IFC. Reporting on the Marketplace Trends in US Higher Education. February 2, 2006 THE PARTHENON GROUP

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1 IFC Reporting on the Marketplace Trends in US Higher Education February 2, 2006 THE PARTHENON GROUP 1

2 The Higher Education is a $400B Market, with Steady Growth (2005) For Profit activities account for at least 5% of total expenditures $400 $350 Total Expenditures by Institution Type $351B Private, For Profit $395B Private, For Profit Real CAGR ( 98-05) 5.3% 21.2% $300 $250 $200 $150 $229B Private, Non-Profit $296B Private, For Profit Private, Non-Profit Private, Non-Profit Private, Non-Profit 5.9% $100 $50 Public Public Public Public 4.2% $0 1997/ / /4 2004/5 Source: National Center for Education Statistics, Projection of Education Statistics, Harris Nesbitt, Real CAGRs based on CPI US City Average 2

3 Since the Mid-Seventies Student Demographics Have Moved Away From the Traditional Undergraduate Profile Higher Education Student Demographics (2000) Enrollment in Degree Granting Institutions by Age 100% 15.3MM 20.0MM 18.8MM Percent of Total 80% 60% 40% 20% Non-Traditional Undergraduate Traditional Undergraduate Total Enrollment in Degree Granting Institutions (MM) MM 11.2MM 12.1MM 13.8MM 14.3MM 15.3MM 22+ <22 0% Undergraduate Student Demographics E Percent 45% 53% 54% 57% 60% 56% 57% > age 22 Note: Non-Traditional Undergraduate defined as financially independent, attend part-time, delayed enrollment, work full-time, have dependents, single parent, no high-school diploma (GED), ages >24 Source: NCES Digest of Educational Statistics 2001 and

4 To Serve a Diverse Population the U.S. Has Built an Elaborate System of Higher Education Access Points Number of Higher Education Institutions by Type(2004) Enrollment in Higher Education Institutions by Type(2004) 3,000 2,659 11MM 10MM Private (For Profit) 10.1MM Number of Institutions 2,500 2,000 1,500 1,000 1,787 Private (For Profit) 2,213 Private (For Profit) Private (Non-Profit) Private (For Profit) Private (Non-Profit) Number of Students 9MM 8MM 7MM 6MM 5MM 4MM 3MM Private (For Profit) 6.5MM Public Private (Non-Profit) Public Private ( Non-Profit) Public Public Public <2 yr 2 yr 4+ yr 2MM 1MM 0MM Private (For Profit) 0.3MM <2 yr 2 yr 4+ yr % Private For Profit # Private For Profit 79% 37% 15% 71% 32% 4% k 212k 382k Note: Only Title IV 2-4 yr and 4+ yr institutions included Source: NCES 4

5 Most Students Who Complete Their Associates Degree Go on to Complete a Bachelors Associates Enrollments by Type (2002) 100% 13.4MM 5.6MM 1.6MM Certificate 80% Associates Associate's Partial Coursework 60% Transfer 40% 20% Bachelors Complete < 2 years (i.e. No Degree) Attain Bachelors 0% Enrollment by Type Associate Attainment Completion Students Source: NCES, Parthenon Analysis 5

6 This Elaborate System has Provided for our Increasing Income Potential Curve Increase in Earnings Relative to H.S. Dropouts for Yearround, Full-time Workers (Ages 25 and Older, 2000) 300% 275% Percent Increase in Earnings for Additional Education Over H.S. Dropout 250% 200% 150% 100% 50% 35% 65% 116% 0% % Increase High School Diploma* Associates Degree Bachelors Degree Professional Degree Median Earnings $28,800 $35,400 $46,300 $80,200 Note: High school diploma includes GED; median annual earnings for High School dropouts are $21,300 Source: Bureau of Labor, Occupational Outlook Quarterly, Spring

7 Although the System of Higher Education is Built on Solid Footing... Multiple options Student loan system Differential price points Transferability of credits Strong regulation to safeguard financial and operating abuse Accreditation system 55 students per 1,000 population $1,700 per capita spend 7

8 ... it has Faced Several Challenges, Resulting in a System that has not Meaningfully Improved in Decades Increasingly diverse student bodies have given rise to new service and content needs Ineffective cost control has resulted in tight budget crunches Investments in technology have not yielded convincing cost savings Institutions struggle to offer rich educational experiences for a growing population of distance students A learning industry with no learning curve 8

9 For Profit Universities Have Focused On Building A More Student-Centric Model and Better Economic Engine Sharp focus on student needs (vs. just academic research) Operate effectively and efficiently with margin objectives Offer career-oriented education with the target of post degree employment Speed to market >20% CAGR in the past five years 9

10 ... and 20% Average Margins $10 For Profit University Revenues 1 $9.3B 8 $7.6B Other $4.4B Other Argosy Education Whitman Ed ucation Straye r Education Kaplan Colleges Corinthian Colleges Education Management Career Education ITT Education Services DeVry Apollo $5.3B Other Argosy Education Wh itman Edu cation Strayer Education Kaplan Coleges Corinthian Colleges Education Management Career Education ITT Education Services DeVry Apollo $6.3B Other Argosy Education Whitman Education Strayer Education Kaplan Colleges Corinthian Colleges Education Management Career Education ITT Education Services DeVry Apollo Other Strayer Educ ation Kaplan Colleges Corinthian Colleges Education Managem ent Career Education ITT Education Services DeVry Apollo Strayer Education Kaplan Colleges Corinthian Colleges Education Management Career Education ITT Education Services DeVry Apollo Operating Industry Margin 1 : 15.2% 16.3% 18.2% 20.6% 20.8% 1 Includes Apollo, DeVry, ITT Education Services, Career Education, Education Management, Corinthian Colleges, Strayer Education, Whitman Education, and Argosy Education Source: Hoovers, Eduventures, 10Ks, Multex data, Thomson Analytics 10

11 For Profit Higher Education Targets Non-Traditional/ Working Adult Students Age Demographics of Undergraduates in Associate & Bachelor Degree Programs(2004) 100% 14,584M 2,840M 1,028M or above Percent of Total Public, 2-4 Years Private Not-For-Profit Private For-Profit, 2-4 Years Source: NCES, NPSAS:2004 Undergraduate Students 11

12 For-Profits Provide Non-Traditional Students Courses Targeted Towards Career Advancement in Job Growth Areas Program Subject Offerings Estimated Job Growth (10Yr CAGR ) 100% 4.0% Other Percent of Total 80% 60% 40% 20% Science Social Sciences Education Health Computer Science Vocational Education Annual CAGR 3.0% 2.0% 1.0% 3.1% Job Growth 2.4% 2.3% 1.8% 1.5% 1.5% 1.3% 1.4% (Overall Job Growth) Business 0% Program Subjects Offered 0.0% Computer Science Health EducationBusiness Social Vocational Science and Sciences Personal Services Course offerings are targeted at advancing students in growing career fields Note: Job growth by subject area includes all jobs which require a bachelor s, vocational, associate s, master s, first professional, or doctoral degree; Subject definitions: Business (Bus. Admin, Accounting, Marketing, Public Admin.) Social Sciences (Law, Psychology, Religion and Philosophy) Vocational (E.g. Auto Mechanics, Aviation Mechanics, Electrician, etc.) Health (Allied Health, Health Sciences) Source: Bureau of Labor Statistics, 2004; NHES Survey

13 For-Profit Institutions also Enjoy Better Job Placement Statistics than the Average US College Graduate Full-Time Job Placement Rate Employment After 6 Months Employment After 12 Months 100% Graduate Job Placement Rate (%) 80% 60% 40% 20% 84% Post-Graduation Employment Rate 77% Post-Graduation Employment Rate 0% For-Profit U.S Colleges Notes: U.S Colleges refers to full-time employment of bachelor s degree recipients 1 year after graduation in 2000; For-Profit refers to average of ITT Education Services, DeVry, Career education, Corinthin Colleges and Education Management for either 2002 or 2003 Source: NCES; Company 10Ks 13

14 For Profit Education Companies Expect the Highest Growth from Online Programs Expected Percent Increase In Online Enrollment ( ) 50% 45% 40% Expected Growth in Online Enrollment 2004 to % 20% 15% 22% 10% 0% Public Private (Non Profit) Private (For Profit) Source: Sloane Institute 14

15 Despite the 20% Growth and 20% Average Margins, Wealth Creation has been Negatively Impacted by a Couple of Core Concerns... For Profit University Market Caps 1 $30 $27.5B 25 Market Capitalization (Dollars in Billions) $6.7B $8.9B $14.5B $21.1B 5 0 Dec 2000 Dec 2001 Dec 2002 Dec 2003 Jan 2006 Change: 33% 63% 90% (23%) 1 Includes Apollo, Career Education, Corinthian Colleges, DeVry, Education Management, ITT Education Services, and Strayer Source: ThinkEquity, Multex, Thompson One Banker Analytics 15

16 Enrollment Growth At For Profits Has Slowed Sharply Ground Enrollment Growth Rate of Publicly Traded For-Profits 30% Ground Enrollment Growth Rate 25% 20% 15% 10% 5% Growth Rate 0% Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Source: Baird, Jan

17 Student Acquisition Costs are Rising Average Sales & Marketing Spend as % of Revenue ( ) 20.0% Average Sales & Marketing Spend % of Revenue % 18.7% 17.7% 17.9% 17.0% 16.4% Note: Data for publicly-held For Profit providers only (Apollo Group, Concorde Career Colleges, Corinthian Colleges and Strayer Education) Source: Harris Nesbitt, Company Financials 17

18 Several Investigations and Litigations have Rattled the Financial Markets Several leading For Profit companies are facing litigation with the following allegations: 1. Misrepresentations to students for marketing purposes 2. Overstated enrollment statistics 3. Financial aid improprieties 4. Falsified student records (to maintain enrollment) Industry is Finding the Limits of Marketing Practices they can Engage in 18

19 Key Drivers for Future Growth Regulation (RHEA) Operational Excellence Customer Acq./Retention Internationalization Would remove current limits on percent of students in distance education in order to qualify for financial aid Would expand the types of revenue that count towards rule to allow an institution to qualify for federal aid programs Bill could also potentially change definition of institution of higher education to include for profit colleges thus providing access to broader range of federal grants Growth of for-profit university networks will require increasing sophistication to manage effectively while keeping down overheads BDP implementation and formalization of procedures across sites will become more important Institutions must become more effective in converting leads and find creative means to reach target markets given rising cost of online and television channels Managing student retention through counseling and tracking of student performance/ attendance will also be key Higher Education systems in many developing countries have little capacity relative to demand Economic growth in large developing markets will continue to increase potential market for higher education De-regulation of key developing markets (e.g., Brazil, China) presents significant opportunity for U.S. companies 19

20 The Industry has Begun to Internationalise... Company Rev. (FY04) International Operations Apollo Group $2.3B Career Education Corp. $1.7B 71 Campuses in US; 11 campuses in Europe/UAE Online courses Kaplan, Inc $1.1B Test prep in 18 countries Dublin Business School (4k Enrollments) Professional Training in UK, HK, Shanghai, Singapore (40k Enrollments) Education Management Corp. Corinthian Colleges $1.0B $0.9B DeVry, Inc $0.8B Laureate, Inc $0.7B Higher education (traditional and online) Mexico/ Chile: $330MM; Spain: $91MM; Other: $99MM ITT Educational Services $0.6B Source: Factiva, Company information 20

21 An Example of a Significant International Opportunity is China Private higher education has grown rapidly (77% CAGR) since its inception in 1997, driven by strong demand and encouragement by the government 15MM Student Enrollment in Higher Education in China 12MM 14MM Higher Ed. (Private Polytech & B.A.) CAGR ('00-'04) 26% 77% MM Students Enrolled 10MM 5MM 3MM 3MM 3MM 3MM 3MM 3MM 4MM 6MM 7MM 9MM Public Higher Ed. (B.A.) 21% 0MM Higher Ed Public Higher Ed. (Polytech.) 29% % of Secondary Grads in Higher Ed. 5% 5% 5% 5% 5% 5% 5% 7% 8% 9% 12% 14% Source: China Education Economy Information Net (CEE) 21