
60
60%

45
30

% of Title IV

Stafford Loans ($ in bil.)

$90

55%
15
0

50%
1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 201197
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12

Source: BMO Capital Markets and College Boards Trends in Student Aid.

Students at forprofits get a


disproportionately
higher amount of
Stafford Loans
though this
percentage has
recently fell

A member of BMO

Students at for-profit schools have received more in Stafford Loan funding than their
proportionate shares of enrollment, as with Pell Grants. While the bulk of Stafford Loans still go
to students attending public and private not-for-profit institutions (49% and 29%, respectively,
in the 2011-2012 school year; latest data available), funding for students attending for-profit
schools has been increasing, reaching roughly 22% of all Stafford Loans provided in the 20112012 school year, well above the for-profits percentage of enrollments at 10.9% at degreegranting institutions, though this is down from the all-time high of 26.7% reached in the 20092010 school year (see Exhibit 195). As such, the recent increases in Stafford Loan limits have
also disproportionately benefited students attending for-profit schools, in our opinion.

Financial Group

173

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 195. Stafford Loans Distribution by School Type (19951996 to 2011-2012 School Years)
60%

% of Stafford Loan funding

52%

49%

50%

1995-96
1998-99
2001-02
2004-05
2007-08
2010-11

1996-97
1999-00
2002-03
2005-06
2008-09
2011-12

1997-98
2000-01
2003-04
2006-07
2009-10

40%
40%
29%

30%

22%
20%
8%

10%
0%
Public Not-for-Profit

Private Not-for-Profit

For-Profit

Source: BMO Capital Markets and College Boards Trends in Student Aid.

The average
Stafford loan per
student is highest
at for-profit

We were able to obtain the percentage of undergraduates that used Stafford Loans and their
average amount by institution type for the 2007-2008 school year (latest data available). As
shown in Exhibit 196, a greater percentage of students at for-profit institutions use Stafford
Loans at higher average amounts relative to their not-for-profit peers.

institutions

A member of BMO

Financial Group

174

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 196. Stafford Loan Percentage Usage and Average


Amount by School Type (2007-2008 School Year)
% Using

Average $
amount

All institutions

34.5%

5,000

Less than 2-year


2-year
4-year
Non-doctorate granting
Doctorate granting
Private not-for-profit:
Less than 4-year
4-year
Non-doctorate granting
Doctorate granting
For-profit
More than one institution

14.6%
10.2%
41.3%
38.9%
42.5%

4,900
3,700
5,000
4,900
5,000

40.2%
53.8%
56.8%
50.4%
87.9%
40.3%

4,600
5,200
5,100
5,200
5,500
4,900

Source: BMO Capital Markets and National Center of Education Statistics.

PLUS Loans

PLUS Loans. In the 2011-2012 school year, an estimated $18.2 billion in PLUS Loans were

provided by the federal government to students attending Title IV eligible schools. These
loans are not need-based but are geared toward parents of dependent undergraduate students
enrolled at least half time in an eligible program at an eligible school. Parents must have an
acceptable credit history. The interest rate on these loans (obtained through the Direct Loan
Program) is 7.9%.
While PLUS Loans were initially only available to parents of undergraduate students, they
became available to graduate students meeting certain criteria effective July 1, 2006. There are
no set annual or aggregate limits for PLUS Loans, as borrowings are up to the full cost of
attendance, minus any other financial aid received (including Direct Subsidized Loans, Direct
Unsubsidized Loans, scholarships, and certain fellowships). HR 5715 increased the time for
payment deferrals to six months from 60 days after the dependent borrower leaves school.
The amount of PLUS Loans provided has increased dramatically from $2.4 billion in the 19961997 school year, also increasing as a percentage of Title IV funds. We believe the spike in
the 2006-2007 school year, when it peaked at 12.5% of all Title IV funds, was driven by the
introduction of PLUS Loans for graduate students. While this percentage fell to 10.1% in the
2009-2010 school year, likely owing to the aforementioned increases in Stafford Loan and Pell
Grant limits, it increased to 11.7% in the 2011-2012 school year, as we believe more students
qualified as dependents (see Exhibit 197).

A member of BMO

Financial Group

175

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 197. PLUS Loans in Dollars and Percentage of Title IV


Funds (1996-1997 to 2011-2012 School Years)
PLUS Loans (in $bil.)

14%

% of Title IV

12%
15

10%
8%

10
6%
4%

% of Title IV

PLUS Loans ($ in bil.)

$20

2%
0

0%
1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 201197
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12

Source: BMO Capital Markets and College Boards Trends in Student Aid.

For-profits share
of PLUS Loans
more in line with
their enrollment
percentage

PLUS Loans may


decrease as the

Students at for-profit schools have historically received more in PLUS Loan funding than
their proportionate shares of enrollment, similar to other types of Title IV funding, though
not to as great an extent. While the bulk of PLUS Loans still go to students attending public
and private not-for-profit institutions (46% and 42%, respectively, in the 2009-2010 school
year, latest data available), students attending for-profit schools received 11.8% of all PLUS
Loans provided in the 2011-2012 school year, just above the for-profits percentage of
enrollments (at degree-granting institutions) at 10.9% (see Exhibit 198).

Exhibit 198. PLUS Loans Distribution by School Type (1996-1997


to 2011-2012 School Years)

percentage of
60%
% of PLUS Loan funding

total

50%
46%

50%

42%
40%

39%

30%

1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
2011-12

1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11

20%
12%

11%
10%
0%
Public Not-for-Profit

Private Not-for-Profit

For-Profit

Source: BMO Capital Markets and College Boards Trends in Student Aid.

For-profits share
of PLUS Loans
declined as the
ED modified
eligibility

A member of BMO

We believe the for-profit sectors share of PLUS Loans has declined since peaking at 17% in
the 2001-2002 school year, as the number of independent students had grown (i.e., parents only
became eligible for PLUS loans for at the graduate level effective July 1, 2006). However, this
percentage declined even further from 15.6% in the 2010-2011 school year, as in October 2011,
the ED modified eligibility for PLUS loans by counting an unpaid account or one in collections
for 90 days or more as an adverse credit history, making it difficult to be eligible for a PLUS
loan. A number of the publicly-held for-profit providers have cited this issue as one reason why
starts fell and bad debt expense increased, as the company found fewer parents were being
approved for such loans and the schools was forced to find other financing alternatives for their
dependents.

Financial Group

176

September 2013

Postsecondary Education

PLUS loan usage


and amounts at
for-profit schools
are higher than at

BMO Capital Markets

We were able to obtain the percentage of undergraduates that used PLUS Loans and their
average amount by institution type for the 2007-2008 school year (latest data available). As
shown in Exhibit 199, PLUS loan usage and amounts at for-profit schools are higher than at
public not-for-profit schools but lower than at private not-for-profit schools.

public not-forprofit schools but


lower than at

Exhibit 199. PLUS Loan Percentage Usage and Average Amount


by School Type (2007-2008 School Year)

private not-forprofit schools

% Using

Average $
amount

All institutions

3.8%

10,800

Less than 2-year


2-year
4-year
Non-doctorate granting
Doctorate granting
Private not-for-profit:
Less than 4-year
4-year
Non-doctorate granting
Doctorate granting
For-profit
More than one institution

N.A.
0.2%
5.9%
3.9%
6.9%

N.A.
4,800
9,600
8,000
10,000

4.8%
8.6%
8.4%
8.7%
5.1%
5.0%

8,200
14,100
12,700
15,600
9,000
9,900

Source: BMO Capital Markets and National Center of Education Statistics.

Stafford Loans and PLUS Loans had historically been provided via two programs:

The Federal Family Education Loan Program (FFELP), via private lenders, including such
companies as Nelnet (NNI) and SLM Corp (Sallie Mae SLM), as well as commercial
banks, such as Citigroup (C) and JP Morgan Chase (JPM).

The Federal Direct Student Loan Program (FDSLP or direct lending or DL), in which
private lenders are not used since funds are provided directly to the schools by the US
government.

We believe many lenders were attracted to these programs, owing to the sizable profits and
guarantees available. However, these lenders and servicers began facing pressure from two
issues, in our view.

A member of BMO

Cut in Title IV program profitability. In late 2006 and early 2007, there was much
negative publicity regarding allegations that certain lenders involved in FFELP may have
provided perks to financial aid officers (at mostly not-for-profit schools, although certain
for-profit schools were implicated as well) to be listed as preferred lenders by these
schools. The public profile was raised by New York Attorney General Andrew Cuomo
and others, which alleged a number of instances of abuse. This, among other issues,
eventually led Congress to pass the College Cost Reduction and Access Act (H.R. 2669
or CCRA), which became effective on October 1, 2007. This Act, in essence, made
participation in FFELP less profitable for these lenders by cutting interest rates on
Stafford and other federally backed loans (from 6.8% to 3.4% over the 2008-2013
period), lowering loan guaranty agency collection fees (from 23% to 16% of funds
collected from loan defaults), and reducing the percentage of student loans guaranteed by

Financial Group

177

September 2013

Postsecondary Education

BMO Capital Markets

the federal student loan insurance program (from 98% to 95%), among other changes.
We believe these cuts caused a number of lenders to review their entire student loan
portfolio including their private loans and concentrate even harder on ensuring their
profitability.

Overall credit crunch. The subprime-driven credit crisis only made things worse for

these lenders, in our view, as the environment caused most lenders to be much more risk
averse than they have been in some time. This was exacerbated by greater selectivity in
the securitization market, especially via failures in the auction rate securities market
where it is estimated that roughly $80 billion of the $330 billion in total were backed by
student loans. This forced these lenders to be even more selective in terms of the types of
students to which they were lending.
FFELP phased out

As such, many lenders withdrew from FFELP and/or reduced their exposure. This withdrawal
was exacerbated by the federal governments push to promote the direct lending program in
place of FFELP, with the goal of using the subsidies, which had been paid to these lenders to
increase Title IV financial aid. While it took some time and a number of iterations, this
proposal became law with the March 30, 2010, signing of the Healthcare and Education
Reconciliation Act of 2010 (H.R. 4872), which included a provision, modeled after The
Student Aid and Fiscal Responsibility Act (SAFRA), and eliminated the FFELP effective July
1, 2010.

Default

In terms of this impact on the schools, the bulk of the changes were administrative, e.g.,
changing software to enable processing via direct lending as opposed to the FFELP lenders, with
the costs relatively minor. However, a number of companies cited that default rates on FFELP
loans put back to the ED through the Loan Purchase Commitment Program as part of the
Ensuring Continued Access to Student Loans Act (ECASLA or HR 5715, signed into law on
May 6, 2008) skyrocketed owing to these loans being shuffled among a number of different
service providers (see more discussion in the CDR section).

management
suffered

Income-based
repayment

Income-based repayment. As part of the College Cost Reduction and Access Act (CCRAA)
(P.L. 110-84), the Income-Based Repayment (IBR) plan was enacted, effective July 1, 2009.
This plan was intended as an alternative to existing income sensitive repayment (ISR) and
income contingent repayment (ICR) plans, and was designed to make it easier for students to
repay their Title IV debt should they take jobs with lower salaries (e.g., public service),
though the type of job is not necessarily a requirement to be eligible. IBR can be used for
most federal loans except for those in default, parent PLUS loans, or consolidation loans that
repaid a parent PLUS loan.

To qualify, one must have a partial financial hardship, i.e., if the monthly amount required
to pay on IBR-eligible federal student loans under a 10-year Standard Repayment Plan is
higher than the monthly amount required to repay under IBR. Most borrowers have a monthly
payment below 10% of their AGI. Borrowers, in essence, trade a lower monthly payment for
a longer loan term.

A member of BMO

Financial Group

178

September 2013

Postsecondary Education

BMO Capital Markets

In December 2012, changes were made to the IBR for new borrowers as of October 1, 2007,
and who received a disbursement of a Direct Loan on or after October 1, 2011. Under the Pay
As You Earn Act, monthly payments were lowered to 10% of a borrower's income (down
from 15%) and loan forgiveness may be conferred after 20 years (down from 25 years).
Despite the benefits of this plan, relatively few borrowers are using it. According to the
Consumer Financial Protection Bureau (CFPB) only 1.6 million (about 11%) of the 15 million
Title IV borrowers were in these types of programs as of June 2013. However, this is up from
about 4% estimated in 2010.
There have been a number of proposals to change the IBR, including making it a two-tiered
system (Simpson-Bowles April 2013 report); and enrolling all borrowers in the program and
collect loan payments through paycheck withholding (the Earnings Contingent Education
Loans (ExCEL) Act of 2012 [H.R. 6674]).
Student loan consolidation. Considering the myriad options within the Title IV programs, many

students finish school with a wide variety of loans. A once popular option was consolidating
these loans, whereby a single lender combines the prior loans. However, many prior FFELP
lenders no longer offer this option, given they have deemed these products to be less profitable.
However, students may still consolidate their loans via the EDs Direct Loan Program.
Students can only consolidate their education loans during the grace period or after the loans
enter repayment. Parents, however, can consolidate PLUS loans at any time.
Loan consolidation offers a number of benefits, according to www.finaid.org, including the
following:

Lower monthly payments, as the term of these loans are typically extended beyond the
10-year repayment plan that is standard with federal loans. However, this would increase
the total amount of interest paid over the lifetime of the loan.

Eases the administrative burden by having a single monthly payment.

Providing access to alternate repayment plans, such as extended repayment, graduated


repayment, income contingent repayment (direct loans only) and income sensitive
repayment (FFELP only).

Interest rates are set at the weighted average rate of the loans being consolidated rounded
up to the nearest one-eighth of a percent and capped at 8.25%. However, the so-called
PLUS loan interest rate loophole can reduce the interest rate on an 8.5% fixed rate
PLUS loans by 0.25% through consolidation.

The three-year clock on deferments and forbearances can be reset.

Deferrals and forbearances. Borrowers can defer (temporarily suspend) their loan payments

if they meet certain criteria, such as enrolling at least half time in school or experiencing
economic hardship or unemployment. Borrowers do not have to make payments on the loan
principal until the deferment ends. During this period, interest payments on subsidized
Stafford loans can be deferred, while those on unsubsidized Stafford loans can be paid
monthly or deferred, but are typically added to the principal balance at the end of the
deferment period.

A member of BMO

Financial Group

179

September 2013

Postsecondary Education

BMO Capital Markets

Lenders may grant a forbearance that temporarily suspends a borrowers payments. These are
typically granted in three- or six-month increments up to a limit of five years. A forbearance
is generally a more expensive option than deferment because interest continues to accrue,
even on subsidized loans. Borrowers do not make principal payments during this period,
although they can make interest-only payments or have the interest capitalized and added to
the principal when the forbearance expires.
For-profits have
fewer students in
deferral/
forbearance,
though more
delinquent or in

In a March 2011 study by the Institute for Higher Education Policy entitled Delinquency: The
Untold Story of Student Loan Borrowing, the authors analyzed borrowers that had entered
repayment over a recent five-year period (between October 1, 2004, and September 30, 2009),
as shown in Exhibit 200, those whose last institution was a for-profit schools were less likely
to have put their loans on deferral and/or forbearance. Unfortunately, they were more likely to
be delinquent or to have defaulted on their loans.

default

Exhibit 200. Percentage Distribution of Borrowers Loan Status by


Last Institution Attended (in repayment from 10/1/2004-9/30/2009)
Timely
Repayment

Deferment/
forebearance

Delinquent

Default

24%
45%
53%
32%
35%

16%
21%
20%
5%
12%

36%
24%
20%
27%
29%

24%
10%
8%
36%
24%

Institution type:
Public two-year
Public four-year
Private not-for-profit four-year
For-profit two-year
For-profit four-year

Source: Institution for Higher Education Policy.

Rates of tuition

Private loans. In recent years, the amount of available financial aid (excluding private loans

increases have

and educational tax benefits) has grown at a slower rate than tuition levels. When measured in
constant dollars (2011), the amount of available financial aid increased 3.9% annually from
the 1998-1999 to 2011-2012 school years per FTE student, versus average annual increases of
6.9% and 6.2% for public and private tuition, respectively (see Exhibit 201). We note this gap
had been widening in recent years.

outpaced available
financial aid

Exhibit 201. Annual Growth in Financial Aid and Tuition in


Constant Dollars (1998-1999 to 2011-2012 School Years)
Index (1998-99=100)

240

Public Tuition

Private Tuition

Financial Aid

220
200

"Funding Gap"

180
160
140
120
100
199899

199900

200001

200102

200203

200304

200405

200506

200607

200708

200809

200910

201011

201112

Note: Financial aid excludes private loans and educational tax benefits. Source: BMO Capital Markets
analysis based on data from College Boards Trends in Student Aid, Trends in College Pricing and Bureau of
Labor Statistics.

A member of BMO

Financial Group

180

September 2013

Postsecondary Education

Private loans had


been one of the
fastest-growing
sources of
financial aid

but declined
after peaking in
the 2007-2008
school year

BMO Capital Markets

Private loans have historically been used most often by students at for-profits institutions to
help mitigate this funding gap. Also known as alternative loans or nonfederal loans, these
loans became more popular in the 1980s as annual tuition rate increases accelerated and the
amount of federally funded financial aid was unable to make up much of the difference (some
of that gap was diminished in the 1990s). The growing use of private financing occurred
despite the tendency for the loans to be more expensive than those provided by the federal
government.
However, owing to the credit crunch and other factors, the amount of private loans used for
postsecondary education has been shrinking. According to the College Board, after rising
roughly 23.2% CAGR to nearly $22.3 billion (12.5% of total) in the 2007-2008 school year
from $3.4 billion (3.6% of total) in the 1998-1999 school year, private loans have shrunk to
by more than 71% to roughly $6 billion (2.6% of total) in both the 2010-2011 and 2011-2012
school years (latest data available; see Exhibit 202). That was despite (or potentially the cause
of) an overall 54% increase in other types of financial aid over the same period.

Exhibit 202. Private Loans in Dollars and Percentage of Financial


Aid (1998-1999 to 2011-2012 School Years)
$25

Private sector loans

14%

As % of all aid

($ Bilions)

10%
15

8%

10

6%
4%

As % of total

12%

20

2%

0%
199899

19992000

200001

200102

200203

200304

200405

200506

200607

200708

200809

200910

201011

201112

Source: BMO Capital Markets and College Boards Trends in Student Aid.

For-profit sector
more active users
of private loans

In an April 2010 report entitled Who Borrows Most?, the College Board provided data on
non-federal loans (i.e., private and institutional loans) by school type for the 2007-2008
school year (latest data available). While we were unable to differentiate between private and
institutional loans, a greater proportion of students at for-profit schools used the non-federal
loans and tended to borrow more than all their peers except those at private not-for-profit
four-year institutions (see Exhibit 203). We believe this makes sense, as for-profit education
tends to be more expensive than schooling at public not-for-profit institutions.

Exhibit 203. Undergraduate Students: Nonfederal Loan Usage and


Average Amount by School Type (2007-2008 School Year)
Institution Type
All institutions
Public not-for-profit
Private not-for-profit
Private for-profit

% using nonfederal loans


Associate's Bachelor's
Degree
Degree
Certificate
34%
22%
33%
12%
15%
28%
N.A.
N.A.
42%
51%
60%
65%

Average per borrower


Associate's Bachelor's
Certificate
Degree
Degree
$5,900
$7,000
$12,800
4,500
5,800
9,800
N.A.
N.A.
16,900
6,000
8,400
11,300

N.A. Not Available Source: BMO Capital Markets and The College Board.

A member of BMO

Financial Group

181

September 2013

Postsecondary Education

Percentage
exposure had
been increasing

BMO Capital Markets

Private loan exposure has increased across all school types, but most significantly for students
at for-profit schools. According to a July 2009 report by Education Sector, the percentage of
students at for-profit schools using private loans increased to 43.1% in the 2007-2008 school
year from only 1.5% in the 1992-1993 school year (see Exhibit 204). The percentage data
differs from that provided from the College Board in the prior exhibit.

Exhibit 204. Percentage of Students With Private Student Loans


(1992-1993 to 2007-2008 School Years)
1992-93

% Receiving Private Student Loans

50%

1995-96

1999-00

2003-04

2007-08
43.1%

45%
40%
35%
27.8%

30%
25%
20%

15.2%

15%
10%
5%

6.5%
0.9%

1.1%

0.3%

1.5%

0%
Public 4-year

Private not-for-profit 4year

Public 2-year

Private for-profit

Source: BMO Capital Markets and Education Sector.

Private lenders
reducing their
student loan
exposure

However, that trend has reversed. Owing to a combination of pressures from the credit
crunch and the reduction in profitability and increase in risk in Title IV programs following
the passage of the College Cost Reduction and Access Act (H.R. 2669), which became
effective on October 1, 2007, a number of private lenders have reduced their student loan
exposure. According to finaid.org, through April 2010, over 50 lenders had suspended private
student loans, including such large providers as Sallie Mae (recourse loans only) and Bank of
America (BAC). There are roughly 30 lenders providing private student loans, down from
about 60 before the market crash of 2008, according to www.finaid.org, although we believe
this list had expanded somewhat recently.
We believe the impact of this reduction has been felt more by students at for-profit
institutions, as they tended to have a greater portion of students considered subprime
lenders, typically those with lower FICO scores. The ceiling to be considered subprime
had moved up in recent years, with anecdotal evidence showing a requirement of a score of
nearly 700 (sometimes higher) to qualify for a private student loan.

Companies with
more lowerincome students
and relatively
expensive
programs have
had more private
lending exposure

A member of BMO

Although most companies disclose the percentage of their annual revenues obtained from
Title IV funding, few have historically disclosed the percentage of funds from private thirdparty lenders or direct loans by the institutions themselves, although, we believe these loans
are somewhat common throughout the industry. Companies with historically relatively high
private lending exposure (e.g., CECO, EDMC) tend to skew toward relatively lower-income
students and fairly expensive programs, which necessitated private lending to fill this funding
gap. Similar to the rest of the industry, private lending exposure has been narrowing (see
Exhibit 205).

Financial Group

182

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 205. Private Lending Exposure for Select For-Profit Providers (FY2002-FY2012)
Company
American Public Education
Apollo Group
Bridgepoint Education (Ashford Univ.)
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI
WPO

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

2002
N.A.
N.A.
N.A.
25.0%
N.A.
N.A.
N.A.
8%
N.A.
14%
N.A.
N.A.
N.A.
N.A.
N.A.
14%

2003
N.A.
N.A.
N.A.
24.0%
N.A.
N.A.
N.A.
9%
N.A.
20%
N.A.
N.A.
N.A.
N.A.
N.A.
20%

2004
N.A.
N.A.
N.A.
24.3%
N.A.
N.A.
N.A.
11%
N.A.
25%
N.A.
N.A.
N.A.
N.A.
N.A.
24%

2005
N.A.
N.A.
N.A.
23.2%
N.A.
N.A.
N.A.
15%
N.A.
30%
N.A.
N.A.
N.A.
N.A.
N.A.
23%

2006
N.A.
N.A.
N.A.
21.8%
N.A.
N.A.
N.A.
19%
N.A.
34%
N.A.
N.A.
N.A.
N.A.
N.A.
22%

2008
2007
1%
1%
5%
3%
1.9%
1.2%
17.6% 10.0%
13%
11%
N.A.
<1%
5%
6%
23% 18.9%
5.1%
2.9%
29%
8%
7%
4%
N.A.
N.A.
3%
3%
10.5% 11-12%
9%
5%
7%
5%

2009
N.A.
N.A.
N.A.
2.1%
N.A.
N.A.
5%
10.9%
0.9%
5%
3%
N.A.
3%
N.A.
1%
3%

2010
N.A.
N.A.
N.A.
N.A.
N.A.
<1%
1%
3.7%
<1%
12%
1%
N.A.
N.A.
N.A.
1%
1%

2011
N.A.
N.A.
N.A.
N.A.
N.A.
1%
1%
2.6%
<1%
7%
1%
N.A.
N.A.
N.A.
N.A.
1%

2012
N.A.
N.A.
N.A.
N.A.
11.7%
1%
N.A.
2.3%
1%
1%
N.A.
N.A.
N.A.
N.A.
1%
1%

Note: Reflects private loans as a percentage of total revenues. All data reflects school years. N.A. Not Available.
Source: BMO Capital Markets and company reports.

As more private lending restrictions were added, many of these for-profit providers have been
forced to replace those loans with their own institutional loans, i.e., using their own balance
sheet to provide loans. While disclosures around these programs are not always consistent,
and companies tend to start and stop programs frequently, we have attempted to provide as
much recent data as possible (see Exhibit 206).

Examples of
internal lending
programs

Exhibit 206. Internal Lending Programs of Select For-Profit Providers


Company
Career Education

Ticker
CECO

Internal Loan/Payment Plan


Extended payment program. Discontinued in 2011.

Current Status/Amounts Outstanding


$6m non-current related receivables as of 2Q13.

Corinthian Colleges

COCO

ASFG agrees to purchase up to $775m in student loans


through June 2015.

$192.7m loans funded in FY2013.

Education Management

EDMC

Not significant in 2013, expect to increase in 2014.

ITT Educational Services

ESI

Lincoln Educational Services

LINC

In 1Q13, began new program to purchase loans from


private lender.
Prior program (PEAKS) ended July 2011 and company
could not find a new lender.
Loans directly to students

Universal Technical Institute

UTI

New loan program began June 29, 2013 (prior one


expired). Tuition revenue only recognized when loans
are repaid.

Issued senior debt of $300m for student loans.


$33.4m as of June 30, 2013 ($24.2m excluding
interest).
$42m loans outstanding as of June 30, 2013 (net
of $4.3m collected and $18.8m written off)

Source: BMO Capital Markets and company reports.

A shift from third-party lenders to an internal lending program would likely lead to an increase
in bad debt expense (in dollars and as a percentage of revenues). Some companies such as
DeVry (DV) had already been providing some internal lending prior to the credit crunch and
have, therefore, historically had relatively higher bad debt expense. Many of these companies
that had relied on third-party lenders had some recourse on loans to subprime students. These
discount rates were typically in the 25% range and this recourse was usually recorded as bad
debt expense.
Bad debt expense
increased along
with internal
lending levels

A member of BMO

Most of the companies with internal lending programs have used higher discount rates some
such as COCO at well over 50%. As such, even if the US economy had not entered the Great
Recession, we believe bad debt levels would have increased (we note that COCO records this
expense as net revenues, while most other companies record it as an expense either in the
Instructional Costs and Services or SG&A line).

Financial Group

183

September 2013

Postsecondary Education

BMO Capital Markets

Borrowing in excess of institutional charges. Under current ED guidance, students are


allowed to borrow for living costs, not just tuition and fees, making financial aid administrators
at all types of schools unable to prevent students from graduating with excessive debt. This is a
particular program at for-profit schools where onerous regulations such as 90/10 for the most
part only apply to programs at their schools and penalize these institutions for such excessive
borrowing.
Disproportionate
number of
students at forprofit schools
have excess
debt

In April 2011, noted industry researcher Mark Kantrowitz (when he was at www.finaid.org)
published an analysis that measured what he termed excess debt by institution type. As
shown, for-profit institutions tend to have a larger proportion of students with excess debt
relative to their not-for-profit counterparts across all types of schools (see Exhibit 207). While
the specific reasons were not stated, Kantrowitz shows some correlation between excess debt
and a student dependence on Pell Grants and private loans two areas where students at forprofit schools have disproportionate amounts relative to their percentage of enrollments, as
previously shown.

Exhibit 207. Percentage of Students with Excess Debt by


School Type (2007-2008 School Year)
Type of degree
Public not-for-profit
4-year
2-year
Less than 2-year
Private not-for-profit
4-year
2-year
Less than 2-year
Private for-profit
4-year
2-year
Less than 2-year

Loans > Tuition


& Fees + $2,500
16.5%
26.9%
8.8%
7.8%
16.5%
16.5%
21.3%
11.9%
34.8%
43.5%
31.6%
19.5%

Loans > Tuition


& Fees - Grants
+ $2,500
20.4%
35.5%
9.6%
11.5%
34.8%
35.2%
28.2%
16.0%
47.4%
56.2%
46.0%
29.1%

Source: www.finaid.org.

Shift to borrowerbased academic


year has limited
excess debt but
had some adverse
consequences

Recently a number of for-profit providers have shifted from a term-based to a borrower-basedacademic year (BBAY), such as Grand Canyon Educations (LOPE) Grand Canyon University.
The company noted that while, in some circumstances, this move had significantly reduced the
amount of living expenses a student is eligible to receive, it also caused some students and some
potential students to choose other institutions where more funding was available. In addition,
this new policy had led to some students more frequently taking breaks between classes
(especially during holiday breaks), which has adversely affected revenues.
Under the initial draft Gainful Employment regulations, the debt component of the debt/earnings
ratio was to include all student loan debt, somewhat unfairly punishing the for-profit providers
for this excess debt that is beyond their control. The finalized regulations include only debt
incurred for program tuition and fees.

A member of BMO

Financial Group

184

September 2013

Postsecondary Education

Billions spent
each year

Percentage of
companies
offering tuition
assistance has
been increasing

BMO Capital Markets

Tuition reimbursement/assistance programs. Bersin & Associates estimates that roughly


$16.5 billion was spent by global and US corporations on tuition assistance in 2008 (latest
available), spending roughly $3,769 per employee about three times what it spent for
traditional corporate training. In its updated 2012 study, the cost per participant had increased
24% to just under $5,000 per employee, though the percentage of US organizations that offered
these programs fell from 87% to 71% -- likely in response to the Great Recession and its
aftermath.

According to the Society for Human Resource Management (SHRM), 61% of employers were
offering undergraduate educational assistance and 59% offer graduate educational assistance in
2012. While these percentages, for the most part, had been declining since peaking in 2003 at
72% and 69%, respectively, they have increased from the post-recession 2011 levels of 58% and
54%, respectively (see Exhibit 208).

since postrecession lows

Exhibit 208. Percentage of Companies Providing Educational


Assistance (2003-2013)
2003

80%

2004

2005

2006

2007

2008

Percentage of Companies Offering

72%

2009

2010

2011

2012

2013

69%

70%
61%

59%

60%
50%
40%
30%
20%
10%
0%
Undergraduate Educational Assistance

Graduate Educational Assistance

Source: BMO Capital Markets and Society for Human Resource Management. Note: Prior to 2003,
educational assistance was not separated into graduate and undergraduate.

Tuition assistance
skews more
towards graduate
programs

According to the NCES, in the 2007-2008 school year (latest data available), 8.3% of
undergraduates, and 21.9% of graduates received some form of employer tuition assistance. The
respective average amounts of $2,943 and $5,132 had increased 9% and 14.3% (CAGR) from
the 2003-2004 school year. A large portion of MBA students a subset of graduate students
received such assistance, at somewhat higher amounts than most other graduate programs (see
Exhibit 209).

Exhibit 209. Employer Tuition Assistance: Percentage of Students


Receiving and Amounts (2003-2004 and 2007-2008 School Years)

Undergraduate
Graduate
MBA (subset of Graduate)

2003-2004 School Year


Percentage
Average
Receiving
Amount
8.7%
$2,088
20.5%
3,004
41.5%
4,449

2007-2008 School Year


Percentage
Average CAGR (avg.
Receiving
Amount
amount)
8.3%
$2,943
9.0%
21.9%
5,132
14.3%
39.0%
6,271
9.0%

Source: BMO Capital Markets and National Center of Education Statistics.

A member of BMO

Financial Group

185

September 2013

Postsecondary Education

Low participation
rate

BMO Capital Markets

Even for those companies that offer such benefits, few employees take advantage. A 2007 study
by SHRM found that fewer than 10% of employees at firms with such programs actually
participated. In a 2009 survey by Bersin & Associates, 60% of survey respondents reported
participation rates of just 1% to 7%, while less than a quarter of organizations had 8% or more
of employees participating.
An Eduventures study, released in February 2007, found that workers in the utilities,
manufacturing, and mining industries were the most likely to have employer-provided tuition
assistance, while those in retail, arts, entertainment, and recreation, and accommodations and
food services were least likely to receive tuition assistance. In addition, students in subjects
related to engineering, transportation, or business were the most likely to receive employer
assistance.

APEI/Walmart
deal

Some cyclical
sensitivity

Companies may
be restricting the
types of eligible
programs

A member of BMO

Most companies that provide tuition assistance programs do not necessarily gear their employees
toward specific schools, but rather set minimum requirements, such as regional accreditation. An
interesting model was announced by Walmart (WMT) in June 2010, when they named American
Public Educations (APEI) American Public University its exclusive education provider to its
1.4 million associates (employees) at Walmart and Sams Clubs. This three-year deal (with
renewable one-year terms thereafter) allows these associates to take classes at a 15% discount to
regular tuition prices (APEI provides the discount and hopes this offsets incremental marketing
costs, which should be minimal as Walmart handles that). We believe this is a win/win for both
companies, as it provides a good recruiting and retention tool (part of WalMarts Lifelong
Learning initiatives) and creates a new focused recruiting base for potential APEI students. While
there have been similar transactions in this sector since, none have been of this size.
We believe there is somewhat of a lag between economic cycle trends and the percentage of
companies offering this assistance, as while these programs are more popular as labor markets
tighten (i.e., recruitment and retention benefits), they likely take some time to be implemented.
Anecdotal data show that during the 2001 economic downturn, few companies actually
disbanded these programs, but rather cut the amount of program funding or limited employee
participation either directly or indirectly (e.g., required multiple internal approvals, changed
policy to require employees to pay with reimbursement contingent on minimum grade levels).
There may have been more such actions in the deeper 2007-2009 Great Recession; a January
2009 Challenger, Gray & Christmas, Inc. survey of human resources executives found that
10.8% had eliminated or reduced tuition reimbursement programs.
We have also seen changes regardless of the economic environment. In November 2006, Intel
(INTC) restricted the number of colleges eligible for tuition assistance by restricting it to
business classes at schools accredited by the Association to Advance Collegiate Schools of
Business and engineering classes taken at institutions accredited by ABET, formerly the
Accreditation Board for Engineering and Technology. As such, about 100 colleges and
universities, including several for-profit institutions such as Apollo Groups (APOL) University
of Phoenix and Capella University (CPLA) no longer qualified. An Intel spokeswoman was
quoted that this change was made after finding that employees were attending institutions "that
were not of the highest value to the company," and that many employees left the company after
completing their education because their new degrees did not improve their prospects at Intel.
We believe this was the beginning of a trend where companies focus on the type of programs
eligible for tuition assistance to ensure a better return on these investments, rather than just
having open-ended programs.

Financial Group

186

September 2013

Postsecondary Education

New methods of
financing

BMO Capital Markets

Non-traditional methods of financing are available to help support these tuition assistance
programs. Organizations, such as CAEL, have developed tools that include Lifelong Learning
Accounts (LiLAs) a sort-of 401(k) program where employees use paycheck deductions,
typically matched by their employee, to further their education, which could continue to enhance
the availability of tuition assistance funds. Following in this mold, International Business
Machines (IBM) announced in July 2007 it would begin to offer learning accounts to its
employees, whereby employees would contribute up to $1,000 annually (and IBM would match
up to 50%) into these accounts for which the funds would be used to enhance skills. LiLA
legislation has gained popularity among lawmakers too. In May 2008, the Lifelong Learning
Accounts Act of 2008 (H.R. 6036) was introduced to 1) establish tax-exempt lifelong learning
accounts to pay certain educational expenses, including tuition, fees, books, supplies, and
information technology devices; 2) allow individuals between age 18 and 71 a tax credit for cash
contributions to their lifelong learning accounts; and 3) allow employers a tax credit for
contributions made to the lifelong learning accounts of their employees and for administrative
costs associated with small employer lifelong learning accounts. Unfortunately, this bill expired
before any vote was taken.
For those companies that focus on working adult students, such as Apollo Group (APOL) and
Strayer Education (STRA), corporate and government tuition reimbursement programs are an
important source of revenues. While neither of these companies breaks out the percentage of
revenues from these programs (i.e., many times students get the monies directly from their
employers and then pay the institutions without stating the source, making it difficult to track the
original source of funds), we believe a sizable number of students at these companies receive at
least some form of tuition reimbursement.

Discounts are

Discounting/scholarships. We believe discounting is fairly rampant in the higher education

very common at

sector, as most traditional schools offer some form of scholarships. Industry consultant Noel
Levitz publishes an annual Tuition Discounting Report for its private not-for-profit school
clients. On average, these schools provided discounts of slightly more than 39% of their gross
revenues (includes tuition, fees, room, and board) in the 2012-2013 school year (2012 per
the report). This was the highest percentage since the company began this survey in 1998 (see
Exhibit 210) and was likely driven by the continued fallout after the Great Recession.

not-for-profit
schools;
percentage
increased after
recent downturn

Discounts as % of revenues

Exhibit 210. Private Not-for-Profit Schools Discounts as a


Percentage of Gross Revenues (Fall 1998 Fall 2012)
40%
38%
36%
34%
32%
30%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Note: Shaded area represents recessionary period. Source: BMO Capital Markets and Noel Levitz.

A member of BMO

Financial Group

187

September 2013

Postsecondary Education

BMO Capital Markets

In Exhibit 211, we provide discounting by school type as measured as a percentage of gross


tuition revenue, according to the Delta Cost Projects annual report entitled Trends in College
Spending. As shown, these percentages have increased slightly over the past decade, though a
relatively greater proportion of private institutions offer discounts relative to their public not-forprofit peers. Unfortunately, data were not available for the private for-profit sector.

Private
institutions offer
greater discounts
when compared
to their public
peers

Exhibit 211. Discounts as a Percentage of Gross Revenues by School Type (Fall 1998
Fall 2010)
Public not-for-profit research
Public not-for-profit master's
Public not-for-profit bachelor's
Public community colleges
Private not-for-profit research
Private not-for-profit master's
Private not-for-profit bachelor's

1998
15%
10%
N.A.
11%
24%
23%
35%

1999
16%
10%
N.A.
11%
24%
23%
35%

2000
16%
11%
13%
9%
24%
23%
32%

2002
17%
14%
N.A.
11%
26%
24%
32%

2003
17%
13%
N.A.
10%
25%
24%
32%

2004
17%
11%
N.A.
10%
26%
24%
33%

2005
17%
11%
14%
9%
26%
24%
33%

2007
18%
12%
N.A.
10%
27%
25%
34%

2008
18%
12%
N.A.
11%
27%
26%
34%

2009
18%
12%
15%
11%
29%
26%
35%

2010
18%
12%
15%
10%
30%
27%
36%

Source: BMO Capital Markets and The Delta Cost Project.

While we believe most for-profit companies also offer some discounting, it is likely not nearly
as high as their not-for-profit counterparts. We believe the most common discounts are for
military students; e.g., Capella Educations (CPLA) Capella University offers military students
discounts of 10%-15%. However, many companies have selective promotions (e.g., waiving
application fees) that are periodically put in place and available for all new students.
Over the past few years, however, many for-profit institutions have begun to offer scholarships
as a way of enhancing the value proposition of their offerings, enticing more students to enroll
and retain, and as a way of limiting the debt burden on their students. Examples can be found in
Exhibit 212.

Examples of
scholarships at
for-profit
institutions

Exhibit 212. Examples of Scholarship by Publicly Held Providers


Ticker

Company

Scholarships/Grants

Other Comments

APEI
APOL
BPI

American Public Education


Apollo Group Inc
Bridgepoint Ed Inc

Academic, Other
Continuing Education, Other
Academic (on campus), Military

N.A.
Total discounts were 6% of revenue in FY2012.
Scholarships increased from $80.2 million (11.2% of
revenue) in 2010 to $124.4 million (12.8%) of revenues in
2012

CPLA

Capella Education Company

27% of students received discount in 2012. 11% received


learner success (persistence) grants

CECO
COCO

Career Education Corp


Corinthian Colleges Inc

Persistence-Based, Academic,
Military, Corporate and educational
relationships
Various, Academic
Military, Continuing Education, Other

DV

Devry Inc

Various, Academic

N.A.
Most up to 15% of tuition
Low-$50 million range in FY2013. "Career Catalyst"
scholarship could be up to $20,000 over three years

EDMC

Education Mgmt Corp

Various

5% of net revenues in 2012, 4% in 2011.

LOPE

Grand Canyon Ed Inc

Academic, Religious

Scholarships increased from $55.8 million (14.2% of


revenue) in 2010 to $94.3 million (18.4%) of revenues in
2012

ESI

Itt Educational Services Inc

Military, Academic

LINC
STRA

Lincoln Edl Svcs Corp


Strayer Ed Inc

Need-Based, Other
Academic

UTI

Universal Technical Inst Inc

Need-Based, Academic, Other

Opportunity Scholarship began March 2013, expected to


reduce revenue per student by 4%-6% in 2013.
Need-based up to $3,000.
Strayer University Graduation Fund (SUGF) announced in
2Q13 will award a free class after completing three essentially a 25% discount.
More than $12 million in scholarships awarded per year.

Source: BMO Capital Markets and company reports.

A member of BMO

Financial Group

188

September 2013

Postsecondary Education

At APOL, one of
few public
companies that
discloses
discounting
exposure each

BMO Capital Markets

Most of the publicly held companies do not disclose their discount amounts with the exception
of Apollo Group (APOL), which typically discloses tuition discounts as a percentage of gross
revenues in its public filings. While it has not moved up in a straight line, from FY2002 through
FY2012, the company's use of discounting expanded from 2.2% of gross revenues to 6.1% and
is at 7.4% in FY2013 year-to-date (first three quarters through May 2012), up from 5.9% in the
prior-year period (see Exhibit 213).

quarter; it has

Exhibit 213. Apollo Group: Discounts as Percentage of Gross


Revenues (FY2002-FY2013 YTD)

Discounts ($mil.)

$250

Discounts

8%

As % of gross revenues

7%

200

6%
150
5%
100
4%
50

3%
2%

FY
20
02
FY
20
03
FY
20
04
FY
20
05
FY
20
06
FY
20
07
FY
20
08
FY
20
09
FY
20
10
FY
20
11
FY
20
12

FY
20
12
(th
FY
ru
20
F3
13
Q
)
(th
ru
F3
Q
)

As % of Gross Revs.

been increasing

Source: BMO Capital Markets and company reports.

Price increases

Economic cycles and pricing trends. There appears to be some lag between economic

have historically

cyclicality and pricing trends. That is, the rate of annual tuition increases tends to accelerate
during a downturn and then continues to accelerate for sometime after a recession ends. This
relationship was apparent using College Board tuition data for not-for-profit schools (both
public and private) in the four US recessions prior to the most recent one (see Exhibit 214). We
believe this occurs as other revenue sources (e.g., state and local appropriations, endowment
income) slow during a downturn, forcing these schools to charge higher prices. Interestingly, the
trend in the Great Recession was a bit different -- specifically for public not-for-profit two-year
schools (i.e., community colleges), where prices were relatively flat in the 2008-2009 school
year (the depths of the recession) but increased significantly thereafter.

accelerated into a
recession and
after one,
although the
Great Recession
was a bit different
(at least for public
two-year schools)

A member of BMO

Financial Group

189

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 214. Economic Sensitivity: Not-for-Profit Schools Annual Tuition Increases


Annual Tuition Increase
Private Not-for-Profit Four-Year Schools:
Prior Recessionary Periods
4 Years Prior 3 Years Prior 2 Years Prior
Apr. 1980- Sept. 1980
N.A.
6.6%
9.6%
Oct. 1981 - Mar. 1982
6.6%
9.6%
9.0%
July 1990 - Mar. 1991
8.8%
5.9%
13.6%
Mar. 2001 - Nov. 2001
6.1%
6.7%
5.5%
Average
7.1%
7.2%
9.4%

Year Prior
9.0%
12.2%
8.2%
3.6%
8.2%

Year Of
12.2%
13.7%
7.8%
8.1%
10.5%

Year After 2 Years After 3 Years After 4 Years After


13.7%
12.8%
9.8%
9.1%
12.8%
9.8%
9.1%
10.2%
5.1%
6.5%
5.4%
6.5%
3.9%
4.9%
5.8%
4.7%
8.9%
8.5%
7.5%
7.6%

4 Years Prior 3 Years Prior 2 Years Prior


2004-05
2005-06
2006-07
5.8%
4.7%
6.3%

Year Prior
2007-08
6.4%

Year Of
2008-09
6.0%

Year After 2 Years After 3 Years After 4 Years After


2009-10
2010-11
2011-12
2012-13E
4.4%
3.9%
4.4%
N.A.

Public Not-for-Profit Four-Year Schools:


Prior Recessionary Periods
4 Years Prior 3 Years Prior 2 Years Prior
Apr. 1980- Sept. 1980
N.A.
6.2%
5.0%
Oct. 1981 - Mar. 1982
6.2%
5.0%
7.3%
July 1990 - Mar. 1991
7.3%
5.0%
6.3%
Mar. 2001 - Nov. 2001
4.6%
4.4%
3.5%
Average
6.0%
5.1%
5.5%

Year Prior
7.3%
8.9%
7.5%
4.3%
7.0%

Year Of
8.9%
13.1%
12.5%
7.4%
10.5%

Year After 2 Years After 3 Years After 4 Years After


13.1%
13.4%
11.3%
7.0%
13.4%
11.3%
7.0%
7.3%
10.4%
10.8%
8.6%
6.7%
8.8%
13.3%
10.4%
7.1%
11.4%
12.2%
9.3%
7.0%

4 Years Prior 3 Years Prior 2 Years Prior


2004-05
2005-06
2006-07
10.4%
7.1%
5.7%

Year Prior
2007-08
6.6%

Year Of
2008-09
6.6%

Year After 2 Years After 3 Years After 4 Years After


2009-10
2010-11
2011-12
2012-13E
6.5%
8.3%
8.4%
N.A.

Public Not-for-Profit Two-Year Schools:


Prior Recessionary Periods
4 Years Prior 3 Years Prior 2 Years Prior
Apr. 1980- Sept. 1980
N.A.
8.1%
6.9%
Oct. 1981 - Mar. 1982
8.1%
6.9%
8.6%
July 1990 - Mar. 1991
3.0%
12.0%
8.1%
Mar. 2001 - Nov. 2001
7.0%
-0.8%
6.1%
Average
6.0%
6.5%
7.4%

Year Prior
8.6%
10.1%
5.3%
-0.4%
5.9%

Year Of
10.1%
11.0%
7.7%
-2.1%
6.7%

Year After 2 Years After 3 Years After 4 Years After


11.0%
9.0%
11.6%
10.6%
9.0%
11.6%
10.6%
9.8%
29.2%
-4.7%
11.6%
5.2%
4.1%
14.0%
8.9%
5.0%
13.3%
7.5%
10.7%
7.6%

4 Years Prior 3 Years Prior 2 Years Prior


2004-05
2005-06
2006-07
8.9%
5.0%
3.8%

Year Prior
2007-08
4.2%

Year Of
2008-09
0.5%

Year After 2 Years After 3 Years After 4 Years After


2009-10
2010-11
2011-12
2012-13E
7.3%
6.6%
9.2%
N.A.

Most Recent Recession


Dec. 2007 - June 2009

Most Recent Recession


Dec. 2007 - June 2009

Most Recent Recession


Dec. 2007 - June 2009

Source: BMO Capital Markets, College Boards Trends in College Pricing, and National Bureau of Economic Research. N.A. Not Available.

Public not-forprofit schools


shift funding
increases to
students in bad
economies

Under normal circumstances, as public not-for-profit schools tend to rely on state and local tax
revenues for more than 30% of their funding (in the 2009-2010 school year per the NCES; latest
data available), we believe the level of this funding may be the key driver for tuition increases at
these schools, i.e., when state and local budgets are under pressure, public not-for-profit schools
tend to impose sizable tuition increases. This can be seen by comparing annual changes in
public not-for-profit tuition with annual changes in state appropriations to higher education.
While annual data were only available for the prior decade, there appears to initially have been
an inverse correlation between these two data streams. Prior to the Great Recession, the highest
annual increase in public college tuition (13.7% in the 2003-2004 school year) came during the
same year as the sharpest drop in state appropriations (down 2.6%), while the lowest annual
increase in public college tuition (4.8% in the 2006-2007 school year) came just after the year
when state appropriations increased the most (11.4% in the 2005-2006 school year). The trend
has been fairly similar during and after the Great Recession with tuition increases accelerating
while state appropriations for the most part have fallen (see Exhibit 215).

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190

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 215. Annual Change in State Appropriations and Public


Not-For-Profit College Tuition (2000-2001 to 2011-2012 School
Years)
Annual change in public college tuition

Annual change in state appropriations


12%
9%

12%
6%
8%

3%
0%

4%

y/y % change:
appropriations

y/y % change: tuition

16%

-3%
0%

-6%
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Note: Shaded area represents recessionary period. State appropriations exclude stimulus funding in the
2008-2009 and 2009-2010 school years. Source: BMO Capital Markets, College Boards Trends in College
Pricing, and Illinois State Universitys Center for the Study of Education Policy.

Tuition increases
at public not-forprofits historically
tend to lag
increases in state
unemployment
rates

In a 2003 paper, Dr. Sarah Turner at the University of Virginia showed that the rate of tuition
increases at public not-for-profit institutions is somewhat counter-cyclical, albeit with a lag. A
regression analysis of state unemployment rates, which most economists agree are later-cycle
data, showed that a 10% increase in state unemployment rates was likely to lead to an 11%
reduction in state appropriations to higher education and a 13% increase in state tuition levels on
average. The opposite should hold true as well, i.e., a decrease in state unemployment rates
should lead to greater state appropriations to higher education and likely a lower rate of
increase in state tuition levels (we do not expect tuition levels to decline).
As it is likely that state unemployment rates continue to decrease in the near term, we envision
state appropriations for higher education to increase, though it will likely occur on a lagged
basis (fall 2012 perhaps?). Should that occur, we could see the rate of tuition increases at public
not-for-profit institutions slow.

Endowments
shrunk in the
most recent
recession

A member of BMO

While the for-profit sector competes against the private not-for-profit sector to a lesser degree,
the Great Recession affected funding for private not-for-profit institutions as well. As shown in
Exhibit 216, the average endowments at higher education institutions (mostly private not-forprofit) fell 3% and 18.7% in the years ended June 30, 2008 and 2009, respectively per the
National Association of College and University Business Officers (NACUBO) annual survey
the latter being the worst result in the surveys history. While the sector returned to positive
returns in the two years thereafter, some endowment funds remain below their prior peaks.

Financial Group

191

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 216. Annual Change in Higher Education Endowments


(Fiscal Years 2000-2011)
25%

20.7%

20% 17.3%
15%

18.0%
11.1%

13.0%

9.3%

Annual return

10%

19.2%

17.2%

15.1%

11.9%

10.7%

3.0%

5%
0%
-5%
-10%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-3.0%
-3.8%
-6.0%

-15%
-20%

-18.7%

-25%

Note: Reflects years ended June 30. Shaded are represents recessionary period. Source: BMO Capital
Markets and National Association of College and University Business Officers (NACUBO).

There is limited historical data for tuition changes at for-profit schools so it is difficult to
ascertain any trends. Nevertheless, we have provided a similar analysis for the for-profit schools
in Exhibit 217 using NCES data. Trends varied across school types during and after the Great
Recession, with the largest annual increases at two-year schools.

Exhibit 217. Economic Sensitivity: For-Profit Schools Annual Tuition Increases


4 Years Prior 3 Years Prior 2 Years Prior

Annual Tuition Increase


Year Prior
Year Of
Year After 2 Years After 3 Years After 4 Years After

Four-Year Schools
Mar. 2001 - Nov. 2001
Dec. 2007 - June 2009

7.9%
8.5%

N.A.
4.5%

N.A.
3.6%

N.A.
5.5%

1.9%
3.5%

5.8%
1.6%

5.2%
0.3%

8.5%
N.A.

4.5%
N.A.

Two-Year Schools
Mar. 2001 - Nov. 2001
Dec. 2007 - June 2009

6.3%
2.5%

N.A.
2.1%

N.A.
0.6%

N.A.
6.9%

6.7%
5.1%

6.4%
10.4%

6.3%
1.9%

2.5%
N.A.

2.1%
N.A.

N.A.
N.A.

N.A.
8.1%

N.A.
4.9%

N.A.
10.4%

N.A.
0.9%

N.A.
4.0%

N.A.
4.8%

N.A.
N.A.

8.1%
N.A.

Less Than Two-Year Schools


Mar. 2001 - Nov. 2001
Dec. 2007 - June 2009

Source: BMO Capital Markets, National Center for Education Statistics, and National Bureau of Economic Research. N.A. Not Available.

Pricing
umbrella has
likely been shut

Even should tuition increases accelerate at public institutions, we believe the pricing umbrella
that many of the for-profit providers have claimed they have (i.e., ability to raise tuition annually
by roughly 4%-6%) has closed. Indeed, while price cuts are still rare, many schools are
reducing costs to students through such methods as providing scholarships or changing course
lengths. While some companies most notoriously Apollo Group (APOL) had historically
raised prices at certain programs based on changes in Title IV limits, they have become more
sensitive to public scrutiny and, as such, we believe policies such as these are a thing of the past.
In addition, the gainful employment regulations may actually force some providers to cut tuition
levels to comply (see details later in this section).
A listing of key tuition and fee metrics can be found in Exhibit 218.

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192

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 218. Key Tuition and Fees Metrics to Watch


Term

Definition

Postsecondary Norms

For-Profit Norms

Average annual
tuition and fees (1)

Measures the amount it costs for


students to attend postsecondary
institution, excluding ancillary
costs (e.g., room and board)

Public Less Than 2-Year Insts.:


In-district:
$6,504
In-state:
$6,505
Out-of-state:
$6,683

Less Than 2-Year Insts.: $13,536

Private Less Than 2-Year Insts.:


$10,860
2-Year Institutions:

$14,618

4-Year Institutions:

$15,728

Public 2-Year Institutions:


In-district:
$2,710
In-state:
$3,162
Out-of-state:
$6,531
Private 2-Year Insts.:

$12,027

Public 4-Year Institutions:


In-district:
$6,767
In-state:
$6,770
Out-of-state:
$15,767
Private 4-Year Insts.:

Average annual
increase in tuition
and fees (2)

$22,348

Annual change in tuition and fees Public Less Than 2-Year Institutions: Less Than 2-Year Institutions:
In-district:
6.8%
N.A.
In-state:
6.6%
Out-of-state:
5.8%
Private Less Than 2-Year
Institutions:
N.A.
Public 2-Year Institutions:
In-district:
6.0%
In-state:
5.8%
Out-of-state:
4.9%

2-Year Institutions:

6.2%

4-Year Institutions:

6.0%

Private 2-Year Institutions: 7.9%


Public 4-Year Institutions:
In-district:
7.0%
In-state:
7.0%
Out-of-state:
6.2%
Private 4-Year Institutions: 6.8%
N.A. Not Available. Sources:
(1) US Department of Education NCES Report 2011-250, Postsecondary Institutions in the United States: fall 2010; data represents average
charges for the 2010-2011 school year.
(2) Data represents average annual change from 1995-1996 to 2010-2011 school years. 1995-1996 data from US Department of Education NCES
Report 2002-156, Postsecondary Institutions in the United States: fall 2000.

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September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 218. Key Tuition and Fees Metrics to Watch (continued)


Term

Definition

Measures the entire amount it


Average annual
price of attendance costs for students to attend
postsecondary institution,
(1)
including tuition and fees, room
and board, books and supplies
and others

Postsecondary Norms

For-Profit Norms

Less Than 2-Year Institutions:


On-campus: $22,870 (private)
Off-campus (w/o family):
$16,264 (public in-district);
$16,265 (public in-state);
$16,442 (public out-of-state);
$23,462 (private)
Off-campus (w/ family):
$10,721 (public in-district);
$10,723 (public in-state);
$10,900 (public out-of-state);
$15,776 (private)

Less Than 2-Year Insts.:


On-campus: N.A.

2-Year Institutions:
On-campus:
$12,423 (public in-district);
$12,664 (public in-state);
$15,072 (public out-of-state);
$25,125 (private)
Off-campus (w/o family):
$15,130 (public in-district);
$15,558 (public in-state);
$18,949 (public out-of-state);
$25,729 (private)
Off-campus (w/ family):
$7,812 (public in-district);
$8,270 (public in-state);
$11,631 (public out-of-state);
$16,963 (private)

2-Year Institutions:
On-campus: $28,842

4-Year Institutions:
On-campus:
$19,476 (public in-district);
$19,478 (public in-state);
$28,924 (public out-of-state);
$35,675 (private)
Off-campus (w/o family):
$20,454 (public in-district);
$20,457 (public in-state);
$29,386 (public out-of-state);
$33,366 (private)
Off-campus (w/ family):
$11,780 (public in-district);
$11,784 (public in-state);
$20,712 (public out-of-state);
$24,991 (private)

4-Year Institutions:

Off-campus (w/o family):


$26,097

Off-campus (w/ family):


$17,490

Off-campus (w/o family):


$27,998

Off-campus (w/o family):


$19,970

On-campus: $34,922

Off-campus (w/o family):


$31,002

Off-campus (w/o family):


$22,211

Sources:
(1) US Department of Education NCES Report 2011-250, Postsecondary Institutions in the United States: fall 2010; data represents average
charges for the 2010-2011 school year.
(2) Data represents average annual change from 1995-1996 to 2010-2011 school years. 1995-1996 data from US Department of Education NCES
Report 2002-156, Postsecondary Institutions in the United States: fall 2000.

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194

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Postsecondary Education

BMO Capital Markets

Postsecondary Schools EBITDA, Operating Income, and Margin


Trends
A summary of historical EBITDA and EBITDA margins, as well as operating income and
operating margins are found in Exhibits 219 and 220, respectively. We note that margins vary
across the spectrum, but that companies with a larger component of online enrollment
(i.e., Apollo Group, Strayer Education) typically have higher margins since that delivery
system is typically more profitable. In addition, there are some scale benefits, with some of
the larger providers (i.e., ITT Educational Services) also having relatively higher margins.

Margins can vary


by school type
and size

Exhibit 219. EBITDA and Margins for Select For-Profit Providers (FY2003-FY2013 YTD) ($ in mn)
EBITDA - FISCAL YEAR
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
Total

Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI
WPO

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

EBITDA MARGINS - FISCAL YEAR


Company
Ticker
American Public Education
APEI
Apollo Group
APOL
Bridgepoint Education
BPI
Career Education
CECO
Corinthian Colleges
COCO
Capella Education
CPLA
DeVry
DV
Education Management
EDMC
Grand Canyon Education
LOPE
ITT Educational Services
ESI
Lincoln Educational Services LINC
National Amer. Univ. Holdings NAUH
Strayer Education
STRA
Universal Technical Institute
UTI
Washington Post
WPO
Median

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
$2.1
$4.2
$4.7
$8.3
$18.5
$31.6
$47.3
$59.3
$75.3
427.6
605.0
760.1
765.3
750.8
882.8
1,315.0
1,584.6
1,421.2
(1.9)
(4.9)
(7.3)
(4.1)
5.2
35.9
134.2
232.9
297.1
N.A.
348.8
452.5
326.8
213.0
189.2
290.8
406.1
322.2
117.2
180.9
208.1
114.9
81.5
107.0
173.7
301.5
228.6
8.2
15.3
21.3
30.2
43.1
56.6
82.1
117.2
112.3
128.1
144.8
100.7
116.3
137.2
211.7
301.7
483.3
573.0
137.7
188.3
229.1
293.2
318.5
368.3
431.1
593.7
661.5
N.A.
(13.5)
(0.9)
9.1
11.7
24.8
64.5
85.8
107.4
94.5
119.5
165.5
184.6
247.1
357.3
528.8
647.9
552.0
27.4
39.2
49.5
46.5
43.5
56.7
116.4
157.8
79.1
N.A.
N.A.
N.A.
N.A.
(0.5)
2.2
7.7
19.2
19.4
55.5
70.9
87.0
95.5
116.3
148.7
197.2
245.1
213.9
42.6
55.4
61.9
54.9
42.5
28.5
36.7
67.6
70.6
106.6
97.3
127.0
155.5
207.5
315.1
449.4
197.4
66.4
$1,105.3 $1,860.4 $2,229.5 $2,168.5 $2,184.0 $2,708.9 $4,042.3 $5,451.4 $4,931.1

FY2003
11.6%
31.9%
-256.8%
N.A.
22.9%
10.1%
18.8%
21.5%
N.A.
18.1%
14.6%
N.A.
37.7%
21.7%
18.0%
18.5%

FY2004
18.3%
33.6%
-395.5%
23.7%
23.3%
13.0%
18.4%
22.1%
-52.7%
19.3%
15.8%
N.A.
38.7%
21.7%
19.0%
19.2%

FY2005
16.8%
33.8%
-92.1%
24.7%
22.4%
14.3%
12.9%
22.5%
-1.7%
24.1%
17.2%
N.A.
39.4%
19.9%
13.5%
18.6%

FY2006
20.8%
30.9%
-14.2%
18.3%
12.7%
16.8%
13.9%
25.1%
12.6%
24.4%
15.0%
N.A.
36.2%
15.8%
14.8%
16.3%

FY2007
26.8%
27.6%
6.1%
12.8%
8.9%
19.1%
14.7%
23.4%
11.8%
28.4%
13.3%
-1.1%
36.6%
12.0%
16.7%
14.7%

FY2008
29.5%
28.2%
16.4%
11.4%
10.0%
20.8%
19.4%
21.9%
15.4%
35.2%
15.0%
4.5%
37.5%
8.3%
17.9%
17.9%

FY2009
31.8%
33.3%
29.5%
15.9%
14.7%
24.5%
20.6%
21.4%
24.6%
40.1%
21.1%
12.2%
38.5%
10.0%
20.5%
21.4%

FY2010
29.9%
32.2%
32.7%
19.4%
18.6%
27.5%
25.2%
23.7%
22.2%
40.6%
24.7%
21.4%
38.5%
15.5%
23.5%
24.7%

FY2011
28.9%
30.0%
31.8%
17.1%
13.1%
26.1%
26.3%
22.9%
25.2%
36.8%
15.6%
18.5%
34.1%
15.6%
14.1%
25.2%

FY2012
$83.8
993.5
237.4
16.8
140.9
93.5
418.4
510.2
149.1
300.4
25.2
13.5
143.0
39.5
37.9
$3,203.2

FY2012
26.7%
23.4%
24.5%
1.1%
8.9%
22.2%
20.1%
18.5%
29.2%
23.3%
6.2%
11.8%
25.5%
9.5%
3.3%
20.1%

'03-12
CAGR
50.9%
9.8%
N.A.
N.A.
2.1%
31.0%
14.1%
15.7%
N.A.
13.7%
-0.9%
N.A.
11.1%
-0.8%
-6.0%
11.1%

'07-12
CAGR
35.2%
5.8%
114.6%
-39.8%
11.6%
16.7%
25.0%
9.9%
66.4%
4.0%
-10.4%
N.A.
4.2%
-1.5%
-24.6%
7.8%

YTD
YTD
FY2012
FY2013
$37.2
$43.9
830.5
662.8
145.1
83.1
55.4
14.8
140.9
126.3
52.3
48.8
418.4
347.5
510.2
376.3
66.7
84.7
201.9
107.9
0.4
(7.6)
13.5
15.8
94.6
73.8
31.0
22.7
38.2
51.0
$2,636.4 $2,051.9
YTD
FY2012
24.7%
25.5%
28.6%
7.0%
8.9%
24.3%
20.1%
18.5%
28.2%
30.1%
0.2%
11.8%
32.0%
9.9%
6.4%
20.1%

YTD '12-13
% chg.
18.2%
-20.2%
-42.7%
-73.3%
-10.4%
-6.7%
-16.9%
-26.3%
27.0%
-46.5%
-1877.3%
16.6%
-21.9%
-26.8%
33.3%
-20.2%

YTD
FY2013
26.7%
23.4%
19.8%
2.3%
7.9%
23.4%
17.6%
15.1%
29.9%
19.7%
-4.3%
12.2%
27.4%
8.0%
9.4%
17.6%

Note: Data represent fiscal years. Data used for Career Education and Corinthian Colleges exclude discontinued operations where available. We
have removed stock-based compensation costs where disclosed. N.A. Not Available.
Source: BMO Capital Markets and company reports.

A member of BMO

Financial Group

195

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 220. Operating Income and Margins for Select For-Profit Providers (FY2003-FY2013 YTD)
OPERATING INCOME - FISCAL YEAR
Company
Ticker
American Public Education
APEI
Apollo Group
APOL
Bridgepoint Education
BPI
Career Education
CECO
Corinthian Colleges
COCO
Capella Education
CPLA
DeVry
DV
Education Management
EDMC
Grand Canyon Education
LOPE
ITT Educational Services
ESI
Lincoln Educational Services LINC
National Amer. Univ. Holdings NAUH
Strayer Education
STRA
Universal Technical Institute
UTI
Washington Post
WPO
Total

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
$1.8
$3.6
$3.4
$6.4
$15.7
$27.4
$42.1
$52.8
$66.0
$72.6
387.3
547.4
714.5
698.0
686.0
820.9
1,234.5
1,437.6
1,262.2
815.3
(1.9)
(5.0)
(7.8)
(4.8)
4.0
35.0
128.3
224.4
284.3
220.0
N.A.
291.3
387.2
252.6
139.5
117.6
225.1
312.2
229.2
225.1
103.8
156.3
171.9
75.6
38.4
62.2
109.8
221.4
139.7
59.7
4.1
9.9
14.9
22.0
33.3
44.4
67.6
98.7
88.2
64.3
87.7
89.2
43.1
68.2
93.2
171.8
251.3
421.1
508.4
329.7
92.7
133.0
168.6
223.0
227.9
269.0
318.8
477.9
526.9
364.5
N.A.
(14.6)
(3.3)
1.1
8.1
19.5
56.7
73.0
89.7
125.3
94.5
119.5
165.5
184.6
247.1
335.1
503.9
621.1
524.1
271.1
17.5
28.8
36.4
31.6
27.7
38.8
92.1
131.5
50.7
8.0
N.A.
N.A.
N.A.
N.A.
(2.2)
0.0
5.4
16.6
14.4
5.4
51.1
65.5
80.3
88.4
107.8
138.0
183.2
227.8
192.4
119.1
36.2
50.1
55.8
46.6
34.7
16.0
23.3
52.4
55.1
22.4
93.4
77.3
100.7
125.6
173.4
277.3
406.3
149.1
166.4
58.4
$933.2 $1,568.4 $1,907.9 $1,793.9 $1,787.0 $2,269.2 $3,519.4 $4,774.9 $4,180.4 $2,868.8

OPERATING MARGINS - FISCAL YEAR


Company
Ticker
American Public Education
APEI
Apollo Group
APOL
Bridgepoint Education
BPI
Career Education
CECO
Corinthian Colleges
COCO
Capella Education
CPLA
DeVry
DV
Education Management
EDMC
Grand Canyon Education
LOPE
ITT Educational Services
ESI
Lincoln Educational Services LINC
National Amer. Univ. Holdings NAUH
Strayer Education
STRA
Universal Technical Institute
UTI
Washington Post
WPO
Median

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

FY2003
10.4%
28.9%
-259.9%
N.A.
20.3%
5.0%
12.9%
14.5%
N.A.
18.1%
9.3%
N.A.
34.8%
18.4%
15.9%
15.2%

FY2004
15.4%
30.4%
-399.3%
19.8%
20.2%
8.4%
11.4%
15.6%
-57.1%
19.3%
11.6%
N.A.
35.7%
19.6%
16.7%
16.1%

FY2005
12.1%
31.7%
-98.3%
21.1%
18.5%
10.0%
5.5%
16.5%
-6.3%
24.1%
12.7%
N.A.
36.4%
17.9%
10.7%
14.6%

FY2006
15.9%
28.2%
-16.8%
14.1%
8.3%
12.2%
8.1%
19.1%
1.5%
24.4%
10.2%
N.A.
33.5%
13.4%
11.8%
12.8%

FY2007
22.8%
25.2%
4.6%
8.4%
4.2%
14.7%
10.0%
16.7%
8.2%
28.4%
8.5%
-4.9%
33.9%
9.8%
13.5%
10.0%

FY2008
25.5%
26.2%
16.0%
7.1%
5.8%
16.3%
15.7%
16.0%
12.1%
33.0%
10.3%
0.0%
34.8%
4.7%
14.9%
15.7%

FY2009
28.2%
31.2%
28.2%
12.3%
9.3%
20.2%
17.2%
15.8%
21.7%
38.2%
16.7%
8.6%
35.8%
6.4%
18.0%
18.0%

FY2010
26.7%
29.2%
31.5%
14.9%
13.7%
23.2%
22.0%
19.1%
18.9%
38.9%
20.6%
18.5%
35.8%
12.0%
21.2%
21.2%

FY2011
25.4%
26.7%
30.5%
12.2%
8.0%
20.5%
23.3%
18.2%
21.0%
34.9%
10.0%
13.7%
30.7%
12.2%
10.6%
20.5%

FY2012
23.2%
19.2%
22.7%
15.2%
3.8%
15.2%
15.8%
13.2%
24.5%
21.1%
2.0%
4.7%
21.2%
5.4%
14.5%
15.2%

'03-12
CAGR
50.4%
8.6%
N.A.
N.A.
-6.0%
35.9%
15.8%
16.4%
N.A.
12.4%
-8.3%
N.A.
9.8%
-5.2%
12.3%
12.3%

'07-12
CAGR
35.8%
3.5%
N.M.
10.0%
9.2%
14.0%
28.8%
9.8%
N.M.
1.9%
-22.0%
N.A.
2.0%
-8.3%
5.8%
7.5%

YTD
YTD
FY2012
FY2013
$31.8
$37.4
697.0
539.2
136.8
72.8
26.3
(77.5)
59.7
55.1
37.9
35.2
329.7
254.3
364.5
233.7
56.7
72.6
186.7
93.3
(3.1)
(16.1)
5.2
10.0
82.9
61.4
17.2
9.0
14.8
27.6
$2,044.2 $1,408.1
YTD
FY2012
21.1%
21.4%
27.0%
3.3%
3.8%
17.6%
15.8%
13.2%
24.0%
27.8%
-1.6%
4.5%
28.0%
5.5%
2.5%
15.8%

YTD '12-13
% chg.
17.6%
-22.6%
-46.8%
-394.3%
-7.7%
-7.1%
-22.9%
-35.9%
28.2%
-50.0%
419.8%
91.7%
-25.9%
-48.0%
86.6%
-22.6%

YTD
FY2013
22.7%
19.0%
17.3%
-12.2%
3.4%
16.9%
12.9%
9.4%
25.6%
17.0%
-9.2%
7.7%
22.8%
3.2%
5.1%
12.9%

Note: Data represent fiscal years. Data used for Career Education, Corinthian Colleges and Lincoln Educational Services excludes discontinued
operations where available. We have removed stock-based compensation costs and one-time items where disclosed. N.A. Not Available.
Source: BMO Capital Markets and company reports.

For-profits are
more profitable
than their not-forprofit peers (not a
surprising

We have attempted to create a common size income statement on a per FTE student basis
using ED data. As shown in Exhibit 221, for-profit schools are more profitable than their
public not-for-profit peers, when measured on a percentage basis likely not a surprising
conclusion to anyone. Private not-for-profits were relatively more profitable in the 20102011 school year owing to strong endowment returns that year.

conclusion)

A member of BMO

Financial Group

196

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 221. Common Size Income Statement on Per FTE Student Basis (2010-2011
School Year)

Revenues
Instructional costs
Gross margins
Non-instructional costs:
Academic and inst. support, and student svces.
Research and public service
Auxiliary enterprises
Net grant aid
Other expenses (includes hospital services)
Total non-instructional costs
Surplus/deficit
As % of revenues
Revenues
Instructional costs
Gross margins
Non-instructional costs:
Academic and inst. support, and student svces.
Research and public service
Auxiliary enterprises
Net grant aid
Other expenses (includes hospital services)
Total non-instructional costs
Surplus/deficit (i.e. operating margins)

Public-Not-For-Profit
Private-Not-For-Profit
Private-For-Profit
Two-year Four-year
All Two-year Four-year
All Two-year Four-year
All
Schools Schools Schools Schools Schools Schools Schools Schools Schools
$17,094
$17,800
$17,632
$14,140
$43,275
$31,627
$19,468
$65,412
$64,924
9,133
7,202
6,177
15,669
15,568
4,529
3,222
3,534
4,280
9,860
34,142
24,425
13,291
49,743
49,356
12,565
14,578
14,098
3,339
180
546
0
4,053
8,118

6,348
6,094
2,912
0
11,943
27,297

5,151
3,741
1,970
0
8,805
19,667

9,036
77
885
40
2,177
12,215

14,495
6,216
4,568
244
6,902
32,425

14,437
6,150
4,529
242
6,853
32,211

7,375
10
375
32
1,933
9,725

9,875
13
282
62
612
10,844

9,279
12
304
55
927
10,577

$1,742

$6,845

$4,758

$1,076

$17,318

$17,145

$2,840

$3,734

$3,521

100.0%
30.3%
69.7%

100.0%
21.1%
78.9%

100.0%
22.8%
77.2%

100.0%
31.7%
68.3%

100.0%
24.0%
76.0%

100.0%
24.0%
76.0%

100.0%
26.5%
73.5%

100.0%
18.1%
81.9%

100.0%
20.0%
80.0%

23.6%
1.3%
3.9%
0.0%
28.7%
57.4%

14.7%
14.1%
6.7%
0.0%
27.6%
63.1%

16.3%
11.8%
6.2%
0.0%
27.8%
62.2%

46.4%
0.4%
4.5%
0.2%
11.2%
62.7%

22.2%
9.5%
7.0%
0.4%
10.6%
49.6%

22.2%
9.5%
7.0%
0.4%
10.6%
49.6%

43.1%
0.1%
2.2%
0.2%
11.3%
56.9%

55.5%
0.1%
1.6%
0.3%
3.4%
60.9%

52.6%
0.1%
1.7%
0.3%
5.3%
60.0%

12.3%

15.8%

15.0%

5.5%

26.5%

26.4%

16.6%

21.0%

20.0%

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

Surprisingly, the
bulk of staff at forprofit institutions
provide
instruction; not so
at their not-forprofit peers

The ED publishes a summary of employees at postsecondary institutions, allowing us to


analyze the staff components at these institutions by primary activity. Surprisingly, the bulk
(nearly 56% in the fall 2011 school year) of staff at for-profit institutions provide instruction
(see Exhibit 222). While the largest component of staff at not-for-profit schools (28.5%)
provide instruction, it is a much smaller component, contrary to the perception that these
schools focus more on this issue when compared with their for-profit peers. We provide data
on a per FTE student basis later in this report.

Exhibit 222. Breakdown of Staff by Institution Type (Fall 2011)

Instruction
Instruction/research/public service
Research
Public service
Executive/administrative/managerial
Other professional (support/service)
Graduate assistants
Technical and paraprofessionals
Clerical and secretarial
Skilled crafts
Service/maintenance
Total

Public
Not-forProfit
28.5%
7.6%
1.8%
0.7%
4.5%
20.5%
11.4%
5.8%
11.0%
1.8%
6.3%
100.0%

Private
Not-forPrivate
Profit For-Profit
28.5%
55.9%
7.3%
0.4%
2.3%
0.0%
0.7%
0.0%
9.3%
10.5%
21.2%
21.6%
6.2%
0.2%
4.4%
1.4%
12.1%
8.4%
1.3%
0.1%
6.8%
1.5%
100.0%
100.0%

Note: Source: BMO Capital Markets and US Department of Education National Center for Education Statistics
(NCES 2012-156).

A member of BMO

Financial Group

197

September 2013

Postsecondary Education

BMO Capital Markets

Postsecondary Schools Instructional Costs Trends


The direct cost of educating students, known as instructional costs or cost of educational
services, is typically one of the largest expenses among for-profit schools. As shown in
Exhibit 223, in FY2011 (latest data available) these costs at for-profit schools represented
roughly 22% of revenues lower percentages than typically incurred by the not-for-profit
sector (29.1% and 24% for public and private not-for-profit schools, respectively) that
potentially show greater efficiency of the for-profit sector, in our view (although some claim
less of a focus by the for-profits on this line item).

For-profits have
relatively lower
instructional
costs than notfor-profits

Exhibit 223. Instructional Costs as a Percentage of Revenues (FY2011)


Public Not-for-Profit

Revenues

Less than
2-Year
100.0%

2-Year
100.0%

4-Year
100.0%

Private Not-for-Profit
All Less than
Schools
2-Year
100.0%
100.0%

2-Year
100.0%

4-Year
100.0%

Private For-Profit
All Less than
Schools
2-Year
100.0%
100.0%

2-Year
100.0%

4-Year
100.0%

All
Schools
100.0%

Instructional costs
Gross margins
Non-instructional costs:
Academic and inst. support, and student svces.
Research and public service
Auxiliary enterprises
Net grant aid
Other expenses (includes hospital services)
Total non-instructional costs

46.8%
53.2%

39.0%
61.0%

26.7%
73.3%

29.1%
70.9%

45.6%
54.4%

38.5%
61.5%

24.0%
76.0%

24.0%
76.0%

32.0%
68.0%

27.1%
72.9%

18.1%
81.9%

22.0%
78.0%

29.3%
0.6%
0.0%
0.0%
10.2%
40.0%

31.2%
1.6%
4.8%
0.0%
17.1%
54.7%

19.2%
17.4%
9.5%
0.0%
18.4%
64.5%

21.5%
14.4%
8.6%
0.0%
18.2%
62.6%

37.8%
1.0%
0.0%
0.1%
11.9%
50.8%

45.0%
0.3%
3.8%
0.2%
10.8%
60.1%

22.2%
9.5%
7.0%
0.4%
10.6%
49.6%

22.3%
9.5%
7.0%
0.4%
10.6%
49.6%

36.6%
0.4%
0.0%
0.2%
12.9%
50.1%

42.9%
0.1%
1.8%
0.2%
11.5%
56.6%

55.5%
0.1%
1.6%
0.3%
3.4%
60.9%

50.2%
0.1%
1.4%
0.3%
6.5%
58.5%

Surplus/deficit (i.e. operating margins)

13.1%

6.3%

8.8%

8.3%

3.6%

1.4%

26.5%

26.4%

18.0%

16.3%

21.0%

19.5%

Note: Academic and institutional support and student services comprise a number of different expenses, including academic support (e.g.,
libraries), institutional support (e.g., administrative), and student services (e.g., admissions). Data follows FASB for private not-for-profit and private
for-profit schools and GASB for public not-for-profit schools. Source: BMO Capital Markets and US Department of Education National Center for
Education Statistics.

Instructional
costs per
student highest
at not-for-profit
research
institutions and
have not
increased much
over the past
decade at most
schools

The American Institutes for Researchs Delta Cost Project tracks the average amount spent in
this line item per FTE student by school type. As shown in Exhibit 224, costs vary by school
type, with private not-for-profit research institutions spending more than most other schools.
When measured in constant dollars, instructional costs did not increase much from the 2000 to
2010 school years, rising the most for students at private not-for-profit research institutions and
actually declining for students at community college. While the Delta Cost Project did not
provide comparable data for the for-profit sector, it is believed that for-profit schools on average
spend less per student on instructional costs per FTE student than their not-for-profit peers.

Exhibit 224. Instructional Costs per FTE Student (20002010


School Years)
School type
Public not-for-profit research institution
Public not-for-profit masters
Public not-for-profit bachelors
Community college
Private not-for-profit research institution
Private not-for-profit masters
Private not-for-profit bachelors

Cost per FTE Student


2000
2010
$9,354
$10,139
6,068
6,355
5,688
6,166
5,381
4,805
16,707
20,032
6,584
7,232
7,603
8,423

CAGR
0.8%
0.5%
0.8%
-1.1%
1.8%
0.9%
1.0%

Note: Data in constant dollars. Source: BMO Capital Markets and Delta Cost Project.

It was difficult to accurately compare the instructional costs across the landscape of the
publicly held for-profit companies, as many companies categorize instructional versus noninstructional differently (i.e., some included occupancy costs as instructional, others include it
as non-instructional). With that caveat, we have made comparisons anyhow.
A member of BMO

Financial Group

198

September 2013

Postsecondary Education

BMO Capital Markets

Instructional costs as a percentage of revenues for the larger publicly held for-profit
postsecondary companies fell to 38% in FY2010 from 48% in FY2003 for the median of this
group. This positive leverage reversed in FY2011 and has continued to date owing to
declining industry revenues; in 2013 year-to-date, the industry median is 46.7% (see
Exhibit 225). We note the wide range of spending on this line item, as companies with more
hands-on programs such as auto tech (e.g., Corinthian Colleges, Universal Technical
Institutes) tend to spend more as a percentage of revenue on instructional costs, and those
with a greater online presence (e.g., Bridgepoint Education, Capella Education) would likely
spend less given that they have lower real-estate related costs.

Most companies
gained some
leverage off this
line item through
FY2010 but the
trend has
reversed since

Exhibit 225. Total Instructional Costs and as a Percentage of Revenues for Select For-Profit
Providers (FY2003-FY2013 YTD)
INSTRUCTIONAL COSTS - FISCAL YEAR
Company
Ticker
FYE
American Public Education
APEI
12
Apollo Group
APOL
8
Bridgepoint Education
BPI
12
Career Education
CECO
12
Corinthian Colleges
COCO
6
Capella Education
CPLA
12
DeVry
DV
6
Education Management
EDMC
6
Grand Canyon Education
LOPE
12
ITT Educational Services
ESI
12
Lincoln Educational Services LINC
12
National Amer. Univ. Holdings NAUH
5
Strayer Education
STRA
12
Universal Technical Institute
UTI
9
Total
AS % OF REVENUES - FISCAL YEAR
Company
Ticker
American Public Education
APEI
Apollo Group
APOL
Bridgepoint Education
BPI
Career Education
CECO
Corinthian Colleges
COCO
Capella Education
CPLA
DeVry
DV
Education Management
EDMC
Grand Canyon Education
LOPE
ITT Educational Services
ESI
Lincoln Educational Services LINC
National Amer. Univ. Holdings NAUH
Strayer Education
STRA
Universal Technical Institute
UTI
Median

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9

FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
$8.6
$10.9
$13.2
$17.9
$29.4
$43.3
$57.9
$74.6
$94.3
$109.4
612.9
781.4
956.6
1,100.2
1,021.4
1,153.9
1,291.8
1,709.5
1,747.1
1,771.3
0.3
1.4
5.5
12.5
29.8
62.8
117.4
185.4
267.8
358.7
316.1
453.6
531.1
553.9
586.0
605.5
606.0
626.3
632.6
568.7
251.4
398.7
497.6
505.8
526.6
622.9
670.0
876.0
1,020.6
953.8
43.8
58.9
71.2
82.9
99.0
119.0
134.3
163.1
172.2
190.6
366.1
420.1
437.3
451.2
485.0
501.3
667.3
822.8
920.9
965.2
417.6
546.1
640.4
636.8
729.9
896.6
1,067.7
1,264.2
1,466.4
1,497.7
N.A.
19.7
30.7
36.0
45.3
61.2
100.8
176.9
191.9
213.6
280.0
298.7
328.3
356.9
358.6
383.8
449.8
537.9
553.1
539.2
78.6
97.4
114.2
129.3
139.5
153.5
211.3
239.7
220.1
194.3
N.A.
N.A.
N.A.
N.A.
10.2
15.1
17.4
20.4
22.6
27.8
53.1
63.9
76.2
90.5
108.2
129.8
165.0
267.2
288.4
296.8
116.7
145.0
172.3
183.0
186.1
193.0
211.7
219.8
209.9
92.4
$2,520.9 $3,267.7 $3,847.4 $4,146.2 $4,351.9 $4,934.7 $5,749.6 $7,175.6 $7,817.7 $7,897.2

FY2003
48.4%
45.8%
47.6%
26.8%
49.1%
53.5%
53.9%
65.2%
N.A.
53.6%
41.9%
N.A.
36.1%
47.0%
48.0%

FY2004
47.3%
43.4%
111.9%
30.8%
51.4%
50.0%
53.5%
64.0%
N.A.
48.4%
39.2%
N.A.
34.9%
45.7%
47.8%

FY2005
47.0%
42.5%
69.1%
29.0%
53.6%
47.7%
56.0%
62.8%
N.A.
47.7%
39.7%
N.A.
34.5%
46.7%
47.4%

FY2006
44.6%
44.4%
43.7%
31.0%
55.7%
46.1%
53.7%
54.4%
49.9%
47.1%
41.6%
N.A.
34.3%
49.6%
46.1%

FY2007
42.5%
37.5%
34.8%
35.1%
57.3%
43.8%
52.0%
53.5%
45.6%
41.2%
42.6%
23.0%
34.0%
51.8%
42.5%

FY2008
40.4%
36.8%
28.8%
36.5%
58.3%
43.7%
45.9%
53.2%
37.9%
37.8%
40.7%
30.6%
32.8%
54.2%
39.2%

FY2009
38.9%
32.7%
25.8%
33.0%
56.5%
40.1%
45.7%
53.1%
38.5%
34.1%
38.2%
27.8%
32.2%
52.6%
38.4%

FY2010
37.6%
34.7%
26.0%
30.0%
54.2%
38.3%
43.0%
50.4%
45.8%
33.7%
37.5%
22.7%
42.0%
48.6%
38.0%

FY2011
36.2%
36.9%
28.7%
33.6%
58.3%
40.0%
42.2%
50.8%
45.0%
36.9%
43.3%
21.5%
46.0%
48.6%
41.1%

FY2012
34.9%
41.6%
37.0%
38.4%
60.3%
45.2%
46.3%
54.2%
41.8%
41.9%
48.0%
24.2%
52.8%
50.8%
43.5%

'03-12
CAGR
32.6%
12.5%
116.2%
6.7%
16.0%
17.8%
11.4%
15.2%
N.A.
7.6%
10.6%
N.A.
21.1%
9.5%
13.9%

'07-13
CAGR
30.1%
11.6%
64.4%
-0.6%
12.6%
14.0%
14.8%
15.5%
36.4%
8.5%
6.9%
N.A.
22.4%
2.8%
14.0%

YTD
YTD
FY2012
FY2013
$53.6
$55.2
1,324.4
1,190.5
167.7
200.8
293.9
254.2
953.8
981.9
94.6
91.1
965.2
967.7
1,497.7
1,435.4
99.4
116.7
275.9
249.0
96.2
91.0
27.8
29.2
147.8
142.8
157.0
148.6
$6,154.9 $5,954.2
YTD
FY2012
35.7%
40.7%
33.1%
36.9%
60.3%
43.9%
46.3%
54.2%
42.0%
41.1%
48.5%
24.2%
50.0%
50.3%
43.0%

YTD '12-13
% chg.
2.9%
-10.1%
19.8%
-13.5%
2.9%
-3.7%
0.3%
-4.2%
17.4%
-9.7%
-5.4%
4.9%
-3.4%
-5.3%
-3.5%

YTD
FY2013
33.5%
42.0%
47.9%
40.0%
61.4%
43.6%
49.0%
57.4%
41.1%
45.5%
51.9%
22.6%
53.0%
52.2%
46.7%

Note: Data represents fiscal years. Data used for Career Education, Corinthian Colleges and Lincoln Educational Services excludes discontinued
operations where available. Restated line item data was not available for Lincoln Educational Services for 2005. We have removed stock-based
compensation costs where disclosed. N.A. Not Available.
Source: BMO Capital Markets and company reports.

Faculty at forprofit institutions


makes less than
their not-for-profit

We believe the largest component of instructional costs is faculty salaries and benefits. On
average, faculty at for-profit institutions make less than their peers at not-for-profit
institutions (see Exhibit 226) because the idea of tenure does not exist and as we believe forprofit faculty skew a bit more toward adjunct positions.

peers

A member of BMO

Financial Group

199

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 226. Average Faculty Compensation (1989-1990, 1999-2000, and


2010-2011 Academic Years)

All institutions
Public not-for-profit:
Doctoral universities
Master's colleges/universities
Other four-year colleges
Two-year colleges
Private not-for-profit:
Doctoral universities
Master's colleges/universities
Other four-year colleges
Two-year colleges
Private for-profit:
Doctoral universities
Master's colleges/universities
Other four-year colleges
Two-year colleges

1989-1990
Fringe
Salary Benefits
$40,100
$8,200

1999-2000
Fringe
Salary Benefits
$55,900 $13,200

2010-2011
Fringe
Salary Benefits
$75,500 $21,700

CAGR: 1989-1990 to
2010-2011
Fringe
Salary Benefits
3.1%
4.7%

44,500
40,400
35,600
34,400

9,600
9,000
7,400
6,100

62,300
52,800
47,900
48,200

14,300
12,500
11,100
11,100

81,600
68,200
61,000
62,300

22,800
21,100
19,200
19,000

2.9%
2.5%
2.6%
2.9%

4.2%
4.1%
4.6%
5.6%

49,000
35,300
32,600
24,500

9,700
7,500
6,400
3,900

71,900
49,900
46,800
37,600

17,700
12,400
11,700
9,800

95,000
65,700
65,700
46,300

26,100
18,900
19,500
11,800

3.2%
3.0%
3.4%
3.1%

4.8%
4.5%
5.4%
5.4%

N.A.
23,700
23,700
N.A.

N.A.
3,300
900
N.A.

74,800
31,900
28,100
24,500

10,700
6,000
3,800
3,700

61,700
53,400
51,100
40,100

16,300
11,000
8,200
9,100

N.A.
3.9%
3.7%
N.A.

N.A.
5.9%
11.1%
N.A.

N.A.. Not Available. Source: BMO Capital Markets and National Center for Education Statistics.

Besides adding more students to leverage the fixed (or at least semi-variable) components of
instructional costs, there are a number of ways these companies have generated leverage off
this line item. Among the methods used are these:
Trade-off between

Increasing class sizes. According to the NCES, the average class size in the not-for-

profit sector in the 2011-2012 school year (latest data available) ranged from 10.8
(private not-for-profit four-year institutions) to 15.1 (public four-year institutions) to 21.1
(public two-year institutions). The average for private for-profit institutions (all sizes)
that year was the highest among these groups at 24.9. There is typically a trade-off
between average class size and quality, with the perception that a smaller average class
size yields a higher quality education. However, schools with smaller class sizes are
typically more costly as they require a greater number of faculty per student.

class size and


quality

Class sizes may vary by type. For example, classes for associate degree students are
typically larger than those for doctoral degree students as they contain more basic
introductory classes (e.g., English composition). In addition, online classes are typically
smaller than campus-based classes, as they require more student/teacher interaction
(i.e., you cant just sit in the back of class and fall asleep as many online classes have
minimum requirement for class participation).
We believe online
programs have
lower
instructional
costs (i.e., higher
gross margins)

A member of BMO

Shift mix toward online and blended programs. We believe the online delivery

model has higher gross margins (i.e., lower instructional costs) than the campus-based
model owing to the lack of facility-related costs, which could offset higher compensation
costs from smaller classes. Unfortunately, none of the publicly held companies disclose
gross margins by delivery type, although Apollo Group (APOL) did so prior to the
August 2004 repurchase of its UOPX tracking stock. As shown in Exhibit 227, the
companys online instructional costs as a percentage of revenues were lower than at its
on-ground campuses, despite having larger average class sizes.

Financial Group

200

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 227. Apollo Group: Instructional Costs as a Percentage of


Revenues by Segment (FY1997FY2004, First Three Quarters)
70%

On-ground

Online

As % of revenues

60%
50%
40%
30%
20%
10%
0%
FY1997

FY1998

FY1999

FY2000

FY2001

FY2002

FY2003

FY2004*

Note: FY2004 data for first three quarters; full-year data not available as company repurchased its UOPX
tracking stock in August 2004. Source: BMO Capital Markets and company reports.

In addition, we believe Apollo pioneered the concept of a blended learning model a


hybrid of on-ground and online that many in the industry have now co-opted. Last
decade, the company rolled out its FlexNet program, where students attend classes at an
on-ground location for the first and last week of a course, with the classes between the first
and last (typically three weeks for undergraduate and four weeks for graduate) conducted
online. Many others in the industry both for-profit and not-for-profit have since rolled
out similar models.

Blended learning
programs

In addition to improving capacity utilization by allowing a greater number of students to be


cycled through its on-ground campuses, we believe blended learning programs allow
schools to accommodate two to three times the number of course offerings without
increasing facility costs. While this may be somewhat offset by increased faculty costs (e.g.,
we believe blended learning class sizes resemble pure online classes rather than the larger
on-ground size), we nevertheless believe the addition of such programs had helped the
industry expand its overall margins before the downturn hit.
Shift to more
adjunct faculty
can save costs

A member of BMO

Shifting from full-time faculty to adjunct (part-time) faculty. All else being equal, a
school with a greater proportion of full-time faculty should have lower instructional costs
as a percentage of revenues, provided those faculty are being used efficiently for
instructional purposes. For most not-for-profit providers, however, given many of their
full-time faculty have tenure and may have other duties beyond instruction (i.e.,
research), it is typically less costly to use adjunct faculty for instruction as they are
typically less seasoned and therefore less expensive (although there may be quality tradeoffs). In recent years, most not-for-profit providers have expanded their use of adjunct
(part-time) faculty as a means of adding flexibility, as well as saving costs (e.g.,
employment-related benefits). As shown in Exhibit 228, the ratio of part-time to full-time
faculty for all postsecondary institutions increased from 0.28 as of fall 1970 to 1.00 as of
fall 2011 (latest data available).

Financial Group

201

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 228. Part-Time to Full-Time Faculty Ratio: All


Postsecondary Institutions (Fall 1970Fall 2011)
Part-time to Full-Time Ratio

1.2
1.0

0.95

0.97

1.00

0.91
0.86
0.80

0.8

0.74 0.74
0.68 0.69
0.57
0.56 0.57
0.54
0.54 0.54 0.55
0.52
0.51 0.52 0.52 0.53

0.6
0.4

0.40

0.43

0.46

0.35
0.32
0.28 0.30

0.2

19
7
19 0
7
19 1
7
19 2
73
19
7
19 4
7
19 5
7
19 6
77
19
7
19 9
8
19 0
81
19
8
19 2
8
19 3
8
19 4
85
19
8
19 6
8
19 7
89
19
9
19 1
9
19 3
9
19 5
97
19
9
20 9
0
20 1
03
20
0
20 5
0
20 7
0
20 9
11

0.0

Source: BMO Capital Markets and National Center for Education Statistics.

For-profit
providers use
relatively more
part-time faculty
at four-year
schools, though
relatively less at

At two-year institutions, public not-for-profits use a higher percentage of adjunct faculty


relative to their for-profit peers. This ratio has been increasing, reaching 2.3:1 and 1.3:1,
respectively, in fall 2011 (latest data available). The opposite holds true at four-year
institutions where for-profit providers use significantly more part-time faculty. While the
ratios have also increased at the not-for-profit four-year institutions (0.6:1 and 0.9:1 at
public and private not-for-profits, respectively in fall 2011), they are still well below the
rate seen at private for-profit institutions (6:1; see Exhibit 229).

two-year schools

Exhibit 229. Part-Time to Full-Time Faculty Ratio by School Type


(Fall 2003Fall 2011)
8.0

Fall 2003

Fall 2005

Fall 2007

Fall 2009

Fall 2011

Ratio of part-time to full-time faculty

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0
Public 4-year

Private not-forprofit 4-year

Private for-profit 4year

Public 2-year

Private not-forprofit 2-year

Private for-profit 2year

Source: BMO Capital Markets and National Center for Education Statistics.

A comparison of the ratio of part-time to full-time faculty for a select group of for-profit
providers can be found in Exhibit 230. As shown, the part-time to full-time faculty ratio has
increased for most companies over the past decade, allowing them to shift some of their
instructional costs to variable from fixed. However, recent concerns regarding educational
outcomes have led to a number of companies reducing their part-time staff ratios.
A member of BMO

Financial Group

202

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 230. Part-Time to Full-Time Faculty Ratio for Select Group of For-Profit
Providers (FY2002-FY2013)
Company
American Public Education
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
MEDIAN

Ticker
APEI
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA

FYE
12
12
12
6
12
6
6
12
12
12
5
12

2002
N.A.
N.A.
1.6
2.5
N.A.
N.A.
N.A.
N.A.
0.8
N.A.
N.A.
4.0
2.1

2003
N.A.
N.A.
1.4
1.1
N.A.
N.A.
N.A.
N.A.
0.8
N.A.
N.A.
5.0
1.3

2004
N.A.
N.A.
N.A.
1.1
5.7
N.A.
N.A.
N.A.
1.3
0.3
N.A.
4.9
1.3

2005
N.A.
N.A.
N.A.
2.0
5.5
N.A.
N.A.
N.A.
1.2
0.4
N.A.
7.2
2.0

2006
N.A.
N.A.
1.4
2.3
6.0
N.A.
2.2
N.A.
2.3
0.6
N.A.
6.6
2.3

2007
4.7
N.A.
1.3
2.3
5.8
N.A.
2.5
N.A.
3.4
0.5
N.A.
9.4
2.9

2008
5.2
20.0
2.8
2.0
5.4
0.0
2.6
9.6
N.A.
0.8
N.A.
12.1
4.0

2009
3.7
37.4
3.5
2.2
6.4
0.1
2.7
8.2
N.A.
0.8
4.3
7.2
3.7

2010
5.0
48.3
3.8
2.0
N.A.
0.1
2.9
N.A.
N.A.
0.7
6.3
5.7
3.8

2011
4.7
N.A.
4.6
2.3
N.A.
0.1
3.2
N.A.
N.A.
0.8
24.2
5.2
3.9

2012
3.7
24.5
2.9
2.4
N.A.
0.1
3.8
N.A.
N.A.
0.9
27.1
5.3
3.7

2013
N.A.
N.A.
N.A.
2.5
N.A.
0.2
3.8
N.A.
N.A.
N.A.
6.5
N.A.
N.A.

Note: Data represents fiscal years. N.A. Not Available.


Source: BMO Capital Markets and company reports.

Some schools pay

Use variable instructional pay. While this may not necessarily help in margin

percentages, it certainly can help maximize margins in dollars. American Public


Education (APEI) uses this model, paying adjunct instructors $130 per student in
undergraduate courses and $150 per student in graduate courses. This approach enables
the university to offer smaller class sizes, provide a greater variety of courses, and
encourage more student-faculty interaction. APEIs average class size is roughly 16
students, with a maximum class size of 25 students. Given the majority of its faculty are
adjunct, rather than full-time, it is relatively easier for the company to follow this policy.

faculty on the
basis of class
sizes

Optimize real estate costs. From FY2007 to FY2011, DeVry (DV) made significant

strides in this line item, helping to reduce its Cost of Educational Services as a
percentage of revenues from 52% to 42.2%. One method employed was its real estate
optimization program, in which the company relocated a number of programs and
administrative staff together in existing underutilized facilities. Also, the company used a
number of sales/leaseback transactions, which, in and of themselves, may have increased
the cost of educational services (rent may be higher than depreciation and amortization
on the facility), although the added interest income on the cash received, as well as the
extra financial flexibility it provided, helped to boost overall profitability.

Incorporate online books. The company that pioneered this approach was Apollo Group

(APOL) at its University of Phoenix. In March 2004, Apollo finished rolling out
rEsource, its online delivery method for course materials. While the roll-out was not
without controversy, rEsource has now become Apollos primary delivery method of
course materials. While there are a number of advantages for students (e.g., real-time
updates), we estimate margins on rEsource are significantly higher than those made on
traditional book sales, which benefits the company. A number of other companies in the
business have since rolled out their own e-book options, helping reduce their
instructional costs as a percentage of revenues.

A member of BMO

Financial Group

203

September 2013

Postsecondary Education

Credit hour
definition could
affect
instructional
costs

BMO Capital Markets

On October 29, 2010, the ED issued its final rules on credit hour definition as part of the
Program Integrity regulations effective July 1, 2011. On March 18, 2011, the ED issued a
Dear Colleague letter, which attempted to clarify some of the ambiguity in the regulation.
While we are no expert on credit hour definitions (we leave that to the accrediting bodies), the
number of credits per course can meaningfully affect the instructional cost line item
especially when comparing across schools. For example, if for whatever reason, a similar
course is considered worth three credits at one institution and four at another, the institution
with the three credit course may have higher instructional costs (when measured as a
percentage of revenues) since, in most cases, tuition is charged on a per credit basis; while the
cost of delivery may be somewhat similar (i.e., unless instructors are paid by their time), the
revenue per student would be lower.
A number of the publicly held companies in the sector include bad debt expenses as part of
Instructional Costs and Services expense (see Exhibit 231). We note that Corinthian Colleges
(COCO) includes reserves associated with its third-party lending through ASFG as a contrarevenue account.

Exhibit 231. Classification of Bad Debt Expense on Income Statement


Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Total

Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9

Income Statement Classification


Instructional Costs
General and Admin.
Separate Line Item
X
X
X
X
X
X
X
X
X
X
X
X
X
X
7
6
1

Source: BMO Capital Markets and company reports.

While bad debts


had been
increasing, they
have been
declining as
companies focus
on this more

A member of BMO

We have listed historical bad debt levels for the for-profit providers in Exhibit 232. Note that
companies with relatively low levels of private lending (e.g., American Public Education), also
have relatively low levels of bad debt expense as a percentage of revenues. Much of the bad
debt recorded (excluding those schools with internal lending programs) represents students who
have dropped out prior to being completely packaged (i.e., financial aid documentation
completely in order). While bad debt increased for most of the industry as enrollment declined
and drop-out rates increased, it has begin to fall again as companies focus more on this metric.

Financial Group

204

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 232. Select For-Profit Postsecondary School Operators Bad Debt Expense
(FY2003FY2013 To Date)
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Total

'03-12
CAGR
N.A.
24.3%
N.A.
N.A.
11.0%
44.9%
11.4%
32.0%
N.A.
32.7%
12.3%
N.A.
27.8%
9.9%
24.3%

'07-12
CAGR
119.1%
4.0%
78.4%
-1.1%
-0.7%
36.9%
12.2%
42.4%
23.5%
33.3%
3.5%
29.9%
17.7%
11.4%
20.6%

YTD
FY2013
$1.6
67.6
36.9
14.0
65.9
7.1
62.4
171.9
9.5
38.9
7.5
4.5
11.2
3.7
$502.5

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9

FY2003
N.A.
$20.7
N.A.
N.A.
19.9
0.6
34.5
13.4
N.A.
6.1
7.4
N.A.
2.6
2.5
$107.8

FY2004
$0.1
26.9
N.A.
N.A.
30.7
1.4
35.5
22.2
N.A.
12.0
9.2
N.A.
4.2
2.3
$144.5

FY2005
$0.5
57.1
0.9
73.9
46.9
2.3
43.5
28.0
2.6
10.7
11.2
N.A.
5.5
4.2
$287.2

FY2006
$0.3
101.0
1.0
55.9
48.3
2.9
47.3
22.9
4.7
10.9
15.6
N.A.
7.6
4.7
$322.9

FY2007
$0.1
120.6
4.1
42.2
52.6
3.6
51.2
28.0
6.3
18.6
17.8
1.1
10.5
3.4
$360.1

FY2008
$0.2
104.2
13.4
43.1
72.8
5.2
51.9
42.2
8.5
43.3
21.6
1.4
12.7
4.4
$424.8

FY2009
$0.4
152.5
23.2
57.0
106.3
7.0
72.4
72.5
14.0
82.0
37.0
1.6
20.6
6.7
$653.2

FY2010
$0.2
282.6
39.6
106.4
88.5
8.7
88.2
105.6
38.7
86.9
39.1
2.4
24.2
6.5
$917.6

FY2011
$3.9
181.3
58.5
55.7
92.4
10.6
90.7
134.6
34.4
61.3
30.6
3.4
24.8
8.3
$790.4

FY2012
$6.1
146.7
73.7
39.9
50.9
17.3
90.9
163.9
18.0
78.3
21.1
4.2
23.7
5.8
$740.6

YTD

YTD

Ticker

FYE

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2012

FY2013
0.9%

Bad debt as % of revenues


Company

YTD
FY2012
$3.7
108.0
33.4
17.5
50.9
7.0
90.9
163.9
7.9
34.6
9.5
4.2
12.1
4.4
$548.2

Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI

American Public Education

APEI

12

N.A.

0.5%

1.7%

0.8%

0.2%

0.1%

0.2%

0.1%

1.5%

1.9%

2.5%

Apollo Group

APOL

1.5%

1.5%

2.5%

4.1%

4.4%

3.3%

3.9%

5.7%

3.8%

3.5%

3.3%

2.4%

Bridgepoint Education

BPI

12

N.A.

N.A.

10.8%

3.4%

4.8%

6.2%

5.1%

5.6%

6.3%

7.6%

6.6%

8.8%

Career Education

CECO

12

N.A.

N.A.

4.0%

3.1%

2.5%

2.6%

3.1%

5.1%

3.0%

2.7%

2.2%

2.2%

Corinthian Colleges

COCO

3.9%

4.0%

5.0%

5.3%

5.7%

6.8%

9.0%

5.5%

5.3%

3.2%

3.2%

4.1%

Capella Education

CPLA

12

0.8%

1.2%

1.5%

1.6%

1.6%

1.9%

2.1%

2.1%

2.5%

4.1%

3.3%

3.4%

DeVry

DV

5.1%

4.5%

5.6%

5.6%

5.5%

4.8%

5.0%

4.6%

4.2%

4.4%

4.4%

3.2%

2.1%

2.6%

2.7%

Education Management

EDMC

3.6%

4.2%

Grand Canyon Education

LOPE

12

N.A.

N.A.

5.1%

6.5%

6.3%

5.2%

5.4%

10.0%

8.1%

3.5%

3.3%

3.3%

ITT Educational Services

ESI

12

1.2%

1.9%

1.6%

1.4%

2.0%

2.1%

2.1%

4.3%

2.5%

6.2%

5.4%

4.1%

4.7%

6.1%

5.9%

5.2%

5.9%

7.1%

Lincoln Educational Services

LINC

12

4.0%

3.7%

3.9%

5.0%

5.4%

5.7%

6.7%

6.1%

6.0%

5.2%

4.8%

4.3%

YTD '12-13
% chg.
-57.8%
-37.4%
10.4%
-20.1%
29.5%
0.2%
-31.3%
4.8%
20.5%
12.5%
-21.0%
6.5%
-7.8%
-17.3%
-3.8%

6.9%

National Amer. Univ. Holdings

NAUH

N.A.

N.A.

N.A.

N.A.

2.6%

2.7%

2.6%

2.6%

3.2%

3.7%

3.7%

3.5%

Strayer Education

STRA

12

1.8%

2.3%

2.5%

2.9%

3.3%

3.2%

4.0%

3.8%

3.9%

4.2%

4.1%

4.1%

Universal Technical Institute


MEDIAN

UTI

1.3%
1.8%

0.9%
2.1%

1.4%
2.7%

1.4%
3.1%

1.0%
2.9%

1.3%
3.3%

1.8%
3.9%

1.5%
4.8%

1.8%
4.0%

1.4%
3.9%

1.4%
3.5%

1.3%
3.4%

Source: BMO Capital Markets and company reports. Note: Data reflects fiscal year. Career Education data not available prior to 2005 owing to
reclassifications. Corinthian Colleges data was not restated for discontinued operations prior to FY2010. N.A. Not Available.

A listing of key instructional cost metrics can be found in Exhibit 233.

A member of BMO

Financial Group

205

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 233. Key Instructional Costs Metrics to Watch


Term

Definition

Postsecondary Norms

For-Profit Norms

Instructional costs
(i.e., educational
services) as % of
revenues (1)

IPEDS (Dept. of Education) definition:


Includes general academic instruction,
occupational and vocational
instruction, community education,
preparatory and adult basic education,
and regular, special, and extension
sessions. Also includes expenses for
both credit and non-credit activities.

Public less than 2-Year


institutions: 46.8%

Less than 2-year institutions:


32%

Public 2-year institutions: 39%

2-year institutions: 27.1%

Public 4-year institutions: 26.7%

4-year institutions: 18.1%

Public company definition varies.


Student/
teacher ratio
(class size) (2)

Records the number of faculty per


student; this serves as a key metric for
quality of education. Should this ratio
spike, it could have a negative impact
on customer satisfaction. Conversely,
schools typically can improve
profitability by increasing class sizes.

Adjunct to full-time Measures the ratio of adjunct (partfaculty ratio (3)


time) faculty to full-time faculty
Bad debt expense

Private less than 2-year


institutions: 45.6%
Private 2-year institutions: 38.5%
Private 4-year institutions: 24%
Public 2-year institutions: 21.1
Public 4-year institutions: 15.1

For-profit public companies


most recent annual average:
46.7% (YTD FY2013)
Private not-for profit
institutions: 24.9

Private not-for profit institutions:


10.8

All postsecondary institutions: 1:1

Bad debt as a percentage of revenues

For-profit public companies


most recent annual average:
3.4% (YTD FY2013)

Note: We believe some of the higher percentage of instructional costs as a percentage of revenues for the publicly held companies reflects a difference
in accounting methodology rather than the entire amount representing a substantially higher cost structure relative to the privately held for-profit
providers.
Sources: (1) US Department of Education NCES Report 2012-174rev Table 2 (FY2011 data) and public company reports; (2) US Department of
Education NCES Digest of Education Statistics 2012 Tables 288 and 289 (fall 2011 data); (3) US Department of Education NCES Digest of
Education Statistics 2012 Table 290 (fall 2011 data)

Postsecondary Schools Sales and Marketing Trends


Sales and
marketing
expense - above
25% of revenues
for many
providers

Competition has
and will likely
continue to
intensify

A member of BMO

Sales and marketing expenses are a large cost for companies in the for-profit education
business. While not all companies disclose this data, it runs above 25% of revenues for many
publicly held companies, with almost half of that spent on external promotions and
advertising, and the remainder on internal enrollment management and direct sales expenses.
We believe this overall spending level dwarfs what not-for-profit postsecondary institutions
spend (reliable data is difficult to obtain) and is likely higher than the spending levels of most
consumer goods companies. This is a major reason we believe that for-profit enrollment
growth has historically outpaced that of their not-for-profit peers.
However, we believe the competition for new students has and will continue to intensify.
Specifically, we have seen a number of not-for-profit providers increase their marketing
presence, whether for their traditional campuses or for new online programs. As many of
these institutions have faced budgetary constraints, they are looking to increase their
enrollments to increase their revenue streams and see this enhanced marketing spending as a
viable investment.

Financial Group

206

September 2013

Postsecondary Education

BMO Capital Markets

Because not all the publicly held companies in this space provide detail about their sales and
marketing expenses, we have analyzed total non-instructional costs (i.e., those not directly
related to teaching students) to help set the stage for our discussion (with the caveat that not
all these companies follow identical expense classifications). From FY20023to FY2008, total
non-instructional costs as a percentage of revenues for the larger publicly held for-profit
postsecondary companies increased to 39.2% from 33.2% for the median of this group, as
marketing became more expensive. These companies gained some operating leverage as
revenue growth accelerated through FY2010 as the median percentage fell to 35.9%.
However, as revenues, for the most part have fallen since then while competition has
intensified, in our view, this combination has driven negative leverage with this expense
increasing back to prior highs (see Exhibit 234).

Companies have
gained some
positive leverage
in noninstructional
expenses but that
trend has
reversed recently

Exhibit 234. Total Non-Instructional Costs and as a Percentage of Revenues for Select
For-Profit Providers (FY2003FY2013 YTD)
NON-INSTRUCTIONAL COSTS - FISCAL YEAR
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
Company
Ticker
FYE
American Public Education
APEI
12
$7.3
$8.6
$11.5
$15.8
$24.0
$36.4
$49.0
$70.8
$100.0
$131.5
Apollo Group
APOL
8
339.3
471.2
579.9
679.3
1,014.4
1,158.6
1,427.3
1,778.7
1,723.8
1,666.8
Bridgepoint Education
BPI
12
2.3
4.8
10.3
20.9
51.9
120.5
208.7
303.4
381.2
389.5
Career Education
CECO
12
N.A.
860.6
913.7
982.8
942.8
937.7
996.3
1,150.2
1,021.2
972.1
Corinthian Colleges
COCO
6
156.2
220.2
259.5
326.4
354.2
383.5
393.7
505.7
580.1
560.4
Capella Education
CPLA
12
34.0
49.0
63.1
75.0
93.9
108.9
132.8
164.3
169.7
167.0
DeVry
DV
6
225.8
275.6
300.2
320.1
355.3
418.7
542.9
671.3
753.0
791.0
Education Management
EDMC
6
129.7
173.9
210.3
310.4
405.9
518.6
625.0
766.5
894.4
898.7
Grand Canyon Education
LOPE
12
N.A.
20.6
24.4
35.1
45.9
80.7
104.4
135.9
145.2
172.4
ITT Educational Services
ESI
12
148.3
199.5
194.2
216.3
263.8
296.5
365.4
429.3
422.7
476.8
Lincoln Educational Services
LINC
12
91.4
122.2
136.8
149.7
160.5
184.6
249.1
268.2
238.1
202.4
National Amer. Univ. Holdings NAUH
5
N.A.
N.A.
N.A.
N.A.
36.4
34.3
39.8
52.8
67.8
81.9
Strayer Education
STRA
12
42.8
53.9
64.0
84.7
102.1
128.5
163.7
141.8
146.7
146.1
Universal Technical Institute
UTI
9
67.9
88.3
110.0
128.2
135.7
141.3
150.3
171.8
177.0
181.2
Total
$1,245.0 $2,548.3 $2,878.0 $3,344.6 $3,986.7 $4,548.8 $5,448.5 $6,610.7 $6,820.9 $6,837.8
AS % OF REVENUES - FISCAL YEAR
Company
Ticker
American Public Education
APEI
Apollo Group
APOL
Bridgepoint Education
BPI
Career Education
CECO
Corinthian Colleges
COCO
Capella Education
CPLA
DeVry
DV
Education Management
EDMC
Grand Canyon Education
LOPE
ITT Educational Services
ESI
Lincoln Educational Services
LINC
National Amer. Univ. Holdings NAUH
Strayer Education
STRA
Universal Technical Institute
UTI
Median

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9

FY2003
41.1%
25.3%
312.3%
N.A.
30.6%
41.5%
33.2%
20.3%
N.A.
28.4%
48.8%
N.A.
29.1%
34.6%
33.2%

FY2004
37.3%
26.2%
387.4%
58.4%
28.4%
41.6%
35.1%
20.4%
80.2%
32.3%
49.2%
N.A.
29.4%
34.6%
35.1%

FY2005
40.8%
25.8%
129.1%
49.9%
27.9%
42.3%
38.5%
20.6%
47.1%
28.2%
N.A.
N.A.
29.0%
35.4%
36.9%

FY2006
39.5%
27.4%
73.1%
54.9%
36.0%
41.7%
38.1%
26.5%
48.7%
28.5%
48.2%
N.A.
32.1%
36.9%
38.1%

FY2007
34.7%
37.3%
60.5%
56.5%
38.5%
41.5%
38.1%
29.8%
46.2%
30.3%
49.0%
81.9%
32.1%
38.4%
38.5%

FY2008
34.0%
37.0%
55.2%
56.5%
35.9%
40.0%
38.4%
30.8%
50.0%
29.2%
49.0%
69.3%
32.4%
41.2%
39.2%

FY2009
32.9%
36.1%
45.9%
54.3%
33.2%
39.7%
37.2%
31.1%
39.9%
27.7%
45.1%
63.6%
32.0%
41.0%
38.4%

FY2010
35.7%
36.1%
42.5%
55.1%
31.3%
38.6%
35.1%
30.6%
35.2%
26.9%
41.9%
58.7%
22.3%
39.4%
35.9%

FY2011
38.4%
36.4%
40.8%
54.2%
33.1%
39.5%
34.5%
31.0%
34.0%
28.2%
46.8%
64.7%
23.4%
39.2%
37.4%

FY2012
42.0%
39.2%
40.2%
65.7%
35.4%
39.6%
37.9%
32.6%
33.7%
37.0%
50.0%
71.2%
26.0%
43.8%
39.4%

'03-12
CAGR
37.9%
19.3%
77.1%
N.A.
15.2%
19.4%
14.9%
24.0%
N.A.
13.9%
9.2%
N.A.
14.6%
11.5%
15.2%

'07-12
CAGR
40.5%
10.4%
49.7%
0.6%
9.6%
12.2%
17.4%
17.2%
30.3%
12.6%
4.7%
N.A.
7.4%
6.0%
12.2%

YTD
YTD
FY2012
FY2013
$65.0
$72.2
1,235.5
1,106.6
202.3
146.0
475.4
458.6
560.4
556.3
83.0
82.6
791.0
754.7
898.7
829.5
80.3
94.2
209.0
205.3
105.1
100.4
81.9
90.0
65.2
65.3
138.1
126.9
$4,990.8 $4,688.5
YTD
FY2012
43.2%
37.9%
39.9%
59.8%
35.4%
38.5%
37.9%
32.6%
34.0%
31.1%
53.0%
71.2%
22.0%
44.2%
38.2%

YTD '12-13
% chg.
11.1%
-10.4%
-27.9%
-3.5%
-0.7%
-0.6%
-4.6%
-7.7%
17.3%
-1.8%
-4.5%
9.9%
0.2%
-8.1%
-2.7%

YTD
FY2013
43.8%
39.0%
34.8%
72.2%
34.8%
39.5%
38.2%
33.2%
33.2%
37.5%
57.3%
69.7%
24.2%
44.6%
38.6%

Note: Data represents fiscal years. Data used for Career Education, Corinthian Colleges and Lincoln Educational Services excludes discontinued
operations where available. Restated line item data was not available for Lincoln Educational Services for 2005. We have removed stock-based
compensation costs and one-time items where disclosed. Source: BMO Capital Markets and company reports.

For-profits
typically spend
more on noninstructional
costs than notfor-profits

A member of BMO

While at one time, for-profit schools spent less on non-instructional costs than their not-forprofit peers, this may no longer be the case, especially when one strips out hospital services
expense from the not-for-profit schools, a service that most for-profits do not provide. As
shown in Exhibit 235, when looking at the category entitled academic and institutional
support and student services, the for-profit sector spent roughly 50.2% of revenues on this line
item in FY2011 (latest data available) more than twice as much as the public and private
not-for-profit schools, which spent 21.5% and 22.3%, respectively.

Financial Group

207

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 235. Non-Instructional Costs as a Percentage of Revenues (FY2011)


Public Not-for-Profit

Revenues

Less than
2-Year
100.0%

2-Year
100.0%

4-Year
100.0%

Private Not-for-Profit
All Less than
Schools
2-Year
100.0%
100.0%

2-Year
100.0%

4-Year
100.0%

Private For-Profit
All Less than
Schools
2-Year
100.0%
100.0%

2-Year
100.0%

4-Year
100.0%

All
Schools
100.0%

Instructional costs
Gross margins
Non-instructional costs:
Academic and inst. support, and student svces.
Research and public service
Auxiliary enterprises
Net grant aid
Other expenses (includes hospital services)
Total non-instructional costs

46.8%
53.2%

39.0%
61.0%

26.7%
73.3%

29.1%
70.9%

45.6%
54.4%

38.5%
61.5%

24.0%
76.0%

24.0%
76.0%

32.0%
68.0%

27.1%
72.9%

18.1%
81.9%

22.0%
78.0%

29.3%
0.6%
0.0%
0.0%
10.2%
40.0%

31.2%
1.6%
4.8%
0.0%
17.1%
54.7%

19.2%
17.4%
9.5%
0.0%
18.4%
64.5%

21.5%
14.4%
8.6%
0.0%
18.2%
62.6%

37.8%
1.0%
0.0%
0.1%
11.9%
50.8%

45.0%
0.3%
3.8%
0.2%
10.8%
60.1%

22.2%
9.5%
7.0%
0.4%
10.6%
49.6%

22.3%
9.5%
7.0%
0.4%
10.6%
49.6%

36.6%
0.4%
0.0%
0.2%
12.9%
50.1%

42.9%
0.1%
1.8%
0.2%
11.5%
56.6%

55.5%
0.1%
1.6%
0.3%
3.4%
60.9%

50.2%
0.1%
1.4%
0.3%
6.5%
58.5%

Surplus/deficit (i.e., operating margins)

13.1%

6.3%

8.8%

8.3%

3.6%

1.4%

26.5%

26.4%

18.0%

16.3%

21.0%

19.5%

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

In its annual report entitled Trends in College Spending, the Delta Cost Project tracked the
average amount spent in various line items per FTE student by school type. For purposes of our
analysis, we have defined non-instructional costs as student services. Academic and
institutional support and have excluded other costs such as research and public service, which
we acknowledge are sizeable. When measured in constant dollars from the 2000 to 2010 school
years, changes in non-instructional costs per FTE varied, remaining relatively flat at most
schools, though falling at community colleges, and rising at private not-for-profit institutions
(see Exhibit 236).

Exhibit 236. Non-Instructional Costs per FTE Student (2000 2010


School Years)
School type
Public not-for-profit research institution
Public not-for-profit masters
Public not-for-profit bachelors
Community college
Private not-for-profit research institution
Private not-for-profit masters
Private not-for-profit bachelors

Cost per FTE Student


2000
2010
$9,952
$11,581
4,770
5,031
5,287
5,462
4,143
3,787
12,587
15,952
7,255
8,420
9,753
11,042

CAGR
1.5%
0.5%
0.3%
-0.9%
2.4%
1.5%
1.2%

Source: BMO Capital Markets and Delta Cost Project.

While the Delta Cost Project did not provide comparable data for the for-profit sector, it is
believed that for-profit schools on average spend more per student on instructional costs per
FTE student than their not-for-profit peers. We believe a sizeable portion of this difference is
driven by higher sales and marketing expense at for-profit schools. While not all companies
report this expense (which includes advertising, compensation for enrollment counselors, and
other associated expenses) as a separate line item, we believe the analysis on those that do is
apropos for analyzing trends across the entire sector.

A member of BMO

Financial Group

208

September 2013

Postsecondary Education

BMO Capital Markets

As shown in Exhibit 237, from FY2003 to FY2008, sales and marketing expenses as a
percentage of revenues for these companies increased to 25.5% from 18.1% for the median of
the companies that disclose this data. While this percentage declined to 22.1% in FY2010 as
revenue growth accelerated, it has increased since that time as revenue trends have reversed.

Sales and
marketing
expense has been
increasing as a
percentage of
revenues

Exhibit 237. Sales and Marketing Expense as Percentage of Revenues for Select ForProfit Providers (FY2003FY2013 YTD)
SALES AND MARKETING - FISCAL YEARS
Company
Ticker
FYE
American Public Education
APEI
12
Apollo Group
APOL
8
Bridgepoint Education
BPI
12
Career Education
CECO
12
Corinthian Colleges
COCO
6
Capella Education
CPLA
12
Education Management
EDMC
6
Grand Canyon Education
LOPE
12
Lincoln Educational Services
LINC
12
Strayer Education
STRA
12
Total

FY2003
$2.8
272.3
0.0
N.A.
106.5
22.2
N.A.
N.A.
N.A.
22.8
$426.7

FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
$2.2
$4.0
$4.9
$6.7
$12.3
$20.3
$34.1
$44.4
$59.5
383.1
485.5
542.4
650.5
788.0
926.1
1,083.5
1,063.3
1,039.7
2.3
4.1
12.2
36.0
81.0
139.2
209.8
274.5
336.5
327.6
454.0
519.4
462.9
445.4
483.9
510.9
477.9
477.9
169.9
212.0
239.2
247.6
275.4
265.4
326.0
381.5
389.9
35.1
45.6
56.3
69.1
81.9
99.2
120.0
135.0
130.4
N.A.
N.A.
201.4
260.7
354.3
440.5
556.9
646.8
640.5
9.7
14.0
20.1
35.1
64.2
85.3
112.3
119.7
140.9
N.A.
N.A.
59.2
60.5
69.7
77.2
90.7
81.3
68.0
29.4
40.5
51.7
60.1
75.3
93.0
95.5
100.8
98.2
$959.3 $1,259.8 $1,706.7 $1,889.2 $2,247.5 $2,630.2 $3,139.5 $3,325.0 $3,381.4

AS % OF REVENUES - FISCAL YEAR


Company
Ticker
American Public Education
APEI
Apollo Group
APOL
Bridgepoint Education
BPI
Career Education
CECO
Corinthian Colleges
COCO
Capella Education
CPLA
Education Management
EDMC
Grand Canyon Education
LOPE
Lincoln Educational Services
LINC
Strayer Education
STRA
Median

FY2003
15.9%
20.3%
0.0%
N.A.
20.8%
27.2%
N.A.
N.A.
N.A.
15.5%
18.1%

FY2004
9.5%
21.3%
181.8%
22.3%
21.9%
29.8%
N.A.
38.0%
N.A.
16.1%
22.1%

FYE
12
8
12
12
6
12
6
12
12
12

FY2005
14.3%
21.6%
51.3%
24.8%
22.8%
30.6%
N.A.
27.1%
N.A.
18.4%
23.8%

FY2006
12.2%
21.9%
42.7%
29.0%
26.3%
31.3%
17.2%
27.9%
19.0%
19.6%
24.1%

FY2007
9.7%
23.9%
42.0%
27.7%
26.9%
30.6%
19.1%
35.4%
18.5%
18.9%
25.4%

FY2008
11.5%
25.1%
37.1%
26.8%
25.8%
30.1%
21.0%
39.8%
18.5%
19.0%
25.5%

FY2009
13.6%
23.4%
30.6%
26.4%
22.4%
29.6%
21.9%
32.6%
14.0%
18.2%
22.9%

FY2010
17.2%
22.0%
29.4%
24.5%
20.2%
28.2%
22.2%
29.1%
14.2%
15.0%
22.1%

FY2011
17.0%
22.5%
29.4%
25.4%
21.8%
31.4%
22.4%
28.0%
16.0%
16.1%
22.4%

FY2012
19.0%
24.4%
34.8%
32.3%
24.6%
30.9%
23.2%
27.6%
16.8%
17.5%
24.5%

'03-12
CAGR
40.3%
16.0%
N.A.
N.A.
15.5%
21.7%
N.A.
N.A.
N.A.
17.6%
17.6%

'07-12
CAGR
54.7%
9.8%
56.4%
0.6%
9.5%
13.5%
19.7%
32.0%
2.4%
10.3%
11.9%

YTD
YTD
FY2012
FY2013
$28.7
$32.5
774.5
693.6
175.9
112.8
248.4
220.1
389.9
395.1
65.8
62.8
640.5
569.5
67.1
79.4
N.A.
N.A.
43.8
44.5
$2,434.6 $2,210.4
FY2012
19.1%
23.8%
34.7%
31.2%
24.6%
30.5%
23.2%
28.4%
N.A.
14.8%
24.6%

'12-13
% chg.
13.4%
-10.4%
-35.9%
-11.4%
1.3%
-4.5%
-11.1%
18.3%
N.A.
1.7%
-4.5%

FY2013
19.7%
24.5%
26.9%
34.6%
24.7%
30.1%
22.8%
28.0%
N.A.
16.5%
24.7%

Note: Data represent fiscal years. Data used for Career Education, Corinthian Colleges and Lincoln Educational Services excludes discontinued
operations where available. N.A. Not Available.
Source: BMO Capital Markets estimates and company reports.

Legislative
proposals to limit
marketing
expenses

A member of BMO

A number of recent legislative proposals would restrict marketing spending by for-profit


schools. They include the following:

On July 30, 2012, the HELP Committee released its long-awaited report on the sector
entitled For-Profit Higher Education: The Failure to Safeguard the Federal Investment and
Ensure Student Status. The report was long on data and criticism of the sector and made a
number of recommendations including examining tying Title IV access to minimum
student outcome thresholds and prohibiting Federal funds from being used for marketing,
advertising, and recruiting activities.

On March 12, 2013 a bill that had previously introduced in the prior Congress called The
Protecting Financial Aid for Students and Taxpayers Act was reintroduced in the Senate (S.
528) sponsored by Senator Kay Hagan (D-NC) and in the House (HR 340) by
Representative Raul Grijalva (D-AZ). The bill would prohibit postsecondary educational
institutions from using revenues derived from federal educational assistance funds for
(1) advertising and promotion, (2) identifying and attracting prospective students, or
(3) other activities the Secretary of Education may proscribe, such as paying for the
promotion or sponsorship of education or military-related associations.

Another bill proposed in September 2012 by Representatives John Tierney (D-MA) and
George Miller (D-CA), The College Student Rebate Act (H.R. 6407), would have required
for-profit schools to spend more than 80% of revenue on educational and related services
(excludes advertising, excessive executive compensation, lobbying, etc.). If a school spends
less than 80%, the difference is rebated to the government or students. The follows the
framework of the 80/20 rule contained in the Affordable Care Act (Obamacare).

Financial Group

209

September 2013

Postsecondary Education

BMO Capital Markets

The admissions process is often described as a funnel, whereby schools generate inquiries or
leads, which then are whittled down until the potential students are admitted, then enrolled, and
then actually show up for class. A graphical depiction of this process is found in Exhibit 238.

Exhibit 238. Admissions Funnel

Inquiry

Visit

Application

Acceptance

Enrollment

Admission

Start

Source: BMO Capital Markets.

A number of different metrics are used in an attempt to measure the effectiveness of sales and
marketing spending at points along this funnel:

Cost per lead (CPL) - costs for admissions, recruiting, and marketing divided by the

number of leads.

Cost per applicant - costs for admissions, recruiting, and marketing divided by the

number of applicants.

Conversion rate (inquiry to applicant ratio) - measures the percentage of leads that

are converted into applications.

Application to admit ratio - measures the percentage of applications that are granted

acceptance to the institution.

Cost per accepted (CPA) - costs for admissions, recruiting, and marketing divided by

the number of students accepted.

Lead-to-start rate (inquiry-to-start ratio) - measures the percentage of applications

that are converted to new students.


A member of BMO

Financial Group

210

September 2013

Postsecondary Education

BMO Capital Markets

Show rate (yield rate) - measures the percentage of those admitted that actually enroll,
calculated as the number of enrollments divided by the number of admitted.

Cost per start (CPS) (cost per enrolled, cost per new student, student acquisition
cost) - costs for admissions, recruiting, and marketing divided by the number of new
students enrolled.

Inquiry to
enrollment ratio
has remained
fairly stable over
time

We obtained benchmark data from the annual Noel Levitz Admissions Funnel Report for fouryear not-for-profit schools on a number of the ratios (non-costs) mentioned above. As shown in
Exhibit 239, while these metrics have fluctuated a bit, the overall inquiry to enroll ratio has
remained fairly stable over time, although it had been increasing slightly at public four-year
institutions driven by slightly higher yield rates, which tend to increase as the economy worsens,
although somewhat on a lagged basis. As would be expected, private not-for-profit institutions
tend to have tougher (i.e., lower) admission rates than what are typically less selective public
not-for-profit institutions (though some high profile public institutions such as the University of
Michigan are more selective than their private counterparts).

Exhibit 239. Higher Education Admission Ratios (Fall 2001Fall 2012)


2001

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Four-year public institutions:


(1) Inquiry to application
(2) Application to admit (all applications)
(1*2) Inquiry to admit
(3) Admit to enroll (yield)
(1*2*3) Inquiry to enroll

22%
77%
17%
46%
8%

24%
72%
17%
49%
8%

27%
70%
19%
47%
9%

25%
73%
18%
43%
8%

28%
70%
20%
42%
8%

31%
67%
21%
39%
8%

33%
66%
22%
38%
8%

34%
65%
22%
43%
10%

35%
66%
23%
41%
9%

33%
69%
23%
40%
9%

33%
66%
22%
38%
8%

Four-year private institutions:


(4) Inquiry to application
(5) Application to admit (all applications)
(4*5) Inquiry to admit
(6) Admit to enroll (yield)
(4*5*6) Inquiry to enroll

9%
79%
7%
40%
3%

10%
76%
8%
36%
3%

12%
75%
9%
36%
3%

13%
72%
9%
35%
3%

14%
70%
10%
35%
3%

13%
73%
9%
33%
3%

13%
71%
9%
31%
3%

15%
65%
10%
29%
3%

15%
66%
10%
29%
3%

17%
64%
11%
31%
3%

16%
64%
10%
29%
3%

Note: 2002 data was not available. Source: Noel Levitz Admissions Funnel Report.

Costs per student


fell dramatically in
the fall 2011
school year,
though likely
owing to more
students

A member of BMO

We also obtained benchmark data from the annual National Association for College Admissions
Counselings (NACAC) State of College Admissions reports for not-for-profit schools on a
number of the cost metrics mentioned above. As shown in Exhibit 240, these costs tend to be
higher at private not-for-profit than at public not-for-profit schools, likely owing to the greater
selectively at the private schools. We note that recruiting-related costs, when measured on a per
student basis, fell dramatically in the fall 2011 school year, though this may be owing to
increased numbers of students rather than declining costs trends.

Financial Group

211

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 240. Costs to Recruit and Enroll (Fall 2004Fall 2011)


2004
Cost per Applicant:
Total

2005

2006

2007

2008

2009

2010

2011

$432

$442

$614

$578

$506

$524

$585

$439

Public College
Private College

191
538

217
533

324
720

343
668

299
590

322
614

349
691

236
575

Change from prior year:


Total

N.A.

2.2%

39.0%

-5.9%

-12.4%

3.4%

11.7%

-25.0%

Public College
Private College

N.A.
N.A.

13.5%
-0.9%

49.5%
35.1%

5.7%
-7.2%

-12.8%
-11.7%

7.8%
3.9%

8.3%
12.6%

-32.4%
-16.8%

$651

$714

$880

$836

$865

$843

$806

$675

Public College
Private College

299
805

328
867

463
1,034

470
977

457
1,022

463
1,006

449
965

371
861

Change from prior year:


Total

N.A.

9.7%

23.2%

-4.9%

3.4%

-2.6%

-4.4%

-16.2%

Public College
Private College

N.A.
N.A.

10.0%
7.7%

41.1%
19.4%

1.5%
-5.6%

-2.8%
4.6%

1.2%
-1.6%

-2.9%
-4.0%

-17.4%
-10.8%

Cost per Admitted:


Total

Cost per Enrolled:


Total
Public College
Private College

$1,684

$1,753

$2,350

$2,366

$2,383

$2,553

$2,408

$2,311

594
2,146

667
2,167

1,083
2,802

1,002
2,895

974
2,954

1,046
3,199

987
3,043

995
3,118

Change from prior year:


Total

N.A.

4.1%

34.1%

0.7%

0.7%

7.1%

-5.7%

-4.0%

Public College
Private College

N.A.
N.A.

12.3%
1.0%

62.2%
29.3%

-7.4%
3.3%

-2.8%
2.1%

7.4%
8.3%

-5.7%
-4.9%

0.8%
2.5%

N.A. Not Available. Source: NACAC (National Association for College Admission Counseling) Annual State
of College Admissions.

Unfortunately, it was difficult to obtain similar benchmark data for the for-profit sector.
However, we attempted to calculate cost per start (CPS) for the publicly held for-profit
providers where information was available (i.e., sales and marketing expenses and number of
starts). While we acknowledge the limitations of this analysis (i.e., sales and marketing
expenses in one year may lead to starts in the following period, only a handful of companies
report both starts and sales and marketing data), we nevertheless believe it can yield some
meaningful insights.
Costs per start
vary dramatically;
APEI is lowest
owing to military
focus; increasing
for most of rest of
industry

A member of BMO

As shown in Exhibit 241, cost per start in FY2012 varied dramatically from a low of $686 for
American Public Education (APEI) to a high of $6,182 for Career Education (estimated).
While the data for APEI represents the cost per new course registration, as opposed to new
student (i.e., if a student takes two courses, it is considered two course registrations), we
nevertheless believe APEIs costs per start are dramatically lower than the other publicly held
providers; APEIs military focus helps it gain marketing efficiencies, in our view, in that it
targets Education Service Officers, who serve on military bases as central repositories for
education-related sources, as opposed to the military personnel themselves. While we expect
APEIs cost per start to continue to rise as it shifts more of its focus on expanding its presence
Financial Group

212

September 2013

Postsecondary Education

BMO Capital Markets

in the civilian market (it has since FY2009), it will not likely approach the levels of the other
publicly held providers. We note that costs per start for most others in the group have been
increasing dramatically, mostly owing to steep declines in start with no commensurate cut in
marketing spending.

Exhibit 241. Cost per Start for Select For-Profit Providers (FY2003-FY2013 YTD)
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Education Management
Lincoln Educational Services
MEDIAN

Ticker
APEI
APOL
BPI
CECO
COCO
EDMC
LINC

FYE
12
8
12
12
6
6
12

FY2003
N.A.
N.A.
N.A.
N.A.
$1,875
N.A.
N.A.
$1,875

FY2004
N.A.
N.A.
N.A.
N.A.
$1,925
N.A.
N.A.
$1,925

FY2005
N.A.
N.A.
N.A.
N.A.
$2,311
N.A.
N.A.
$2,311

FY2006
$338
2,504
2,196
N.A.
2,764
4,045
2,620
$2,562

FY2007
$272
2,516
2,386
4,777
2,791
4,261
2,500
$2,516

FY2008
$334
2,734
2,212
4,401
2,748
4,597
2,564
$2,734

FY2009
$406
2,603
2,263
4,084
2,511
4,486
2,070
$2,511

FY2010
$584
2,915
2,548
3,880
2,594
4,428
2,454
$2,594

FY2011
$512
4,907
3,743
6,182
3,505
5,422
4,070
$4,070

FY2012
$686
4,798
4,588
6,182
3,582
5,369
3,404
$4,588

'03-12
CAGR
N.A.
N.A.
N.A.
N.A.
7.5%
N.A.
N.A.
7.5%

'07-12
CAGR
20.3%
13.8%
14.0%
5.3%
5.1%
4.7%
6.4%
6.4%

YTD
FY2012
$715
4,725
4,037
6,535
3,582
5,369
N.A.
$4,381

YTD
FY2013
$878
5,259
4,721
7,831
3,720
5,618
N.A.
$4,990

YTD '12-13
% chg.
22.9%
11.3%
16.9%
19.8%
3.9%
4.6%
N.A.
14.1%

Note: Data represents fiscal years. Data for American Public Education represents costs per new course registration. Data used for Career
Education, Corinthian Colleges and Lincoln Educational Services excludes discontinued operations where available. N.A. Not Available.
Source: BMO Capital Markets estimates and company reports.

While advertising tends to be less than half of the total selling and marketing budget, it has
received the most investor attention in recent years given its volatility (e.g., Great Recession
saw a decline in TV rates, which have since escalated) and greater profile. Fortunately,
several companies report their advertising costs on an annual basis even those that do not
break out sales and marketing expenses. As shown in Exhibit 242, while there is limited
historical data, advertising expenses as a percentage of revenues has ranged between 9% and
12% for much of the last decade, increasing in recent years as revenues have declined. By
comparison, consumer goods giant Procter & Gamble (PG) spends roughly 10% of revenues
on advertising costs.

Advertising has
ranged between
9% and 12% of
revenues for the
median of the
group, increasing
in recent years

Exhibit 242. Advertising Expense and as a Percentage of Revenues for Select For-Profit
Providers (FY2003-FY2013 YTD)
ADVERTISING COSTS - FISCAL YEARS
Company
Ticker
FYE
American Public Education
APEI
12
Apollo Group
APOL
8
Bridgepoint Education
BPI
12
Career Education
CECO
12
Corinthian Colleges
COCO
6
Capella Education
CPLA
12
DeVry
DV
6
Education Management
EDMC
6
Grand Canyon Education
LOPE
12
Lincoln Educational Services
LINC
12
National Amer. Univ. Holdings NAUH
5
Universal Technical Institute
UTI
9
Total

FY2003
N.A.
$126.5
N.A.
N.A.
63.1
12.2
N.A.
35.0
N.A.
17.5
N.A.
7.9
$262.2

FY2004
$0.7
174.6
N.A.
164.7
104.6
17.8
N.A.
46.2
N.A.
22.3
N.A.
12.0
$542.9

FY2005
$1.8
224.0
1.5
218.0
133.3
22.9
88.2
63.5
3.4
25.6
N.A.
16.2
$798.3

FY2006
FY2007
FY2008
FY2009
FY2010
$1.8
$2.9
$6.4
$12.1
$22.0
231.6
338.8
413.9
490.4
618.6
5.0
15.1
26.9
40.7
63.0
260.7
241.4
248.9
291.7
300.4
148.4
152.8
156.0
150.0
145.5
30.3
35.1
42.5
51.6
64.3
107.1
112.6
135.1
179.4
224.1
91.4
132.4
165.6
218.1
259.7
4.7
10.2
18.5
24.8
35.6
28.9
31.1
33.8
40.9
46.7
N.A.
6.2
5.3
6.2
7.6
22.8
27.3
26.4
23.7
32.6
$932.7 $1,106.0 $1,279.3 $1,529.6 $1,820.1

AS % OF REVENUES - FISCAL YEAR


Company
Ticker
American Public Education
APEI
Apollo Group
APOL
Bridgepoint Education
BPI
Career Education
CECO
Corinthian Colleges
COCO
Capella Education
CPLA
DeVry
DV
Education Management
EDMC
Grand Canyon Education
LOPE
Lincoln Educational Services
LINC
National Amer. Univ. Holdings NAUH
Universal Technical Institute
UTI
Median

FY2003
N.A.
9.4%
N.A.
N.A.
12.3%
15.0%
N.A.
5.5%
N.A.
9.3%
N.A.
4.0%
9.4%

FY2004
3.1%
9.7%
N.A.
11.2%
13.5%
15.1%
N.A.
5.4%
N.A.
9.0%
N.A.
4.7%
9.3%

FY2005
6.2%
10.0%
18.9%
11.9%
14.3%
15.3%
11.3%
6.2%
6.6%
8.9%
N.A.
5.2%
10.0%

FY2006
4.5%
9.3%
17.5%
14.6%
16.3%
16.8%
12.8%
7.8%
6.5%
9.3%
N.A.
6.6%
9.3%

FYE
12
8
12
12
6
12
6
6
12
12
5
9

FY2007
4.2%
12.4%
17.6%
14.5%
16.6%
15.5%
12.1%
9.7%
10.3%
9.5%
14.0%
7.7%
12.3%

FY2008
6.0%
13.2%
12.3%
15.0%
14.6%
15.6%
12.4%
9.8%
11.5%
9.0%
10.8%
7.7%
11.9%

FY2009
8.1%
12.4%
9.0%
15.9%
12.7%
15.4%
12.3%
10.8%
9.5%
7.4%
9.8%
6.5%
10.3%

FY2010
11.1%
12.6%
8.8%
14.4%
9.0%
15.1%
11.7%
10.4%
9.2%
7.3%
8.5%
7.5%
9.8%

FY2011
$29.3
650.1
84.0
300.4
153.4
80.7
246.9
300.0
45.6
43.4
10.5
34.6
$1,978.9

FY2012
$41.9
657.0
103.7
287.2
166.4
81.1
266.0
280.0
51.0
34.2
16.0
42.1
$2,026.7

FY2011
11.3%
13.7%
9.0%
16.0%
8.8%
18.8%
11.3%
10.4%
10.7%
8.5%
10.0%
7.7%
10.5%

FY2012
13.4%
15.4%
10.7%
19.4%
10.5%
19.2%
12.8%
10.1%
10.0%
8.4%
13.9%
10.2%
11.7%

'03-12
CAGR
N.A.
N.A.
N.A.
N.A.
11.4%
23.4%
N.A.
26.0%
N.A.
7.7%
N.A.
20.4%
20.4%

'07-12
CAGR
70.5%
14.2%
47.0%
3.5%
1.7%
18.2%
18.8%
16.2%
38.0%
1.9%
20.7%
9.1%
17.2%

YTD
FY2012
N.A.
$477.6
N.A.
154.5
166.4
N.A.
266.0
280.0
N.A.
N.A.
16.0
32.2
$1,392.8

YTD
FY2013
N.A.
$489.4
N.A.
145.2
177.7
N.A.
261.0
270.0
N.A.
N.A.
12.4
28.2
$1,383.8

FY2012
N.A.
14.7%
N.A.
19.4%
10.5%
N.A.
12.8%
10.1%
N.A.
N.A.
13.9%
10.3%
12.8%

FY2013
N.A.
17.3%
N.A.
22.8%
11.1%
N.A.
13.2%
10.8%
N.A.
N.A.
9.6%
9.9%
11.1%

'12-13
% chg.
N.A.
2.5%
N.A.
-6.0%
N.A.
N.A.
-1.9%
-3.6%
N.A.
N.A.
-22.5%
-12.6%
-4.8%

Note: Data represents fiscal years. Data used for Career Education, Corinthian Colleges and Lincoln Educational Services excludes discontinued
operations where available. N.A. Not Available. Source: BMO Capital Markets and company reports.

A member of BMO

Financial Group

213

September 2013

Postsecondary Education

APOL and ESI are


among the largest
US media
spenders across
all industries

BMO Capital Markets

These increased spending levels have raised the ranking of certain for-profit companies
among all US companies. Each year, Advertising Age lists the Top 200 Megabrands, a
ranking of goods and services under the same brand name by measured media spending in the
US. Apollo Groups (APOL) University of Phoenix first made the list in 2003, joined by ITT
Educational Services (ESI) in 2004. Over those periods, University of Phoenix has been
ranked as high as number 85 (2010), while ITT Educational Services reached a high of 124 in
2008. In the 2012 (latest) ranking, APOL and ESI spent roughly $154 million and $93
million, respectively (see Exhibit 243), with APOL spending more than such household
names as Applebees and IBM. We believe the sizeable increase for University of Phoenix in
2010 was more of a branding initiative as APOL tried to position the school as a high-quality
provider.

Exhibit 243. Apollo Group (APOL) and ITT Educational Services


(ESI) Media Spending (20032012)
University of Phoenix (APOL)

Measured Media Spending ($ mil.)

$200

ITT Educational Services (ESI)

170
140
110
80
50
20
-10

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: Advertising Age.

Changes in
advertising
spending are
cyclical

A member of BMO

We believe some of the increase in advertising expense in the last decade was related to the
overall increase in advertising costs, which is typically cyclical. As shown in Exhibit 244,
after falling during the 2001 recession, US advertising spending grew at a 3.5% CAGR to
roughly $168 billion in 2007 from roughly $136 billion in 2001. However, the Great
Recession took its toll on this industry, as revenues fell to just under $134 billion in 2009, a
20.4% drop over the two-year period. The economic recovery has helped to once again spur
growth, with industry revenues increasing 3.6% CAGR, reaching an estimated $155 billion in
2013. MAGNA Media forecast growth to accelerate a bit, with US advertising revenues
increasing 4.4% annually to nearly $192 billion in 2018.

Financial Group

214

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 244. US Advertising Spending (19992018E)


15%

190

10%

180

5%

170
0%
160
-5%
150

y/y % change

y/y % change

-10%

140
130

-15%

120

-20%

19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
E
20
14
E
20
15
E
20
16
E
20
17
E
20
18
E

Total spending ($ in bil.)

US Advertising
$200

Note: Shaded area represents recessionary period. Source: MAGNA Media Advertising Forecast

But online
advertising is still
in a secular
growth phase

However, this masks the secular trend of the increase in online advertising an industry that really
only began to develop in the mid-1990s. With the growth in search engines and other related tools,
online advertising did not fare as badly as the overall advertising market during the past two
recessions. In addition, its growth in the post-recession periods has been even stronger; since 2009,
US online advertising revenues has increased at a 15.2% CAGR to nearly $41 billion in 2013
(estimated), representing over 26% of all advertising dollars spent. MAGNA Media forecasts
continued growth, with US online advertising revenues projected to increase at a 11.6% CAGR,
generating nearly $71 billion in revenues in 2018, or nearly 37% of total US advertising spending
that year (see Exhibit 245).

Exhibit 245. US Online Advertising Spending as Percentage of


Total (19992018E)
% of total
35%

50

30%

20%
30
15%
20

10%

20
09
20
10
20
11
20
12
E
20
13
E
20
14
E
20
15
E
20
16
E
20
17
E

20
08

0%
20
04
20
05
20
06
20
07

0
20
02
20
03

5%

20
01

10

Note: Shaded area represents recessionary period. Source: MAGNA Media Advertising Forecast.

Internet - fastest
growing source of
new students

A member of BMO

Over the past decade, we have seen a dramatic increase in the use of online advertising for both
for-profit and not-for-profit schools. According to the US Custom Education Study by Compete,
Inc. (3Q 2011), roughly 1 in 4 education researchers never look to courses outside the web,
while 8 of 10 students apply online.

Financial Group

215

September 2013

% of total

25%

40

19
99
20
00

Total spending ($ in bil.)

US Online Advertising
$60

Postsecondary Education

BMO Capital Markets

While few of the publicly held companies consistently disclose their new student enrollment by
source, we believe the internet has been the fastest growing source of new students, taking share
from such old media sources as TV, print, and radio, as well as referrals. The internet will likely
become the top source of leads for most companies in this sector over the next few years; we
believe it is already for those companies with a larger online presence.
Online lead costs
could rise,
following trends
seen with
traditional media
leads
Some companies
backward
integrated by
purchasing leadgeneration
providers

Scrutiny on the
industry has led
to slower growth
in online leads

During the Great Recession, many companies cited decreasing costs per online lead, as
economic pressures led many third-party advertisers to increase their exposure to the
education sector one of the largest buyers of interactive leads with this increased
competition holding back increases in lead prices. However, as the economy rebounded, cost
per online lead have increased, following trends already being seen with traditional media
(e.g., cable TV) leads.
Some companies in the sector have taken actions on their own to rein in these costs. Among
the most aggressive is Apollo Group (APOL), which arguably spends more on internet
advertising than any other company in the sector and is one of the top internet advertisers
overall. In October 2007, APOL purchased online advertising network Aptimus for
$48 million in a move to essentially in-source some of this spending and keep a lid on these
costs (this purchase also signaled to us that its February 2006 decision to enter into an
exclusive relationship with Advertising.coms affiliate network may not have worked out as
initially hoped). Since then, other lead-generation providers have been purchased by
postsecondary providers, including the October 2007 purchase of CourseAdvisor by The
Washington Post Company (WPO), owner of Kaplan Higher Education.
The recent regulatory and media scrutiny of the sector (see details later in this section) has
also led to many companies proactively slowing their recruiting efforts by shifting the focus
to outcomes (e.g., retention and graduation rates) from inputs (e.g., new students). While this
could lead to companies reducing their external marketing spending, it may shift the focus to
higher converting leads (e.g., referrals, high school recruiting) rather than purchasing online
leads. Many providers in the business have cited less reliance on so-called lead aggregators,
marketing firms that act as middlemen between the schools and affiliates, i.e. other websites
that collect potential student leads, given their relatively lower conversion rates. While this
may slow the purchase of online leads, we still believe online leads will be the largest lead
source for most companies in the sector.
We note the trade-off between advertising spending and enrollment growth could be
substantial, and those companies that focus on managing these costs for the near term could
be sacrificing future top-line growth. Nevertheless, while the for-profit sector was once
notorious for its if you spend it, they will come mentality, we no longer believe that to be
the case.

Cost per lead and


conversion rates
can vary by
source

A member of BMO

Historically, most investors were concerned with costs per inquiry (or cost per lead; CPL),
which had been rising by specific media type along with increasing advertising rates during
last decades economic expansion. The CPL varies based on the type of student being targeted
(e.g., online versus campus, allied health versus MBA) and how targeted the schools wish to be
(e.g., certain zip codes, age, etc.). While it may be misleading to show specific rates, in a March
2013 presentation by Gragg Advertising, CPLs conversion rates and costs per start for the forprofit sector were provided based on the companys recent experience by source and campus
type (see Exhibit 246).
Financial Group

216

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 246. Cost per Lead and Conversion Rates by Source and
Campus Type: For-Profit Schools (2013)
Source
Pay-per-lead: Ground
Pay-per-lead: Online
Search engine marketing: Ground
Search engine marketing: Online
Website: Ground
Website: Online

Cost per
Lead to Start
Inquiry
Conversion %
$49.50
2.71%
51.17
1.01%
104.98
5.49%
153.70
1.05%
8.02%
2.62%

Cost per
Start
$1,828.12
5,078.73
1,913.84
14,609.19

Source: Gragg Advertising.

At one time, online CPLs were less than half the rates of those from traditional lead sources, but
that price gap has disappeared for the most part. Typically, as online leads are considered lower
quality (i.e., a student less focused on one particular school), admissions representatives must work
harder to convert these leads, taking up more of their time per lead, likely making these folks less
productive when measured by the number of leads they converted within a specific timeframe. As
such, online leads typically convert at lower rates when compared with leads from traditional
media sources. In a June 2010 presentation at the Association of Private Sector Colleges and
Universities (formerly Career College Association) Convention, Gragg Advertising stated that an
inbound call was 65% more likely to convert to a start than an inquiry that requires an outbound
phone call (i.e., internet leads).
Internet leads
typically convert
at lower rates

Reasons vary by
age when looking
at show rates

A member of BMO

Conversion rates for internet leads tend to vary dramatically depending on whether the lead is
generated by networks that obtain single leads for multiple schools (known as co-registered),
which have lower conversion rates, or from a schools website, which tend to convert at higher
rates as these students are likely more focused on attending a specific school. Many companies
provide leads for postsecondary schools (to be discussed in detail later in this report), although a
number of school operators have stated the quality of these leads can vary greatly.
Interestingly, some schools have cited low show rates (i.e., percentage of admitted students
that actually begin their classwork) as one reason for declining enrollments. This is
particularly an issue for schools that recruit traditional students, as there is typically more lead
time between when they choose a specific institution (e.g., spring) and when they begin
classes (e.g., fall). While coaching services provider InsideTrack conducted their survey of
reasons students did not start college in 2010, we believe many of those reasons still apply
today. As shown in Exhibit 247, each age group has slightly different reasons, with younger
students (under 25) citing suitability as their top reason, those between 25-39 citing finances,
and those 40 and over citing a competitor.

Financial Group

217

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 247. Reasons for Not Starting at College (2010)


Nonstart reason
Competitor
Suitability
External
Finances
Delayed start term
Program not offered
Administrative
Commitment to degree
Not interested
Managing commitments

All Students
Rank
Percent
1
18.2%
2
17.9%
3
17.8%
4
13.9%
5
13.4%
6
11.6%
7
3.0%
8
1.9%
9
1.1%
10
0.9%

Under 25
Rank
Percent
2
20.6%
1
32.8%
5
7.8%
4
13.9%
3

20.0%

25 - 39
Rank
Percent
2
23.3%
4
18.8%
2
23.3%
1
25.2%
5

9.4%

40 and Over
Rank
Percent
1
25.2%
2
23.3%
4
18.5%
3
23.4%
5

8.6%

Source: InsideTrack 2010 survey.

Non-advertising
expenses has
been declining as
a percentage of
sales and
marketing
expenses

A member of BMO

While advertising has received the most attention, non-advertising costs, such as enrollment
management, marketing, and direct sales, are roughly half of total sales and marketing
expense for postsecondary providers, according to Eduventures. An analysis of the data for
the public companies that disclose both sales and marketing and advertising expense shows
that non-advertising expenses have been declining when measured as a percentage of total
sales and marketing expenses (though increasing as a percentage of revenues as revenues have
fallen; see Exhibit 248). Therefore, we believe it is important for investors to understand
trends in these expense components.

Financial Group

218

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 248. Non-Advertising Expense as Percentage of Sales and Marketing and


Revenues for Select For-Profit Providers (FY2003FY2012)
NON-ADVERTISING EXPENSES

'07-12

Company

Ticker

FYE

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012

American Public Education

APEI

12

Apollo Group

APOL

Bridgepoint Education

BPI

12

Career Education

CECO

12

Corinthian Colleges

COCO

43.4

Capella Education

CPLA

12

10.0

Education Management

EDMC

N.A.

N.A.

Grand Canyon Education

LOPE

12

N.A.

N.A.

Lincoln Educational Services

LINC

12

N.A.

N.A.

N.A.
$145.8
N.A.
N.A.

CAGR

$1.5

$2.3

$3.1

$3.8

$5.9

$8.2

$12.0

$15.1

$17.5

208.5

261.5

310.8

311.6

374.2

435.7

464.8

413.3

382.7

4.2%

2.6

7.2

20.9

54.1

98.5

146.8

190.5

232.8

61.9%

162.9

236.0

258.7

221.5

196.5

192.2

210.6

177.5

190.7

-2.9%

65.3

78.7

90.8

94.8

119.4

115.4

180.5

228.1

223.5

18.7%

17.3

22.8

N.A.

N.A.
10.6
N.A.

35.8%

26.0

34.0

39.4

47.6

55.7

54.3

49.3

7.7%

110.0

128.3

188.7

222.4

297.2

346.8

360.5

23.0%

15.4

24.9

45.7

60.5

76.7

74.1

89.9

29.2%

30.3

29.4

35.9

36.3

44.0

37.9

33.8

Median

2.8%
18.7%

AS A % OF SALES AND MARKETING EXPENSE


American Public Education

APEI

12

N.A.

67.5%

56.6%

62.8%

56.6%

47.9%

40.5%

35.3%

34.0%

29.5%

Apollo Group

APOL

53.6%

54.4%

53.9%

57.3%

47.9%

47.5%

47.1%

42.9%

38.9%

36.8%

Bridgepoint Education

BPI

12

N.A.

N.A.

63.2%

59.1%

58.1%

66.8%

70.8%

70.0%

69.4%

69.2%

Career Education

CECO

12

N.A.

49.7%

52.0%

49.8%

47.8%

44.1%

39.7%

41.2%

37.1%

39.9%

Corinthian Colleges

COCO

40.7%

38.4%

37.1%

38.0%

38.3%

43.3%

43.5%

55.4%

59.8%

57.3%

Capella Education

CPLA

12

44.9%

49.2%

49.9%

46.2%

49.2%

48.1%

48.0%

46.4%

40.2%

37.8%

Education Management

EDMC

N.A.

N.A.

N.A.

54.6%

49.2%

53.3%

50.5%

53.4%

53.6%

56.3%

Grand Canyon Education

LOPE

12

N.A.

N.A.

75.6%

76.7%

70.9%

71.1%

70.9%

68.3%

61.9%

63.8%

Lincoln Educational Services

LINC

12

N.A.

N.A.

N.A.

66.3%

54.1%

44.0%

37.5%

36.4%

33.8%

27.3%

44.9%

49.7%

53.9%

57.3%

49.2%

47.9%

47.1%

46.4%

40.2%

39.9%

Median
AS A % OF REVENUES
American Public Education

APEI

12

N.A.

6.4%

8.1%

7.6%

5.5%

5.5%

5.5%

6.1%

5.8%

5.6%

Apollo Group

APOL

10.9%

11.6%

11.6%

12.5%

11.4%

11.9%

11.0%

9.4%

8.7%

9.0%

Bridgepoint Education

BPI

12

N.A.

N.A.

32.4%

25.2%

24.4%

24.8%

21.7%

20.6%

20.4%

24.0%

Career Education

CECO

12

N.A.

11.1%

12.9%

14.5%

13.3%

11.8%

10.5%

10.1%

9.4%

12.9%

Corinthian Colleges

COCO

8.5%

8.4%

8.5%

10.0%

10.3%

11.2%

9.7%

11.2%

13.0%

14.1%

Capella Education

CPLA

12

12.2%

14.7%

15.3%

14.4%

15.0%

14.5%

14.2%

13.1%

12.6%

11.7%

Education Management

EDMC

N.A.

N.A.

N.A.

9.4%

9.4%

11.2%

11.1%

11.8%

12.0%

13.1%

Grand Canyon Education

LOPE

12

N.A.

N.A.

20.5%

21.4%

25.1%

28.3%

23.1%

19.9%

17.4%

17.6%

Lincoln Educational Services

LINC

12

N.A.

N.A.

N.A.

4.0%

3.4%

3.5%

2.7%

2.8%

2.5%

2.6%

10.9%

11.1%

12.9%

12.5%

11.4%

11.8%

11.0%

11.2%

12.0%

12.9%

Median

Note: Data represents fiscal years. Data used for Career Education, Corinthian Colleges and Lincoln Educational Services excludes discontinued
operations where available. N.A. Not Available. Source: BMO Capital Markets and company reports.

While most public companies in this sector have some sort of national marketing function that
typically assists research, strategy, and national recruitment efforts (e.g., high school
recruiting), it is typically supplemented with on-site directors of admissions and recruitment
staff at each campus. We believe the largest portion of non-advertising sales and marketing
expenses relates to compensation for recruiters (sometimes called admissions or enrollment
advisors, representatives, or counselors). According to Eduventures, the typical recruiting
staff person working for a for-profit postsecondary provider interacts with 500-1,500 leads per
year and is expected to convert 10%-15% of these prospects into students. In the 2012 EDU
Advertising and Marketing Survey of for-profit schools conducted by ForProfitedu.com, 5-6
new leads per day was the most common amount given to recruiters. However, recent
regulatory changes including the removal of the safe harbor provisions from the incentive
compensation rule (see details later in this section) have affected the dynamics of this
function, shifting the focus to more of an advisory position than a recruiting one.

A member of BMO

Financial Group

219

September 2013

Postsecondary Education

Increases in sales
and marketing
staff salaries for
not-for-profits
have moderated
recently; likely
higher for forprofits

BMO Capital Markets

We were unable to obtain typical salary data for the marketing functions at for-profit
companies. However, the College and University Association for Human Resources (CUPAHR) compiles an annual salary survey for the non-profit sector. We have compiled some of
the data related to what we believe would be employee categories included in sales and
marketing expense in Exhibit 249. As shown, the median costs for these positions rose, on
average, 2.9% annually between FY2005 and FY2013, although they had increased at higher
annual rates last decade. We believe these salaries provide a proxy for salaries in the for-profit
postsecondary space, although it is likely that the for-profits would pay somewhat higher
salaries commensurate with the greater importance they place on recruiting new students. As
a reminder, both for-profit and not-for-profit institutions whose students are eligible for Title
IV funding (federally financed student loans and grants) are prohibited from providing
incentive compensation to their employees engaged in admissions and financial aid roles
based on enrollment levels.

Exhibit 249. Median Salaries for Typical Sales and Marketing Positions (FY20042005 to
FY2012-2013 School Years)
Title/Category Number
Chief, Enrollment Management (115000)
Chief Campus Marketing Administrator (196460)
Chief Student Admissions Officer (171000)
Director, Admissions and Financial Aid (2081)
Director, Admissions and Registrar (2077)
Associate Director, Admissions (2076)
Admissions Rep-High School Relations (2576)
Median

FY2004-05 FY2005-06 FY2006-07 FY2007-08 FY2008-09 FY2009-10 FY2010-11 FY2011-12 FY2012-13


$96,250
$99,920
$104,000
$106,322
$112,044
$118,648
$120,560
$129,738
$132,349
65,394
68,250
72,100
74,940
77,126
78,320
78,510
79,682
82,265
70,216
75,000
75,920
78,978
83,294
84,605
87,000
90,000
88,597
83,757
90,000
94,700
91,776
93,953
105,913
106,419
90,614
N.A.
62,899
68,108
67,440
69,431
70,065
71,866
73,264
71,654
N.A.
49,110
51,945
52,316
53,150
54,785
54,724
55,608
56,107
N.A.
31,544
32,049
32,392
33,139
33,957
34,581
N.A.
N.A.
N.A.

CAGR
4.1%
2.9%
2.9%
N.A.
N.A.
N.A.
N.A.
2.9%

Note: Data represents fiscal years. N.A. Not Available.


Source: College and University Association for Human Resources (CUPA-HR) Annual Salary Survey.

Recent legislation
proposed to limit
marketing
spending

Given accusations against some for-profit providers regarding the aggressive marketing for
potential students, there has been some legislation proposed to rein in that spending. On April
18, 2012, Senators Kay Hagan (D-NC) and Tom Harkin (D-IA) proposed The Protecting
Financial Aid for Students and Taxpayers Act to prohibit postsecondary schools from using
certain federal funding on advertising, marketing and recruitment. This legislation would
prohibit the use of Pell Grants, federal student loans, the Post-9/11 G.I. Bill, and other
federal education funds for such practices, similar to a current law that bans the use of federal
higher education dollars for lobbying. We note the other revenue sources are beyond Title IV
funds. As noted earlier, this bill was reintroduced in the current Congress.
What was noteworthy was that this proposed legislation would apply to all higher education
institutions not just the for-profit providers. As such, it may have more difficulty passing
given the formidable not-for-profit higher education lobby, though as noted, not-for-profit
providers typically spend less in this area relative to their for-profit peers; the Senators cite
that in FY2009, the 15 large for-profit companies it analyzed spent $3.7 billion or 23% of
their budgets (we infer revenues) in advertising, marketing, and recruiting, while
nonprofit colleges and universities spend an average of 0.5% of their revenues on marketing.
Such comparisons may be misleading, as such expenses such as sports may not be considered
marketing at nonprofit institutions, though they provide strong branding and public
relations opportunities, in our view.

A member of BMO

Financial Group

220

September 2013

Postsecondary Education

BMO Capital Markets

A number of different terms are used when measuring the effectiveness of sales and
marketing expenses. We have outlined them in Exhibit 250 along with some typical
benchmarked costs.

Exhibit 250. Key Sales and Marketing Metrics to Watch


Definition

Postsecondary Norms

For-Profit Norms

Sales and marketing Public company definition varies, but typically


includes compensation for enrollment advisors
expenses as % of
and corporate marketing, advertising costs,
revenues (1)
production of marketing materials, and other
selling and promotional costs.

N.A.

For-profit public
companies most recent
annual average: 24.5%

Lead flow

Measures the number of leads generated from


media (new and traditional) and referrals.

N.A.

N.A.

Cost per lead

Costs for admissions, recruiting and marketing


divided by the number of leads.

N.A.

$50-$154 (2)

All non-profit institutions: $439

N.A.

Term

Cost per applicant (3) Costs for admissions, recruiting and marketing
divided by the number of applications.

Public college: $236


Private college: $575

Conversion
rate (4)

Acceptance
rate

Cost per accepted


student (3)

Measures the percentage of "leads" that actually


are converted into applications. Also known as
the inquiry to application ratio.
Measures the percentage of students that apply
to a school that are actually accepted.
Calculated as number of acceptances divided
by number of applications. Also known as a
selectivity ratio or applications to admit ratio.
Costs for admissions, recruiting, and marketing
divided by the number of students accepted.

Public 4-year institutions: 33%

N.A.

Private 4-year institutions: 16%

Public 4-year institutions: 66% (4)

All for-profit institutions: 74%


(5)

Private 4-year institutions: 64% (4)


All non-profit institutions: $675

N.A.

Public college: $371


Private college: $861

Lead to admit rate (4) Measures the percentage of applications that


are converted into admitted students. Also
known as the inquiry to admit ratio. Can be
calculated by multiplying inquiry to applications
ratio by application to admit ratio.
Show rate (4)

Cost per start (new


student)

Inquiry to enroll rate


(4)

Measures the percentage of those accepted that


actually enroll. Calculated as number of
enrollments divided by number of acceptances.
Also known as a yield rate or admit to enroll
rate.

N.A.
Public 4-year institutions: 22%
Private 4-year institutions: 10%
N.A.
Public 4-year institutions: 38%
Private 4-year institutions: 29%

Costs for admissions, recruiting, and marketing


divided by the number of new students enrolled.
Sometimes referred to as cost per start, cost
per enrollee, or student acquisition cost.

All non-profit institutions: $2,311 (3)

Measures the percentage of inquires that


eventually enroll in the institution. Calculated by
multiplying the inquiry to application rate by the
application to admit rate by the admit to
enroll rate.

Public 4-year institutions: 8%

Public college: $995


Private college: $3,118

For-profit public companies


most recent annual
average: $4,990 (YTD
FY2013) (1)

Private 4-year institutions: 3%

Note: N.A. Not Available. Sources: (1) BMO Capital Markets calculation for FY2012 to date based on company reports. (2) Gragg Advertising 2013
data. (3) National Association for College Admissions Counseling (NACAC) State of College Admissions Report (fall 2011 data) (4) Fall 2012
Admissions Funnel Report conducted by Noel Levitz (5) For-Profit Higher Education: Growth Innovation and Regulation (Bennett, Lucchesi and
Vedder) using US Department of Education data (2007-2008 school year).

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Postsecondary Education

BMO Capital Markets

Postsecondary Schools New Campus Opening and Relocation


Trends
Opening new locations and/or expanding existing locations is a common method used to
foster organic growth. As there are some regulatory restrictions (e.g., obtaining state licensing
approval), the process may take some time, especially when entering a new state.
Most for-profit campuses are relatively small (typically 20,000-40,000 square feet),
typically located in existing facilities (e.g., office complexes) rather than stand-alone
locations, and average a few hundred students; as such, they usually require minimal capital
expenditures. However, for certain programs, such as auto tech, locations are larger (well over
100,000 square feet) and greater capital outlays may be needed to properly equip the facility.
For example, a typical large new campus for auto-tech education provider Universal
Technical Institutes (UTI) requires an initial capital outlay of roughly $4-$5 million, with
about half spent prior to opening and the remainder during the first year of operations.

Minimal capital
outlays except for
certain programs

In Exhibit 251, we have provided a list of the capital expenditures as a percentage of revenues
for a select group of for-profit providers. As shown, for much of the last decade, the median
capital expenditures as a percentage of revenues has ranged in the low- to mid-single digits
for the industry as a whole, though it varies, e.g., companies that offer capital-intensive
programs, such as the auto-tech programs offered by Universal Technical Institute (UTI), tend
to have higher capital expenditures as a percentage of revenue. We note that, as enrollments
have declined, most companies have trimmed their capital spending budgets, focusing on
backfilling existing capacity rather than adding new seats.

Capital spending
varies by program
type; more
hands-on
programs (e.g.,
auto-tech) are
higher

Exhibit 251. Select For-Profit Postsecondary School Operators Capital Expenditures as


a Percentage of Revenues (20032013 YTD)
Company
American Public Education
Apollo Group
Bridgepoint Education
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
Grand Canyon Education
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

Ticker
APEI
APOL
BPI
CECO
COCO
CPLA
DV
EDMC
LOPE
ESI
LINC
NAUH
STRA
UTI
WPO

FYE
12
8
12
12
6
12
6
6
12
12
12
5
12
9
12

FY2003
23.2%
4.2%
0.7%
8.5%
6.7%
4.5%
6.4%
12.6%
N.A.
7.7%
7.0%
N.A.
4.7%
5.9%
5.7%
6.4%

FY2004
11.3%
4.3%
21.0%
9.7%
9.6%
6.4%
5.5%
9.5%
95.1%
5.7%
9.6%
N.A.
6.0%
6.7%
8.8%
9.1%

FY2005
16.4%
3.9%
4.1%
6.9%
8.2%
6.1%
5.5%
7.0%
1.6%
6.8%
7.9%
N.A.
5.6%
14.7%
6.8%
6.8%

FY2006
11.2%
1.8%
4.8%
3.9%
6.2%
8.5%
3.0%
5.6%
3.3%
5.6%
6.2%
N.A.
5.0%
13.3%
4.2%
5.3%

FY2007
9.9%
2.2%
4.2%
3.5%
7.7%
7.1%
4.1%
7.0%
7.5%
3.2%
7.6%
5.6%
4.7%
13.2%
2.9%
5.6%

FY2008
9.3%
3.0%
7.3%
3.2%
5.1%
5.3%
5.8%
9.0%
5.2%
3.5%
5.4%
7.1%
5.2%
5.2%
4.0%
5.2%

FY2009
7.2%
3.2%
5.3%
4.0%
4.2%
4.9%
5.1%
7.5%
9.5%
2.1%
4.3%
1.3%
5.9%
7.8%
4.3%
4.9%

FY2010
11.3%
3.4%
3.7%
6.1%
5.2%
6.0%
6.8%
7.0%
16.2%
2.1%
6.6%
5.2%
7.2%
8.5%
3.0%
6.1%

FY2011
9.6%
3.4%
3.7%
4.2%
6.3%
6.9%
6.2%
4.8%
18.9%
2.1%
7.5%
6.8%
4.8%
6.4%
3.7%
6.2%

FY2012
11.2%
2.7%
2.6%
2.6%
2.7%
5.5%
6.2%
3.4%
20.5%
1.4%
2.2%
11.5%
4.4%
2.7%
4.5%
3.4%

YTD
FY2012
12.6%
2.6%
3.0%
2.5%
2.7%
5.4%
6.2%
3.4%
21.3%
1.8%
2.4%
11.5%
3.3%
2.2%
N.A.
3.1%

YTD
FY2013
6.6%
3.4%
1.6%
1.6%
2.8%
4.9%
5.7%
3.3%
13.4%
0.7%
1.1%
6.7%
1.9%
2.3%
N.A.
3.0%

Note: Data represents fiscal years. N.A. Not Available. Source: BMO Capital Markets and company reports.

Most new campuses accrue start-up losses prior to opening from fit-out costs and premarketing before the first student enrolls. These locations tend to be profitable within a few
months after opening, but cumulative breakeven points are generally reached within a few
months (e.g., campus relocations where some students already exist) to more than two years
(e.g., large new auto-tech facilities). While we believe the IRR of a new campus (usually over
30%) is typically higher than that of an acquired facility, it may be advantageous to make
selective acquisitions for faster entry into a geographically or programmatically hot market.

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Postsecondary Education

BMO Capital Markets

Companies must consider a number of issues when opening a new school or relocating an
existing facility:

Lease versus buy. Typically real estate issues (e.g., price, financing options) come into

play here, but in certain instances tax credits become available when placing a campus in
lower-income areas. The vast majority of campuses operated by for-profit providers are
leased, allowing greater flexibility.

For-profit schools
had expanded
much faster than
their not-for-profit
counterparts until
recently

Hub and spoke. We believe Apollo Groups (APOL) University of Phoenix (UOP)
pioneered this concept with its learning centers. The learning centers differ from
campuses in that they are primarily classroom facilities with limited on-site
administrative staff. They are usually located in cities where the company already has
existing campuses, but are placed where a large facility may not be financially feasible
owing to limited demand and/or financial constraints (i.e., inner city with high rents). In
October 2012, the company announced plans to retrench from this strategy with plans to
close 115 locations, including 90 learning center.

Size of campus. When a campus is in a hot geographic market and/or offers a hot

program, it generally pays to have a larger facility to leverage a greater amount of fixed
costs. From the 2000-2001 to 2009-2010 school years, the average number of students
attending a for-profit institution increased at a 12.2% CAGR to 763 students (see Exhibit
252); over the same period, the average public and private not-for-profit schools, while
much larger only grew at average annual rates of 3.3% and 3.2%, respectively. We
believe the faster increase at for-profit schools is related to more aggressive expansion
strategies, as well as a mix shift toward more degree-granting schools that tends to be
larger than non-degree granting schools. In addition, the relatively faster growth in online
enrollment at for-profit schools may also be skewing this calculation, since an online
school may be counted as one institution. Since that peak, however, the average at forprofit institutions fell 8.9% to 695 students in the 2011-2012 school year, while the
averages at public and private not-for-profit schools have risen slightly to 7,580 and
2,161, respectively, as enrollment in the for-profit sector has declined.

800

Avg. Size (in students)

700

y/y % change

763
640

600
464

500
400
300

271

307

348

513

519

761

695

20%
15%

546
10%

401
5%
0%

200
-5%

100

Annual % Change

Avg. No. of Students

Exhibit 252. Average Size of For-Profit Postsecondary Institution


(20002001 to 20112012 School Years)

-10%

0
2000-012001-022002-032003-042004-052005-062006-072007-082008-092009-102010-112011-12

Source: BMO Capital Markets and US Department of Education National Center for Education Statistics.

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BMO Capital Markets

A campus expansion strategy can be daunting should demand begin to slow, as most
providers are now experiencing. This was particularly acute at DeVry (DV) in the early
part of last decade as the tech wreck slowed demand for its IT programs and capacity
utilization fell sharply at its big box locations, creating more overhead than the
company could easily absorb. DeVry has since shifted its strategy away from the big
box and toward smaller DeVry University Centers, allowing it to expand more rapidly
and with relatively less risk.
Universal Technical Institute (UTI) had been facing similar problems at some of the
newer campuses it opened in recent years, owing to slowing demand for auto-tech
programs. As such, this company is also opening smaller boxes. In July 2010, the
company opened its Dallas campus; in line with management expectations, this new
facility (about one-third the size of the company's current destination campuses) was
profitable in less than nine months after opening faster than the 9-to 15-month target.

Temporary versus permanent. Corinthian Colleges (COCO) has taken this strategy one

step further by typically opening relatively small locations, starting with a handful of
students, and targets reaching 400 students after two years. If enrollments approach those
levels and the company believes there is still unmet demand, it either moves the campus
to a larger location or remodels or enlarges the existing facility. In FY2013, COCO
remodeled, relocated, or expanded 51 of its 97 schools.

Shared services. Education Management (EDMC) followed a shared-services strategy

earlier last decade in which more than one school occupies a single location, increasing
campus utilization (e.g., day and evening) and taking greater advantage of fixed-cost
leverage (e.g., administrative services such as human resources and finance). EDMC
management (at that time) believed this strategy allowed it to reach breakeven earlier,
saving roughly $400,000 in the first year of operations and about $1 million annually
thereafter. However, under its current management team, the company no longer
aggressively pursues this strategy.
Public companies
are present in all
top 50 MSAs in
the US

A member of BMO

In the middle part of last decade, a number of investors had cited concerns about the rapid
opening of new campuses in recent years, potentially leading to a for-profit school on every
street corner. While the rate of new campus openings has slowed since then, we do not
believe we have reached those levels yet, but see certain geographic locations (e.g., some
Florida markets) where there may be a preponderance of schools run by larger providers. In
Exhibit 253, we list companies with locations in the top 50 US metropolitan statistical areas
(MSA). As shown, there is at least one for-profit school run by the larger providers in each of
the top 50 MSAs, with a number of areas hosting schools run by at least 10 of these 13
companies. Apollo Group (APOL) and ITT Educational Services (ESI) have the largest
penetration, respectively covering 46 each. While these companies may not compete head to
head in every market owing to different program offerings, we believe this is a useful tool to
show current penetration and also identify potential targets for new campuses.

Financial Group

224

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 253. Select For-Profit Companies Penetration in Top 50 MSAs


Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

MSA
New York-Newark-Jersey City, NY-NJ-PA
Los Angeles-Long Beach-Anaheim, CA
Chicago-Naperville-Elgin, IL-IN-WI
Dallas-Fort Worth-Arlington, TX
Houston-The Woodlands-Sugar Land, TX
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD
Washington-Arlington-Alexandria, DC-VA-MD-WV
Miami-Fort Lauderdale-West Palm Beach, FL
Atlanta-Sandy Springs-Roswell, GA
Boston-Cambridge-Newton, MA-NH
San Francisco-Oakland-Hayward, CA
Riverside-San Bernardino-Ontario, CA
Phoenix-Mesa-Scottsdale, AZ
Detroit-Warren-Dearborn, MI
Seattle-Tacoma-Bellevue, WA
Minneapolis-St. Paul-Bloomington, MN-WI
San Diego-Carlsbad, CA
Tampa-St. Petersburg-Clearwater, FL
St. Louis, MO-IL
Baltimore-Columbia-Towson, MD
Denver-Aurora-Lakewood, CO
Pittsburgh, PA
Charlotte-Concord-Gastonia, NC-SC
Portland-Vancouver-Hillsboro, OR-WA
San Antonio-New Braunfels, TX
Orlando-Kissimmee-Sanford, FL
Sacramento--Roseville--Arden-Arcade, CA
Cincinnati, OH-KY-IN
Cleveland-Elyria, OH
Kansas City, MO-KS
Las Vegas-Henderson-Paradise, NV
Columbus, OH
Indianapolis-Carmel-Anderson, IN
San Jose-Sunnyvale-Santa Clara, CA
Austin-Round Rock, TX
Nashville-Davidson--Murfreesboro--Franklin, TN
Virginia Beach-Norfolk-Newport News, VA-NC
Providence-Warwick, RI-MA
Milwaukee-Waukesha-West Allis, WI
Jacksonville, FL
Memphis, TN-MS-AR
Oklahoma City, OK
Louisville/Jefferson County, KY-IN
Richmond, VA
New Orleans-Metairie, LA
Hartford-West Hartford-East Hartford, CT
Raleigh, NC
Birmingham-Hoover, AL
Buffalo-Cheektowaga-Niagara Falls, NY
Salt Lake City, UT
Top 50 MSA's Penetrated

Population (mil.)
% change
7/1/2012 from 2011
19.83
0.5%
13.05
0.8%
9.52
0.3%
6.70
2.0%
6.18
2.1%
6.02
0.4%
5.86
1.5%
5.76
1.3%
5.46
1.5%
4.64
0.8%
4.46
1.3%
4.35
1.1%
4.33
1.8%
4.29
0.1%
3.55
1.6%
3.42
1.0%
3.18
1.2%
2.84
0.6%
2.80
0.1%
2.75
0.7%
2.65
1.8%
2.36
0.0%
2.30
1.7%
2.29
1.3%
2.23
1.9%
2.22
2.2%
2.20
0.9%
2.13
0.3%
2.06
-0.2%
2.04
0.7%
2.00
1.7%
1.94
1.0%
1.93
1.0%
1.89
1.4%
1.83
3.0%
1.73
1.7%
1.70
0.8%
1.60
0.1%
1.57
0.4%
1.38
1.2%
1.34
0.6%
1.30
1.6%
1.25
0.5%
1.23
1.1%
1.23
1.1%
1.21
-0.1%
1.19
2.2%
1.14
0.4%
1.13
-0.1%
1.12
1.5%
1.0%

APOL
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

BPI

CECO COCO
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

X
X

X
X

X
X

X
X
X
X

X
X
X
X

X
X

X
X
X
X
X

X
X
X

X
X
X

X
X
X

DV
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

EDMC
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

ESI
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

X
X
X
X
X
X
X
X

X
X
X
X
X

X
X
X
X

X
X
X
X
X
X
X

29

LOPE NAUH STRA


X

X
X

X
X

X
X
X
X

X
X
X
X
X
X
X

UTI
X
X
X
X
X

X
X

X
X

X
X
X

X
X
X
X

X
X
X

X
X
X

X
X

X
X

X
X

X
X

X
X
X

X
X
X

X
X
X

X
X
X
X

X
X
X
46

LINC
X

X
33

X
X

X
42

X
41

X
X
X
X
46

X
X

19

X
30

10

WPO TOTAL
7
X
8
X
10
X
11
X
10
X
9
X
7
8
X
9
X
8
X
7
X
6
8
X
7
6
8
X
5
8
X
8
X
5
X
10
X
8
X
7
6
X
7
8
X
8
X
7
X
8
7
X
8
X
5
X
9
4
8
X
8
6
2
X
6
X
9
4
4
5
4
3
2
5
4
1
6
27

Note: Population estimates as of July 1, 2012. APEI and CPLA have no physical campus locations. Sources: Census Bureau, BMO Capital
Markets, and company reports.

In Exhibit 254, we highlight recent new campus opening and relocation trends for the publicly
held companies. Given recent enrollment trends, most companies in the space have been
recently closing or consolidating campuses, rather than opening new ones.

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225

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 254. Select For-Profit Postsecondary School Operators New Campus


Openings/Relocations (20022012)
Company
American Public Education
Apollo Group
Career Education
Corinthian Colleges
Capella Education
DeVry
Education Management
ITT Educational Services
Lincoln Educational Services
National Amer. Univ. Holdings
Strayer Education
Universal Technical Institute
Washington Post
MEDIAN

Ticker
APEI
APOL
CECO
COCO
CPLA
DV
EDMC
ESI
LINC
NAUH
STRA
UTI
WPO

FYE
12
8
12
6
12
6
6
12
12
5
12
9
12

2002
N.A.
4
2
4
N.A.
2
0
4
0
N.A.
3
1
N.A.
2

2003
N.A.
10
4
6
N.A.
3
0
3
0
N.A.
5
0
N.A.
3

2004
N.A.
11
4
(13)
N.A.
11
2
3
0
N.A.
5
1
N.A.
3

2005
N.A.
8
4
(7)
N.A.
13
4
7
0
N.A.
5
1
N.A.
4

2006
N.A.
9
(11)
(14)
N.A.
3
2
11
1
N.A.
9
0
N.A.
2

2007
N.A.
3
3
(2)
N.A.
6
7
10
(2)
N.A.
8
0
N.A.
3

2008
N.A.
N.A.
4
0
N.A.
0
10
8
2
N.A.
9
0
N.A.
3

2009
N.A.
N.A.
2
0
N.A.
3
4
10
1
N.A.
11
0
N.A.
3

2010
N.A.
N.A.
6
1
N.A.
1
9
9
2
N.A.
13
1
N.A.
4

2011
N.A.
2
N.A.
6
N.A.
4-5
4
11
3
N.A.
8
N.A.
N.A.
5

2012
N.A.
N.A.
(4)
2
N.A.
1
4
8-10
(7)
N.A.
8
N.A.
N.A.
2

Notes: Campus openings exclude acquisitions and are net of closures. Data represents fiscal years. N.A. Not Available. Source: BMO
Capital Markets and company reports.

Given enrollment declines for many schools, it has recently been more common for the
publicly held companies to close, teach-out or even sell, rather open campuses. Examples of
recent such moves can be found in Exhibit 255.

Campus
closures/teachouts/sales

Exhibit 255. Examples of Recent Campus Closures/Sales/Teach-outs for Selected


Publicly Held For-Profit Providers
Company/Ticker
Date
Apollo Group (APOL) Oct-12

Type
Closure

Career Education
(CECO)

Nov-12

Teach-out

Corinthian Colleges
(COCO)

FY2013

Teach-out

Corinthian Colleges
(COCO)
Corinthian Colleges
(COCO)
Corinthian Colleges
(COCO)

FY2012

Teach-out

FY2011

Teach-out

FY2013

Sale

Corinthian Colleges
(COCO)

Jun-12

Sale

Lincoln Educational
Services (LINC)

Jun-13

Teach-out

Details
Announces closing of 115 locations, consisting of 90 learning
and student resource centers, which are generally smaller
satellite locations, and 25 campuses. University of Phoenix
will preserve a national coast-to-coast network of 112
locations and plans to retain a presence in 36 states, the
District of Columbia and Puerto Rico.
Announced plans to teach out 23 domestic campuses across
its Art & Design, CTU and Health Education verticals. The
campuses identified for teach-out are expected to contribute
approximately $124.3 million in revenue and approximately
$62.0 million in operating loss in CY2012.

Expected Costs
Company expects to incur approximately $175
million of restructuring and other charges,
principally for lease exit and other related costs,
with most of these costs incurred in FY2013.

Company expects to take a $33-$41 million


charge, including $25-$30 million of noncash
asset impairments, $5-$7 million in cash
severance and related charges and $3-$4 million
in cash retention bonuses.

Completed the teach-out of its Arlington, VA; Decatur, GA and


Milwaukee, WI, Hialeah, FL; London, Ontario (Canada) and
Thunder Bay, Ontario (Canada) campuses
Completed the teach-out of the Ft. Lauderdale, FL and
Chicago, IL campuses.
Completed the teach-out of its Fife, WA and Toronto
(Central), Ontario campuses
Completed the sale of the four Everest schools located in San
Francisco, CA; San Jose, CA; Hayward, CA and Los Angeles,
CA (announced plans in FY3Q12)
Approved a plan to sell its WyoTech campuses in
In August 2013, the company disclosed it was
Sacramento, California and Daytona Beach, Florida.
unable to sell these campuses and had taught out
the Sacramento location and retained the Florida
location
Approved a plan to cease operations at four campuses in
In addition to the expected operational losses,
Ohio and one campus in Kentucky by December 31, 2013.
company expects to incur approximately $12.5
These campuses were expected to contribute roughly $24
million in additional pre-tax expenses.
million in revenue and 1,800 student starts in 2013.

Source: BMO Capital Markets and company reports.

A member of BMO

Financial Group

226

September 2013

Postsecondary Education

BMO Capital Markets

In the mid-2000s, a number of companies that own larger campuses (e.g., DeVry, Universal
Technical Institutes) began to employ sales/leaseback techniques to extract some value from
these somewhat under-utilized assets and take advantage of what might have been peak real
estate values in certain markets. The recent rebound in the real estate market, combined with
the need for certain companies (e.g., Corinthian Colleges) to strengthen their balance sheets,
has led to a renewal of this strategy. However, as the vast majority of campuses run by the
publicly held companies are leased, not owned, this strategy is somewhat limited.

Sales/leaseback
transactions

Historically, for-profits have been much more aggressive in their campus expansion strategies
than have their not-for-profit peers. While many not-for-profit institutions open satellite
locations or new branches within the same geographical area (e.g., Pennsylvania State
University has 24 campuses throughout the state), there are a few that have physically
expanded beyond their core geographical base in the US (though many have opened
international locations, as discussed later in this report). Some examples can be found in
Exhibit 256.

Some not-forprofits open new


locations far from
their base

Exhibit 256. Examples of Not-For-Profit Institutions New Campus Openings


School
New Location(s)
Albright College (Pennsylvania),
Mesa, AZ
Benedictine University (Illionis) AND
Westminster College (Missouri) and
Carnegie Mellon University
(Pittsburgh)
Drexel University (Philadelphia)

Moffett Field, CA
Sacramento, CA

Emerson College (Boston)

Los Angeles, CA

Northeastern University (Boston)

Charlotte, NC; Seattle, WA

Wharton School (Philadelphia)

San Francisco, CA

Comments
In 2012, these three liberal arts colleges announced plans to set up
branches in Mesa, Arizona. The Albright campus opened in fall 2012,
with the Benedictine and Westminster campuses planned openings in
fall 2013.
Established this Silicon Valley location in 2002 by offering software
engineering programs at this site of NASA research.
Opened a Center for Graduate Studies in January 2009. At the time,
the school had also hoped to build a larger undergraduate campus
nearby in suburban Roseville , California, but those plans were
cancelled in August 2011, blamed on the subpar real estate market
and its impact on the local economy.
November 2011: Announced plans to open a new academic center,
with hopes of opening in 2014
Opened graduate school campuses in Chartlotte (fall 2011), and
Seattle (January 2013). According to InsideHigherEd.com, the school
plans to open similar campus in Austin, Texas, Minneapolis, Minnesota
and the Silicon Valley over the next few years
The University of Pennsylvanias Wharton School of Business
established its Wharton West campus in San Francisco in 2001.

Source: BMO Capital Markets and school news items.

Postsecondary Schools New Program Trends


Centralized
curricula
development:
faster creation
and rollout

A member of BMO

Another growth area among for-profit providers is the addition of new programs, whether
created from scratch or transplanted from existing locations. As most of the publicly held
providers have a centralized curricula development department, we believe this provides a
competitive advantage versus their not-for-profit peers as they can create new program
offerings at faster rates (sometimes within a few months). In addition, the uniformity of these
programs makes them easier to roll out across all company locations, with usually only minor
modifications based on certain state requirements.

Financial Group

227

September 2013

Postsecondary Education

BMO Capital Markets

We believe another competitive advantage is that the programs provided by for-profit


providers tend to be more in tune with current and expected supply/demand imbalances within
the labor force. Exhibit 257 contains a list of the expected fastest-growing occupations
through 2020, according to the BLS, which updates these projections every two years.
Surprisingly there has been some turnover in this list recently. While healthcare is still overrepresented, it has been joined by a number of construction and extraction occupations.
Interestingly, no computer and related jobs were on this top 30 list, though we expect more to
join when the next set of projections are released (early 2014). Nevertheless, for the first time
in recent memory, many of these projected fastest-growing jobs do not require much
education beyond high school.

Fastest-growing
occupations
healthcare and
construction/
extraction; only 4
of the top 10
require higher
education

Exhibit 257. Expected Fastest-Growing Occupations (2010-2020E)


Employed (000's)

Change

Rank Title

2010

2020E

No.

Personal care aides

861

1,468

607

70.5% Less than high school

% Required Education/Training

Healthcare

Occupational Group

Home health aides

1,018

1,724

706

69.4% Less than high school

Healthcare

Biomedical engineers

16

25

10

61.8% Bachelor's degree

Architecture and Engineering

Helpers - brickmasons, blockmasons, stonemasons and tile and


marble setters

29

47

18

59.9% Less than high school

Construction and Extraction

Helpers - carpenters

47

72

26

55.7% Less than high school

Construction and Extraction

Veterinary technologists and technicians

80

122

42

52.0% Associate's degree

Healthcare

Reinforcing iron and rebar workers

19

28

67

98

31

Physical therapist assistants


Helpers - pipeplayers, plumbers, pipefitters and steamfitters

58

84

26

45.4% High school diploma or equivalent

Construction and Extraction

10

Meeting, convention and event planners

72

103

31

43.7% Bachelor's degree

Business and Financial

48.7% High school diploma or equivalent

Construction and Extraction

45.7% Associate's degree

Healthcare

11

Diagnostic medical sonographers

54

77

23

43.6% Associate's degree

Healthcare

12

Occupational therapy assistants

29

41

12

43.2% Associate's degree

Healthcare

13

Physical therapist aides

47

67

20

43.2% High school diploma or equivalent

Healthcare

14

Glaziers

42

60

18

42.4% High school diploma or equivalent

Construction and Extraction

15

Interpreters and translators

58

83

25

42.2% Bachelor's degree

Education, Training and Library

16

Medical secretaries

509

719

210

41.3% High school diploma or equivalent

Healthcare

17

Market research analysts and marketing specialists

283

399

117

41.2% Bachelor's degree

Business and Financial

18

Marriage and family therapists

36

51

15

41.1% Master's degree

Life, Physical and Social Science

19

Brickmasons and blockmasons

89

125

36

40.5% High school diploma or equivalent

Construction and Extraction

20

Physical therapists

199

276

77

39.0% Doctoral or professional degree

Healthcare

21

Dental hygienists

182

250

69

37.7% Associate's degree

Healthcare

22

Bicycle repairers

10

14

37.4% High school diploma or equivalent

Entertainment and Sports

23

Audiologists

13

18

36.9% Doctoral or professional degree

Healthcare

24

Health educators

63

87

23

36.6% Bachelor's degree

Education, Training and Library

25

Stonemasons

16

21

36.5% High school diploma or equivalent

Construction and Extraction

26

Cost estimators

185

253

68

36.4% Bachelor's degree

Business and Financial

27

Medical scientists, except epidemologists

100

137

37

36.5% Doctoral or professional degree

Healthcare

120

164

44

36.2% Master's degree

Healthcare

36.6% High school diploma or equivalent

Transportation and Material Moving

61

83

22

35.8% Doctoral or professional degree

Healthcare

28

Mental health counselors

29

Pile-driver operators

30

Veterinarians

Source: Bureau of Labor Statistics and BMO Capital Markets.

More managerial
and professional
office jobs
expected to
require
postsecondary

In its June 2013 report Projections of Jobs and Education Requirements Through 2020, the
Georgetown University Center on Education and the Workforce analyzed where it expected the
fastest employment growth for those occupations requiring at least some postsecondary
education. Not surprisingly, those in higher-skilled positions (e.g., managerial and professional
office) are expected to see the greatest increases in the percentage of their jobs requiring such
from 2010 to 2020 (see Exhibit 258).

education

A member of BMO

Financial Group

228

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 258. Distribution of Jobs Requiring Postsecondary Education by Occupation


(20102020E; ranked by shift in distribution)
2010
Jobs Req.
Postsec.
Education
% of Jobs in
(in 000s)
Category
Occupation
Managerial and professional office
Sales and office support
Education
Blue collar
Community services and arts
Food and personal services
Healthcare professional and technical
Social science
STEM
Healthcare support
Total

15,570
22,600
7,350
8,740
5,510
9,330
6,040
700
5,750
2,160
83,750

78%
60%
90%
31%
88%
40%
93%
100%
95%
59%
59%

2020E
2010-2020E
Jobs Req.
Postsec.
Change in
Change in %
Education
% of Jobs in
Jobs Req.
of Jobs in
(in 000s)
Category Postsec. Ed.
Category
21,320
27,760
9,500
10,370
7,170
11,890
7,990
830
7,120
2,700
106,650

86%
66%
94%
34%
91%
43%
94%
100%
94%
58%
65%

37%
23%
29%
19%
30%
27%
32%
19%
24%
25%
27%

8%
6%
4%
3%
3%
3%
1%
0%
-1%
-1%
6%

Source: Georgetown University Center on Education and the Workforce.

In the same study, when ranking by industry, the differences are not as great, though those in
financial activities and government and public education rank highest (see Exhibit 259).

Exhibit 259. Distribution of Jobs Requiring Postsecondary Education by Industry (2010


2020E; ranked by shift in distribution)
2010
Jobs Req.
Postsec.
Education
% of Jobs in
(in 000s)
Category
Industry
Financial activities
Government and public education
Natural resources
Wholesale and retail trade services
Healthcare and social assistance
Manufacturing
Construction
Transportation and utilities services
Private education services
Information services
Leisure and hospitality
Professional and business services
Personal services
Total

18,840
14,330
1,220
10,610
12,440
5,240
2,670
2,970
2,730
2,050
6,430
6,980
3,920
90,430

77%
79%
32%
55%
79%
52%
36%
54%
79%
78%
50%
72%
53%
64%

2020E
2010-2020E
Jobs Req.
Postsec.
Change in
Change in %
Education
% of Jobs in
Jobs Req.
of Jobs in
(in 000s)
Category Postsec. Ed.
Category
23,870
16,253
1,452
12,043
15,833
5,526
3,038
3,463
3,517
2,287
7,690
8,767
4,640
108,379

79%
81%
34%
56%
80%
53%
37%
55%
80%
79%
50%
72%
53%
66%

27%
13%
19%
14%
27%
5%
14%
17%
29%
12%
20%
26%
18%
20%

2%
2%
2%
1%
1%
1%
1%
1%
1%
1%
0%
0%
0%
2%

Source: Georgetown University Center on Education and the Workforce.

Unemployment
rates and
earnings vary by
major despite
little difference in
cost of degrees

A member of BMO

In May 2013, the Georgetown University Center on Education and the Workforce updated its
analysis of earnings and unemployment by major in its publication entitled Hard Times: Not
All Colleges Degrees Are Created Equal. As per the publications title, there was a wide
variance in unemployment rates (from health majors in low-single digits to architecture
majors in high-single/low-double digits) and earnings (arts majors at the low-end to
engineering majors at the high-end; see Exhibit 260), despite what is likely not strikingly
different costs when these degrees are obtained at the same schools (i.e., few schools charge
different prices by major).
Financial Group

229

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 260. Unemployment Rates and Median Earnings by Major (2010-2011)

Major
Agriculture and Natural Resources
Architecture
Arts
Business
Communications and Journalism
Computers and Mathematics
Education
Engineering
Health
Humanities and Liberal Arts
Industrial Arts
Law and Public Policy
Psychology and Social Work
Recreation
Science - Life/Physical
Social Science

Unemployment Rates
Recent Experienced
Graduate
College
College
Degree
Graduate
Graduate
Holder
6.1%
3.4%
2.3%
12.8%
9.3%
6.9%
9.8%
6.9%
5.6%
7.3%
5.2%
4.3%
7.8%
6.0%
4.2%
9.1%
4.8%
3.6%
5.7%
4.0%
2.0%
7.4%
4.4%
3.0%
6.1%
2.6%
2.0%
9.0%
6.3%
3.0%
8.2%
4.6%
N.A.
9.2%
4.8%
4.1%
8.8%
6.6%
3.4%
5.2%
4.5%
N.A.
7.3%
4.8%
2.1%
10.3%
5.7%
4.0%

Median Earnings
Recent Experienced
College
College
Graduate
Graduate
$33,000
$51,000
36,000
65,000
30,000
48,000
39,000
63,000
33,000
54,000
45,000
76,000
33,000
44,000
54,000
83,000
43,000
65,000
30,000
51,000
41,000
71,000
33,000
56,000
30,000
46,000
29,000
50,000
30,000
60,000
36,000
61,000

Graduate
Degree
Holder
$67,000
72,000
55,000
83,000
64,000
91,000
57,000
101,000
81,000
66,000
N.A.
70,000
60,000
N.A.
90,000
84,000

N.A. Not Available. Source: Georgetown University Center on Education and the Workforce.

Reasons students
at for-profit
schools choose a
program

In 2012, Imagine America and Wonderlic conducted an Educational Benchmark Survey for
students at for-profit schools. When asked why they chose a specific program, a wide variety
of answers were provided surprisingly jobs and tuition were near the bottom of the list (see
Exhibit 261).

Exhibit 261. Why College Students Choose a Particular Program


(2012)
Reason
I liked a particular program
The length of the program was reasonable
The school had a good reputation
The program and quality of education were strong
A friend, family member, coworker, or employer suggested it to me
The classes were scheduled at convenient hours
The school location was convenient (e.g. transportation)
The school had good equipment or other resources
The students at this school get good jobs when they graduate
The school helped me get a school loan
There were a variety of programs available
The tuition was affordable

% cited
73%
60%
54%
51%
41%
40%
38%
35%
30%
27%
23%
15%

Source: Educational Benchmark Survey from Imagine America and Wonderlic.

Given that most schools have core requirements for graduation, it is not surprising that the
most frequently taken classes are core classes (e.g., writing, history; see Exhibit 262).

A member of BMO

Financial Group

230

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 262. Top Courses Taken by Bachelors Degree Recipients


(Graduated in 20072008 school year)
Course name
Psychology, general
Writing, general
Sociology
American History
Biology/Biological Sciences, general
American Government and Politics
Calculus
Statistics, general
Spanish Language and Literature
Accounting
Chemistry, general
General Literature
Marketing/Marketing Management, general
Algebra and Number Theory
Microeconomics
Speech Communication and Rhetoric
Economics, general
Macroeconomics
Philosophy
Business Administration and Management, general
Business Law
Finance, general
Sports and Exercise
Physics, general
World Civilization/World History
Public Speaking, Debate and/or Forensics
Developmental and Child Psychology
Communication, general
Geology/Earth Science, general
Music, general

Percentage
earning
credits
59.0%
57.7%
44.2%
43.7%
37.6%
33.6%
32.5%
31.1%
31.0%
29.9%
28.8%
28.6%
27.9%
27.4%
25.2%
24.2%
23.8%
23.5%
23.1%
22.8%
22.7%
22.3%
21.5%
21.0%
20.5%
19.8%
18.9%
18.7%
17.3%
16.7%

Source: National Center for Education Statistics.

Recent recession
affected incoming
freshmen career
choices

A member of BMO

Each year, the National Research Center for College & University Admissions (NRCUA)
conducts a survey of incoming freshmen, asking them their career choice upon entering
college. While we personally acknowledge ones right to change his or her focus and major
while attending college (I started out pre-law), it is interesting nonetheless to see how these
choices have changed over the years. Interestingly, after years of fairly stable results, recent
entering classes have showed some dramatic changes, including the following:

Nursing/healthcare moving to the number one or number two choice over the past four
years.

Lawyer/legal services dropped to number nine in each of the past two year its lowest
ranking in the survey history.

Science moved up to 17 in the 2012 survey its highest ranking ever.

Financial Group

231

September 2013

Postsecondary Education

BMO Capital Markets

We believe the Great Recession has taken its toll, with more students choosing to enter
programs (e.g., healthcare) with better near-term job opportunities (see Exhibit 263).

Exhibit 263. Top Career Preferences Among College-Bound Students (20022012;


Ranked by 2012 Preference)
Career
Nursing/Health Care
Medical Physician
Art
Business Administration
Psychology/Psychiatry
Music
Teaching/Education
Criminal Justice/Law Enforcement
Lawyer/Legal Services
Culinary/Chef
Engineering (Mechanical)
Engineering (General)
Biology
Business Owner/Entrepreneur
Athletics/Coaching
Child Care/Development
Science
Drama/Theatre Arts
Military Science
Architecture

2012 Survey
Rank
%
1
5.8%
2
5.4%
3
4.0%
4
3.3%
5
3.2%
6
3.1%
7
3.1%
8
3.0%
9
2.9%
10
2.4%
11
2.2%
12
2.2%
13
2.0%
14
2.0%
15
1.8%
16
1.8%
17
1.8%
18
1.7%
19
1.7%
20
1.7%

2011 Survey
Rank
%
2
5.5%
1
5.5%
3
3.8%
5
3.6%
4
3.7%
7
3.0%
6
3.4%
10
2.7%
9
2.9%
12
2.2%
16
1.9%
11
2.5%
13
2.0%
15
1.9%
19
1.8%
17
1.8%
21
1.6%
20
1.7%
23
1.5%
21
1.6%

2010 Survey
Rank
%
2
4.9%
1
5.2%
3
4.2%
8
2.7%
6
3.0%
4
3.6%
7
2.9%
9
2.6%
5
3.4%
11
2.3%
12
2.2%
17
1.9%
19
1.9%
13
2.1%
10
2.4%
15
2.0%
31
1.2%
14
2.1%
18
1.9%
20
1.9%

2009 Survey
Rank
%
1
5.4%
3
4.6%
5
3.8%
2
5.1%
6
3.5%
7
3.0%
4
4.0%
9
2.5%
8
2.8%
16
1.8%
22
1.5%
10
2.5%
12
2.2%
17
1.8%
19
1.7%
24
1.4%
24
1.4%
14
2.0%
20
1.5%
18
1.7%

2008 Survey
Rank
%
3
4.2%
1
5.0%
5
4.0%
15
2.1%
6
3.0%
2
4.8%
8
2.9%
10
2.8%
4
4.1%
25
1.6%
11
2.8%
31
1.1%
22
1.5%
7
3.0%
9
2.9%
13
2.2%
32
1.1%
12
2.3%
30
1.4%
16
2.0%

2007 Survey
Rank
%
4
4.1%
1
5.1%
5
3.9%
17
2.0%
6
3.2%
2
4.8%
7
3.0%
10
2.8%
3
4.5%
25
1.5%
11
2.8%
31
1.3%
22
1.5%
8
2.9%
9
2.9%
14
2.2%
32
1.2%
13
2.3%
30
1.3%
16
2.0%

2006 Survey
Rank
%
2
4.2%
1
5.6%
6
3.5%
18
2.0%
9
2.8%
9
4.4%
8
3.0%
11
2.8%
4
5.1%
25
1.4%
12
2.8%
27
1.4%
24
1.5%
10
2.8%
7
3.0%
14
2.4%
37
1.1%
16
2.2%
29
1.3%
15
2.4%

2005 Survey
Rank
%
4
4.3%
1
5.2%
5
3.3%
26
1.3%
7
3.1%
3
4.6%
12
2.6%
11
2.7%
2
5.1%
24
1.4%
10
2.8%
39
1.0%
28
1.2%
8
3.0%
6
3.1%
13
2.5%
33
1.2%
15
2.0%
30
1.2%
14
2.3%

2004 Survey
Rank
%
4
3.8%
1
5.4%
5
3.3%
24
1.5%
7
3.2%
3
4.5%
10
2.7%
13
2.4%
2
5.2%
30
1.2%
11
2.6%
40
1.0%
28
1.3%
9
3.0%
8
3.0%
12
2.4%
34
1.1%
15
2.0%
29
1.2%
14
2.2%

2003 Survey
Rank
%
4
3.7%
1
5.2%
8
2.8%
9
2.6%
7
3.2%
3
3.8%
6
3.5%
16
1.9%
2
4.5%
32
1.0%
13
1.9%
23
1.4%
29
1.2%
10
2.4%
11
2.3%
12
2.0%
22
1.5%
15
1.9%
31
1.0%
14
1.9%

2002 Survey
Rank
%
9
3.1%
1
5.3%
8
3.2%
18
2.0%
4
3.4%
6
3.3%
3
3.5%
14
2.4%
2
5.1%
39
1.0%
11
2.6%
N.A.
N.A.
22
1.7%
7
3.2%
10
2.9%
12
2.5%
31
1.2%
13
2.4%
30
1.3%
17
2.0%

N.A. Not Available. Source: National Research Center for College & University Admissions.

Community
college focus
matches well with
fastest-growing
occupations

Health and
technology
among most
popular associate
degrees

A member of BMO

As many of the expected fastest-growing occupations over the next decade with at least some
higher education requirements require less than a bachelor degree, we believe community
colleges and for-profit schools will play an important role in the schooling for these jobs.
According to the American Association of Community Colleges (AACC), community
colleges provide postsecondary education and specialized training programs to about 45% of
all US undergraduates. Community colleges are also at the forefront of educating and training
many of the first responders in the health care and security industries expected to continue
to be areas of future job growth. According to the AACC, community colleges educate 59%
of new nurses and the majority of other new healthcare workers. In addition, close to 80% of
firefighters, law enforcement officers, and EMTs are credentialed at community colleges.
While we were unable to obtain a list of top fields of study by program type, we were able to
obtain a list of degrees granted. These top degrees do not necessarily match up with the
expected fastest-growing occupations, except at the associate degree level where students may
be more career-focused as opposed to those attending master and graduate programs, where
they may be more degree-focused. As shown in Exhibit 264, health and technology-related
degrees account for four of the top seven most popular associate degrees the highest of any
field of study. We note the most popular associate degrees tend to be liberal arts/general
studies as it has become more common for students to fulfill their basic requirements at a less
expensive community college and then transfer to another school to focus on their major.

Financial Group

232

September 2013

Postsecondary Education

BMO Capital Markets

Exhibit 264. Degrees Granted by Field of Study: All Postsecondary Institutions (20102011 School Year)
Bachelors

Associates
Rank Field of Study
1
Liberal arts and sciences,
general studies, and humanities
2
Nursing, RN and other

% of
Degrees Field of Study
32.5% Business

Masters
% of
Degrees Field of Study
21.3% Business

8.8%

Social sciences and history

10.3%

Education

8.4%

Health professions and related


programs
Public administration and
social services
Psychology

Health sciences, other

6.1%

Business administration and


management
Criminal justice and corrections

4.9%

Health professions and related


programs
Education

4.2%

Psychology

5.9%

4.2%
4.0%

Visual and performing arts


Biological and biomedical
sciences
Communication, journalism,
and related programs
Engineering

5.5%
5.2%

5
6
7
8
9
10

Medical assisting
Computer and information
sciences
Engineering-related technologies
Business and management,
other
Multi/interdisciplinary studies

3.8%
3.3%
2.5%

Top 10 programs
Other programs
TOTAL

74.3%
25.7%
100.0%

Total degrees granted

942,327

English language and


literature/letters
Top 10 programs
Other programs
TOTAL

6.1%

4.9%
4.5%
3.1%
75.0%
25.0%
100.0%

Doctors
% of
Degrees Field of Study
25.6% Health professions and
related clinical sciences
25.3% Legal professions and
studies
10.3% Education

27.4%
5.9%

5.3%

Engineering

5.1%

3.4%

Biological and biomedical


sciences
Psychology
Physical sciences and
science technologies
Social sciences and history

4.7%

Social sciences and history


Computer and information
sciences
Visual and performing arts

2.9%
2.7%

Theology and religious


vocations
Biological and biomedical
sciences
Top 10 programs
Other programs
TOTAL

1.8%

1,715,913

% of
Degrees
36.7%

2.2%

1.6%
81.1%
18.9%
100.0%

Theology and religious


vocations
Business
Top 10 programs
Other programs
TOTAL

730,635

3.2%
3.2%
2.7%
1.4%
1.4%
91.8%
8.2%
100.0%
163,765

Source: BMO Capital Markets and National Center for Educational Statistics.

When drilling down within the for-profit sector, the degrees offered tend to skew more
heavily toward business, health, and computer programs, except at the doctorate levels, where
nearly half the degrees are in legal and education (see Exhibit 265).

Most popular
degrees at forprofit schools are
business, health,
and computerrelated

Exhibit 265. Degrees Granted by Field of Study: For-Profit Postsecondary Institutions


(2010-2011 School Year)
Associates
Rank Field of Study
1
Health professions and related
programs
2
Business
3
4
5
6

Computer and information


sciences
Homeland security, law
enforcement and firefighting
Engineering technologies and
engineering-related fields
Virtual and performing arts

Bachelors
% of
Degrees Field of Study
31.5% Business
25.4%

Masters
% of
Degrees Field of Study
43.3% Business

5.5%

Health professions and related


programs
Computer and information
sciences
Homeland security, law
enforcement, and firefighting
Virtual and performing arts

4.0%

Multi/interdisciplinary studies

2.9%

9.3%
8.9%

Doctors
% of
Degrees Field of Study
46.7% Legal professions and
studies
25.1% Education

11.9%

Education

10.4%

Health professions and related


programs
Psychology

11.4%
5.2%

Health professions and


related programs
Psychology

15.6%

Homeland security, law


enforcement, and fir