IFC Reporting on the Marketplace

1
IFCReporting on the Marketplace Trends in US
Higher Education
January 21-23, 2004
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Higher Education is a 300B Market, with Steady
Growth (2002)

• For profit products and services comprise 6 of
  total expenditures

Total Expenditures by Institution Type
Source National Center for Education Statistics,
Projection of Education Statistics, Eduventures
Learning Markets Opportunities 2003, Real CAGRs
based on CPI US City Average
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The Public Sector Faces Several Challenges

• Ineffective cost control has resulted in tight
  budget crunches
• Increasingly diverse student bodies have given
  rise to new service and content needs
• Investments in technology have not yielded
  convincing cost savings
• Institutions struggle to offer rich educational
  experiences for a growing population of distance
  students
• Public institutions are held increasingly
  accountable for educational outcomes

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Though Emulated Internationally, the American
Higher Education System Suffers from Wide Gaps in
Attainment
Graduate High School
Enroll in Associates or
Bachelors Program
Complete Associates or
Bachelors Program
Percent of Total 8th Graders
75-77 (11 GED)
34
72
Coordination required across secondary and
postsecondary to produce better outcomes
Source NCES National Education Longitudinal
Study, 1988/2000 Parthenon analysis
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Higher Education Has Significantly Outperformed
All Relevant Indices
Higher Ed65
K-1248
Corporate42
SP 50016
Indexed to January 3, 2003
Publishing4
Source ThinkEquity, Thomson Analytics, Parthenon
Analysis
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There is Massive Value Creation at the For Profit
Level
For Profit University Market Caps 1
Market Capitalization (Dollars in Billions)
Change 33 63
90
1 Includes Apollo, Career Education, Corinthian
Colleges, DeVry, Education Management, ITT
Education Services, and Strayer Source
ThinkEquity, Multex, Thompson One Banker
Analytics
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Driven in Part by Consolidation
For Profit University Revenues 1
Dollars (in Billions)
Operating Industry Margin1
15.2
16.3
18.2
20.6
Latest Twelve Months of publicly reported
data 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
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Three Distinct Branding Strategies Exist
National Multiple Brands
National Single Brands
Regional Single Brand

• Career Education
• Corinthian Colleges
• Education Management Corp.

• University of Phoenix (Apollo)
• ITT Educational Services
• DeVry

• Strayer

Major Players
Overview

• Broad national presence with a limited
  international footprint
• Separate branding for various programs and
  geographies
• Classroom and online delivery

• Regional presence in Southeast (Washington D.C.,
  VA, MD, NC and TN)
• Recent northern expansion into PA
• Classroom and online delivery

• Broad national presence with a limited
  international footprint
• Identical branding for all offerings, regardless
  of program of study or location
• Classroom and online delivery

Key Components

• Growth by acquisition
• No formal assimilation of properties to a common
  standard
• Aggressive marketing on television and online

• Organic growth
• Similar look and feel of campuses across the
  country
• Aggressive marketing on television and online

• Organic growth
• Enrollment growth driven by online expansion
• Heavy investment in staff and equipment of online
  division

Source Factiva, Company information
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Leading Players Generate Healthy Bottom Lines

• EBIT margins range from 15-35

EBIT Margin (2002)
EBIT Margin
Source Company 10Ks Hoovers
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Aggressive Investment in Selling and Promotion Is
Needed

• National multiple brands require 40 higher
  support over national single brands

SP / Total Students
Spend Per Student
Source Company 10Ks Analyst Interviews
Parthenon Analysis
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Other Drivers of For Profit University Value
Creation

• Increasingly sophisticated marketing services to
  attract customers
• Increased focus on the working adult customer
• Continued focus on segments where education
  provides immediate benefits for career
  advancement
• Aggressive cost management
• Innovative technology
• State-supported financing

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For Profit Higher Education Represents the
Largest Corporate Training Provider

• University of Phoenix employs roughly 200
  business development salespeople to target
  corporations (80 at UoP and 100 at Online)

Percent of Revenues from Corporate Tuition
Reimbursement
Actual Revenues from Corporate Tuition
Reimbursement
Percent of Revenues from Corporate Tuition
Reimbursement Programs
Dollars in Millions
UoP
Strayer
UoP
Strayer
Source Company 10Ks Parthenon Analysis
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Different Business Models are Evolving
Traditional Institutions
HybridModel
VirtualUniversity
Competency-BasedVirtual University
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New Business Models are Driven by Ubiquitous
Technology
Internet Access

• 99 of faculty have internet access through the
  campus network
• 82 of classrooms have internet access through
  the campus network
• 81 of dormitory beds have a network connection
• 79 of institutions offer email accounts to
  students
• 89 of institutions offer internet access to
  students

Student Services

• 78 of institutions enable students to view
  course catalogs over the internet
• 52 of institutions provide space on college
  server for student web pages

Libraries

• 84 of institutions have web pages for their
  library
• 76 of institutions offer access to library
  catalog through the internet
• 59 of institutions offer introductory internet
  courses to students

Admissions

• 39 of institutions have websites with
  interactive application forms

Source Survey of Internet Administrators and
Webmasters in Higher Education, Campus Computing
2002
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Distance Enrollment is 2.5MM Today

• Distance penetration is highest in Graduate and
  Associate programs

Enrollments by Type (2002)
Percent of Total
Fully Distance EnrollmentsAs a Percent of
Total 6 4 2 6 Partially Distance
EnrollmentsAs a Percent of Total 18 13 6 13
Source NCES Parthenon Analysis
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Most International Markets Lead the US in
Distance Education, yet all Lag the US in Online
Market Maturity

• While countries like South Korea and Hong Kong
  report higher distance penetration than the US,
  the online component of such offerings is much
  lower than the US

Distance Enrollments, 2002
Online Enrollments, 2002
Graduate and Undergraduate
Graduate
Hong Kong
Undergraduate
US
Hong Kong
Enrollments
Enrollments
South Korea
South Korea
Canada
Canada
US
Hong Kong
Canada
Japan
Japan
South Korea
US
Japan
Current position on penetration curve
Current position on penetration curve
Source NCES, Government statistics,
universities, Parthenon Analysis
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International Markets Present Growth Potential
for For Profit Universities
For Profit University Revenues
EU Latent Demand forHigher Education (2001)

• Average percentage of 18-30 year-olds in the
  European Union who enroll in tertiary education
  is 20, compared with 32 in the US
• Differential employment rates and wage gap
  between individuals with tertiary degrees and
  those without them are driving increased demand
  for higher education, despite overall slowing
  population growth across the EU
• Assuming that EU countries can raise the
  percentage of 18-30 year-olds who enroll in
  tertiary education to US levels, the market would
  increase significantly
• This would create a large business opportunity.
  At US levels of for profit penetration of 3-4 of
  higher education enrollments, suggest 1-2B market

42B
150
155B
6.8MM
Students
113B
100
19.7MM
Students
12.9MM
50
Students
Dollarsin Billions
CurrentExpenditures
AdditionalPotentialExpenditures
TotalExpenditures
Source UNESCO, OECD, Parthenon Analysis
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Key Questions and Key Success Factors
Key Questions
Key Success Factors

• What is the full potential of the for profit
  higher education market?
• Campus vs. online vs. blended model growth?
• Opportunity in international markets?
• Is the for profit higher education market nearing
  saturation?
• Is consolidation inevitable?
• If so, what strategies must firms employ to
  maximize value from integration efforts?
• Who will be the winners and losers?
• What implications does success in the higher
  education markets have on K-12 education
  opportunities?
• To what extent will college applicants embrace
  online admissions? What additional services can
  providers charge for?

• Thorough understanding of core customer segments
  and corresponding needs, both US and globally
• Working adult vs. traditional age, etc.
• Campus vs. hybrid vs. fully online
• Diversify offerings
• Targeted acquisition plans
• Discipline in acquisitions, given high trading
  multiples (strategic vs. financial value)
• Quick and aggressive integration of acquisitions
• Efficient sales and marketing expenditures,
  bolstered by investments in student supports to
  maximize retention rates and thus profitability