If you're an investor in for-profit schools, note this heads-up: Profit margins are likely headed down—and not by a small amount.
That’s the word from analyst Brad Safalow of PAA Research, who has tracked the industry for more than 10 years.
In a just-published report, he says that the key to understanding this story is that operating margins at these schools ballooned from January 2008 until June of this year.
That's due largely to a decline in lead-generation costs as unemployment-juiced enrollments took off.
- ITT Education , whose operating margins soared to 37 percent in its last fiscal year from 24.2 percent in 2005.
- DeVry: 21.5 percent versus 6.3 percent.
- Capella Education, whose operating margins nearly doubled from 10.2 percent.
So what hits margins going forward? Safalow points to the last thing you might expect: Skyrocketing prices of keyword searches. That's when you go to Google and type in something like “online degrees,” and then a bunch of stuff pops up.
Results at the very top for commercial searches don't get there randomly. These are called paid searches. They cost money, and they're considered among the highest in terms of lead-generation quality. Prices can vary because they’re generally said in a bidding war.
Safalow says his research shows that keyword prices for for-profit schools has shot up at 200 percent to 500 percent in the recent months.
With advertising accounting for as much as 50 percent of new-student marketing costs, Safalow says this, in turn, is likely to hit margins hard—by as much as 10 percent in over the next 12 months.
Among those spending the most on keyword searches, Safalow says, are by Apollo Group , which owns the University of Phoenix; DeVry and Capella. Apollo almost always shows up as the No. 1 or No. 2 on any search variation.
Meanwhile, the likes of Bridgepoint Education , Education Management , ITT, Grand Canyon Education and Strayer Education , barely show up in the 150 searches he reviewed.
Most schools dodged our calls, but ITT told us that as a result of the price inflation, “We’re shifting some of our 'spend' to more efficient media."
My take: Schools are still trying to figure this out, but the upshot is if marketing costs don’t go up, new-student starts may go down.
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