ESI reported 3Q09 result this morning. You can find the release here.  Overall the company beat by approximately $5 million on the topline and $0.03 on the bottomline. Here are our quick observations:

• We would characterize the EPS beat as low quality.  Excluding the benefit of share buybacks during the quarter we estimate the company would have posted EPS of $1.96, a penny below consensus
• The company’s balance sheet issues continue to grow. DSO increased from 20.0 days in 2Q09 to 25.4 days in 3Q09. B ad-debt expense as a percentage of revenue increased 90 bps quarter/quarter and 180 bps YOY to 6.8%, slighlty above our expectation of 6.5%.
• SS&A expense excluding bad-debt increased 17.3% YOY and 50 bps sequentially as a percentage of revenue.  As we stated in our preview, the company’s operating margins appear to be unsustainable assuming that lead costs begin to normalize.
• This is the first time in the company’s history as a public company that operating margins declined from the second quarter to the third quarter.
• The company did not offload any receivables exposure to Student CU Connect through its note receivable lending program (ESI lent $13.9 million to Student CU Connect in 2Q09, so that Student CU Connect could lend those dollars to ESI students).  As we stated in our preview the overall size and student lending experience of the credit union members of Student CU Connect makes it unlikely that the relationship will significantly reduce ESI’s internal lending program.
• The fall term enrollment intake was slightly above our expectations as was student persistance.
• Strangely enough, the company offered little commentary in its press release and no guidance. This is a change from the past, it could be a mistake in the press release, but it warrants noting.

The company will host a conference call today at 11AM.  We think there will be increased scrutiny on the company’s rapidly growing receivables balance and bad-debt expense, as well as the sudden increase in SS&A expense.  Overall, we think the company’s 3Q09 results confirm many of our concerns about ESI’s fundamental prospects from a balance sheet risk perspective and operating margins.  For now it appears the company is having little success in reducing its balance sheet risk exposure.  We continue to believe that 2009 will represent peak earnings for ESI.

As always, please act accordingly…