Strayer Education's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.21.14 | About: Strayer Education, (STRA)

Strayer Education, Inc. (NASDAQ:STRA)

Q4 2013 Earnings Conference Call

February 21, 2014 10:00 a.m. ET

Executives

Robert Silberman - Chairman

Karl McDonnell - Chief Executive Officer

Mark Brown - Chief Financial Officer and Executive Vice President

Analysts

Sara Gubins - BofA Merrill Lynch

Jeff Volshteyn - JP Morgan

Jeff Silber - BMO Capital Markets

Paul Ginocchio - Deutsche Bank

Corey Greendale - First Analysis Securities

Jason Anderson - Stifel Nicolaus

Peter Appert - Piper Jaffray

Trace Urdan - Wells Fargo

Tim Connor - William Blair

Operator

Good morning, everyone, and welcome to the Strayer Education, Inc.’s Fourth Quarter 2013 Earnings Results Conference Call. This call is being recorded. For those of you who wish to listen to the conference via the Internet, please go to strayereducation.com, where the call will be archived.

With us today to discuss the results are Robert Silberman, Executive Chairman for Strayer Education; Karl McDonnell, Chief Executive Officer; Mark Brown, Executive Vice President and Chief Financial Officer; and Daniel Jackson, Senior Vice President and Treasurer. [Operator Instructions]

I would like to remind everyone that today's press release contains and certain information on this call may contain 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 assumptions, uncertainties and risks 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. Copies of these filings and the full press release are available online and upon request from the company's Investor Relations Department.

And now, I'd like to turn the call over to Robert Silberman. Mr. Silberman, please go ahead.

Robert Silberman

Thank you, Ben and good morning ladies and gentlemen. We’re going to begin this morning with Mark commenting on our company's financial results for the fourth quarter, including providing a detailed crosswalk on the impact of the restructuring charge we reported this morning. Karl will provide an update on our operating results and I will conclude with some comments on our capital allocation over the last year and we will try to leave as much time as possible to answer your questions. Mark?

Mark Brown

Thanks, Rob and good morning everyone. I will start with revenue. Revenue for the fourth quarter 2013 was $124 million, which was a decrease of 13% from 2012. The decrease was primarily driven by lower enrollments which were down 17% in our fall academic term and partly offset by higher revenue per students of about 500 basis points. Although we did see a revenue per student increase in the fourth quarter, we fully expect this decline in 2014 -- we fully expect revenue per students to decline in 2014 which Karl talked about on the last call, as our newly introduced lower tuition levels for undergraduate students and our graduation fund rolled through.

Revenue per student was up in the quarter partly due to the phasing out of the previous scholarship program offerings as well as higher student retention in the quarter. As previously announced, we implemented a large restructuring in the fourth quarter in order to reduce our expense base in 2014 and beyond. This restructuring resulted in a pre-tax charge to earnings of $55 million, $48 million of this charge relates to lease abandonments and asset write offs of the campus and corporate locations. The remaining $7 million relates to severance and other employee separation costs.

To make it easier to understand the impact of the restructuring, we did include an additional table in our earnings release, which highlights our fourth quarter and full year results with and without the impact of this $55 million charge. As you can see, about two-thirds of the restructuring charge is recorded in the I&E line where we report our campus-based expenses and most of the balance is in G&A where we report our corporate-based expenses.

For the fourth quarter, including the impact of the restructuring, we’re reporting a loss from operations of $30 million, a net loss of $19 million and a loss per share of $1.08. Excluding the $55 million restructuring charge, our income from operations was $25 million, net income was $14 million and EPS was $1.32.

Looking at the full year in a similar fashion, including the impact of the restructuring, we're reporting income from operations of $33 million, net income of $16 million and EPS of $1.55. Excluding the restructuring charges, our income from operations was $87 million, net income was $49 million and EPS $4.64.

Lastly, I like to point out, in the fourth quarter, our cash flow from operations was approximately $6 million lower as a result of the restructuring. Rob?

Robert Silberman

Thanks, Mark. Karl, on to the operations?

Karl McDonnell

Sure. Thank you and good morning everybody. I'd like to begin this morning by expanding on Mark's comments regarding our expense reduction initiatives and just provide a little more detail.

Our restructuring plan consisted of two primary elements: a reduction in our workforce which was completed in mid-October and the closing of 20 physical campus locations as collective enrollment represented about 5% of our total student population. 19 of the 20 locations taught their last on-ground classes at the conclusion of our fall academic term which ended in December. The one remaining location will teach their final on-ground class at the end of the winter academic term in late March.

The transition of our on-ground student in these locations to our global online region has gone smoothly but obviously we will continue to provide whatever support these students may need moving forward. And based on the implementation of our plan, we expect to achieve the full $50 million of reduced operating expenses targeted for 2014 and beyond.

Now turning to our operating results for the winter academic term. Our total enrollment of 41,098 students represents a 14% decline from last year. Our continuing population decreased 17% and our continuation rate was basically flat; it declined about 10 basis points. And although the continuation rate for our fall cohort of new students improved, we still think it's too early to assess any impact to the graduation fund given that we only have two cohort of students in the program, and realistically I think it could take at least the full-year data to get our first solid read on that program’s impact on our retention.

Our new student enrollment decreased 2% versus the last year and within that number, our new undergraduate students decreased 7% and that compares to the 26% decline we had in the fall term and new graduate-level students grew 15% year-over-year, and that’s comparing to a 13% decline that we had in the fall. Also, graduate students now comprise 37% of our total enrolment.

Although we’re encouraged by the improvements in both our continuation rate and new enrolment, we feel it's important to point out to our owners that moving forward these numbers in themselves will be a less reliable predictor of future revenue growth due to the reduction in our undergraduate tuition and the graduation fund. Instead we believe the strongest indicators of future revenue growth will be our total enrollment and revenue per student. And although our revenue per student increased 5% in the fourth quarter, as Mark pointed out, we are planning to see year-over-year declines in each quarter this year, again as more students at the undergraduate level enrol in our lower tuition. The rate of decline will obviously depend on the number of new students enrolling as well as the mix of our graduate and undergraduate students.

I’d also like to make just a couple of comments about the Jack Welch Management Institute. We’ve seen continued strong interest and solid growth in the JW MBA program throughout 2013. And earlier this month, we were pleased to announce a strategic partnership with Skillsoft, a global leader in corporate learning solution. Over the next 10 years, they will be the exclusive distributor of our Welch Way management training product which today consists of six courses designed by and featuring Jack Welch, the executive chairman of JWMI. And in addition to our six courses, Skillsoft will have the ability to create new Welch Way branded products and services to serve their customers’ management development needs.

And given their large global sales force, proven track record and the fact they serve more than 19 million employees across more than 6000 customers, we think this is a great partnership and we’re looking forward to working with them in the years ahead.

Finally, although we don't normally comment on future enrolment, I did want to mention that we have experienced some weather-related disruptions across our footprint over the past few weeks and that many of our largest markets have been impacted, including Atlanta, Carolina, Washington DC and the Northeast. And clearly we won't know if there is any impact and what that impact is until the end of the quarter. But given the number of days and locations involved, there is some chance that our enrollment will be impacted. Rob?

Robert Silberman

Thanks, Karl. Just a brief comment on our allocation of capital in 2013. We started the year with $47 million in cash on our balance sheet, 11.4 million diluted shares outstanding and $125 million in principal outstanding on our bank term loan.

During the year we generated $84 million in cash flows from operations. As Mark mentioned, the impact of the restructuring charge was -- only about $6 million of that was reduction in cash and we used that $84 million during the year as follows: First, we invested $9 million in academic technology, routine maintenance and CapEx. Second, we used $3 million to make principal payments on our term loan. Third, we invested $25 million in repurchase of shares of our company stock. And finally, the remaining $47 million was added to the $47 million we started the year with to bring our total cash and cash equivalents on hand at year-end to $94 million.

And at year-end 2013, we had $122 million of principal outstanding on our term loan, no draws on our $100 million revolver for a net debt position of $28 million and 10.6 million diluted shares outstanding as a result of the share repurchases.

And with that, Ben, we’ll be pleased to answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from the line of Sara Gubins of Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch

I am looking what you think drove the improvement for the new student enrollment for undergrads, if the decline is getting better and the growth that you saw in the graduate program.

Karl McDonnell

Well, I can’t speak to any specific lever, Sara. We continue to focus on just building the best possible University that we can make sure that the student experience as good as we can. I can say that we've seen at the undergraduate level a significant favorable feedback from students on the lower undergraduate tuition. In terms of graduate students, we’ve had strong graduate student performance for well into the last year. And so we weren’t completely surprised to see the growth there.

Robert Silberman

And partly JWMI.

Karl McDonnell

Clearly JWMI is a big help.

Sara Gubins - BofA Merrill Lynch

Okay. But just to make sure I understood what you were saying on the call. New graduate students grew 15% but in the fall they were down 13%.

Karl McDonnell

That’s correct.

Sara Gubins - BofA Merrill Lynch

That’s a pretty big improvement, it’s not coming from scholarship but you are not very scholarship there, correct?

Karl McDonnell

We're not doing anything on scholarships at the graduate level. And as Rob pointed out, we’ve seen strong growth in JWMI’s MBA program throughout 2013, and they are at a level where they are making contributions to the total Strayer graduate students.

Robert Silberman

And we also had growth in new students and graduate students earlier in 2013 as well. So the fall term was down but there were previous terms where we had graduate new student growth.

Sara Gubins - BofA Merrill Lynch

Okay. Could you give us a sense of how many graduates you had in 2013 and what your expectations for 2014 are?

Robert Silberman

It’s little over 8000 graduates in ’13. I don't have that – do you have that number – it’s likely to be lower just because enrolment was lower.

Sara Gubins - BofA Merrill Lynch

And then in terms – as we think about cost for 2014, you obviously take out the benefit of the $50 million in cost saving. Excluding that, is it reasonable to think that your other cost would be relatively flat or are there other areas that might be more variable as your revenue is lower?

Robert Silberman

Sara, of course, it'll depend on how many students we have enrolled in our teaching next year. So there is a variable component to it. But i don't anticipate a whole lot of other wild swings in our cost next year.

Sara Gubins - BofA Merrill Lynch

And then just last question, you mentioned that students who were attending the campuses that were closed for shifting over to the online program. Could you give us any sense of what the retention rate of those students who were at campuses who were attending on ground have in fact moved online?

Karl McDonnell

Sure. There was a – to begin, a large percentage of those students were already online and at the end of the quarter, the continuation rate of that cohort of students in these 19 campuses was almost flat actually. We were just slightly below the continuation rate that we had in the prior year's. So the bulk of the students retained and are with us online now.

Robert Silberman

That’s around 80%.

Operator

Thank you. Our next question comes from the line of Jeff Volshteyn of JP Morgan.

Jeff Volshteyn - JP Morgan

So I wanted to ask a high level question. In the past when I looked at your model, we thought about online delivery and campuses really supplemented the online delivery. When you entered new markets, there was a certain bases students already there and you could quantify. Now that you’ve scaled-back campuses, what is the long-term strategy for your campuses and your online institutions? Are you shifting more online? Will we kind of see more campus closures or will see selective openings? Help us train the strategy going forward.

Karl McDonnell

Sure. Well, first, we are campuses are a critical part of our delivery and the experience for our students. In any given quarter we have tens of thousands of students that are taking on-ground classes and the feedback from the bulk of those students is that, that's why in large measure they chose Strayer because we do offer the flexibility to learn either at a brick-and-mortar facility or online. We don't have any plans to close anymore campuses. When we were putting our plans together for the restructuring plan that we just completed, we feel that the $50 million plan is sufficient across the range of scenarios that we look like that we look at as being somewhat likely.

And so to answer your question, Jeff, we think campuses are critical. We don't have any plans to close any additional campuses, and whether or not we open campuses or when we open campuses, that’s something that we look at on a year-to-year basis. And as we said in the past, we’d want to see some enrollment stabilization for our existing set of campuses. We want to see some additional clarity on the regulatory front and we like to see the macro-economy at large shows some signs of improvement.

Jeff Volshteyn - JP Morgan

So what percentage of the students is online now?

Karl McDonnell

Well, in terms of classes, just under about 60% of our classes in any given quarter are online but that’s a very fluid number in that the absolute number may remain somewhat flat but you have a lot of students going in and out of the modality. So a student who may take all their classes online one quarter, in the subsequent quarter they may decide to take all or part of their classes on ground. And actually over the last year we’ve seen a pretty large increase in what we call hybrid modality, which is a student taking one of their classes online and one of their classes on ground. And our view on that is we’re fairly agnostic as long as we’re confident that the learning outcomes are similar in both modalities, we would like to leave it up to the student to have the choice of where he or she will take their courses.

Jeff Volshteyn - JP Morgan

[indiscernible] A couple of numbers questions. [indiscernible] 90% ratio for 2013?

Robert Silberman

We don't yet, Jeff.

Jeff Volshteyn - JP Morgan

And a drop rate for the CDR?

Mark Brown

Well, we do have that but as you know we choose not to disclose it primarily because the number can change from the time it goes from draft from to the time it gets finalized.

Robert Silberman

The last number we have on 90/10 is 12, correct?

Mark Brown

Correct.

Robert Silberman

And that was –

Mark Brown

Mid-70.

Robert Silberman

And we don't anticipate that going up in ’13, Jeff.

Operator

Our next question comes from the line of Jeff Silber of BMO.

Jeff Silber - BMO Capital Markets

Thanks much. I missed the beginning of the call, your explanation for the increase in revenue per student, if you don’t mind going over that and providing a little more color, that would be great.

Karl McDonnell

Sure. Well, as Mark pointed out, Jeff, it's really due to a combination of things. We had the rolling off of some of the scholarships that we had offered in 2012. That was a component. There were fewer drops by students within the quarter which helped and we had better retention. And so the combination of that resulted in the 500 basis point gain in revenue per student.

Jeff Silber - BMO Capital Markets

And looking at your balance sheet, you have been building up some cash over the course of the year. I am just wondering is there a minimum amount of cash that you need on the balance sheet and what you would do with the excess in terms of your priorities for future capital allocation?

Robert Silberman

Well, there is a minimum amount, Jeff, but as we said in the past, this is a relatively cash positive business, so that’s positive working capital. We did – it’s a couple years ago -- enter into a bank term loan because we thought we had very favorable interest rates and we thought as the cost of capital that made more sense for us. We've been in a position particularly going through this restructuring in terms of making – we really wanted to make sure that we had adequately funded the operations of the business which we think is probably the highest return we can for our owners.

And then as we build cash, our strategy for capital redeployment hasn’t really changed. We look first at high return investments that we can make in the business. As Karl mentioned, we’ve got a few concerns with regard to the overall economy and the regulatory structure at this point. And we have a couple of initiatives that we’re working through – we’d like to see with little more clarity what those results are. But in general those opportunities that we have right now in the business that where we can like capital, we are doing it. Above that, we look at our overall cost of capital, our debt level and with the cash which is purely access to our needs and with an ideal balance sheet we look to return to the owners in the most value enhancing way. And that really hasn’t changed.

Jeff Silber - BMO Capital Markets

Just a couple quick numbers questions, I am just wondering what you are budgeting for capital expenditures in the current year and also what we should be modeling for depreciation and amortization?

Mark Brown

Yes, Jeff, our CapEx will be in the range of -- our current forecast is in the range of $10 million to $12 million this point. In terms of depreciation, if you back out the impact of the restructuring on depreciation which was about $11 million, then the residual is pretty much what we would expect into 2014.

Operator

Our next question comes from the line of Paul Ginocchio of Deutsche Bank.

Paul Ginocchio - Deutsche Bank

Thanks. Karl, just a question around the scholarship and reworking old leads, have you sort of gone back and reworked now all the previously sort of unconverted leads, and is that process over, or is there still more to go?

Karl McDonnell

Sure. The way that our admissions function work, Paul, is our admission officers are responding to a student who has inquired with University and to the extent any individual who had previously enquired and for whatever reason, wasn’t interested in attending at that point, should that individual express interest again, and of course we would be talking to them. But we don't have an admission engine in the way that you might be thinking about it where we're constantly going back and try to talk people into attending because maybe they didn't feel it was the right point of time for them whenever they first inquired. Really the entire admissions process here Strayer has designed just to try to work with individuals who have for the most part in that specific quarter expressed some interest in attending the University.

Robert Silberman

Paul, we can’t really be any clearer on this. Assume that you have to convince to enroll through some newly effective marketing function, it’s just less likely to be a successful student. And it’s just how we think about it and probably the best way to understand our institution.

Paul Ginocchio - Deutsche Bank

Did you have any students who sold the scholarship and existing students who saw the scholarship and were then kind of asking question how do I get the price, or how do I refund to the last year?

Karl McDonnell

No, we haven’t. We haven’t experienced any feedback like that. And what I would point to is that our continuation rate variance on a year-over-year basis basically being flat is probably the best of areas that we've had in over a year. And if there were going to be some dissatisfaction for any reason, including anything having to do with tuition I would expect you’d have seen that in the continuation rate variance.

Robert Silberman

Most of the students were on the higher scholarship.

Paul Ginocchio - Deutsche Bank

Then just final, can you break out, I mean how much did Jack Welch help the graduate, just trying to understand, is it across all your graduate programs or is it mainly Jack Welch driving it?

Karl McDonnell

No, it was pretty widespread. We saw a growth really across all of our graduate programs, JWMI being one of them, Strayer’s core MBA group, so did several other of our undergraduate programs.

Paul Ginocchio - Deutsche Bank

I’d like to ask one more follow up on the core MBA. MBA, traditional MBAs online, I think everyone, MBA applications, every struggling in MBA how are you able to grow that when I guess the rest of the industry is down quite significantly?

Karl McDonnell

Again, I don't know that I can point to any specific factor, Paul. To Rob’s point earlier, with the exception of fall term we were down 13% on graduate students. We've seen pretty good graduate-level interest throughout most of 2013. There was a lot of interest squarely in the winter quarter and I can't really equate it to any one item other than what we have already said the JWMI is a positive contribution there.

Robert Silberman

The Jack Welch Management Institute right now is relatively small. So I mean it was a positive contributor but I don’t think it was dispositive and if you look at our recent history through the downturn, our graduate programs have always been relatively strong. We think partly that’s a result of the fact that we think our undergraduate programs have been diminished and hurt by the higher rates of unemployment. And if you listen to our calls, you read our letters and it’s pretty clear empirically that's what’s driving things. And with a better employment picture for people with masters degrees doesn’t surprise us that our graduate programs would be stronger over the last three years than our undergraduate.

Operator

Thank you. Our next question comes from the line of Jason Anderson of Stifel.

Jason Anderson - Stifel Nicolaus

Can you give us any color on how enquiries and conversions or applications are looking in intra-quarter period here heading into next quarter, any color?

Karl McDonnell

No, Jason, we don’t provide any forward-looking commentary other than what I said in my prepared remarks. And the only reason we provided that is it's something that we have experienced and it’s been quite unique at least if you look at the trends and weather that we’ve had over even a 10-year period. But we don’t provide anything other than that.

Jason Anderson - Stifel Nicolaus

Also, and could you give any color on national accounts maybe with the start growth look like there? And also in the market in general are you seeing the competition in that market whether the employer or Community College partnerships getting tougher, because as you are well aware many in the sector and beyond are trying to get heavier into that market?

Karl McDonnell

Yes, sure. Our new students from [ph] national accounts grew 8% year-over-year. So that continues to be a very bright spot for us. We added several new national accounts in the quarter and the growth of 8% in the new students really came from a mix both from adding new accounts but also just having more students from some of our existing accounts.

And in terms of competition, I’ve heard that there are lot of institutions that certainly have an interest in it. But I can’t say that we really encountered a lot of resistance at least from our existing accounts where relationships tend to be pretty strong.

Robert Silberman

I also think that Welch Management Institute helped there as well, that’s the rationale into essentially corporate training programs which is what the Welch Way courses are that are going to be distributed by Skillsoft, reinforces that brand and I think helps us with those relationships.

Jason Anderson - Stifel Nicolaus

One additional and that segues into my next one here on Welch Way and the partnership with Skillsoft, could we see maybe full impact in ‘14 with the training courses due to that partnership?

Karl McDonnell

Well I don't know it remains to be seen exactly what Skillsoft delivery of the product will be. I can tell you that it's been rolled out across their company. I attended the launch to their internal team down in Florida a week ago. Jack and myself will be attending a similar event for some of their top clients next month. But I can't speak to whether or not it'll be a meaningful amount of revenue to either Skillsoft or us, it will obviously depend on the take-up of their clients with this product.

Operator

Our next question comes from the line of Corey Greendale of First Analysis.

Corey Greendale - First Analysis Securities

Just want to ask about the cost – and given that vast majority of the campuses are out there, their final [ph] question is in the fall term, should we expect to see almost the entire full year run rate at $50 million savings in Q1?

Karl McDonnell

Yes, we should.

Corey Greendale - First Analysis Securities

Second question, do you see improved new student results came despite – could have been a couple of headwinds, so if you probably could comment on one is, your historical strengths with the federal government in that the shutdown happened during Q4, did you see any negative impact from that?

Karl McDonnell

There might’ve been pockets of areas in our footprint where that could have a slight negative impact or a particularly in the DC market, the Washington DC area, Northern Virginia. But overall we saw a strong interest in both at the undergraduate and graduate level.

Corey Greendale - First Analysis Securities

And I think realize it’s really hard to parse this, but how would evaluate the results in the geographies areas where the 50 campuses were shut down?

Karl McDonnell

Well, if you were to exclude the impact of the 20 campuses, our total new student enrollment would have increased year-over-year by about 4.5%.

Corey Greendale - First Analysis Securities

And just generally, this can go online in the areas where the campus shutdown, was it kept consistent with what you were expecting to have those campuses remain open?

Mark Brown

It was a little better.

Karl McDonnell

Yes, I would characterize it a slightly better.

Robert Silberman

I mean overall there’s worse Corey because you lose the brand effect having the at campuses. But with regard to global it was better because you had areas where we’ve invested in brand and we’ve expanded the capital even though we were writing off then, that were just shifted into the global online unit.

Corey Greendale - First Analysis Securities

And last one from me, when we are thinking about how to model revenue per student in ’14, are there any factors we should be thinking about other than the undergraduate graduate mix and the 20% tuition type [indiscernible]?

Karl McDonnell

Graduation fund. Those are the primary levers, Corey. What we see is that it will obviously depend on the number of new undergraduate students who enroll and the mix of undergraduate and graduate students as you point out. But if you were to assume a constant sort of one third graduate, two thirds undergraduate mix of students we would expect our revenue per student to decline about 8% over the course of two years.

Corey Greendale - First Analysis Securities

And filtering in, so presumably smaller than that, a less decline in the beginning and then increases as you have more students getting to new tuition price level?

Karl McDonnell

That’s right, yes.

Operator

Our next question comes from the line of Peter Appert of Piper Jaffray.

Peter Appert - Piper Jaffray

So the 20% reduction is exclusively for new students, correct?

Karl McDonnell

New undergraduate students.

Peter Appert - Piper Jaffray

And I guess this would be a follow on to the earlier question. I guess sort of back the issue why existing students wouldn’t take note of that and find it objectionable, is there some procedure where student could drop out and reapply and that might have allowed them to capture that price reduction?

Robert Silberman

Well, Peter, welcome back, haven’t heard you in a while. As I mentioned before, most of those existing undergraduate students are on even more concessionary scholarships that we put in place in 2012. So there’s really very few that would fall in that crack, and we’re dealing with students in ways that we think are most appropriate for them and help their process of continuing through to get their Bachelors degree.

Peter Appert - Piper Jaffray

And how about on the graduate-level, what have you done pricing wise there recently?

Karl McDonnell

Well, we’ve kept our – the Strayer University tuition, meaning excluding Jack Welch Management Institute. We haven’t taken any tuition increases there over the last year. So that’s been flat and as part of JWMI’s program, we actually increased the tuition there last summer. And so their tuition levels are slightly higher than Strayer University’s.

Robert Silberman

A modest level, that’s a premium price degree. But the other way to say that, Peter, is we did not reduce price at our core Strayer University MBA program but we did increase it in 2014.

Peter Appert - Piper Jaffray

Have you guys quantified a level of operating margin that you think is appropriate for the business in the context of the changes that you’re making and all the changes that are taking place industry wide?

Robert Silberman

I think the most important way to think about that Peter is it depends on the utilization for us of our existing asset base. As Karl mentioned, we think that the physical campuses are important adjunct to the academic mission. They cost money and they are like an airplane that flies, the NPCs hurt your operating margin and it’s a fill-up that helps. So at a fully utilized campus network, our operating margin would be significantly higher. Beyond that we want to make sure that our tuition is priced appropriately for our students that we are creating value for our students. And we think that in doing that you will generate both a healthy operating margin and consequently a healthy return on capital invested to your owners.

Peter Appert - Piper Jaffray

For the financial metrics you’re really focused on to see enrolment growth rate and not trying to manage the margin level?

Robert Silberman

Correct, absolutely.

Operator

Our next question comes from the line of Trace Urdan of Wells Fargo.

Trace Urdan - Wells Fargo

[indiscernible] this question about existing student, but you are happy with price reduction the same way in both cases. And I am a little surprised because it seems to be that little is no difference in the pricing for the new students coming in and the other students who have been on these additional scholarships. But that can’t be correct, is it? I mean is there no effective different in pricing, it’s just about the messaging?

Karl McDonnell

Well, they are two different programs, Trace. In 2012 you will recall that we had various scholarship programs one of which offered students the opportunity to have $1000 off at the undergraduate level for up to 17 terms. And so I think Rob’s point when he’s saying it’s even more generous is that you are taking two courses and you get $1000 off, as a percentage that’s a steeper discount and what our undergraduate tuition reduction is that we undertook recently and we have a lot of students that are still attending university and they are still enjoying that benefit. So I can’t really say it any differently other than that –

Trace Urdan - Wells Fargo

But then you terminated those programs in 2013 for a period of time before you then introduced the new graduate scholarship program.

Karl McDonnell

Yes, we did and we also introduced the graduation fund which was 25 -- up to a 25% reduction in the cost of tuition, albeit constructed differently for somebody to benefit in the last 10 courses of their education. And we are not saying that there is not any students who don’t have some benefit. That’s not what we’re saying. What we are saying is we’ve not heard from the students that they are dissatisfied.

Trace Urdan - Wells Fargo

And I wondered if you could give a little bit more context to – I mean you suggested that at the undergraduate level the pricing has had a positive impact and that’s I guess in large part what the sort of the improvement in the rate of decline can be attributed to – can you put some context around that? Is it manifesting itself in terms of improved enquiries, is it improved conversions, is it both? Are you seeing the show rate improved or is it sort of all three dimensions or better?

Karl McDonnell

What I can say is that throughout 2013, even in periods where we had lower new student enrolment, we still saw that there was a lot of interest in various programs. And for the winter academic term there was a strong interest on the part of prospective students and a left back percentage of those students on a year-over-year basis decided to enrol.

Robert Silberman

Yes, I mean let’s not get ahead of ourselves, Trace. I mean we are still negative.

Trace Urdan - Wells Fargo

Yes I understand, Rob, I mean the improvement in the rate of decline is pretty remarkable.

Robert Silberman

It is large compared to the prior quarter but we try not to be too myopic on this and we openly said enrollment is volatile, and we are comfortable with that. And the most important we don’t want to -- I don’t want anybody to misinterpret Peter’s comment on our – how we think about this business. In other words, we are comfortable with the fact that students for their own purposes and their own reasons will decide to come when they come. And if you spend a lot of time obsessing over trying to manage that process for either a relatively smooth progression or even upward progression, you’re going to end up with students who are less successful in the long-term.

The best way to describe how we think about managing this business is we are creating a healthy cohort of graduates, because that over the long-term we think is – it creates the most value for the institution which ultimately creates the most value for the owners. So – and I think the other one I would make with regard to the performance in the longer term enrollment is our graduate degrees – our graduate enrollment for which there was no discounted tuition was up significantly. So we spent a lot of last year and the year before trying to determine what the optimal tuition level was to help our undergraduate students in a position to complete their degrees and achieve status as graduates. We think we’ve found that now particularly with the graduation fund which over time will work itself in. And ultimately we’re hopeful that, that will result in a level of enrollment that will drive the university.

Operator

Our next question comes from the line of Tim Connor of William Blair.

Tim Connor - William Blair

The 5% of enrolment that was affected by the campus closures, was that just on-ground and hybrid, want to clarify that?

Karl McDonnell

If you take the collective total enrollment of the students that were attending in 20 campuses, that represents about 5% of our total student population.

Tim Connor - William Blair

So it didn’t include maybe the online students in those areas?

Karl McDonnell

It did. It’s their total enrolment.

Tim Connor - William Blair

So the 650 basis point headwind that you said those campuses represented from a new enrollment perspective seems to be larger than the total enrolment, I am just trying to reconcile those numbers given that those sounded like they were under performing campuses?

Karl McDonnell

I didn’t understand [ph] –

Tim Connor - William Blair

So you said, new enrolment would have been up 4.5% had it not been for the campus closures, is that right?

Karl McDonnell

That’s right. New student enrolment.

Tim Connor - William Blair

New students but that was basically 650, 6.5% difference in the new enrolment you reported but it was only 5% of students were impacted. I am just trying to understand those numbers given that I thought those were sort of underperforming campuses.

Karl McDonnell

That’s 5% of total students.

Tim Connor - William Blair

Right and the headwind from new students was larger than that 5%, is that right?

Karl McDonnell

As a percent of the new students, right.

Tim Connor - William Blair

I am just trying to reconcile those numbers to figure out why that would have been such a new enrollment headwind given that it was only 5% of enrolment.

Karl McDonnell

Because there was a lot of new students previously in those new markets relative to new –

Tim Connor - William Blair

So were those campuses still ramping? Is that fair to say?

Karl McDonnell

I think we talked about this on the last call that the problem with those campuses were -- some were ramping; they weren’t ramping at rates that we thought were going to be in a position to achieve our returns on capital. And given the fact that the overall economy in those markets was weak, we just didn’t like that the early indicators there. Some had been ramping and then turned down which we thought was a significant issue. And others were not ramping. So there was a mix of all of that.

Tim Connor - William Blair

And then can you walk through again the 8% revenue per student decline you mentioned, what over exactly what time period would that be?

Karl McDonnell

We think that will occur over the next two years, meaning 2014 and 2015.

Tim Connor - William Blair

Okay, so comparing kind of full year revenue per student for 2013 to full year per student for ’15?

Karl McDonnell

’16 really. So it’s going to work its way through over that timeframe.

Operator

Thank you. And ladies and gentlemen that does conclude our Q&A session. I would like to turn the conference back over to Mr. Silberman for any closing remarks.

Robert Silberman

Thank you, Ben and thank all of you for participating. We look forward to talking to you again in May.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day.

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