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Ambassadors Group, Inc. (NASDAQ:EPAX)

Q3 2010 Earnings Call

October 21, 2010 11:30 am ET

Executives

William Sennet - Director of Market Research

Jeff Thomas - President & CEO

Peg Thomas - EVP

Tony Dombrowik - CFO & SVP

Kristi Gravelle - VP of Finance and Accounting

Susannah Stoltz - Discovery Student Adventures

Analysts

Greg Mckinley - Dougherty & Company

Mike Roarke - McAdams Wright and Ragen

James Bellessa - D. A. Davidson & Company

Greg Mckinley - Dougherty & Company

Wilson Jaeggli - Southwell Partners

Russ Silvestri - SKIRITAI Capital

DeForest Hinman - Walthausen & Company

Erica Niemann - Lane Five Capital

Greg McKinley - Dougherty & Company

Operator

Good morning ladies and gentlemen and welcome to the Q3, 2010 Ambassadors Group Incorporated earnings conference call. My name is Andrea and I will be your coordinator for today.

I would now like to turn today's call over to William Sennet, Director of Market Research. Please proceed sir.

William Sennet

Thank you, Andrea. Good morning. On the call with me today is Jeff Thomas, President and Chief Executive Officer of Ambassadors Group; Peg Thomas, President of the Operating Subsidiary Ambassador Programs; Tony Dombrowik Chief Financial Officer of Ambassadors Group; Kristi Gravelle, Vice President of Finance and Accounting, Jim Kreyenhagen, President of BookRags; and Susannah Stoltz representing Discovery Student Adventures.

First, before we proceed into the call, I will read a Safe Harbor statement regarding forward-looking statements. Statements contained in this press conference and related comments by Ambassadors Group's Management, which are not historical in nature, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.

These forward looking statements include without limitation, statements that relate to expectations concerning matters that are not historical facts. Word such as projects, believes, anticipates, plans, expects, intends, estimates and similar words and expressions are intended to identify forward-looking statements.

These forward-looking statements reflect our beliefs or current expectations with respect to among other things, trends in the travel industry, our business and growth strategies, our ability to integrate acquired businesses, future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies such as legal proceedings, financial results and fluctuations in our current results of operations.

Forward looking statements involve certain risk and uncertainties that could cause actual results to differ materially from anticipated results. These and other risks are discussed in greater detail in the Ambassadors Group's periodic reports filed with the SEC.

All forward looking statements are expressly qualified in their entirety by these factors and all related cautionary statements. We do not undertake any obligation to update any forward looking statements.

With that, I will hand the call over to Jeff.

Jeff Thomas

Thank you. Good morning. Thank you for joining our call. Before discussing our results I'd like to talk about some of the people that we have on the phone this morning. First Kristi Gravelle, who has done a great job as serving as interim CFO for the past 11 months, will transition to Vice President Finance Accounting, where she will remain a critical member of our team. This is a promotion from her position as controller. Second our new CFO and Senior Vice President Tony Dombrowik is also on the call for starting with our company only three days ago. I am pretty sure that this will be the only call that Tony doesn't have a lot to say.

Tony joins us from Red Lion Hotels Corporation, where he has been since 2003. He joined Red Lion Hotels as Director [counting], growing and expanding to executive roles of Senior Vice President Corporate Controller ultimately followed by a promotion to Senior Vice President and Chief Financial Office in 2008.

We are pleased that Tony and the Team look forward to his contributions. Regarding our business results, there are several key things that we want to cover on our call this morning. First we posted 7.1 million net income for Q3, 2010. In these challenging times we are pleased that we are reporting profits and continuing to strengthen our balance sheet, although our longer term goal is to renew our growth and achieve full financial recovery.

We completed in our summer travel season 2010 without major incident, our program quality saving is measured by net promoter scores improved across the board. The 2011 our Enrolled Revenue is up 7% as of October, 17 compared to last year at the same time. More importantly enrolled revenue for our largest most important product line Ambassadors is up 11% year-over-year. We attribute this increase in the Student Ambassadors enrolled revenue to continued incremental improvements and execution, while concentrated sales and marketing effort, and fewer negative economic impacts.

Although we are still early in the process, we are pleased with our current enrolled revenue position for 2011. As we have said before, since having this downturn our customers behavior has deferred from our prior [norms] which makes forecasting a challenge. We still several more reach mainly in our key application enrollment season than we need to maintain our momentum.

In addition we can show that we have successful retention program during the winter months. BookRags online study guide and research sites down slightly in gross receives and gross margin as we expected we had lower advertising revenue which was nearly offset by increases in content sales. Discovery Student Adventures has now completed its four year of travel operations. During the year we travel approximately 125 students.

The program for both students and teachers is very strong as expected and as it needs to be. The 2011 travel this point in time Discovery has generated twice as much business from interest from teachers and have drove nearly 150 seats for travel in 2011. This is what wasn't expected that significantly had a rush and had about 30 students enrolled. We continue to believe that Discovery brand distribution network and product content will benefit our shipments in the longer term.

Finally our balance sheet and the strength of the company. We remain debt free and have continued to generate cash. We have noticed our balance sheets great share owner value. For 2010 year-to-date we have returned approximately $8.3 million to our shareholders in the form of dividend and share repurchases, this represents more than 100% of operating cash flow.

Looking back over the downturn we have distributed just over $32 million to our shareholders in the form of dividends and share repurchases. Looking ahead we will continue to review our capital allocation each for make adjustment as market economic conditions change.

At this point I'll turn the call over to Peg Thomas.

Peg Thomas

Good morning and thank you for joining us this morning. With our Peak Travel season behind us I would like to focus on a few high points from the last quarter. We enjoyed many successes on our programs and our down economy. We continue to deliver high quality programs which by year end will explore 47 countries in all seven continents. We are traveling students on our programs from almost a 100 other countries. Our delegates will [load] over 200,000 service hours this year changing the globe with their own two hands, rebuilding homes and schools in New Orleans, visiting orphanages and delivering mails for the elderly are just a few examples.

We continue to be recognized as a leader in health and safety in our industry. Our net promotes scribes have continued to increase share every year as we continually strive to improve product quality and service to our customers.

Our quality scores have come in better than ever, in fact if you ask our parents what they think about programs 98% of our parents report that the people-to-people Student Ambassadors program was a valuable educational experience for their child. If ask our teachers the trial with students 91% of them agree that our program helped their students prepare for their next level of education which matches our other data that says that 84% of our alumni travelers get into their college of their first choice.

If you ask our students what they thought, besides having a great time over 90% agreed that they were more willing to try new things because there are people-to-people experience.

Our summer travel season went well, our comprehensive incident response plans have continued to improve every year. While we often have challenging student related incidences our number one priority is that every child be turned home safely there are no events to report for the third quarter.

In the summer 2009, we were pressed by issues regarding the H1N1 virus. This year we did not have this level of event occur. In the spring we are anticipating this year to be the year of the volcano. We track prepared and had continuously plans in place but unfortunately the volcanic activity subsided.

During the third quarter of 2010, we traveled 11,025 delegates a 15% decrease from the 12,967 that traveled in the same period one year ago. And year-to-date we have traveled 25,224 delegate in comparison the 32,454 at the same time period one year ago. This 22% decrease should [be bolt] of the continued economic slowdown over the past year.

For the remainder of 2010 we have approximately 1450 enrolled delegates in comparison to about 1800 for the remainder of 2009 at this time. I am looking forward to 2011 as Jeff talked about we are seeing signs of revenue improvement. Our current enrollment are relatively flat year-over-year, however the enrolled revenue from these enrollments is $124 compared to $116.5 million up 7% one year ago at this time.

The enrolled revenue from just core product is at 11% year-over-year, our other programs are flat or down when compared to last year. We have recently restructured these smaller product marketing teams for future success and anticipate these changes to impact revenue in the late 2011 and 2012.

Looking specifically at our core product we are pleased with the results of our solo marketing campaign. As a remainder our international program has a higher price point and a higher return to the bottom line so that is why enrolled revenues is up year-over-year but the numbers of travelers is flat.

We are constantly optimistic that these trends will hold, but want to remind you that we have seen [model] withdrawal rates over the past two years based on economic news. We have taken actions to minimize withdrawals that will not yet know how effective these will be until spring.

Last year we introduced a piece of mind program that provides a full refund to parents who loose their job after their students are on our program that has yet to travel. We recognize that this is going to be uncertainty safety parents who are reluctant to connect to our program due to job insecurity.

We believe that this program speaks directly to those parents unless people know that we understand that the environment is tough and want to work with them so that their child can participate.

In addition this year we added an enhanced insurance policy that allows our families to withdraw for a broader range of reasons. We believe these two changes have partnershiply impacted our enrollment rates. We have yet to see how this flow change or impact our retention rates.

For 2011 revenue we were able to maintain our prices year-over-year, however we are not expecting the same growth margin percentages that we have seen in the past two years. The travel industry has tightened considerably in the last six months and the US dollar has hit substantial lows against the major currencies.

We anticipate our margins for 2011 to still be in the high 30s, but will continue to aggressively take steps to minimize the impact of these market conditions, including re-renegotiating with hotels and airlines on a group-by-group basis.

Thank you for your continued support. We are looking forward to a return of our core business as economic recovery continues. And with that I'll turn the call over to Kristi Gravelle, for a review of our financials.

Kristi Gravelle

Thank you Peg and good morning. Today I will begin with our third quarter result recap. Recap of our balance sheet and cash flows enclosed with our outlook for the remainder of 2010 and 2011. During the third quarter 2010, we traveled 11,025 delegates and recorded $65.7 million in growth receipts, 21% decline. However gross margin as a percent of gross receipts held steady at 39% compared to 40% reported during the third quarter of 2009.

Gross margin during the quarter of 2010 was $25.6 million, a $7.6 million decline from 2009. These results combined with the first and second quarters yield a year-to-date delegates traveled of 25,224 and gross receipts of $152 million. Gross margin as a percent of gross receipts for the nine-month period was 41% for both 2010 and 2009.

The consistency in gross margin percent is primarily attributable to continued benefits achieved from lower air and land costs, a result of negotiations made possible by the economic downturn. Gross margin per delegate improved slightly as of September 2010 as it was $5,930 per delegates as compared to $5,847 for the same period in 2009.

Total operating expense increased 8% or $1.2 million during the quarter and increased 5% or $1.8 million year-to-date when compared to 2009. Sales and marketing expense increased 8% during the third quarter and 6% year to date related to changes made to drive future enrollment. Nearly half of the increase is driven by targeted marketing and promotional activities, about $500,000 in higher personal cost for BookRags and Discovery as we ramp up new initiatives, and approximately $400,000 of expense related to the closing of our print and production facility.

General and administrative cost increased 2% during the first nine months of 2010 compared to 2009. For the third quarter of 2010, net income after tax was $7.1 million and fully diluted earnings per share was $0.37 down from $12.5 million or $0.64 per share reported in Q3, 2009. Year-to-date net income was $14.8 million and fully diluted earnings per share was $0.77 compared to $26.4 million and $1.37 per share reported for the first nine months of 2009.

On the balance sheet cash and short-term investments decreased $2.5 million or 3% down to $77.8 million which represents 60% of our total $129.5 million asset balance. Participant spends are lower by 8% just compared to the same period last year. Remember that participant funds represent cash received for travel yet to occur.

Our participant deposits for 2010 at this point are lower than last year as we are expecting fewer travelers in Q4 this year as compared to last year. At the same point, our participant deposits for the upcoming travel year are higher when compared to last year. This higher level of deposits is driven by the increase in the number of student ambassador enrollments. Year-to-date, we generated $4.7 million in free cash flow and allocated $8.3 million back to the shareholders in the form of dividends of $3.5 million and share repurchases of $4.8 million.

Deployable cash increased 3% to $55.5 million in September 2009 to $57 million in September of 2010. Total cash in investments per share was $4.11 while deployable cash per share was $3.01. Our third quarter results have us on track to achieve the lower end of our EPS guidance reported on our last quarter call.

For the full year 2010 we are revising our expectation for earnings per share to be in the range of $0.48 to $0.50. The change in the range is driven by a reduction in anticipated net revenue. This decrease was caused by a small increase in the projected withdrawal rate reducing the number of travelers initially expected to travel in Q3 and Q4 2010.

Moving forward to 2011, we are pleased to report a 7% growth in enrolled revenue for the upcoming travel year. To increase in enrolled revenue is larger than the increase in enrolled participants mainly due because of the growth of our student ambassador program line. Based on the total enrollments we have received so far for 2011 travel combined with a promising outlook for book rates and discovery student adventures, we are looking to deliver higher full year revenue than achieved in 2010. We do anticipate first quarter 2011 revenue to be much lower than first quarter 2010 related to the reduced number of projected delegates traveling on our student leadership program.

As we have discussed before, we are generally pleased with our gross margin performance in 2009 and 2010. In an environment when the volume of delegates traveled was down we were able to deliver gross margins in excess of 40% in comparison to the mid 30s in 2007 and 2008.

Looking ahead, we anticipate our ability to leverage air and land cost to weaken which we anticipate will impact our gross margin for 2011. Given this and the impact of the generally high margin business of BookRags, we expect to be able to deliver margins in the high 30s.

We also anticipate our operating margin to improve as we gain leverage on our core business through top line growth. We foresee a similar run rate for operating expense as we manage our fixed cost and continue to invest in the expansion of our revenue channels through BookRags, Discovery Student Adventures and social media. As the growth occurs, we are looking forward to a better leverage on these cost.

Thank you for your continued interest and attention this morning. I will now turn the call back over to Jeff.

Jeff Thomas

Thank you Kristi, Andrea we are now ready to take questions.

Question-and-Answer Session

Operator

Ladies and gentlemen to give everyone an opportunity we ask that you please limit yourself to one question and one follow up. If you have further question welcome you to rejoin the queue. (Operator Instructions)

Our first question will come from Greg Mckinley with Dougherty & Company.

Greg Mckinley - Dougherty & Company

You commented that for your 2011 programs you have I would say implemented or tested some measures to further help manage withdrawal rates in the last year you indicated you had this job loss protection.

Did you introduce a couple of other options this year? I wonder if you could tell us a little bit about that and then maybe help us understand what if any marketing effort changes you've made for 2011 versus what you done in the past.

Peg Thomas

I am going to withdraw them particular we've seen a shift in our organization of working relational relationship with the family earlier on. For example, I think we talked quite a bit at our information in even about when you first interview with the program and you pulled in right away.

You meet the teachers but then here in our National Office there is a welcome call that goes out to you and there is a relationship that builds specifically in the region with a person that your direct contact that was a significant change this year. And we believe that impacted it.

Greg Mckinley - Dougherty & Company

Okay.

Peg Thomas

And then for marketing for 2011, I think you know we just offered the marketing strategies as we got through the season. We had a number of them work but they are all relatively minimal. The one that, I think we have talked about at the last call as an opportunity, more scholarship dollars early on in the cycle of communication with the family we think has impacted it. And so not only do we have the more scholarship dollars that we are talking about them earlier and more often and so you might ask then why is that a concern about what's [wrong] that they don't have the scholarship but that's a relationship again goes back to the relationship building early. That's our part of that strategy.

Operator

(Operator Instructions) Our next question comes from (inaudible).

Unidentified Analyst

Had a few questions, can you kind of talk about how travel warnings are impacting sales process and also some headlines are seeing we're going to rest in Europe and how that impacts us?

Peg Thomas

Obviously we watch those very closely. We have not yet seen an impact on those or from those. Oddly enough, even the questions at the meetings have not increased around this European warning. And again you would inherently you would expect it to but we just aren't yet seeing it.

Unidentified Analyst

Then the dollar has been weakening substantially, how does that impact us from an FX prospective? I think we do some hedging, but it sounds like we might be seeing more of it on the revenue side and the FX side and that you might put in the financials, is that correct or not?

Kristi Gravelle

Well it's our policy to hedge between 80% and 100% by December of the year and right now we've already locked into some contracts for 2011 travel to minimize our risks, but we continue to watch that and we will be planning to follow our policy of 80% to 100% hedge by the end of the year.

Operator

And our next question comes from Mike Roarke with McAdams Wright and Ragen.

Mike Roarke - McAdams Wright and Ragen

Hi. This question is for Jeff, regarding your advanced bookings for 2011, how did they compare with your internal expectations. Given the $40 million marketing expense, are you satisfied with this outcome?

Jeff Thomas

Yes, I am satisfied with the outcome. I think it represents really good progress, particularly in terms of it continuous to be a choppy economic market and what we are seeing is just a continued high level of interest in the program grade receptivity in the market and we've done a better job of getting people to the application process and enrolling them. So we are pleased with where we are. Obviously I'd like to see more than we have, but if we concentrated on our largest and most profitable product line the Student Ambassador programs and we are seeing some strong results there.

Mike Roarke - McAdams Wright and Ragen

With your stock below $11 today, is there any directional shift in thinking on auditor, on the share repurchase front in particular, are you going to become more aggressive about buying stock at lower price levels?

Jeff Thomas

We look at that each quarter and I think we look at a number of conditions in the market and we also have to content with the fact that sometimes we have information that the market does have and sometimes that hampers our ability to buy back shares, but as I mentioned earlier I think if you look at our cash flows over the years and the amount we had allocated back to shares, we have been a great allocator of capital back to the owners at the appropriate times and we expect to continue to do that in future.

Operator

Our next question comes from James Bellessa with D. A. Davidson & Company

James Bellessa - D. A. Davidson & Company

What were the number of shares repurchased during the third quarter, what was the dollar amount and how much do you have remaining on your buyback authorization?

Kristi Gravelle

During the third quarter, we bought back 431,203 shares at an average price of $11.20 per share equated to $3 million, authorization on our buyback is currently at $14.3 million.

James Bellessa - D. A. Davidson & Company

On the scholarship discussion you had earlier, is this a way to actually discount your price without saying to the world that you are discounting your price?

Jeff Thomas

No, we really don't discount the program. I think the scholarship opportunity is what it says it is that recognizes people's needs and merits that are out there and the program continues to be a premium product.

James Bellessa - D. A. Davidson & Company

What I am asking I guess is the money for the scholarship is really coming from mere resources, is that right? It doesn't come from some external resource?

Jeff Thomas

Correct

James Bellessa - D. A. Davidson & Company

The drop in enrollees in near term you say next six months, what's causing the drop?

Kristi Gravelle

In the other products, Jim?

James Bellessa - D. A. Davidson & Company

Yes.

Kristi Gravelle

The biggest change specifically has been our Washington, DC programs, they have seen the biggest decline and that is the most competitive product that we have. That market place is highly competitive. We had tried to cut some expenses out of those programs in these economic times and quite honestly it didn't work. We have readjusted that and are moving forward we believe will make changes that will positively impact it.

Jeff Thomas

Jim, let me add on that, the expenses that we cut on there were kind of in the sales and marketing side, we are working towards having a more streamlined sales and marketing process. The programs themselves have maintained their high level of quality.

I think it is important, Peg started of the narrative, we were talking about program quality that throughout this downturn we've continued to maintain really good customer satisfaction rate in that promoter ratings. So I don't want people on the call to think that we've in any way shortchanged the product.

Operator

With that, we will go to a follow up question from Greg Mckinley with Dougherty & Company.

Greg Mckinley - Dougherty & Company

Given your outlook for increased gross program receipts next year and some moderation in gross margin, are we expecting net revenue growth next growth next year or will the margin decline fully offset or maybe even more than fully offset the increase in gross program receipts.

Kristi Gravelle

We were definitely increasing an increase in net revenue and net margin there. The mix between the growth of delegates and the margin impact will have us looking at a about 15% growth.

Greg Mckinley - Dougherty & Company

In net revenues?

Kristi Gravelle

Yes.

Operator

Our next question will come from Wilson Jaeggli with Southwell Partners.

Wilson Jaeggli - Southwell Partners

Jeff a question for you in looking at the metrics here where you are at this point in time, do you think basically your decline in enrollment, in revenue have stopped, in other words the company have been stabilized at this level?

Jeff Thomas

It's been obviously kind of choppy waters, we might take this as sign that we started turnaround, that's obviously too early to tell. I think in my narrative I talked about that. We still have several more weeks of our key application enrollment season out there, but we have got good momentum going. Again what we see is very high levels of interest in the product but families having more difficult time committing the financial resources in this economic environment.

Wilson Jaeggli - Southwell Partners

Do you see a change in enrollment withdrawal rates for upcoming year and I know it's really but?

Jeff Thomas

Last year so 2009 to 2010 we improved our retention rate and I think part of what we had mentioned before is the consumer behavior has changed so much over the past two years in terms of the rate at which they sign up, if they withdraw, when they withdraw, that's been changed a lot. So it's actually hard to tell kind of where we are right now in the process and it's obviously most of our sign ups that we have for our enrollments for next year have occurred after Labor Day, so they are barely a month into it. So it's pretty early to get much of an indicator on retention or withdrawal direction.

Wilson Jaeggli - Southwell Partners

When you count these enrollment revenues potentially for next year, the normal deposit put down per enrollee, what is that amount?

Jeff Thomas

On the main product line, the Student Ambassador product line, it's $400 deposit.

Operator

Our next question comes from Russ Silvestri with SKIRITAI Capital.

Russ Silvestri - SKIRITAI Capital

I know you understand your target of cost, it sounds like you are hedged 80% to 100% by December. I was curious as to what percent of your cost today when it comes to the hotels and the airfare you have hedged, given the fact of enrollees that you have signed up so far?

Kristi Gravelle

Just wanted to clarify the question. You are asking how much of our hotel and air cost related to our hedged position, are we recovered?

Russ Silvestri - SKIRITAI Capital

Yes, I guess at this point in time being October of your cost that you anticipate for the travelers that you expect to go. What percent of the costs have you already purchased and are hedged?

Kristi Gravelle

Yeah, we are well into the process I think the thing right now because as Jeff mentioned we are early in the enrollment. We still have enrollment time to go, the mix is going to be changing. So we are seeing lift in the Europe travel numbers that are coming in. So I think it's a little too early to give you a percent today.

Jeff Thomas

Russ, the thing I would add and so just to clarify our air fares are paid in dollars. So there is no foreign currency hedging on that and I wasn't sure to the questions you were asking that.

Russ Silvestri - SKIRITAI Capital

Both of that in the hotel business, trying to get a sense I mean obviously the dollar is down I think 20% in the last 15 weeks and if you are making $5900 per traveler I mean that's a major impact to the profitability per traveler. So I am just trying to get a sense of what it means and in terms of the risk to the story.

Kristi Gravelle

And I would pray that we are more than half way into our process here.

Jeff Thomas

So let me kind of continue so if you take your $5900 and I am over simplifying to say you know roughly 35% - 40% is gross margin so that doesn't need to be hedged and then we have the airfare which is less than [a third] that doesn't need to be hedged. So the foreign currency exposure on that product is around the third of the cost, and at this point it kind of tend to what destination but work over 50% hedged on that, so you are starting to see a pretty narrow end of the GAAP in terms of one exchange exposure, does that answer your question.

Operator

And with that we'll move to our next question. (Operator Instructions). Our next question is a follow up from DeForest Hinman with Walthausen & Company.

DeForest Hinman - Walthausen & Company

Hi can you just kind of have you know a more broad discussion of you know what makes parents withdraw from the program if you feel you have identified any key factors that we should also be paying attention to and then I have another follow up as well.

Peg Thomas

Reason for withdrawal the first is financial issues and first part of the discussion around scholarship that is on the table we talk about it early thus we have different payment plans than we have had in previous years so, that's an area of focus for us, that is the component and the other thing that we are seeing some success with now that I don't know for a whole again is fund raising a significant piece of our information meaning now is around fund raising and our [orientation] meetings are focusing on that, again depending on areas of the country we are seeing more fund raising than we have in previous years.

DeForest Hinman - Walthausen & Company

I guess I am not familiar with this but what are the payment plans and do we have any third party financing that we use or offer the parents.

Kristi Gravelle

The parent plans are a mix of two things people can get an equal monthly amount that they can split up from the time that they enrolled to the time 30 to 60 days prior to travel, so they are paying the same amount every month. There are process that we use with the $400 deposit is just mentioned with incremental payments that end up with a balloon payment 60-days prior to travel. As far as financing is concerned, we have looked at different versions of that when the economic downturn occurred actually trying to find partners to work with on that has been much more difficult. We continue to have feeders out there and look at that. But today we don't have a partner per se that we do business with.

DeForest Hinman - Walthausen & Company

Have we ever had that in the past?

Peg Thomas

We had that in the past.

DeForest Hinman - Walthausen & Company

We tried third parties on a couple of different occasions I think it was before (Inaudible) you hear one in this year and when you look at, when you do the analysis, you think its something that, this is something that should work by all the channels. But its something that when we offered there is not a high level interest in it and the consumer and then once that one is created, those few people actually make it through the [funnel] and are able to take out a good help with their financing from the third party.

Operator

And next we'll go to a follow-up question from James Bellessa with D.A. Davidson & Company.

James Bellessa - D.A. Davidson & Company

Yes your SNM expense for the most recent quarter were higher than I expected and you're going to explain this by saying that you had 2011 marketing campaign expenses begin to promotional activities and then higher personnel expenses. Can you go through those? Try to describe maybe if this is a new level of SNM type of expenditures or if there are one-time items in this most recent quarter.

Peg Thomas

There is definitely I think all of the things that you mentioned there. So if you looked at our run rate on our operating expenses. That's really a function of fixed cost and investment. On the fixed cost perspective and running our core business, we have some fixed costs that may seem like there would be variable for example, we have our health and safety team in place that are regardless of the number of delegates we were travel that that's an expense that we would have there. We have had some one-time expenditures as we have gone to sell equipment with the one down at the print and production facility and have some losses on some of those sales of equipment. And then as we go forward, we think its important to expand our revenue opportunities so that expansion in going into the internet business with BookRags and the future accretive internet based model with Discovery Student Adventure, those investments are positioning us to have revenue channels outside the traditional direct marketing campaigns that we've had in the past and we think that that's and important way to position ourselves for the future and we'll be able to achieve greater leverage on those costs as growth continues to happen.

James Bellessa - D.A. Davidson & Company

New management hires who we know that we have a new CFO, what other personnel hires were notable?

Peg Thomas

If we look at a year-over-year comparison, we've got significant attires with I think in first quarter we talked about Jim Kreyenhagen's running for Book Rags, Dave Hausrath, the Senior VP of product management. And then we've also got some new hires, Dave came from a competitor, we've got a new hire with discovery that came from a competitor and its just a lot of strategic hires that really are on the sales and marketing side.

Operator

Our next question will come from Erica Niemann with Lane Five Capital.

Erica Niemann - Lane Five Capital

First, can you just remind me how scholarships are flowing through the income statement? Are they marketing expense or are you accounting for them in your future enrolled revenues?

Peg Thomas

They would be running through the net revenue line.

Erica Niemann - Lane Five Capital

Okay but when you report to us [featuring] old revenues have you taken into account any assumption of what the scholarships might be?

Peg Thomas

No, the enrolled revenue is based on gross received, not net.

Erica Niemann - Lane Five Capital

And then also could you just share with us any information that would indicate that the 2011 enrollments are kind of that pace or core level and by that I mean is there a certain number of repeat travelers that are some families that you've had relationships with or have seen siblings travel on the past, is it possible to share any of those kind of metrics on that front?

Kristi Gravelle

We don't normally share those metrics that I can't tell you that the same as them. There is some increase in some of our alumni and sibling, the mix of where the traveler comes from is about the same.

Operator

Our next question is a follow-up question from Greg McKinley with Dougherty & Company.

Greg McKinley - Dougherty & Company

Yes thank you again I don't mean to keep harping on the same topic but I wanted to get back to the question I previously asked around your outlook for margin rates and gross program received growth in 2011. I think you ended up indicating that the combination of this do you think will result in net revenue growth of about 15% next year. I think currently, what do we have 7% increase in enrolled gross program receipts and we are expecting some margin rate decline. So that would imply we are expecting a fair amount of acceleration in enrollment growth for next year to get up to that 15% level, so we offset the margin rate decrease, is that accurate?

Kristi Gravelle

I think that we have got a look at a mix issue here to some degree as our student ambassador program line is up, the growth receipts of that brings on. It is part of what is impacting that dollar amount and so if we are looking at the mix issue, that's part of what is causing that.

Greg McKinley - Dougherty & Company

That is fully reflected in the 7%, should it not be?

William Sennet

No, if the 7% reflects the gross revenue change what Kristi was referring to is on the net revenue side, so if you think about the mix and the impact of the core business, the student campaign with the higher gross revenue side, it continues to drop that leverage down to the bottom line when you get to net revenue. So the 7% that you see at the top line is even more strongly impacted on the bottom line to net revenue.

Kristi Gravelle

So Greg I will add the international traveler is worth more to us as the net revenue than an domestic DC traveler.

Greg McKinley - Dougherty & Company

Yes if it were still expecting our net revenue margin rate to be a little bit lower next year?

Kristi Gravelle

That's true.

Greg McKinley - Dougherty & Company

So I guess I am not sure how a 7% increase in gross program receipts translates to 15% increase in net revenues if/or net revenue rate actually declines?

Susannah Stoltz

And the other thing that is not obvious in that number is when you layer on BookRags into that equation and the growth that we have got plans for BookRags, you got to remember that that business is a high 80% gross margin product.

Greg McKinley - Dougherty & Company

And Greg I think you are underestimating the mix, it is significant.

Operator

And our last question today is a follow question from Mike Roarke with McAdams Wright and Ragen.

Mike Roarke - McAdams Wright and Ragen

I had the same question that Greg did. I guess the one thing that I am trying to square is how, so if you have guided for or if you are indicating that there is going to be lower margin in the program how you get from 7% to 15% of the net line.

Kristi Gravelle

The other thing I would add to that Mike is that the 7% of the point in time number also. So when I am looking at the 15% thinking more of a full year impact on that.

Operator

And with that I would like to turn the call back over to Jeff Thomas for any final and closing remarks.

Jeff Thomas

Great, thank you for joining our call this morning. We appreciate your questions and as indicated we will be working very hard over the next couple of months to continue our momentum on the revenue side. We will also be focused very heavily on retention and with new programs there and as the last couple of clarifying questions indicated, we will working on making sure that net revenue growth is there and we are able to articulate that, demonstrate that next quarter. Thank for your time. Have a great day.

Operator

And once again ladies and gentlemen, that does conclude today's earnings call. We do thank you for your participation and ask that you have a wonderful day.

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