Finances continued to wilt at public and private colleges during the past year as income streams slowed and budget managers turned up the heat. Yet for-profit institutions -- both publicly traded and privately held -- posted record gains. Revenues of the top 10 publicly traded higher-education companies grew in excess of 30 percent.

With total income for all accredited proprietary institutions reaching $15-billion in 2003, and profits growing, investors have come to expect that the good times will continue.

The value of Strayer Inc. shares, for example, nearly doubled last year, trading at about $116 per share in late January. Stock in Apollo Group Inc., owner of the national University of Phoenix, recently commanded $75 a share, up from $43 one year earlier. Other stock prices in the sector have risen to historical highs as well.

There are, however, signs that the pace of growth could slacken as the field becomes more crowded.

A slowdown is already becoming apparent in some markets, like Los Angeles, where 9 of the 10 major institutions have campuses, according to Jeffrey M. Silber, an education-industry analyst with Harris Nesbitt, an investment-banking firm in New York.

The pace of enrollment growth in Phoenix's online operations has slowed. When the company released its fiscal-year earnings report, in October, online growth for 2003 was still robust, at 61 percent. Even so, it was down from 2002's 70 percent and 2001's 81 percent.

"There's a very slight deceleration taking place," says Trace Urdan, an education-industry analyst with ThinkEquity Partners, in San Francisco. "Certainly, growth has to slow over time as these companies get bigger, but the numbers are still astronomical."

In addition, merger-and-acquisition activity, which played a large part in increasing both share prices and enrollments, is expected to slow. In 2003, 31 proprietary institutions completed such transactions, a "historic peak" for the sector, says Sean R. Gallagher, an analyst with Eduventures, a Boston-based consulting firm in education research. Other analysts agree with his assessment that "many of the most attractive schools for the big companies to acquire have already been acquired."

In response to the heated competition and resulting slowdown in enrollment gains, most of the major proprietary-college systems are taking new approaches in their efforts to sustain growth and profits. The changes they are making have a significant effect on the type of programs they offer and the way that students are taught.

Bigger Classes

In December, the University of Phoenix, the largest publicly traded for-profit provider of higher education, announced plans to gradually raise its ratio of students to instructors. Classes there now average about 15 students, compared with an industry average of 20.

"For a school of their size, they only have to move the needle a little bit for it to have huge financial implications," says Mr. Urdan. Incremental increases in class size don't require additional classroom space or salaries for instructors, he says, so "the additional revenue from each class goes directly to the company's bottom line."

Other institutions have not announced plans for larger classes, but many are exploring ways to ensure that every class enrolls the maximum number of students allowed by company policy.

Distance Boom

For almost all of the major for-profit systems, online growth has been very good for business. "One of the primary advantages" of online classes, says Rene R. Champagne, chief executive officer of ITT Technical Institute, is their capacity to consistently attract the maximum number of students per class.

The growth of Phoenix's online division may have slowed, but newer entries in the field are just beginning to grow.

"The online market still has huge potential," says Eduventure's Mr. Gallagher, "especially for companies like ITT, DeVry, and Corinthian who have just entered the field."

DeVry University, which offers certificate and degree programs in information technology, engineering, and business, more than doubled its enrollment of online students to 9,077 in November 2003, from 3,824 a year earlier, says its executive vice president, Daniel Hamburger.

Online classes generally have fewer students per instructor but significantly higher operating margins than programs held on actual campuses, analysts say. Online classes also contribute disproportionately to profits. Career Education Corporation, which operates 78 institutions, has an average operating margin of 16 percent, but that of its online division is 30 percent, says Jerry Herman, an equities analyst at Legg Mason.

Big profits from online operations are raising overall profit margins for the industry. Once all of the major publicly traded companies have released their 2003 year-end earnings reports, Mr. Herman says, the industry's average profit margin for the 2003 calendar year is expected to exceed 20 percent for the first time.

Blended Approach

In recognition of the growing popularity and profitability of online courses, most institutions are encouraging students enrolled on their bricks-and-mortar campuses to adopt a "blended" approach to learning, taking some of their classes online.

"Blending online and on-ground programs expands the capacity of the space a company has," says Mr. Urdan. "They can open new campuses more quickly, because they don't need as large facilities. We're seeing companies like Apollo doing this much more, in response to competitive pressure."

At the Indianapolis-based ITT, such an approach, known as the "2+1" program, requires students to take at least two courses on campus and one course online in each semester. The program is mandatory for students enrolling on new campuses and will be phased in for all students by the end of this year, says Mr. Champagne.

Phoenix and DeVry take slightly different approaches to blending. Phoenix's FlexNet program allows students to attend some weekly sessions of a class online and others on campus. In DeVry's IOptimize program, the mix of online and classroom teaching in a particular course varies according to the type of material taught, says Mr. Hamburger.

At Strayer University, students are not required to take a certain number of courses online or on campus. At Argosy University, owned by Education Management, 22 percent of the students are enrolled in a blended program, says James R. Sober, vice president for investor relations.

Officials of many of the institutions say a blended approach also widens the pool of potential students for each of their campuses.

"Students who don't want to take all their classes online will fly in for a week to take classes and then take the rest online," says Mr. Sober. "This works especially well in our teacher-education programs, where they can take classes on campus during the summer and then take them online during the school year, when they have to work. ... We see [blended programs] as a huge opportunity for growth."

Even without adding any students to their enrollments, most for-profit institutions have a built-in guarantee of about 6 percent annual revenue growth -- the average increase in what they charge for tuition.

To students, that might compare favorably with four-year public colleges' recent tuition increases, which averaged 14 percent in 2003, according to College Board statistics. (Tuition at private colleges rose at about the same rate as at the for profit institutions: 6 percent.)

The proprietary institutions "raise it because they can," says Mr. Gallagher, the industry analyst. "Just like any product on the market, there are built-in increases that don't necessarily reflect costs, and there's always going to be this pricing increase because that's historically been part of the growth of the market."

At ITT, Mr. Champagne said tuition has increased by an average of about 5 percent per year over the last 15 years, but the price increase will reach 6 percent in 2004.

Sylvan Learning Systems Inc., which owns the online Walden University in the United States as well as 33 institutions abroad, increased its tuition by an average of 7.3 percent in 2003, in part because of inflation in some of its foreign markets, says Chris Symanoskie, a company spokesman.

For-profit institutions are also bringing more variety to their programs, both to spur continuing growth and to reduce risk from the inherently cyclical appeal of certain careers.

"Investors prefer diversified companies because they aren't as dependent on one market," says Mr. Gallagher. "That way, when the information-technology demand falls apart, as it did a few years ago, a company doesn't fail because of decreased demand in that one field."

Looking Abroad

The least-developed strategy for future growth is expansion into international markets. With the exception of Sylvan, which has concentrated heavily on acquisitions abroad -- attracting 100,000 students to its campuses in nine Latin American and European countries -- most of the major proprietary-college systems aren't relying on their presence abroad to drive enrollments and revenues.

For example, while ITT licenses curricula for two-year programs in information technology to a provider that runs three campuses in Beijing, its forays into India have not attracted enough students to make the venture profitable, Mr. Champagne says.

"We'll continue looking at other countries for growth in the longer term," he says. "The volume of opportunities outside the U.S. is going to be immense."

For the next few years, however, proprietary institutions will very likely remain more focused on gauging the success of their new domestic strategies.

And as the companies continue to mature, their educational approaches are expected to attract more attention -- not only from their peers, but from traditional colleges as well.