THE PARTHENON GROUPTHE PARTHENON GROUP

1

IFCReporting on the Marketplace –Trends in US Higher Education

January 21-23, 2004

2

Private, For Profit

Private,Non-Profit

Public

Private, For Profit

Private,Non-Profit

Public

1997/98 2001/02

$236B

$302B

$0B

$50B

$100B

$150B

$200B

$250B

$300B

$350BReal CAGR(‘98-’02)

3.6%

3.1%

8.0%

3.7%

Source: National Center for Education Statistics, Projection of Education Statistics, Eduventures Learning Markets & Opportunities 2003, Real CAGRs based on CPI US City Average

Higher Education is a $300B Market, with Steady Growth (2002)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

3

The Public Sector Faces Several ChallengesThe Public Sector Faces Several Challenges

1. Ineffective cost control has resulted in tight budget crunches

2. Increasingly diverse student bodies have given rise to new service and content needs

3. Investments in technology have not yielded convincing cost savings

4. Institutions struggle to offer rich educational experiences for a growing population of distance students

5. Public institutions are held increasingly accountable for educational outcomes

4

Though Emulated Internationally, the American Higher Education System Suffers from Wide Gaps in Attainment

Though Emulated Internationally, the American Higher Education System Suffers from Wide Gaps in Attainment

Graduate High School

Enroll in Associate’s or

Bachelor’s Program

Complete Associate’s or

Bachelor’s Program

Coordination required across secondary and postsecondary to produce better outcomes

Percent of Total 8th Graders:

75-77%* (+11% GED)

34%

Source: NCES National Education Longitudinal Study, 1988/2000; Parthenon analysis

72%

5

0.0

0.4

0.8

1.2

1.6

2.0

Higher Ed+65%

Source: ThinkEquity, Thomson Analytics, Parthenon Analysis

Corporate+42%

S&P 500+16%

Ind

exed

to Jan

uary

3, 2

003

Higher Education Has Significantly Outperformed All Relevant IndicesHigher Education Has Significantly Outperformed All Relevant Indices

Jan2003

Feb2003

Mar2003

Apr2003

May2003

June2003

July2003

Aug2003

Sep2003

Oct2003

Nov2003

Dec2003

K-12+48%

Publishing+4%

6

Dec 2000 Dec 2001 Dec 2002 Dec 2003

$6.7B$8.9B

$14.5B

$27.5B

$0

$5

$10

$15

$20

$25

$30

There is Massive Value Creation at the For Profit Level There is Massive Value Creation at the For Profit Level

1 Includes Apollo, Career Education, Corinthian Colleges, DeVry, Education Management, ITT Education Services, and Strayer

Source: ThinkEquity, Multex, Thompson One – Banker Analytics

Change: 33% 63% 90%

Mark

et

Capit

aliz

ati

on

(Dolla

rs in B

illio

ns)

For Profit University Market Caps 1

7

Other

Argosy EducationWhitman EducationStrayer Education

Kaplan Colleges

Corinthian Colleges

Education Management

Career EducationITT Education Services

DeVry

Apollo

Other

Argosy EducationWhitman EducationStrayer Education

Kaplan Colleges

Corinthian Colleges

Education Management

Career Education

ITT Education Services

DeVry

Apollo

Other

Argosy EducationWhitman Education

Strayer Education

Kaplan Colleges

Corinthian Colleges

Education Management

CareerEducation

ITT Education Services

DeVry

Apollo

Other

Strayer Education

Kaplan Colleges

Corinthian Colleges

EducationManagement

CareerEducation

ITT Education Services

DeVry

Apollo

2000 2001 2002 LTM 2003*

$4.4B

$5.3B

$6.3B

$7.5B

$0

$2

$4

$6

$8

* Latest Twelve Months of publicly reported data1 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

For Profit University Revenues 1

Driven in Part by ConsolidationDriven in Part by ConsolidationD

olla

rs (

in B

illio

ns)

Operating Industry Margin1: 15.2% 16.3% 18.2% 20.6%

8

Three Distinct Branding Strategies ExistThree Distinct Branding Strategies Exist

National Multiple Brands

National Single Brands

Regional Single Brand

Overview

Major Players

Key Components

• Career Education

• Corinthian Colleges

• Education Management Corp.

• University of Phoenix (Apollo)

• ITT Educational Services

• DeVry

• Strayer

• Broad national presence with a limited international footprint

• Separate branding for various programs and geographies

• Classroom and online delivery

• 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

• Regional presence in Southeast (Washington D.C., VA, MD, NC and TN)

• Recent northern expansion into PA

• Classroom and online delivery

• Organic growth

• Enrollment growth driven by online expansion

• Heavy investment in staff and equipment of online division

• Broad national presence with a limited international footprint

• Identical branding for all offerings, regardless of program of study or location

• Classroom and online delivery

Source: Factiva, Company information

9

Leading Players Generate Healthy Bottom LinesLeading Players Generate Healthy Bottom Lines

EBIT margins range from 15-35%

Source: Company 10Ks; Hoover’s

National Multiple Brands

National Single Brands

Regional Single Brand

15%

25%

35%

0%

10%

20%

30%

40%

EB

IT M

arg

in

EBIT Margin (2002)

10

National Multiple Brands

National Single Brands

Regional Single Brand

$1,800

$1,300

$1,000

$0

$500

$1,000

$1,500

$2,000

Aggressive Investment in Selling and Promotion Is NeededAggressive Investment in Selling and Promotion Is Needed

National multiple brands require ~40% higher support over national single brands

Source: Company 10Ks; Analyst Interviews; Parthenon Analysis

Sp

en

d P

er

Stu

dent

S&P / Total Students

11

Other Drivers of For Profit University Value CreationOther Drivers of For Profit University Value Creation

1. Increasingly sophisticated marketing services to attract customers

2. Increased focus on the “working adult” customer

3. Continued focus on segments where education provides immediate benefits for career advancement

4. Aggressive cost management

5. Innovative technology

6. State-supported financing

12

40%

20%

0%

10%

20%

30%

40%

For Profit Higher Education Represents the Largest “Corporate Training” ProviderFor 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)

Source: Company 10Ks; Parthenon Analysis

Perc

ent

of

Reven

ues

from

Corp

ora

te T

uit

ion

Reim

burs

em

en

t Pro

gra

ms

Percent of Revenues from Corporate Tuition Reimbursement

$400MM

$25MM

$0

$100

$200

$300

$400

Actual Revenues from Corporate Tuition Reimbursement

UoP Strayer UoP Strayer

Dolla

rs in M

illio

ns

13

Traditional Institutions

HybridModel

VirtualUniversity

Competency-Based

Virtual University

Description • Instructor-led, face-to-face classes

• Combines face-to-face instruction with online teaching

• Delivers all education courses online

• Combines distance education classes of traditional universities with classes designed by corporations and publishers

Example • University of Pennsylvania

• Community Colleges

• University of Massachusetts

• Apollo / University of Phoenix

• Career Education

• DeVry / DeVry Online

• Strayer Education

• University of Phoenix Online

• WGU (Western Governors’ University)

Different Business Models are EvolvingDifferent Business Models are Evolving

14

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

Admissions • 39% of institutions have websites with interactive application forms

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

New Business Models are Driven by Ubiquitous TechnologyNew Business Models are Driven by Ubiquitous Technology

Source: Survey of Internet Administrators and Webmasters in Higher Education, Campus Computing 2002

15

Distance penetration is highest in Graduate and Associate programs

Fully Distance (0.3MM)

Partially Distance(1.0MM)

Campus(4.3MM)

Fully Distance (0.1MM)

PartiallyDistance(0.2MM)

Campus(1.1MM)

Fully Distance (0.1MM)

Partially Distance (0.4MM)

Campus(5.9MM)

Fully Distance (0.1MM)

PartiallyDistance(0.2MM)

Campus(1.5MM)

Associates Bachelors:Degree Completion

Bachelors:Full Program

Graduate

5.6MM 1.3MM 6.5MM 1.9MMTotal =15.3MM

0%

20%

40%

60%

80%

100%

Enrollments by Type (2002)

Source: NCES; Parthenon Analysis

Perc

ent

of

Tota

l

Fully Distance EnrollmentsAs a Percent of Total: 6% 4% 2% 6%Partially Distance EnrollmentsAs a Percent of Total: 18% 13% 6% 13%

Distance Enrollment is 2.5MM TodayDistance Enrollment is 2.5MM Today

16

0%

5%

10%

15%

20%

25%

0%

20%

40%

60%

80%

100%

Most International Markets Lead the US in Distance Education, yet all Lag the US in Online Market MaturityMost 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

Enro

llments

Source: NCES, Government statistics, universities, Parthenon Analysis

Distance Enrollments, 2002 Online Enrollments, 2002

Enro

llments

Undergraduate

Graduate

Japan Japan

South Korea

South Korea

CanadaCanada

Hong Kong

Hong Kong

Canada

Japan

South Korea

Hong Kong

US

US

US

Current position on penetration curve

Current position on penetration curve

Graduate and Undergraduate

17

International Markets Present Growth Potential for For Profit UniversitiesInternational Markets Present Growth Potential for For Profit Universities

12.9MM Students

6.8MMStudents

19.7MMStudents

CurrentExpenditures

AdditionalPotential

Expenditures

TotalExpenditures

$113B

$42B $155B

Dollarsin Billions

$50

$100

$150

• 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

Source: UNESCO, OECD, Parthenon Analysis

For Profit University Revenues

EU Latent Demand forHigher Education (2001)

18

• 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

Key Questions and Key Success FactorsKey Questions and Key Success Factors

Key Questions Key Success Factors