Wall Street Perspectives on

1

• Wall Street Perspectives on
• For-Profit EMOs
• sponsored by
• National Center for the Studyof Privatization in
  EducationColumbia University Teachers College

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EMO Panel Agenda

• Introduction (5 Min.)
• Education Industry Landscape (10 Min.)
• For-Profit Postsecondary B-Models (10 Min.)
• Moderated Discussion of EMOs (20-30 Min.)
• Open QA (35 Min.)

3
Education Services Overview
Teachers College, Columbia University May 7, 2002
Presented by
Brandon Dobell, Senior Analyst Credit Suisse
First Boston
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Agenda

• Sector Overviews
• K-12
• Post-secondary
• Corporate Training

5
K-12 Education

• 54 million children in k-12 schools in the US
• enrollments expected to grow 1-2 per year now
  thru 2004/5
• every kid goes to school
• this is not just a demographic play
• birthrates are key and they are fueling a Tidal
  Wave in k-12 enrollments
• 350 billion spent this year
• federal and state monies regulation, control,
  etc.
• we spend more than any industrialized nation on
  k-12 education yet our outcomes are among the
  worlds worst
• per student spending has grown 5-7 per year

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K-12 Education Becoming an Investable Space

• Significant focus from Capitol Hill and State
  Governments
• School Choice Standards
• Assessment and Testing Teacher Training
• Businesses are gaining critical mass - finally
• More to for-profit vendors - changing the pie
• technology to better the learning process, make
  administration more efficient
• Products and services that help teachers teach
  better, faster and with more accuracy
• Capital Markets have provided a filter
• Participants
• Edison Schools Renaissance Learning Scholastic
• Sylvan Learning Riverdeep McGraw-Hill

7
Post-secondary

• 16 million people in college in the US
• Growing number are working adults,
  non-traditional students
• Service economy Income differential between
  diploma and degree
• Flexibility of programs (content), schedules,
  delivery (classroom, web)
• 250-270 billion will be spent this year
• federal and state funds mean rules and
  regulations
• 70b in financial aid If you want to go, the
  money is there
• Income differential between diploma and degree

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Post-secondary

• Stocks have outperformed market consistently
• Multi-term enrollments create visibility and
  predictability
• Great cash flows (get the up front, deliver
  the service)
• Returns on capital are very high creating lots
  of value
• Consistent Pricing Power (under the umbrella)
• High Barriers to Entry
• Participants
• Apollo Group / University of Phoenix Online
• Career Education
• DeVry
• ITT Education

9
Corporate Training

• 60 Billion spent each year for
  corporate/government training
• Service economy, globalization, pace of
  technology driving need for training
• Keeping pace, driving productivity
• Technology, business skills, personnel skills
• Focus on core competencies Driving Outsourcing
  Proposition
• Large majority still done face-to-face but
  e-learning growing
• E-Learning 2-4B, growing 50-75 per year
• Aligning the extended enterprise
• Employees, Suppliers, Customers

10
Corporate Training

• Stocks have underperformed
• Training more cyclical than anyone thought
• Difficulties of measuring true ROI
• Overabundance of capital created too many
  providers
• Pricing pressure, minimal differentiation
• Participants
• Content Technology/Service Site-based
• SmartForce Saba LearningTree
• SkillSoft Docent NewHorizons
• DigitalThink

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The Economics of For-Profit Postsecondary
Education
Wall Street Perspective on For-Profit EMOs

• National Center for the Study of Privatization in
  Education
• May 7, 2002
• Peter P. Appert, CFA
• Managing Director
• Deutsche Bank

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Agenda

• Unit Volume Growth
• Pricing Power
• Margin Leverage
• Stock Performance
• The Players

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Unit Growth
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Unit Growth

• Economics drive demand for postsecondary education

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Unit Growth
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Unit Growth
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Pricing Power
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Margin Leverage
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Conclusion

• Unit Growth Pricing Power Margin Leverage
  Superior Financial Performance
• 20 earnings growth rates
• High returns on capital
• Significant free cash flow
• Predictable, counter-cyclical growth

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Stock Performance
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The Players