Strayer Education Inc.Q1 2009 Earnings Call Transcript

| About: Strayer Education, (STRA)

Strayer Education Inc. (NASDAQ:STRA)

Q1 2009 Earnings Call

April 30, 2009; 10:00 am ET

Executives

Sonya Udler - Senior Vice President, Corporate Communications

Rob Silberman - Chairman, Chief Executive Officer

Mark Brown - Executive Vice President, Chief Financial Officer

Analysts

Amy Junker - Robert W. Baird

Gary Bisbee - Barclays Capital

Kevin Doherty - Banc of America

Mark Marostica - Piper Jaffray

Andrew Steinerman - JP Morgan

Andrew Fones - UBS

Bob Craig - Stifel Nicolaus

Ariel Sokol - Wedbush Morgan

Jeff Silber - Signal Hill Group

Corey Greendale - First Analysis

Brandon Dobell - William Blair

Kelly Flynn - Credit Suisse

Trace Urdan - Signall Hill Group

Operator

Good morning, everyone and welcome to Strayer Education Inc. first quarter earnings results conference call. This call is being recorded. Following today’s call we will offer the opportunity for questions-and-answers.

At this time for opening remarks and introductions, I’d like to turn the call over to Strayer Education’s, Senior Vice President of Corporate Communications, Ms. Sonya Udler. Miss Udler, please go ahead.

Sonya Udler

Good morning. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education and Mark Brown, Executive Vice President and Chief Financial Officer.

For those of you that wish to listen to the conference via the Internet, please go to www.strayereducation.com where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1:00 pm Eastern Time through Tuesday, May 5. The replay is available at 888-203-1112, pass code 1744172.

Following Strayer’s remarks, we will open the call for questions-and-answers. Please note that today’s press release contains statements that are forward-looking and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act. The statements are based on the company’s current expectations and are subject to a number of uncertainties and risks that the company has identified in the press release and that could cause the company’s actual results to differ materially.

Further information about these and other relevant uncertainties may be found in the company’s annual report on Form 10-K, and its other filings with the Securities and Exchange Commission.

Now, I’d like to turn the call over to Rob. Rob, please go

Rob Silberman

Thank you, Sonya. Good morning, ladies and gentlemen. As it is our custom, I’d like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. I’ll then ask Mark to report on the detailed financial results for the first quarter, after which I’ll comment on our enrollment results for the spring academic term, provide an update on our growth strategies and finally end up with the company’s earnings outlook for Q2 2009.

Strayer Education Inc. is an education service company whose primary asset is Strayer University, 46,000 student, 65 campus, post secondary education institution which offers Undergraduate and Graduate degrees, Business Administration, Accounting, Computer Science, Public Administration and Education.

Strayer’s students are working adults who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. Approximately 70% of that revenue comes to us from federally insured Title IV loans issued to our students.

Our expenses at Strayer Education include the cost of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We serve students in 16 states through physical campuses, as well as in all 50 states and over 30 foreign countries through our on-line courses.

Strayer University is accredited by the Middle States Association of Colleges and Schools.

Mark, you want to run them through the financials?

Mark Brown

Revenues for the three months ended March 31, 2009 increased 28% to $124.5 million, compared to $97.1 million for the same period in 2008 due to increased enrollment and a 5% tuition increase which commenced in January of ‘09. Income from operations was $47.6 million compared to $35.6 million for the same period in ‘08, an increase of 34%. Operating income margin was 38.2% compared to 36.6% for the same period in ‘08.

Net income was $29.1 million compared to $23.5 million for the same period in ‘08, an increase of 24%. Diluted earnings per share were $2.07 compared to $1.64 for the same period in 2008, an increase of 26%. Diluted weighted average shares outstanding decreased to approximately 14 million from 14,340,000 for the same period in ‘08.

At March 31, ‘09 the company had cash, cash equivalents and marketable securities of $84 million and no debt. The company generated $47.1 million from operating activities in the first quarter of ‘09 compared to $34.2 million during the same period in ‘08. Capital expenditures were $6.6 million for the three months ended March 31, ‘09 compared to $5.1 million for the same period in ‘08.

During the three months ended March 31, ‘09 the company invested $60.1 million to repurchase approximately 348,000 shares of its common stock, at an average price of $172.57 per share as parts of a previously announced common stock repurchase authorization. The company’s remaining authorization for common stock repurchases was $10.1 million at March 31, ‘09.

During the there months ended March 31, ‘09, the company paid a regular quarterly common stock dividend of $7.1 million or $0.50 per share. For the first quarter of ‘09, bad debt expense as a percentage of revenues was 3.2% compared to 2.5% for the same period in ‘08. Day sales outstanding adjusted to exclude tuition receivables related to future quarters was 15 days at the end of the first quarter of ‘09 compared to 12 days at the end of the first quarter of ‘08. Rob.

Rob Silberman

Thanks Mark, just a few amplifying comments on the financials from my perspective. For the first quarter as Mark mentioned, we earned $0.10 more than the midpoint of our forecast which is admittedly a little bigger variance than normal. Almost all of that positive variance was caused by higher than expected revenue. Our revenue growth of 28% was a full 200 basis points higher than Mark and I had forecast from the 22% enrollment growth that we had for the winter term.

That extra revenue was largely the result of a lower number of students dropping during the quarter than we normally experience. It led to a fairly significant 160 basis point operating margin expansion and roughly $0.08 of the $0.10 of the EPS out performance. On expenses, we were pretty much right on our forecast for the quarter with the exception of stock based compensation which ended up lower than last year.

That lower stock based compensation, combined with a slightly lower share count led to the remaining $0.02 of our EPS out performance. Bad debt, invested income and tax rates were all right on target. Distributive cash flow in the quarter was particularly strong, up a little over 40%. Some of that was associated with the timing impact of the tax benefits from stock based compensation activities in the fourth quarter of 2008 as we mentioned on the last call, but even without that the free cash flow growth would have been well in excess of net income in the quarter, so the cash was quite strong.

Turning to the spring term enrollment results; total University enrollment increased 22% on a year-over-year basis. New students increased 26% and continuing student enrollment increased a little over 21%. With regard to student mix, business administration, accounting and economic degree seekers continue to make up about 70% of our student body for the spring term, with computer science degree candidates at below 20%, just below 20% of the total student population.

Our graduate population is remaining around 30% of our student mix for the spring term. We did start instruction on our new criminal justice bachelor’s degree at several of our campuses for this spring term and in our on-line three year offerings and so we are excited about that and keeping careful track of that. Turning to an update on the growth strategy; many of you will remember that our strategy is based on five objectives.

First, maintain enrollment in the company’s mature markets. Second, accelerate greater growth in new campuses, particularly in the new states. Third, invest in and build up our on-line offerings. Fourth, increase our corporate and institutional alliances and the final objective is to effectively redeploy our owner’s capital.

Just quickly going through all of those; on the first objective for the spring term we remain fairly well ahead of target at our mature campuses showing 10% growth. With regard to new campus activity for the spring term, we opened one campus each in three new markets for us Allentown, Pennsylvania, Charleston, West Virginia and Salt Lake City, Utah.

We also announced, this morning our intention to open our first two campuses in the state of Ohio to offer classes for the summer academic term. One will be in Cincinnati and the other in Columbus.

In the global on-line unit, the growth rate for the spring term was 40%. We have opened our second global on-line operation center in Salt Lake City just within the last couple of weeks. We are currently staffing that and recruiting students for the summer academic term.

On capital redeployment, we announced this morning our regular quarterly dividend of $0.50 per share and also that we had taken advantage of market conditions, as Mark mentioned during the first quarter, to repurchase approximately $60 million of our common stock.

On the business outlook for the second quarter, and then we’ll go right to questions, the higher revenue associated with the University’s 22% enrollment growth for the spring term, and in that Mark and I are already calculating that higher revenue per student we experienced in the first quarter, all of that increased revenue will more than offset the increased expenses from the openings of both our new campuses and our second online operation center.

So we actually expect 100 to 150 basis points of operating margin expansion in the second quarter, which should drive second quarter EPS to the $1.95 to the $1.97 range; and with that, Operator, would you please answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Amy Junker with Robert W. Baird.

Amy Junker - Robert W. Baird

Good morning, thanks. Let me ask about just the margin and make sure I understand Rob, and I apologize because I came on a minute late, but so it sounds as if there’s no real change in your expectations for the spend, it’s just a better than expected enrollment that’s offsetting that, because I know last quarter you talked about the global center in particular going online that you would expect to see margin pressure, and I just want to make sure that that’s not getting pushed out or anything. It’s just the better than expected enrollment is offsetting that.

Rob Silberman

Sure Amy. Yes, you’re correct. We didn’t push off any expenses. We spent everything that we intended to on our investment and on our growth and the margin expansion is mostly, virtually all related to increased revenue. It’s not so much unexpected enrollment because we knew exactly what our enrollment was going to be when we had our call in February, because our recruitment cycle, our classes had already started for the winter term.

What changed and what Mark and I are unable to know exactly is how many of our students will drop during the quarter, and we had a lower than expected number of that, and that drove a much higher revenue. As I said, a couple hundred basis points more of revenue growth, and that’s what really drove both the margin expansion and the EPS up.

Amy Junker - Robert W. Baird

Okay, and are you expecting that same level of behavior, I guess as you look at your second quarter guidance? Are you assuming that that drop level will stay lower?

Rob Silberman

Yes, that’s exactly what I tried to communicate. We’ve anticipated that in our second quarter guidance now.

Amy Junker - Robert W. Baird

Okay, and I guess last question that I would just have is and perhaps it’s because of the macro environment or just because you’re getting efficient at this and I know I ask this frequently, but I just want to check in, you’re newer campuses, are the ramping faster than what you’ve seen; and I know you’ve talked about that over the last couple years, but I’m just wondering, is that pace accelerating or do you think maybe there’s a new bar that you need to set in terms of new campuses and the trends that you’re seeing there.

Rob Silberman

They’ve been very healthy, and that obviously helps in terms of any negative margin impact that you get by opening the new campuses in the early years. The three that we just opened in this quarter, and then the two that we opened in the last quarter, have not been appreciably better than over the last couple of years.

So over the last couple of years as you’ve asked in the past, our campuses have ramped faster than the notional investment model that Mark and I use, but I wouldn’t say there was anything specific in this quarter that was markedly better than last quarter or the quarter before. It’s a very healthy environment right now.

Amy Junker - Robert W. Baird

Great, thank you.

Rob Silberman

Thank you, Amy.

Operator

And we’ll go next to Gary Bisbee with Barclays Capital.

Gary Bisbee - Barclays Capital

Hi guys, congratulations on the quarter. I guess on that last point about expecting the retention to remain stronger, what gives you the confidence that that’s going to continue, and I guess, do you have real sense as to why it improved so much in the quarter?

Rob Silberman

Let me take it in reverse order. There’s really two explanations I think for why; number one, I think that the macro environment is fairly benign for us right now. I think that the economic insecurity that people feel causes them to be more serious about their academic pursuits, so that’s certainly not hurting us; it’s probably helping us a little bit.

I think the other major cause is that we’ve put a lot of effort over the last several years in our student support and student readiness activity. Our diagnostic testing that we do for all of our incoming students, and the mandatory placement into math and English courses that may give them the necessary skill set to succeed at the college level, frankly just being a little more rigorous in winnowing out students who are unlikely to succeed as part of our admission’s process. I think we’re getting a lot of benefit from that in terms of the success rate of the students that we have and we’re quite please with that.

With regard to confidence; with regard to this upcoming quarter, we’re only a couple weeks into the quarter, so we don’t have that much data. We don’t have any more than Mark and I had last quarter when we looked at this, but in general what we’ve found with our academic performances, it doesn’t normally turn on a dime.

When we built up some positive momentum, it gives us I think a reasonable level of confidence that the best forecast we can make with regard to revenue growth is to roll in some of that slightly higher retention and hopefully be a little closer next quarter in terms of our EPS, what Mark and I think it’s going to be.

Gary Bisbee - Barclays Capital

Okay great, and the next question, given that I know you don’t believe that your business is very countercyclical, can you give us any color on why the new student start growth was so strong and particularly I know you’d had a terrific summer or spring enrollment last year, and so the comp looked really difficult in terms of the growth rate.

Rob Silberman

Well, I mean it’s like any other quarter Gary. Our new student growth and our total student growth over time, we believe will match our rate of capital investment as long as we’re doing a good job in the classroom. Within that, we’re quite comfortable that that new student growth can be somewhat volatile. It can go up and down.

We’re really not trying to manage that, and we are comfortable with and understand that the student who’s most likely to succeed in the classroom is the one who’s convinced themselves to enroll and they’re going to do that at different paces and at different times.

So I don’t think it has much to do with macro cycles. I think it has a lot to do with the pace of investment, the rate of university expansions that we’re enjoying right now in terms of new campus opening, and the compounding effect of that over a couple of years, but we were quite pleased with it. We were pleased last quarter as well.

There’s a lot of students who want to go to school, and I don’t think there’s anything with regard to the macro environment that’s really changing that, beyond the basic underlying macro shift away from a manufacturing economy towards a knowledge based economy.

Gary Bisbee - Barclays Capital

Okay. Well, it feels to me like this does a good job to put behind us some of the fears of corporate reimbursements really hurting the growth, so keep up the good work.

Rob Silberman

Yes, thanks Gary. Certainly not much of problem there this time.

Operator

And we’ll go next to Kevin Doherty with Banc of America.

Kevin Doherty - Banc of America

Thanks guys. Just looking at the growth in selling and promotion on this last quarter, you obviously have new campuses coming out, you’re going to support the new online center, but what’s the right way to think about the trajectory for the rest of the year? Was there much front end loading maybe to support that online center?

Rob Silberman

There wasn’t anything in Q1 for the second online center; that will all start in Q2. All the expenses with regard to the second online center in the first quarter would have been more personnel related.

Our marketing team adjusts their budget through the year, and we tend to have the highest raw dollars expenditure in our third quarter, which is when we’re hopefully most effective at the brand building associated with a fall enrollment, which is when even for working adults, most students decide they want to come back to school.

It trends down during the year, I think Mark sequentially, right? The first quarter and the fourth quarter would be higher than the first quarter of the next year, which is higher than the second quarter the next year, and then it ramps back up again.

Kevin Doherty - Banc of America

And then I know it’s a little tougher to see now with the investments you’re making, but what are you just seeing out there these days in terms of the underlying ad market and any softening that’s been a benefit to your company?

Rob Silberman

Well, it’s continuing. I mean one of the benefits of a softer economy is that advertising rates tend to be much more competitive, they go down. That was certainly the case even over the last four or five years in the teeth of a rapidly expanding economy, just because the disintermediation of normal media now with the Internet. So we’ve been the beneficiary of really going back the whole eight years that Mark and I have been here of increasing favorable media costs, and that certainly hasn’t slowed down in the last quarter.

Kevin Doherty - Banc of America

Okay and then just one more. Just switching gears, the regulatory environment’s gotten a lot of attention recently. Could you just make some comments about the potential out there for increased scrutiny and what you’re hearing and what your take is on the situation?

Rob Silberman

Well, our view has always been that it’s a heavily regulated industry. We understand that and accept that, and we’re operating in what’s perceived to be a public good and governmental authorities and educational authorities have an opinion as to how that should work, and particularly given the fact that the government is heavily involved in terms of supporting education through the Title IV program.

So I don’t really see it getting any worse, or any more severe or rigorous than it has been for the eight years that Mark and I have been at the helm and we think it’s an important part of running the business, is an understanding of those constraints and risks.

I think the simplest way to think about it is that for the most part, anyone who’s focused on our enterprise from a regulatory standpoint is really asking the basic question of, ‘is the enterprise first and foremost an educational institution or will it let the educational value suffer in order to generate shorter term financial gain?’ and as long as your head’s square on that issue and on that balance, the rest of the regulations tend to sort of fall outside of that key area, and that’s the way we try and run it.

Kevin Doherty - Banc of America

So you’re not aware of any specific new areas of scrutiny that are coming about because of this administration, I guess as just the follow-up.

Rob Silberman

No, I’m not.

Kevin Doherty - Banc of America

Okay, thanks guys.

Rob Silberman

Thank you.

Operator

And our next question comes from Mark Marostica from Piper Jaffray.

Mark Marostica - Piper Jaffray

Thank you, and congratulations on the quarter guys.

Rob Silberman

Thanks Mark.

Mark Marostica - Piper Jaffray

My first question relates to a topic that came up on a previous earnings call in regards to course loads, and certainly from the behavior of revenue per student growth in the quarter, it doesn’t appear that there’s any material impact on course loads, but I’ll just ask the question, if there’s anything behind the numbers that you’re seeing as you’ve march through the quarter and look at the spring term as well, if you’re seeing any change in course loads per student.

Rob Silberman

No, they’re fairly consistent.

Mark Marostica - Piper Jaffray

Okay, fair enough. You also mentioned that the new criminal justice bachelor program has been rolled out at a number of campuses and online, and just layering onto Gary’s question, was there any material contribution to student start growth from the criminal justice program?

Rob Silberman

Well, it’s a few hundred students; I mean it’s a handful. It would be less than a percent, but we’re happy for whatever it was, and it’s sort of a soft rollout at this point. We don’t even have it across all of our campuses, so.

Mark Marostica - Piper Jaffray

Okay, and then regarding your Salt Lake City global operations center, I’m curious whether you witnessed any surprises, positive or negative, in the launch of the center in the quarter?

Rob Silberman

No, no major surprises Mark. I mean we’ve been quite pleased that our initial analysis of Salt Lake City as a labor market and the availability of personnel who can understand our culture and get up to speed quickly with regard to our institution has been pretty high. So we’re more confident now than we were six months ago, even at the right location and we’re hopeful for a good start there.

Mark Marostica - Piper Jaffray

Great, and last question, in the past Rob, you’ve shared with us the retention rate in the quarter, and I know you did you mention your drops are down, but could you give us a little more color, granularity, around what you’re retention rate was in the quarter?

Rob Silberman

Sure, it was roughly stable. If you count all the graduations that we had in the quarter, I guess it would have been slightly below, maybe a few basis points below. Our total student enrollment was about 22% in the winter term, and we were between 21% and 22% continuing student growth for the spring term. So that’s usually the ratio that I look at and see that it’s roughly equivalent.

Mark Marostica - Piper Jaffray

Great, thanks.

Rob Silberman

You’re welcome.

Operator

And our next question comes from Andrew Steinerman with JP Morgan.

Andrew Steinerman - JP Morgan

Hi there. Could you talk a little bit about bad debt. I know some of that is within the company’s control, kind of local decision making at campuses, allowing students to start occasionally before being packaged. Is any of that being scrutinized sort of internally now, maybe tightening things up there? Just give us general color on what’s trending in bad debt and is the company responding at all to it.

Rob Silberman

Sure Andrew, the only clarification I would make is it’s actually all within our control, not partially within our control, because given that we have four academic starts per year, and they tend to line up exactly with our financial quarters, we could just unilaterally decide not enroll any students who are not completely packaged, so we could drive it to zero.

As I’ve said in the past, we don’t do that, because that would be significantly inconvenient for students that would have to wait 10 or 12 weeks to start, and then we’d have a high level of trust for the most part on our local campus leadership to be able to make those decisions.

We’re not really doing anything differently now. We were actually comfortable with that bad debt expense. It was right about where we had expected it would come out. There’s probably 20 or 30 basis points associated with bad debt right now that is related to the macro economic situation, because the way our algorithm works is we’re making a provision against our receivables that is basically an allowance for capital accounts. It’s not just a guess.

The way we do that is we do sort of a mathematical algorithm that’s based on our previous history and end up writing off a certain amount of both the receivables that are zero days old, and then 90 days old, and then we write off 100% against that reserve for those receivables that are 180 days old.

The one affect which sort of counterbalances all that is the recoveries of accounts that we have already written off, and over the last eight years, we generally had a fairly healthy input which we then balance that against the reserve or the expense the we have to take to top off the reserve.

Mark and I have both noticed that over that last year, certainly over the last six months, those recoveries of already written off accounts, i.e. students that have left, that are long gone, that I think is going to suffer and I think that that’s already rolling through some of these dollars.

For me that doesn’t have much of a cultural impact on the organization, which is really what I focus on. The numbers of our students who are dropping out before they are packaged, who are just dropping in general is actually going down, and so I’m fairly comfortable with the cultural tradeoffs that are going on at the campus level right now.

Andrew Steinerman - JP Morgan

Super, and could you just talk about the timing of P&L expense for the online campus. Obviously I heard you saying second quarter was inline with expectations, tracking well, but just remind us, is second quarter probably the largest P&L investment for the second online campus, and how would it look past second quarter?

Rob Silberman

No. What I think I may have not been adequately clear on going back to last fall or at least people haven’t adequately understood what I’ve been trying to say, is that the actual expenses will ramp all the way through the year and into next year. The operating income impact, the losses are highest in the second quarter, because that’s when we’ll have the least amount of revenue associated with those expenses.

The expenses we expect to ramp over the next three or four years as that center grows, but starting probably early next year, we would expect the revenue to ramp at a faster rate and so to actually have positive contribution as opposed to losses. The maximum amount of losses should be in the second, maybe third quarter and then hopefully starting with the fall term we’ll start to see that reverse a little bit.

Andrew Steinerman - JP Morgan

All right, very helpful. Thank you.

Rob Silberman

Thank you, Andrew.

Operator

We’ll take our next question from Andrew Fones with UBS.

Andrew Fones - UBS

Yes, thank you. I have a question related to the fact that a lot of your new students come from community colleges and already have an associate degree. Based on that thought, how do you feel about the fact that as we’ve seen very strong growth in enrollments at the associate level over the last 12 months, in about a year from now where you might start to see those students graduating from the associate levels at their community colleges, and actually helping your growth; is that something that you’re expecting at all?

Rob Silberman

Well, we spend a lot of time communicating with our community college partners, and I can confirm that for most of them they’ve got a big squeeze going on. They have record numbers of enrollments or desired enrollments and in many cases quite a severe budge squeeze or fiscal squeeze.

Whether that translates a year or two years from now into increased enrollment for us, we’ll just have to wait and see, but certainly the desire for education and the acceptance and acknowledgement among individual, particularly at the working adult level, that having a Bachelor’s degree is an important steppingstone to ensuring the ability to earn a middleclass lifestyle that’s out there, and it’s quite strong.

We really like the community college partnerships because the community colleges in some ways act as a filter to take a number of those student or perspective students who recognize that fact, acknowledge that necessity, but may just not have the cognitive skills or perseverance to succeed at the college level, so they’ll go to the community college first and in some way get filtered out, and the community college graduates who come to us with an associate’s degree, just tend to have much more staying power, and a much higher success rate.

So we really like that relationship and think it’s a positive contributor to both our academic performance and our financial performance, and if they’re getting a surge of enrollments this year, then as I said, hopefully a year or two from now, we’ll see a fair amount of that.

Andrew Fones - UBS

Okay thanks, and an added question as well related to that topic and the impact of it on seasonality, particularly of your starts. Over the last 18 months, we’ve seen kind of an oscillating pattern if you like in terms of your start growth, which seems to correspond with when students would be graduating out of those community colleges and perhaps starting at Strayer.

I was wondering whether that is something that you see and perhaps a greater impact from students graduating from the community colleges have perhaps created this kind of oscillating start growth that we’ve seen over the last 12 months.

As kind of a related point, if you could also just talk a little bit about the seasonality of your global school as well, we typically see a big step-up in students in the fourth quarter, and what you think drives that seasonality thing.

Rob Silberman

Sure. Again, let me take that in reverse order. To the degree there’s seasonality in our business, it tends to be there for both our campuses and our global online student, and that is that even though they’re working adults, they tend to be affected by the several hundred year old agricultural pattern of people going back to school in the fall. It may be because they have kids, and the kids go back to school in the fall, so we’ve always at all of our campuses and online tended to have our highest step-up in enrollment growth for our fall academic term, which corresponds to the fourth quarter.

With regard to new student starts, I don’t believe that the oscillation that you’ve described has much to do with community college graduations. They tend to roll through fairly evenly as well. I just think its part of the natural variability of the business and one that we’re quite comfortable with. I wouldn’t try and predict it, nor do we do much to try and control it. We’ll take the students when they want to enroll and when we have the space. If you go back the last eight years, my guess is you’ll probably see an even distribution of higher start rates in all our four quarters.

Andrew Fones - UBS

Okay, thank you.

Rob Silberman

Thank you, Andrew.

Operator

And we’ll go next to Bob Craig with Stifel Nicolaus.

Bob Craig - Stifel Nicolaus

Good morning guys.

Rob Silberman

Hi Bob.

Bob Craig - Stifel Nicolaus

Rob, at some point we need to chat about the pecking order or Ohio City entries, but we can pursue that offline.

Rob Silberman

We wanted to stay as far away from Cleveland for as long as possible.

Bob Craig - Stifel Nicolaus

Then I guess as long as you don’t open Steubenville before Cleveland we’ll be happy. Just a question for you related to a subject that you broached in your letter to shareholders. I wonder if you could talk about the genesis of the decision to include a science requirement, where that stands in terms of when will that be fully in place; you eluded to some possible influence on enrollment. I take it obviously that hasn’t happened to-date, but maybe just because it’s not in place yet.

Rob Silberman

Well, it is actually in place now, and the genesis of requiring a laboratory science course at the bachelor level came out of our tri-annual review. Each year our academic faculty and our academic staff takes a very deep look at one of our major program areas, and this year, it actually started in late 2008, it will be completed in 2009, they’re doing the review of the arts and sciences curricular.

What came out of an early part of that review was a sense on our faculty’s part, that in order to graduate with a bachelor’s degree you really needed to have a laboratory science course, either biology, chemistry, physics or environmental science, and so it wasn’t that complicated a discussion.

Sondra Stallard, our President, brought it forward to the Board of the Trustees. The Trustees looked at it and we all decided that if our faculty felt that was the right way to structure the academic program, that’s what we should do. In that discussion we did have a couple of admissions managers of various campuses that said, that might be a little bit of a detriment; a little bit of a downer in terms of student’s wiliness to enroll, because as we’ve talked in the past, having a working adult coming back to school requires an enormous amount of courage on their part.

Making them take a course which may not be exactly what they have in mind to go back and get a bachelor’s in business or accounting, could complicate that decision, but it wasn’t really much of a choice and we tried to communicate as clearly as we can on those tradeoffs. We fall on the side of what’s necessary to ensure the academic quality and frankly, I’m actually not that worried about.

Over the last eight years every time one of these issues has come up, when you make the academics more rigorous, as long as you’ve got strong student support, the demand for what we do is pretty overwhelming and I’m not particularly concerned about the impact on the enrollment. It certainly hasn’t had a negative impact with regard to this quarter.

Bob Craig - Stifel Nicolaus

That’s helpful. I know its early Rob, are you seeing any changes in ethicacy, in mainly alluding to retention as satisfaction on the next gen online programs; what’s the penetration level now?

Rob Silberman

We’re about 40% to 50% through the entire course catalog, but we try to obviously focus on those courses that have the highest usage, so I don’t know exactly in terms of the amount of students each. Mark, we might have to check with Randy Rice and get back to Bob on that and it’s early. I mean, we’ve only had them for a year or so, so I don’t think we have enough institutional assessment data to answer definitively what the ethicacy is.

I also think it’s just an ongoing requirement. This is the kind of thing where we’re just going to have to stay on top of this every year, and be at the cutting edge of being able to provide innovative academic technology as a means of having the content get to students, where they need to get it and have it be as interactive and as wholesome as it can be to try and replicate that classroom experience in a virtual world. So this isn’t something that’s just going to be done. It’s going to be an ongoing focus and effort of ours.

Bob Craig - Stifel Nicolaus

Okay, last one and I’ll move on. Do you sense that the criminal justice programs, I know it’s very early here too, and might attract a different student demographic than what you’re used to?

Rob Silberman

I don’t think it’ll be a different age or socioeconomic, if that’s what you mean by demographic. I think it is attracting incrementally additive students who didn’t want to study business or accounting or computer science, but we’re looking for a management science type of program in the area of criminal justice. I would expect they would be working adults. The first few hundred I think are pretty right down the centerline of the types of student that we would normally attract.

Bob Craig - Stifel Nicolaus

Great, that’s helpful Rob, thanks.

Rob Silberman

Thank you, Bob.

Operator

And our next question comes from Ariel Sokol with Wedbush Morgan.

Ariel Sokol - Wedbush Morgan

Hi, good morning. I have a question and hopefully this doesn’t happen, but what kind of preparedness do you have for things like Swine flu, and what potentially could that do to enrollments internally persistence, and how challenging would it be to get some of your students who are on ground campuses to take online classes.

Rob Silberman

Well, let me take these in the original order. The operational requirements in dealing with that for a university like ours is much less cumbersome and difficult than for obviously a residential university. Our students live at home, they come for four hours a night, and then they go back home. So it would be really the same thing that you have with sort of any retail kind of organization.

We’re obviously in touch with public health officials in the areas where we operate, and none of what we’ve seen to date has caused us to change any of our operating procedures. We do clearly advise our students that if they’re not feeling well to stay home. It’s just good commonsense.

It would not be difficult to have in a real severe situation, all of our classes offered online; most of our classroom faculty are trained to teach online. It would be an operational requirement we’d really have to sit down and focus on, but it’s not something that I don’t think we could accomplish if we had to and as you said, we certainly hope that doesn’t happen. Did that get the answer, Ariel?

Ariel Sokol - Wedbush Morgan

Yes, that was pretty good.

Operator

And we’ll go next to Jeff Silber with BMO Capital Markets.

Jeff Silber - Signal Hill Group

Thanks so much. I wanted to go back to the new online operating center and I’m just curious, when you compare that to when you opened up your first center, are you doing anything differently this time that we might see a higher or a quicker return on that investment?

Rob Silberman

Well, we are doing things differently just because we didn’t really have a formal opening of that first center. I mean, when Mark and I took over here in 2001, Strayer University had offered classes well; they were all synchronous classes at the time to a few hundred of their existing students in kind of a nation form.

Over a three or four year period, the whole management team and the academic infrastructure here really focused on online as a means of reaching our students, and incrementally and additively both added programs, added the synchronous, expanded that unit, added people each year, added space, technology, etc.

This is really the first time that we started from scratch with a real vision of what we want to accomplish. So we don’t have a lot to compare to with regard to that first center, beyond the fact that we expect that over time it will generally replicate in size and therefore enrollment and revenue, and ultimately margin contribution that the first one does.

I expect that it will be at or faster than the eight years that the existing unit has taken to grow to its size, certainly just based on the fact that we’ve thought about it a lot more systematically and put plans in place to support that, but we’ll see. We’ll have to see.

Jeff Silber - Signal Hill Group

Okay and then just a quick question on the Salt Lake City campus. Since this is really your first new campus, it’s not really contiguous to the others, I’m just curious what has been the response? Do you have to work harder from a brand recognition perspective in Salt Lake City than maybe in some of the other new campuses you’ve been opening?

Rob Silberman

Well, it’s been harder but not for that reason. Every new market we go into, even it happens to be 50 or 100 miles away from an existing market, i.e. in driving distance, we generally have the same brand building challenge. I mean, nobody knows us when we get there. So that’s no different in Salt Lake City than it was when we went to Charlotte or Atlanta or Tampa.

What’s more difficult is it’s a four hour flight, and there’s not that infrastructure of having a number of campuses within an hour’s drive of there where you get an ability to synergize your support structures, but so far, it’s worked out okay and mainly because we already have this large investment in the city of Salt Lake with our global online operation center and that it’s our largest corporate onsite facility.

So we’ve got enough of an academic and administrative presence there that we’re able to really ensure the quality and make sure that the hiring of faculty has been up to the standards that we’re looking for and we had a pretty good start there. So right now I think it’s entirely manageable, but we’re probably still going to get to Cleveland before we get to any place out near Salt Lake City. We’ll make Bob feel much better, so.

Jeff Silber - Signal Hill Group

Okay, that’s good to hear, and just a quick follow-up on that, and again I know it’s earlier, but based on the experience you’ve had so far, would we see other noncontiguous openings, or was this such a unique situation that this might be one-off?

Rob Silberman

No, I think it was a unique situation. I mean, the investment in human capital and infrastructure necessary to support that second global online center, which had it’s own reasons for being in Salt Lake City, married with the fact that we had so many faculty and administrative personnel supporting our largest corporate onsite facility, the Verizon Wireless facility in Salt Lake, really made that sort of a really generous situation that cried out for a campus.

I don’t expect to see that at other places and I do expect that over the next couple of years our campus geographic expansion will move contiguously into states that are nearby where we are.

Jeff Silber - Signal Hill Group

Okay, I appreciate the color, thanks so much.

Rob Silberman

Thanks Jeff.

Operator

And we’ll go next to Corey Greendale with First Analysis.

Corey Greendale - First Analysis

Hi, good morning.

Rob Silberman

Good morning Corey.

Corey Greendale - First Analysis

I also had a question about the geographic expansion. If I’m calculating this right, it looks like you’ve got seven - this isn’t a calculation that’s done with the press release, but seven of the 11 campuses that you plan for the year done already, which would suggest four in the fall term and I don’t believe you’ve ever opened four in one term before, and that’s on top of the online center that you’re opening, so it’s an unusual amount of expansion activity.

Do you think that there’s any resource constraints? Are people scrambling more than they might otherwise or are you scaled for that kind of activity and we might see that level of activity sustained in future years.

Rob Silberman

Well, we wouldn’t have done it if we weren’t 100% confident in our ability to support it. I mean, that’s really how we solve for an investment plan for the following year, is do we have the personnel to support at the high level of execution performance that we’ve done in the past, really providing this level of academic quality without any risk.

As it turns out, we did do four campuses last fall. So the four campuses won’t be a new event and we’re really opening the second global online operation center this quarter, which is a quarter ahead of when the four campuses we’ll be focusing on for the fall term. You raised the point that we ask ourselves before we setout a plan like this, do we have the human capital in place so that people aren’t scrambling around in order to really ensure both the quality of the academics and the student experience and support that’s necessary in order to be successful.

Corey Greendale - First Analysis

And you have pointed that your enrollment generally tends to grow at the same rate as your campus openings. This year you’ve encouraged us to think of the new online center as the equivalent of five campuses, so that on top of the 11 campuses you should have 16 new campuses this year on a base of nine last year, which would be a pretty meaningful acceleration.

So would that suggest that you think your rate of enrollment growth could accelerate toward that, and I know it’s early, but I would assume that you’re not necessarily thinking that 2010 you’d open-up more than 16 new campuses, but is that correct that I should be thinking about it that way?

Rob Silberman

Well, the correlation between your enrollment growth and your capital expansion is there, it does tend to lag a little bit because your campuses really start to hit their stride in their second and third year. We haven’t even begun to think about 2010 yet, so I just couldn’t answer that question Corey.

Corey Greendale - First Analysis

But in terms of the first part, the fact it’s 16 or the equivalent of 16 campuses on a base of nine, you wouldn’t argue with that suggestion that there could be an acceleration.

Rob Silberman

Yes, I don’t think it’s so much; 16 on a base of nine, it’s 16 on a base of 60, which is your existing base of campuses. Last year’s was nine on a base of 51. There is some acceleration there and over time we would expect to see that in our enroll.

Corey Greendale - First Analysis

Okay, and then one last one. I don’t know if you can speak for the entire Board, but is it fair to assume that the repurchase authorization will likely be re-upped?

Rob Silberman

I would never speak on behalf of the entire Board Cory, no. We’ve been pretty clear with regard to our view on capital deployment, and there’s really nothing that’s changed our view of either intrinsic value or the methodology of returning capital to owners, so let’s leave it at that.

Corey Greendale - First Analysis

Great, fair enough. Thank you very much.

Operator

And we’ll go next now to Brandon Dobell with William Blair.

Brandon Dobell - William Blair

Thanks. Rob, in the mature campuses, 7% on ground growth, how much of that was a function of overall new capacity versus let’s say class size or scheduling of classes per location.

Rob Silberman

I don’t think it’s really either. In other words, the number of classes that we scheduled wouldn’t have increased. At a mature campus, the reason most enrollment growth runs right to your bottom line is that you tend to have a full class schedule anyway, so you’re just filling up those classes. Incrementally, when you get to about 20, 22 students you add another adjunct professor, because you’re fulltime professor’s will have already been fully scheduled, but most of that runs right to your bottom line.

Brandon Dobell - William Blair

Okay, you’ve talked about roughly a dime in earnings generated from every 1% enrollment above planned. Any reason to think that that’s not as relevant as it used to be given revenue per student trends or persistence trends or things like that, is that still the right way to think about how we should think about your plan.

Rob Silberman

Well, obviously the denominator matters the most there, so your share count is going to have an effect on it. If your share count goes down, that $0.10 could go up, but for the same share count, the underlying economics’ to business haven’t changed, and so yes, I would say that is a fairly good proxy.

Brandon Dobell - William Blair

Okay, finally at community colleges for a second, any change either way in the receptivity from community colleges if you go out and talk and you’re trying to set up agreement with them, just given the overall macro environment. Are they more or less likely to sit down at the table with you guys?

Rob Silberman

Well, they’ve been more likely, but I think that’s more associated with the fact that our brand recognition, our brand equity within the academic community is increasing. We’ve got a very talented group; actually Dr. Lloyd Tredwell who works in our organization really manages this under Lysa Hlavinka.

He’s told me that as we get better and better at this, and as we have more successful relationships, when we get into new areas, new states like Ohio, they tended to have heard of us before, whereas in the past that wasn’t the case. So that makes it a little bit easier.

I would guess that the macro economic environment certainly isn’t hurting us and as I said earlier, the community colleges I think are somewhat at a squeeze with increased demand and decreased financial resources. So all in, I would say it’s probably been easier and we have had a number of new relationships that we signed up in the last six months. The evidence of that is fairly strong as well.

Brandon Dobell - William Blair

Great, thanks a lot.

Rob Silberman

Thank you, Brandon.

Operator

And we’ll take our next question from Kelly Flynn with Credit Suisse.

Kelly Flynn - Credit Suisse

Thanks, a couple of questions. On the bad debt, I think you said Rob, you thought 20 to 30 basis points related to the macro economic situation, but it’s gone up by more that that. What’s the other factor there, and then secondly, on corporate reimbursement, I know Gary touched on it, but could you give a detailed download on what you’re seeing there positively and negatively if anything, thanks.

Rob Silberman

Sure. Well again, let me take those in reverse order. We haven’t seen any negative, so there’s nothing to report on a detailed basis or otherwise on that. On the positive, we continue to sign up new accounts. In the last six months, we’ve had organizations as diverse as NASA, McDonald’s, Lowe’s, Capital One, there’s probably a couple others that I’m not remembering, and our student enrollment from our existing corporate alliances; again, this term went up at a faster rate than our overall rate of enrollment. So it’s been positive for us, I guess is the simplest way I can describe it.

With regard to the bad debt, our bad debt expense will fluctuate on the basis of decisions that are made at the local campuses to extend credit to students, and we’re comfortable with that fluctuation. What we’ve talked about in the past is at any point at which we feel like it’s indicative of a cultural problem of bad decision making, of a willingness or an eagerness to extend credit to enroll students that basically don’t belong in the classroom, that’s when we tend to take management actions to really clamp down on that.

In the range that we’re experiencing right now, I don’t see that happening, and so we really haven’t made any of those management decisions, and if it were to move significantly, and particularly if it was associated with a high growth rate of students, and a large percentage of that new growth of students dropping out, and then causing bad debt expense, that would cause more of an alarm bell for us.

Kelly Flynn - Credit Suisse

Okay. Thank you very much.

Rob Silberman

Thank you, Kelly.

Operator

And we’ll go next to Suzie Stein with Morgan Stanley.

Rob Silberman

We may have lost her, Chad.

Operator

And we’ll go now to Trace Urdan with Signal Hill.

Trace Urdan - Signall Hill Group

Hey thanks. Good morning. Rob, does the opening of the second global online center represent anything in terms of how you think about that type of student strategically? And I guess related to that, do you see anything changing in what could be described as the global online marketplace going forward?

Rob Silberman

It doesn’t change how we view that student strategically. I mean we’re delighted to be able to serve any students that we can as long as we can serve them well. We’ve always felt that serving the purely online student for which you have no physical interaction at all is a more difficult challenge.

It’s just you’re ability to properly communicate with the student, the requirements necessary to legitimately gain a college degree, your student support functions, your advising, tutoring as necessary, and then the interaction between the professors and the students are just necessarily more difficult I think. It’s just probably the easiest way to say that.

Nevertheless, we’re excited about the ability to use technology to reach students that we otherwise would not be able to reach, and we think that those difficulties can be overcome and which is one reasons why we have that as part of our university.

At least domestically within the US, over time, those pool of students that we deal with who through our global online centers will shrink, because as we open campuses in Cincinnati, Ohio this next term, the few dozen or 100 or whatever it was, online students that we had in Cincinnati will through our global operation center will be assigned to that campus. So the pool that we draw from, continually shrinks as our expansion plans continue to reach fruition and we open campuses in areas we don’t already have campuses.

Ultimately, at some point in the future, years and years from now, those centers will probably be uses solely to serve either international students or students in rural areas that are just so far from campuses that we can’t serve them. I think it’s an important part of our business in our university. It’s one that we recognize that there are additional challenges to and that we try really hard to make sure that we’re adapting to, but ultimately it doesn’t really change our view of the strategic value of it, and why we’re trying to address them.

Trace Urdan - Signall Hill Group

Okay, that’s helpful. Thank you.

Operator

As it appears there are no further questions at this time, Mr. Silberman, I’d like to turn the conference back over to you for any additional or closing remarks.

Rob Silberman

Great, thank you Chad. Thanks everybody for listening. Suzie, if you just couldn’t reach, dial, call us directly, we’ll be glad to talk to you; and we look forward to talking to you again in July. Thanks very much.

Operator

And this does conclude today’s conference, and we thank you so much for your participation.

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