Capella Education Co. Q4 2008 Earnings Call Transcript

 |  About: Capella Education Company (CPLA)
by: SA Transcripts


Welcome to this Capella fourth quarter 2008 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms. Heide Erickson, Director of Investor Relations. Please go ahead.

Heide Erickson

Welcome to Capella Education Company’s fourth quarter 2008 earnings results conference call. Please note that this call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor Provisions to the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risks and uncertainties.

Although the company believes that the expectations reflected in such statements are based upon reasonable assumptions, the company’s actual results could differ materially from those described in the forward-looking statements and are subject to a number of uncertainties and risks that the company has identified in the fourth quarter news release.

These and other factors are discussed in the company’s most recent 10-K and 10-Q filed with the Security and Exchange Commission other and changed factors may also be discussed in future 10-K and 10-Q filings. All filings and reconciliations of non-GAAP financial information presented in this call are available for viewing on our website at

Now, I would like to turn the call over to Steve Shank, Chairman and CEO of Capella Education Company. Steve?

Steve Shank

With me today is Lois Martin, Capella’s Senior Vice President and Chief Financial Officer. During our call this morning, we will discuss our 2008 fourth quarter outlook and full year results, provide an outlook for the first quarter and full year 2009, update you on the progress on our long-term growth and operational goals, including some thoughts on future margin expansion, and finally, provide an update on our CEO transition.

To summarize our financial performance for the fourth quarter, enrollment grew by 20.5% to just under 27,000 learners. Revenue grew year-over-year by over 18% to approximately $76 million and our operating margin improved by 180 basis points to approximately 21.5%. These are solid results demonstrating the company-wide productivity has for the most part returned to pre-ERP implementation levels.

We look forward to capturing significant productivity benefits over the coming year. On an annual basis, we achieved revenue and enrollment growth of 20% and an operating margin of approximately 14.5% with an improvement of 150 basis points over 2007. We also achieved strong operating income growth of 34%.

Let me highlight some of the achievements in 2008 that contributed to our financial results, strengthened the fundamentals of our business and positioned us for continued growth into the future. These achievements center on three key performance areas, academic excellence, technology leadership and business performance.

In terms of academic excellence, our goal is to establish Capella as the leader in defining high quality online education for adult learners. This is driven by a fundamental commitment to continue with quality improvement in our programs, curriculum and faculty performance, and by ongoing leadership in the emerging field of learning and career outcomes transparency.

We made major progress in 2008 in our academic performance, including sustaining a strong graduation rate of 49% at the end of 2008. Solid persistence through a year of significant change for our learners, higher learner satisfaction with about 9 out of 10 Capella learners indicating they would recommend Capella, advancing the work to embed specific learning competencies and assessments into the curriculum of each program we offer.

The purpose is to ensure that our graduates and learners acquire the knowledge and expertise expected for success in their profession. Our learners graduate from Capella with demonstrable proficiency in each of the specified competencies required in their field. This is a key differentiator for Capella. We continue to receive recognition for the quality of our programs. To name just a few from the past year, accreditation from the Project Management Institute for our masters and bachelors IT programs and project management.

These programs received very positive feedback from the PMI reviewers. Named one of the top 20 military friendly institutions in the country, established an academic partnership with the FBI National Academy, recognized by the National University Telecommunication Network for excellence in distant learning, and last we received very positive feedback from our various regulating and reviewing bodies who performed site assessments on Capella programs.

Most recently, the Minnesota Board of School Administrators Site Accreditation Team commented that they had seldom reviewed an academic program that exceeded standards in so many areas. These achievements demonstrate our differentiation in the market and the value we bring to our learners.

The second key area of achievement relates to Capella’s technology leadership and how we utilize technology to support academic and business performance. Our investment in a single integrated technology platform was completed in 2008. The system provides a robust and scalable infrastructure to support our future growth and operating performance.

We are beginning to see exciting benefits in terms of productivity gates and improvements in the end-to-end customer experience. This integrated end-to-end system also strengthens our robust data and analytics capabilities. These are critical to understanding the needs of current and perspective learners in order to drive greater marketing efficiencies and provide a better support system for learners.

The third significant set of achievements in 2008 involves our business performance, including solid performance of our new products introduced over the past two years measured by new enrollments, introduction of three new degree programs and ten new specializations, including three new doctoral and ten new masters offerings introduced in 2008, continued efficiency in advertising and lead generation, growth in all of our degree programs with accelerated traction in our bachelors offering, and in a year of significant investment and some new enrollment process challenges, we improved operating income by 34%.

To summarize, 2008 was a year in which we made great progress on our commitment to build a business that delivers sustainable profitable growth for our shareholders, employees and learners, a business that defines high quality online education for adult professionals. We are continuing to monitor the very difficult external economic conditions to ensure that we have visibility to and awareness of any potential impact on our business.

We have noted, as have some other schools, that our learners are taking slightly fewer courses per quarter. Based on our conversations with learners, this slight reduction in quarterly course load is due to increased job pressures and demands. Meanwhile, lead flow, application intake and persistence all remain strong.

As of this time, we see no material impact from changes in employer tuition reimbursements. We would characterize the corporate tuition reimbursement environment for our learners as currently stable. There has been no disruption of Title IV loan availability for our learners. As a reminder, our learners have very little exposure to the private lending market. Less than 1% of our learners utilize private loans. Also, Capella learner’s loan default rate is one of the lowest in the education market at 1.5%, the most recently published rate for 2006.

As my final topic, I will provide an update on the status of our CEO succession. As you know, we recently announced the appointment of Kevin Gilligan as Capella’s next CEO. Kevin brings to Capella outstanding leadership competencies, a proven ability to grow organizations and broad operational and strategic experience. I have every confidence that Kevin is the right leader to take Capella to the next level and to execute on our commitment to deliver sustainable profitable growth. Kevin will be on board as CEO in early March. I will continue to serve as the Executive Chairman of the Board of Directors.

With that, I will now hand the call over to Lois Martin to discuss our quarterly performance and outlook. Lois?

Lois Martin

As reflected in our reported results, we had a great fourth quarter. Likewise we delivered our original full year 2008 guidance for revenue, enrollment and margin growth. At the end of our second full year as a public company, we are pleased to have delivered our financial targets during each of these years, and we are poised to continue delivering our long-term financial goals.

Our balance sheet and cash flow fundamentals remain strong with bad debt expense below 2% of revenue, a strong cash position, no debt, and free cash flow of over $30 million on an annual basis. Revenue for the three months ended December 31, 2008 was $75.8 million, an increase of 18.4% from the previous year.

Total enrollment at the end of the fourth quarter grew 20.5% year-over-year. Fourth quarter new enrollment growth showed the strongest year-over-year growth since the end of 2007. Both revenue and enrollment growth exceeded our fourth quarter guidance, primarily due to stronger than anticipated new enrollment growth in November and December.

The higher than anticipated November and December new enrollment growth was primarily a result of a quarter four pilot we tested in a select number of our programs. The objective of this pilot was to encourage a learner who started mid-quarter to re-enroll in the sequential quarter following their start. As we have previously shared, learners who start mid-quarter do not typically re-register in the sequential quarter, as they are still completing their first course.

We believe this was a major driver for approximately 300 new learners to accelerate their start date from January 2009 into quarter four 2008 and was the primary reason quarter four ending enrollment was above our expectations. Because of this timing, enrollment growth was stronger than revenue growth in the fourth quarter as these monthly new enrollments generate revenue for only a fraction of the quarter.

Also as highlighted in last quarter’s call, lower colloquial revenue impacted year-over-year revenue growth in quarter four. And finally, our learners on average took slightly fewer courses compared to the fourth quarter of 2007.

To continue the discussion on fourth quarter enrollment, total enrollment in all of our degree programs increased in double-digit percentages. Total enrollment in bachelors programs increased by 28.9% over last year, masters degrees increased by 23.5% and doctoral enrollment by 13.4% year-over-year. We continue to see a slight mix shift from doctoral to the masters and bachelors program.

As a percent of total enrollment, the masters and bachelors programs each increased by one percentage point. As of the end of 2008, 82% of our enrollment was in graduate programs. Learners in doctoral programs made up 36% of our total enrollment at the end of fourth quarter, masters 46% and bachelors 17%.

The bachelors program is currently our fastest growing program, and we believe demand dynamics for the bachelors program are strengthened by the current economic environment. As mentioned in previous quarters, the profitability of the bachelors program continues to make considerable and positive improvement. We anticipate the bachelors program will be profitable on a fully allocated basis by the end of 2009.

Operating income for the fourth quarter improved 29.4% to $16.4 million for the quarter, resulting in an operating margin of 21.6% of revenue, a 180 basis point improvement from the fourth quarter 2007. This is the highest operating margin in the company’s history and is a reflection of the ability to deliver continued margin expansion through scale and leveraging of our business model, even with a slight shift in mix.

Instructional costs as a percent of revenue in quarter four declined by 180 basis points from quarter four 2007, primarily related to lower IT expenses as a result of the completion of our ERP system implementation in quarter three 2008 and lower bonus expense. These decreases were partially offset by increased depreciation and amortization and learner support expenses.

Our increased investment in learner support, primarily in financial aid counseling, has been a significant contributor to our strong persistence. It is also an area where we see significant opportunity for future leverage due to our now fully integrated and implemented system infrastructure.

Marketing and promotional spending as a percent of revenue was 27.6%, an increase of 100 basis points from fourth quarter 2007, reflecting our reallocation of quarterly spend in 2008 to better align with enrollment patterns.

General and administrative expense as a percent of revenue was 10%, down 100 basis points from a year ago. This is primarily related to lower IT expenses, which were significantly higher in fourth quarter 2007 because of the ERP module implementations that were occurring. Bad debt expense as a percent of revenue was 1.8%, up slightly from 1.6% in fourth quarter 2007, but down from third quarter 2008.

We continue to be pleased with the strong financial responsibility and commitment of our learners. We support our learners with financial counseling throughout their educational journey to help them manage their significant education investment.

Other income for the quarter was $825,000, a decrease from $1.4 million in the prior year. The decrease in interest income was primarily due to a 90 basis point reduction in interest rate and a lower average cash position due to our share repurchases of $58.3 million during 2008. Diluted earnings per share for the fourth quarter were $0.66, up $0.15 or 29.4% per share from last year.

The shares of common stock outstanding at the end of the fourth quarter 2008 was 16.557 million shares. In conjunctions with the share repurchase authorization in August, we repurchased approximately 96,000 shares for a total consideration of $4.1 million during the fourth quarter. About $51.7 million remains under our current share repurchase program. We will continue to use our share repurchase program to opportunistically buy our stock. Our focus remains on creating long-term shareholder value while balancing liquidity and other investment needs.

To summarize, we were pleased with our fourth quarter enrollment growth and financial performance, especially the significant operating margin growth and resulting strong free cash flow.

Let me briefly review our annual financial performance. Year-over-year revenue for 2008 was up 20.4%. New enrollment grew year-over-year by 17.1%, below the 22% growth rate in 2007. This decline is primarily a result of the new enrollment process challenges we experienced in the second quarter and early part of third quarter 2008. New enrollment growth was steadily increased from second quarter’s level, and was the strongest since the end of 2007 during fourth quarter 2008.

Operating income was up 33.9% from 2007. Year-over-year operating margins improved by 150 basis points to 14.7%. Instructional costs and services as a percent of revenue were virtually flat in 2008 compared to 2007. This was primarily due to higher learner support and IT expenses in 2008, associated with the implementation of the learner facing ERP module, as well as higher depreciation costs. These increased costs were offset by lower bonus expense in 2008.

Marketing and promotional expenses as a percent of revenue declined 40 basis points from 2007 to 2008. Inquiry volume growth was strong in 2008 and cost per inquiry were down due to favorable external advertising rates, continued improvements in our lead generation, and lower bonus expenses. However, costs per enrollment were up slightly from 2007, primarily due to inefficiencies we experienced in the selling process earlier this year as we implemented the ERP.

Finally, general and administrative expenses as a percent of revenue showed impressive leverage, declining 100 basis points. While bad debt expenses were slightly higher than the previous year, overall corporate overhead and IT expenses as a percent of revenue scaled significantly.

Included in the $40 million of operating income for 2008 is FAS 123R related stock-based compensation expense of $4.3 million before tax. This compares to $3.4 million in 2007. During 2008, we re-purchased a total of 1.039 million shares for a total consideration of $58.3 million.

Capital expenditures were 5.3% of revenue compared to 7.1% of revenue in 2007. As you know, 2007 was the peak investment year for our multiyear ERP system implementation, which we completed in quarter three of 2008. We anticipate relatively low capital requirements going forward now that our enterprise-wide integrated technology infrastructure is in place.

Pre-cash flow defined as cash generated from operating activity less capital expenditure has increased 44.2% to $30.5 million for full year 2008, compared to 2007. Our financial position is very solid. The significant investments in our infrastructure are behind us and we have the foundation in place for continued revenue growth and significant improvements in operating performance.

Now, I would like to discuss our first quarter 2009 outlook and our expectations for the full year 2009. Our fiscal year expectations are for revenue and average quarterly enrollment growth of 18% to 21%. Enrollment growth by degree is expected to be similar to 2008 levels. We expect an operating margin of 16.5% to 17.5% of revenue or about 30% to 45% year-over-year operating income growth. Operating improvements are expected throughout the year, with higher earnings leverage in the first half of 2009 due to timing factors between the 2008 and 2009 spending pattern.

In 2009, we believe we will deliver revenue and enrollment growth within our long-term target. This confidence is driven by several factors. First, new enrollment remains solid and the demand dynamics, including lead and application flow, remains strong. Second, we continue to make strides in further differentiating Capella and our academic offerings.

Third, the efficiency of our enrollment counselors and learner support functions continue to increase as we improve processes and further leverage our data rich environment. And fourth, our new product introductions from 2007 and 2008 are performing well and have strengthened our product portfolio.

Within instructional cost and services we expect significant efficiencies and process improvements in 2009. To provide context for these expectations, let me share just a couple of areas in which we see exciting opportunities to reduce costs while improving learner satisfaction.

First, with our integrated system in place, we have been able to analyze all of the calls we receive related to financial aid. This has provided us with insight into process and communication changes we can make to significantly decrease learner call volume.

Specifically, identification of information that we can proactively communicate, providing learners easier and direct access to the most requested data, and streamlining of processes to facilitate first call resolution. We believe we can reduce call volume and financial aid by as much as 20% by the end of 2009, while providing improved service and a better experience for our learners.

A second example, we expect to implement later this year, a systemic approach to automatically handle over 100,000 documents processed annually. With our ERP in place, we can implement this document management system, which provides two primary benefits. First, productivity and efficiencies increase with the reduction in manual handling of documents and second, information is almost immediately available increasing our ability to improve the conversion process and the learner experience.

In marketing and promotional, we are continuing to implement analytic tools to take further advantage of our data rich infrastructure. This will simplify or automate many of our processes related to understanding the behavior of perspective and current learners. This data can be used to further improve our lead scoring to lower our acquisition costs, improve conversion rates, and further strengthen our persistence rate.

On an annual basis, we expect marketing and promotional costs to decrease slightly as a percent of revenue. While we anticipate continued advertising and sales expense efficiencies, we are increasing our IT investment to further improve the efficiency of our selling process. These investments are targeted to enhance the experience for perspective learners and continue to lower acquisition costs.

General and administrative expense consists of about 70% fixed cost. We continue to expect leverage of support function costs through scale from efficiencies and process improvement. This leverage is expected to be slightly offset by the compensation associated with our new CEO. We believe that the improvements in all expense areas are realistic, and in combination with our revenue growth expectation, will drive a significant operating margin increase in 2009.

We expect other income for 2009 to decline by as much as 25% from full year 2008 levels. While we expect our average investment balance to grow during 2009, incremental interest income is expected to be more than offset by lower investment returns based on the current interest rate environment.

We expect our tax rate to be about 36% for the full year due to a lower proportion of tax exempt interest as a percent of earnings.

We also expect 2009 capital expenditures to decrease from 2008 levels to approximately 4 to 5% of revenue, as our heavy capital investment period in our system infrastructure was completed in 2008. Cash flow from operations should increase significantly from 2008 based on our operating performance expectations.

Turning now to the first quarter of 2009, we are expecting total enrollment to grow 17.5% to 19% and revenue to increase by 16% to 17.5% compared to the first quarter of 2008. The enrollment and revenue expectations for the first quarter are lower than our annual growth expectation due to the unintended results of approximately 300 learners starting their first course in quarter four 2008, which I previously described.

While these learners accelerated the timing of their start, they did not accelerate re-enrollment in their second course for January, 2009. Rather, these learners are continuing to follow historical trends of waiting a quarter before re-registering.

In terms of revenue we anticipate first quarter colloquial revenue will be flat with 2008 first quarter levels due to timing and size of first quarter's events. We schedule colloquial throughout the year to align with the needs of our learners, which can result in quarterly fluctuations.

On an annual basis, we anticipate colloquial revenue will be in line with PhD enrollment growth. We also anticipate slightly fewer average courses per learner, which again impacts revenue. Quarter one, 2009 operating earnings are expected to grow by 55% to 65%, resulting in a quarter one operating margin of 14.5% to 15.5% of revenue, compared to 10.9% in the first quarter of 2008.

This significant improvement in margin demonstrates continued and significant improvements in the leverage inherent in our business model. In light of our operating margin improvement expectations for the first quarter and for full year 2009, we now believe that we can deliver higher annual operating earnings improvement than previously anticipated.

Therefore our three year financial performance goals from 2009 to 2011, our year-over-year operating earnings growth of 33% plus, driven by a combination of revenue growth and margin expansion, an annual enrollment and revenue growth of 18 to 22%.

In each of the last two years, we have exceeded our operating earnings objectives while making significant infrastructure investments. We believe we can achieve operating margins that progressively increase to 20% to 22% by 2011.

With that, I'd like to hand the call back over to Steve. Steve?

Steve Shank

I'd like to conclude our comments today by noting that this is the last earnings call I will lead as Capella's CEO. It's been an honor for me to have had the opportunity to lead this great organization, an organization dedicated to delivering business success by providing superior educational outcomes, and a superior experience to our learners and graduates.

Capella's talented and committed team of employees and faculty are key to our success and our positive outlook for 2009 and beyond. I want to express my deep appreciation for all they contribute. I'd like to thank you, our shareholders, analysts, and also our perspective shareholders for your support.

I have been impressed with your knowledge of the industry and the effort you made to get to know Capella, along with your appreciation of our differentiation within this industry. I believe that Capella is just at the beginning of an exciting future of opportunity, growth and differentiation.

That concludes our prepared remarks. We'll now take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Ariel Sokol – Wedbush Morgan.

Ariel Sokol – Wedbush Morgan Securities

Just a couple of quick questions, the first one was could you quantify the impact of the 300 learners on Q4 results and Q1 guidance? I just want to make sure we don't make a mathematical mistake, given potential revenue recognition issues.

Lois Martin

Absolutely. The estimate for those 300 learners that were pulled forward I would put at about 1.5% to 2%.

Ariel Sokol – Wedbush Morgan

Okay. The next question, so on the last call you provided some color on October year-over-year new enrollment growth rates. And could you provide similar color with respect to January?

Lois Martin

Absolutely. Fourth quarter, as we talked about, was our highest that we have had in over a year. And, as we talked about on the last call, we have seen an upward progression on our new enrollment growth as we moved out of the transition on the ERP module and its limitations. So starting in September we had extremely strong fourth quarter growth rate.

First quarter's growth rate for '09, again strong but clearly impacted by the 300 learners that we pulled forward that accelerated their start date into fourth quarter. We do report new enrollment, specifically on an annual basis because it can vary on a quarterly basis. Overall, we do expect 2009's new enrollment growth to be slightly above or ahead of 2008's new enrollment growth.

Ariel Sokol – Wedbush Morgan Securities

Okay. Well then the next question, so revenue per enrolled student declined in the quarter, presumably due to the mix shift from graduate to undergraduate degree students. Can you just help us understand what's going on here, and perhaps, just in the context of 2009 guidance where you provided revenue and enrolled student growth rates of 18% to 21%?

Lois Martin

I do want to clarify that revenue per learner is impacted, not just by the mix shift, but also by the lower courses per learner that we highlighted in addition to the lower colloquia. So from that standpoint you do see just a very slight decline. But again, a lot of that is impacted, not just by mix, but by the other factors that I mentioned.

Ariel Sokol – Wedbush Morgan

So how should we think about that going through the rest of the year in '09?

Lois Martin

We do expect going forward, as we highlighted in this economic time, we are seeing that learners are, on average, taking slightly fewer courses per quarter. So we are expecting that will continue during 2009. Probably not to the level of degree, or we're not expecting, to the level of degree that we have seen to date simply because, as you get closer and closer to one course per quarter, there's less chance for that to move.

Likewise on colloquia growth, we do expect colloquia growth to grow at about the rate of PhD growth. What I'm anticipating is, based on the size and number of events that we have, is first quarter has virtually no growth year-over-year. We will see very nice growth in colloquia in second quarter and third quarter. And then actually, based on timing this year, we will see a decline in fourth quarter colloquia growth year-over-year.

In mix shift, as we talked about in the prepared comments, we continue to expect the degrees to grow at about the same proportion as they did this year. So again, continued slight mix shift.

Ariel Sokol – Wedbush Morgan

And, last question, if you could just talk about trends that you're seeing in selling promotion, with respect to just advertising costs by media. What are you seeing on customer acquisition with respect to online versus TV versus radio?

Lois Martin

Yes. We don't do any TV. But what we are seeing within the advertising channels in which we do participate is favorable rates and favorable pricing. Now, from that standpoint we continue to use some of that muscle to drive increased quality of leads. But overall, we have seen a decline in costs per inquiry.

Now for us, our real focus is on cost per enrollment because we're willing to pay more for higher quality leads and leads that convert better. As we've highlighted, our cost per enrollment this year was negatively impacted by the inefficiencies that we experienced back in second quarter and early part of third quarter. But as we look at the trend on that cost per enrollment, we're seeing it improve again [inaudible] or come back to prior levels.


Your next call comes from Bob Craig – Stifel Nicolaus.

Robert Craig – Stifel Nicolaus & Company

I was wonder, Lois, when you take a look at the combination of costs and inefficiencies that you incurred from ERP in 2008 versus the savings that you expect to realize in the absence of those costs in 2009, is it possible to quantify what the swing factor would be there, either in dollar terms or in margin terms?

Lois Martin

Sure, absolutely. As we look at 2009 and the drivers of our operating margin improvement, you could put about 75% of our operating margin improvement is due to scaling of fixed costs, along with increased productivity, which actually impacts and where we’re talking about weak and even improve our variable cost structures. So, about 75% of the margin improvement is that. About 25% is lapping a year where we did have significant and increased investments in spending last year associated with ERP.

Robert Craig – Stifel Nicolaus & Company

Okay. A couple of questions on the marketing side, I think the last read we had in terms of your rep count was around 200. Is that about where you still are, or are you increasing that? And what are your hiring plans this year?

Lois Martin

Actually, it is still around 200 and we anticipate, as our enrollment grows, we will clearly be adding headcount but not nearly at the rate of the top line growth. This is where we will begin to get some significant efficiencies, and again, not just in enrollment services and counselors, but across the organization.

Robert Craig – Stifel Nicolaus & Company

Okay. And I know in the past you've broken out rough percentages in terms of marketing mix between direct selling, branding overhead, and then also sources of enrollment. Have those numbers changed all that much?

Lois Martin

No, they haven't changed. It can change a little bit I want to say, by five percentage points here and there between quarters. But overall it is still about the same as we've talked about in the past.

Robert Craig – Stifel Nicolaus & Company

Okay. Last question and I'll turn it over. Could you guys run through or describe what's in the new program pipeline to the best of your ability relative to your competition, obviously, and also, maybe the timing of any new verticals?

Steve Shank

Yes, Bob. What we have said is that we will introduce programs in a fourth market vertical by the end of this year. I'd characterize that planning as well advanced at the present time. We don't announce in advance our intentions about program introductions. We have recently announced the introduction of an EDD or a professional education doctorate, which we think opens up a very attractive increase in our position in the doctoral marketplace.

And I would say, generally, last year, Lois, we introduced 13 new programs. And we are guiding to look for us to introduce in the range of 8 to 12 programs annually. And you can expect that this year from us.


Your next question comes from Jeff Silber – BMO Capital Markets.

Jeff Silber – BMO Capital Markets

Just a little bit more clarification on this pilot program that you mentioned, was it confined to any specific vertical or degree, or was it broad-based.

Lois Martin

It was specific to certain of our programs. It wasn't to a specific degree. But actually certain of our programs within various of our verticals and various of our degrees because we wanted to test a certain thing. It involved, actually, a book voucher and you would earn that book voucher if you reregistered on a sequential basis.

Again, it had the unintended results of taking some January learners or prospects who had identified January as their start month and they moved themselves to November and December, but again did not re-enroll in a different or accelerated pattern than what we've seen in the past. So as much as we've talked about before with our planned test to measure concept we're analyzing the results of the pilot and we'll go from there.

Jeff Silber – BMO Capital Markets

And again you're not talking about specific verticals but were these in some of your newer programs within those verticals or some of the more mature programs?

Lois Martin

Actually, some of the more mature programs.

Jeff Silber – BMO Capital Markets

OK. In looking at your guidance for 2009 on the top line, it's a little bit wider than what we've seen from your company in the past. I was wondering if you can kind of go through on some of the assumptions you're using both at the high end and the low end? Thanks.

Lois Martin

Sure. Actually, we did intentionally go at the slightly broader band on the guidance reflecting really the economic uncertainty that's out there. While, over all it seems to be not having undue influence or significant detriment tot his industry, we have, as we've mentioned, seen a slight decline in courses per learner.

We want to be sensitive to that likewise colloquial growth is an additional or colloquia attendance is an additional expenditure for learners. So we're just trying to be sensitive to the fact that it is a bit more of uncertain territory out there than we have in most years and we wanted to be sensitive to that.


Your next question comes from Andrew Steinerman – JP Morgan.

Andrew Steinerman – JP Morgan

Lois, I know you said something in your prepared remarks about longer term 20% to 22% growth and I know your long-term operating goals have been 18% to 22%, both on revenue and enrollment growth. Can you just repeat what you said in your prepared remark and is that a change to your long-term growth targets?

Lois Martin

Absolutely, thank you Andrew for asking for the clarification because we didn’t want to be confusing. Our long-term financial targets in the past, starting from when we went public, were for enrollment and revenue growth of 18% to 22% over the five-year period. We're now within the three-year period. We are reaffirming that 18% to 22%.

The change is on the operating earnings growth. In the past we have stated that we would expect annual operating earnings to grow 25% to 30%. We are now saying we expect that to be from 2009 through 2011 in the 30% plus range. As such, with that trajectory we expect that by the end of the 2011 our operating income margin will be between 20% and 22%.

Andrew Steinerman – JP Morgan

Right, wow that is good clarification, and could you just remind us, Lois, when do price increases go into effect or when are they revisited and what's the plans there?

Lois Martin

Price increases go into effect at the beginning of an academic year for us, which is July, each year. As we've talked about before, and we are maintaining this, in our long-term financial targets is the assumption of about a 3% price increase and, from that standpoint, we are sticking by that. Again, we believe in the current economic times affordability is an issue or we want to be sensitive to it so again we are only anticipating at this point 3%.

Now obviously we do pricing at a strategic level. We don’t do across the board price increases so we are currently in the annual process of analyzing each program. Each offering we have to determine what its appropriate price increase should be for the next year, and so the overall price increase will depend upon those individual decisions at the program level and then our mix.

Andrew Steinerman – JP Morgan

Right, just to square aware on price increases, if the $2,000 in Stafford had gone through and now it's looking like it's not included in the compromise bill, would it have affected your pricing strategy at all, either way?

Steve Shank

Andrew this is Steve, and I would say I would not expect the particular details of Stafford to impact our decisions. So I would stand by the guidance we've just given.


Your next question comes from Trace Urden – Signal Hill.

Trace Urden – Signal Hill

Lois, maybe I am not understanding this phenomenon, but I don’t quite get the business about the enrollments being pulled forward from Q1 to Q4. Why wouldn't that phenomenon simply roll forward given the way that you described it?

Lois Martin

Actually, Trace, I will try to add a little bit more color. We introduced a pilot test actually during the fourth quarter, and it was intended for those learners that had already reregistered in first quarter that they could earn a book voucher if they actually reregistered in the sequential quarter while they were finishing up their first course.

What we saw happen from a result standpoint is that prospects who had targeted January as their start date, some of those, in this case around 300, accelerated and changed their start date to be November or December intrigued and, I think, interested in trying to earn the book voucher.

In actuality, when January re-registration came around, they did not reregister for their second course and that's really the typical pattern we have where a mid-quarter start will actually wait until the following quarter, not the sequential quarter, but the quarter following that to reregister. So we saw no change in pattern and that was really the design of the pilot, so we have not further rolled out the pilot.

Again, our goal had been to increase actually the pace at which they reenrolled, so we are back to analyzing those results determining what we can do to look at other ideas that could improve or, I would say, further encourage learners to stay contiguously enrolled.

Steve Shank

Trace, just for clarification because of something you said, Lois. This program applied only to new starts that started in the months of November and December. That's the only time in our program you can enroll off the quarter starts, and Lois inadvertently said re-registration and this applied only to new starts.

Trace Urdan – Signal Hill

And then, Lois, the commentary about reallocating the marketing costs. Could you explain that a little bit further because I guess I am not really understanding what exactly you're doing there, why that shouldn't have a corresponding impact on the enrollment, or maybe it does. And then maybe as a follow-up if we saw the negative leverage of that impact in Q4 then which of the quarters where we would see the corresponding offset from the reallocation?

Lois Martin

Trace, if I haven't understood your questions come back to us. As we had talked about throughout 2008, we had made the decision at the beginning of 2008 to realign the allocation of some of our marketing and promotional spends based on the patterns of the specific professions and the specific verticals in which we operate.

As such, at the beginning of 2008 we demonstrated and had significantly more leverage in marketing and promotion than we were expecting for the full year. For full year 2008, our expectations and guidance had been that marketing and promotion for the full year would be flat to slightly down. From that standpoint, we also said there would be a timing difference where you would see more leverage in the first half of 2008, because we were moving spending to more of it to the back half or specifically certain points in third quarter and fourth quarter.

So the increase in fourth quarter we were expecting based on that realignment. To your point, and I think to clarify, when do you see the benefit of that marketing spend? Again, I think our average enrollment period from inquiry to enrollment ranges anywhere from three to six months depending upon the degree. So again any investment that we make at a certain quarter certainly has some impact to that quarter, but again has quite a tale to it because we work that inquiry. Does that help answer the question?

Trace Urdan – Signal Hill

A little bit. I think intuitively you might appreciate the notion that this sort of increased spending, lack of leverage you'd expect to see some kind of corresponding improvement in the enrollment. And I guess what I am hearing is it is we might have seen that in 2008 but maybe it was muddied by the ERP issues that you experienced is that?

Lois Martin

I think actually you are seeing the impacts or I think we are seeing the impacts of that timing spend because one, we have realigned it to the point where we did, and as we’ve talked about, we’ve had much higher new enrollments starts after we got through the first part of third quarter and as we talked about, new enrollments start in the fourth quarter were the highest that we’ve had in over four quarters. I think there is great evidence of the effectiveness of that spend.

Trace Urdan – Signal Capital

The commentary that you had about stepping up your anticipated margin growth heading into next year, I wonder if you could comment on that relative to what we are seeing in the economy, and to what extent you feel like your ability to do that is a function of lower cost pressures that you’re seeing right now in your business, or is this something that is more structural and you might have done even in a normalized economic environment.

Steve Shank

I will respond to that. Trace, the one area where I think we would see a direct benefit from the economy is relatively favorable trends in the costs we are spending to acquire leads. Beyond that, our primary costs are people costs and our strategy there is to continue to build a great organization, so we are not economizing on people costs.

The outlook for gains and leverage going forward really is a two-fold outlook. The continued growth of revenue enrollment across our fixed structure, but secondly, now the productivity opportunities that we’re seeing from this end-to-end infrastructure really are quite significant and we’re just really beginning to see the results of the big investment we’ve made.

Trace Urdan – Signal Capital

Very last question, the words you chose to use it seems be around the tuition reimbursement question were very careful, and I think I heard you talking about it basically being not material. Is it fair to say that you are seeing some activity, but that you’ve got it under control and we shouldn’t worry about it or are you genuinely not seeing any pullback, any employees being laid off while their benefiting from tuition reimbursement, or can you give us something a little bit more behind the scenes look at that?

Lois Martin

We do want to be careful because we are sensitive to the economic environment out there. In total, we are not seeing an impact. And it’s not saying that we’re not seeing any; it’s just there is in any quarter, corporate alliance and partnership that get added, some that might suspend fewer on the suspending.

In this past quarter for example, we had a heavy equipment manufacturer, which I think others have noted too, that suspended their tuition assistance program. Likewise, this past quarter, we’ve added three significant or large sized companies, including Disney, to our corporate alliance program. So we do have some ins and outs there. That’s what we’re seeing in total, we’re seeing a relatively stable environment.


Your next question comes from Brandon Dobell – William Blair & Company

Brandon Dobell – William Blair & Company

Any changes in your outlook or prospects for what the next focus or the next leg of growth might be, either given the recent management change or the overall macro environment, just given how what the breadth of layoffs. Any change in that perspective? Are you still on track for it?

Steve Shank

Brandon, I would say that the answer is generally no change in our strategy or our growth strategy. We expect Kevin Gilligan, our new CEO, will basically come on and take on with executing against our strategy. We are well advanced on our fourth market plans. We are also now moving to a point that we are paying more attention to a longer term further out new business development plans. But the plans for organic growth stay very much the same and no impact on the economy from that.

Brandon Dobell – William Blair & Company

Given the overall macro environment, any change in how you view the relative importance of the bachelors programs, or do you think you may want to do more marketing, less marketing or is there just no change there?

Steve Shank

I would say the bachelors program our enrollment trends are very strong, they appear to be very strong across the industry and so we are saying that we expect, in this year, bachelors to be our strongest growth category. We are pleased with the fact that we are demonstrating strong growth in bachelors while we continue to improve overall company operating margins. We think this just strengthens the diversified base of our business.

Brandon Dobell – William Blair & Company

Looking back at the change you made to the infrastructure, the processes with ERP, does that help you more in bachelors or is it pretty much across the types of degree programs, is there any extra benefit from being in a better position from a technology perspective with the bachelor students.

Steve Shank

I would say both. It certainly helps us across all degree programs, but with the bachelors learners, that is the program where the speed and efficiency of your ability to serve them is really important and we’re getting great productivity and efficiency benefits across the line. So it’s certainly helping us there.

Brandon Dobell – William Blair & Company

Lois, I may have missed it, but I’m not sure 2009 stock-based comp guidance or kind of a range given what might happen with the new CEO.

Lois Martin

I would definitely anticipate an increase in stock-based compensation around the range of 30% plus again based on normal additions to that but also the new CEO.


Your next question comes from [Blair Milnarik] – Robert W. Baird.

[Blair Milnarik] – Robert W. Baird

Wondering if you can touch on what you’re seeing for demand trends among your pre-existing verticals, are any of them particularly strong or showing weakness relative to the others?

Lois Martin

Actually, great question. Across each of the market verticals we’re actually seeing very nice double-digit growth. There can be some variation in that on a quarterly basis, but all of them are within a range in the high teens into the twenties of each other.

[Blair Milnarik] – Robert W. Baird

Can you circle back and maybe specifically talk about what you’re seeing in Ph.D. trends? What you expect for growth there?

Steve Shank

We are guiding that for going forward we expect our doctoral category to grow in the low teens. That was the result we had in 2008, and our outlook for 2009 would be similar.

[Blair Milnarik] – Robert W. Baird

Okay, and then any metrics you can give in terms where you think retention could go over the next few years and specifics. I know you mentioned that it should be increasing.

Lois Martin

Great question, we continue to focus on persistence, which is our definition of retention. We have seen some nice improvements in that solid to improving, even during a big year of change for our learners that with our systems implementations, etc. We are continually looking at new ways at which we can continue to improve persistence, and that includes, not just from a customer experience standpoint, but also from an academic offering standpoint.

So we will continue to focus on persistence. We think that is of critical importance. Again, we don’t guide to persistence, but we’ve been very pleased with, I would say, our very strong persistence to date and our goal is to continue to move that forward.

Steve Shank

I think we have reached the end of our appointed time and I know many of you have to get onto another conference call. So at this point, I would extend our thanks to you for participating in our fourth quarter earnings release call. We are pleased with our continued progress and our momentum, and we look forward to continued success in 2009. Please contact Heidi Erickson if you have any questions regarding the quarter, and I hope you have a good day.


That does conclude today’s conference. You may now disconnect.

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