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Strayer Education (NASDAQ:STRA)

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET

Executives

Karl McDonnell - President and Chief Operating Officer

Sonya Udler - Senior Vice President of Corporate Communications

Robert Silberman - Chairman of the Board and Chief Executive Officer

Mark Brown - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Brandon Dobell - William Blair & Company L.L.C.

Ariel Sokol - UBS Investment Bank

Robert Craig - Stifel, Nicolaus & Co., Inc.

Maria Karahalis - Goldman Sachs Group Inc.

Peter Wahlstrom - Morningstar Inc.

Jeffrey Silber - BMO Capital Markets U.S.

Andrew Steinerman - JP Morgan Chase & Co

Amy Junker - Robert W. Baird & Co. Incorporated

Peter Appert - Piper Jaffray Companies

Kelly Flynn - Crédit Suisse AG

Sara Gubins - BofA Merrill Lynch

Arvind Bhatia - Sterne Agee & Leach Inc.

Suzanne Stein - Morgan Stanley

Gary Bisbee - Barclays Capital

Steven Bachman - RBC Capital Markets, LLC

Operator

Good morning, everyone, and welcome to Strayer Education Incorporated's Second Quarter 2011 Earnings Results Conference Call. This call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Strayer Education's Senior Vice President of Corporate Communications, Ms. Sonya Udler. Ms. Udler, please go ahead.

Sonya Udler

Thank you, operator. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education; Karl McDonnell, President and Chief Operating Officer; 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 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 p.m. Eastern through Thursday, August 4. The replay is available at (800) 642-1687, conference ID 78833654. Following Strayer's remarks, we will open the call for questions and answers.

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 uncertainties and risks that the company has identified in the paragraph on forward-looking statements at the end of its 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. Copies of these filings and the full press release are available online and upon request from the company's Corporate Communications department.

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

Robert Silberman

Thank you, Sonya, and good morning, ladies and gentlemen. As it's 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 our second quarter financial results and Karl to comment on our second quarter operational results, as well as our enrollment statistics for the summer academic term. Finally, I'd like to provide an update on our growth strategy, the company's earnings outlook for Q3 2011 and some thoughts on the Department of Education's recently finalized gainful employment rule making. Strayer Education is an education service company, whose primary asset is Strayer University, a 55,000-student, 92-campus, post-secondary education institution founded in 1892, which offers bachelors, masters and associate degrees in Business Administration, Accounting, Computer Science, Public Administration and Education.

Unlike traditional universities, Strayer University students are working adults, who are returning to college and graduate schools to improve their lives. Our revenue comes from tuition payments and associated fees. Approximately 75% of that revenue comes to us from federal Title IV loans issued to our students.

Our expenses at Strayer Education, include the costs of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We serve students in 20 states through physical campuses, as well as in all 50 states and over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Commission on Higher Education.

Now Mark, would you run through the financials

Mark Brown

Sure. Revenues for the 3-months ended June 30, 2011, increased 3% to $163.8 million, compared to $159.3 million for the same period in 2010, due to level enrollment and a tuition increase, which commenced in January of this year. Income from operations was $50.1 million compared to $58.7 million for the same period in 2010, a decrease of 15%. Operating income margin was 30.6%, compared to 36.8% for the same period in 2010. Net income was $29.6 million, compared to $35.7 million for the same period in 2010, a decrease of 17%. Diluted earnings per share was $2.53 compared to $2.60 for the same period in 2010, a decrease of 3%, reflecting a lower share count due to share repurchases. Diluted weighted average shares outstanding decreased to 11,737,000 from 13,704,000 for the same period in 2010. Revenues for the 6-months ended June 30, 2011, increased 6% to $335.7 million, compared to $317.2 million for the same period in 2010, due to increased enrollment and a tuition increase which commenced in January of this year.

Income from operations was $109.4 million, compared to $118.6 million for the same period in 2010, a decrease of 8%. Operating income margin was 32.6%, compared to 37.4% for the same period in 2010. Net income was $65.4 million, compared to $72 million for the same period in 2010, a decrease of 9%. Diluted earnings per share was $5.34, compared to $5.25 for the same period in 2010, an increase of 2%, reflecting a lower count -- a lower share count due to share repurchases. Diluted weighted average shares outstanding decreased to 12,263,000 from 13,716,000 for the same period in 2010. At June 30, 2011, the company had cash and cash equivalents of $50.6 million. The company generated $87.4 million from operating activities in the first 6 months of 2011 compared to $87.9 million during the same period in 2010. Capital expenditures were $18.1 million for the 6-months ended June 30, 2011, compared to $22.6 million for the same period in 2010. As previously announced, the Company entered into an amended and restated revolving credit and term loan agreement on April 4, 2011. This credit facility, which is secured by the assets of the company provides $100 million revolving credit facility and $100 million term loan facility, with a maturity date of March 31, 2014. Proceeds from the term loan were used to pay off the $80 million outstanding at March 31, 2011, under the original revolving credit facility. At June 30, 2011, the company had $100 million outstanding under its term loan and $15 million outstanding under its revolving credit facility. During the 3-months ended June 30, 2011, the Company used $55.5 million to repurchase approximately 434,000 shares of stock at an average price of $127.73 per share, as part of a previously announced stock repurchase authorization. During the 6-months ended June 30, 2011, the Company used $182.7 million to repurchase approximately 1,370,000 shares of stock at an average price of $133.32 per share. The company's remaining authorization for stock repurchases was $25 million at June 30, 2011. During the 6-months ended June 30, 2011, the company paid regular quarterly dividends of $25.2 million or $1 per share for each of the quarterly dividends. For the second quarter 2011, bad debt expense as percentage of revenues was 4.1% compared to 3.6% for the same period in 2010. Days sales outstanding was 12 days at the end of the second quarter of 2011, compared to 11 days at the end of the second quarter of 2010. Rob?

Robert Silberman

Thanks, Mark. Karl, you want to hit the operational results and comment on the summer enrollment as well.

Karl McDonnell

Sure. Total enrollment for the summer academic term was 47,790 students, a decrease of 8% versus the prior year. New student enrollments decreased 21% and continuing enrollments decreased 5%. Our continuation rate in the quarter declined 390 basis points. Enrollment at mature campuses decreased 9%, declined 3% at new campuses and global online students decreased 12%. Enrollments from corporate and institutional alliances grew 8% and as a result, students from corporate and institutional alliances have increased from 20% to 25% of our total student body. In addition, we added 4 new agreements during the quarter, including the agreements with Sysco Corporation, a nationwide food distribution company, as well as the BIC Corporation. Also today, we announced that we have opened 3 new campuses for the fall academic term, including 2 in Chicago, which is both a new state and a new market as well as one in Dallas, Texas, which is our 4th in that market. With these 3 campuses, we have completed our planned 8 new campuses for 2011. And in October, we'll announce our new campus plans for 2012. Lastly, in terms of student mix, approximately 70% of our students are enrolled in undergraduate degree programs with Business and Accounting, representing roughly 2/3 of that population. Graduate programs continue to comprise 1/3 of our overall student mix. Rob?

Robert Silberman

Thanks, Karl. Just a couple of comments on the Q2 financials from my perspective going back to Mark's comments. At first, at $2.53, we did earn $0.16 -- $0.16, $0.17 more than our forecast of 90 days ago. Over that large positive variance was caused entirely by lower share count from share repurchases that we executed during the quarter. Our actual revenue and expense lines were right on Mark's and my target. So, that explains the large variance. Using the share account that we had reported at the end of the first quarter, we would have earned $2.38, which was right where we said we would be in the second quarter. Second, while net income was down 17% in the quarter, distributable cash flow in the quarter was actually flat with last year at about $14 million, and that's as a result of Mark and Karl and their teams doing both a great job at working capital management and slightly lower CapEx.

Turning to a brief update on the growth strategy. Many of you will remember that our strategy is based on 5 objectives: The first is to maintain enrollment in the company's mature markets; the second is to invest our human and financial capital in opening new campuses, particularly in new states and markets; third, is to continue to build our online offerings; fourth, increase our corporate and institutional alliances; and the fifth and final objective, is to effectively redeploy are owner's capital. Karl has already covered the update on the first 4 objectives. On the capital redeployment, as Mark mentioned, we did announced our regular quarterly dividend of $1 per share and also that we have repurchased approximately $55 million worth of our common stock during the second quarter, and that was at an average price of around $128 per share. That brings our share repurchases during calendar year 2011 to approximately 10% of the outstanding shares of the company at the start of the year. On the earnings outlook for the third quarter of 2011, based on the 8% decrease in the university's enrollment for the summer term, we expect earnings per share between $1.04 and $1.06 in the third quarter and that's again, using the share count at the end of Q2. And approximately 1,000 basis points of operating margin decrease versus the prior year. You'll remember summer term is seasonally lower for us, and so the incremental margin impact of both increases or decreases in enrollment have always been larger in the summer term. Finally, on the Department of Education's recently published gainful employment regulation. While we're still reviewing all 450-some pages, and awaiting both clarifications and data from the Department in certain areas, which they have said they are going to provide, based on what we have seen, we remain comfortable that all of our academic programs will meet the requirements of this rule and we currently contemplate no major changes to either our academic offerings or our business model on the basis of this rule.

And with that, operator, we'd be pleased to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Sara Gubins with Bank of America.

Sara Gubins - BofA Merrill Lynch

I know it's early, but do you have any sense on how new student enrollment is going for the upcoming term? Is there any reason to think that there's an improvement in the overall marketplace?

Robert Silberman

Well, we never comment on future enrollments, Sara. And it is early in the process. We think that over time, our new student enrollment should match the rate at which are capital expansion expands the University. In the shorter term, there is obviously a great deal of volatility and variability that we'd be comfortable with. So, I think that the new student enrollment -- the most interesting part of this data today is that, we now have essentially 3 quarters in a row of minus 20% and so that's a fact and something that we're dealing with, but we don't have any comment with regard to the full-term enrollment at this point.

Sara Gubins - BofA Merrill Lynch

Okay. I guess, maybe another way to ask about it is, are you seeing any change in your operations in terms of enrollment advisor productivity? Or are any of the questions that incoming students are asking any different? I know, at some point, you said they were asking whether or not Strayer is a for profit. Is that changing at all?

Robert Silberman

No, I don't, I mean I'll have Karl comment because he's closer, but again, our view is the whole concept of an enrollment advisor, and we have admissions officers' productivity, is a bit of a misnomer. I mean these 2 are not factors of production, These are not things that we're trying to move through or convince or managed in some way. And we fill the university, we've got admissions officers at the campuses and our global center. They're dealing with incoming inquiries, and I think the demand is clearly lower at this point, for a variety of reasons, but we don't spend a whole lot of time worrying about how that's going to get adjusted in the short term. I think in the long term, demand for education is quite high and if you're doing a good job in the classroom, then you're going to have a very successful enterprise. But Karl, do you have anything on their questions or...

Karl McDonnell

The only thing I would add is students continue to raise concerns and questions, and I wouldn't say that there is any new questions we're hearing or certainly on a trend basis, but there's also no difference over about the last year or now really.

Sara Gubins - BofA Merrill Lynch

Okay. And then, have you -- I don't know if you've been in any contact with the Department of Education about this. But is there any concern that federal financial aid might stop flowing, depending on what happens over the course of next week or so?

Robert Silberman

I have been in contact with the Department of Education on a number of issues. I haven't raised that question and nobody that I've talked to on the Department side has suggested that, that is a concern. I don't know that, that's just possible because we're not really talking about it. Karl, does our FSA group had anything on that...

Karl McDonnell

No, we've not heard anything around that disruption.

Operator

Our next question comes from Suzi Stein with Morgan Stanley.

Suzanne Stein - Morgan Stanley

Your peers have been talking about more competition for higher-quality students. Just curious given kind of where you are, are you seeing those from either your peers or from traditional schools, specifically?

Robert Silberman

Well, again, the whole term "higher-quality student" I find somewhat puzzling. Our University for over 100 years has been built to serve working adults. We've always served students, who generally have some college credit when they enroll, and we find that students that have some college credit tend to perform better in our academic surroundings. We have some students who come in with no college credit, who actually do fine, it's just a lower percentage. The idea that a student is either higher or lower quality is just not the way we think about this. What we want is that our prospective students know what it is that they're signed up for, that they're adequately briefed and counseled by our admissions staff and our academic staff and that the ones who enrolled have self-selected to be the one that are most likely to be successful, but there are some who are not successful. The competition for those students has always been high. In other words, students have a number of opportunities to go back to school. What we found is that the nature of our offerings both in terms of academic content and where and when they're offered, have been attractive. And I continue to see that going forward. So we really don't try and think about whether it's a higher- or a lower-quality student. We want the prospective student to be interested in attending Strayer University and have both the commitment and the wherewithal to succeed and that's really just part of our process to make sure that, that's been communicated.

Suzanne Stein - Morgan Stanley

Okay. And then maybe I can just ask a question on buybacks. Are there any issues with risk back to the financial responsibility ratio that would limit buybacks? And also, what are your thoughts as far as raising the dividend in Q4?

Robert Silberman

Well, Let me take it in reverse order. Our board and I always talk about the next calendar year's dividend in our October meeting. But what we said fairly consistently in the past is that we expect our dividend policy to rise generally in concert with net income. And I don't know of any sort of major change to that as an overarching concept, but we'll talk about it in October and let you all know. With regard to the financial composite score, I mean it is one way in which the department regulates the industry and it certainly goes into the question of either both how much debt you have and how many shares that you buyback. The financial composite score is affected by share repurchases.

Suzanne Stein - Morgan Stanley

Okay. So that you think that, that could limit the ability to continue to make repurchases at the rate at which you have?

Robert Silberman

Well, we don't really comment on future repurchases, but it is a factor that goes into that decision.

Operator

Our next question comes from Bob Craig with Stifel, Nicolaus.

Robert Craig - Stifel, Nicolaus & Co., Inc.

Rob, I know you mentioned you'll discuss school openings in October but any directional thinking on those plans? I mean, given the elimination of regulatory uncertainty, which correct me if I'm wrong, which was behind the reduction this year. I know it's always been driven by human capital but I would suspect you have the human capital support well more than 8. So maybe some thoughts on what's going to drive that decision?

Robert Silberman

Sure. It's generally always limited by human capital and you're correct in saying that last year we limited below that, open probably half the number that we could have because of that regulatory uncertainty. I wouldn't say that it's completely eliminated at this point, there's still a fair amount of implementation and interpretation risk that over the next, I think, 18 months will be clarified and we also have somewhat of a timing issue as well in that we're fairly late in the year to do a significantly larger number because it would back end so many openings into the same quarter. But you're also correct in saying that having slowed down last year -- I think our bench actually is stronger than it's ever been and so when we sit down with our board in October and our Board of Trustees, we'll go through all those issues and share that with the investment community in October. We are firmly committed to our expansion plan, and I expect that we'll be opening new campuses next year. I don't exactly how many. Karl, do you want to comment on the human capital bench or anything you want to add to that?

Karl McDonnell

No, the only thing that I would say Bob is that we just completed, my senior management team, we just completed a review of it. And as we said in the past, there's many dozens of people who are at various stages of writing us and we'll make our final recommendation to the board in October and what that number should be next year,

Robert Craig - Stifel, Nicolaus & Co., Inc.

Hopeful. Over and above the normal quarterly fluctuations, Rob, any real changes here in marketing strategy and spending levels, especially on the brand-building side, seemingly from some of the sites we've been visiting, your ubiquity of banner ads has increased here recently?

Robert Silberman

Karl?

Karl McDonnell

Well, we always take a look at the way that we invest our marketing dollar and within every channel that we advertise, be it traditional broadcast media or over the Internet, we're always working with our team to tweak things based on what we think is going to be the most effective and just getting the Strayer brand out. And what you're seeing is just probably a reflection of those ongoing changes.

Robert Craig - Stifel, Nicolaus & Co., Inc.

Okay. Last one for me. Any cost adjustments, you can talk about, given the lower volume, looking at a same-school basis on admission staffing and adjunct faculty, for example?

Robert Silberman

Well, certainly adjunct faculty. Admission staffing is not -- hasn't really been affected. I mean we don't have that many admissions officers anyway, we generally have 3 or 4 per campus and a few dozens in the global online. I don't see that changing significantly and that's part of almost what we think of as a fixed cost to build the University. As in the same context, we think full-time faculty in the academic infrastructure necessary to support all the courses that we do teach. Adjunct faculty clearly are truly variable and expand or contract on the basis of the number of classes that we offer. Fair amount that we're seeing in projecting with regard to our Q3 results, is first off, your summer term enrollment is always lower anyway so your margin goes down. There's less of a revenue based to offset all these costs. But really for the whole year what we've seen is we're going to run a certain number of courses, and we need to run those courses regardless of how many students are in the class because you have to have the courses available for students to progress through to get to their degrees. So our average student per class is down significantly and that increases our instructional and educational expenses as a percent of revenue and you'll see that quite a bit with regard to the summer, the Q3 financial results in the summer academic term.

Operator

Our next question comes from Amy Junker with Robert W. Baird.

Amy Junker - Robert W. Baird & Co. Incorporated

Rob, just a question on underlying retention, given starts have been lower for several quarters, not surprising to see a decrease in the overall number of continuing students, but can you just help us understand the trends of what's happening in underlying retention, if you would adjust for graduation and adjust kind of for the lower starts. Are you seeing any difference in trends there, are more people dropping out or maybe even bad retention is better? I'm not sure.

Robert Silberman

Yes. That's a great question. If you think about it, our continuation rates, our retention rates were basically as high as they could be going into last year and we talked about that going back several years. So when you have down 20% on new students, you've got a bunch of cohorts going through that just less continuing students to enroll so on a year-over-year basis, that continuation rate is clearly going to go down. The other way to think about it, just mathematically, is our average student stays, Mark, 7 or 8 quarters, 7.5 quarters, so if you got 3 or 4 quarters of down 20% then that continuation rate ought to be down 10% roughly. That's just the way that the math works. It's not that complicated. And that's essentially what we're seeing right now. We also get a little more granular in what we call our cohort retention rate, which is the individual retention rate of each new class of new students that come in. That was also down slightly Karl, but there was something on our remedial classes, our developmental classes wasn't there?

Karl McDonnell

We did a change in the quarter to the failure policy for our developmental education courses, both English and Math, and we capped a number of times that a student can fail at it too. So if any student fails one of the developmental courses twice, they're automatically disenrolled from the University.

Robert Silberman

But you got noise like that almost every quarter.

Karl McDonnell

We do. We make those kind of changes every quarter and this one was at the request of our Senior Academic Leadership team who had been looking at it for a while and we decided to implement that in the spring term.

Robert Silberman

I think the sort of broader way to look at this, Amy, is eventually our growth in continuing students is going to match on an average basis over the last 8 quarters the growth rate or shrinkage rate of new students. As long as our retention rate stays high.

Amy Junker - Robert W. Baird & Co. Incorporated

That's exactly the color I was looking for. And just a follow-up to Bob's comment on opening up new campuses, any impact or maybe you could comment on I know there has been some challenges in the upper Midwest with those campuses perhaps not ramping as quickly as some others, given what's happening in the macro environment. Does that play in at all in your decision of how many campuses to open or is it more just -- or is it more dependent on -- or may be that maybe just plays a role in where you open the campuses not necessarily how many?

Robert Silberman

Yes, it really doesn't affect either of those, and for 2 reasons. One is, even the ones that are growing at a slower than recent rate, they're still at or above our investment model and they're great investments. So there's none of those markets that we're going to shy away from. It happens that the Upper Midwest is sort of that next area of the country that's contiguous to where we're going. And so there's been over the last 2 years, in Ohio, Indiana, your home town Milwaukee, Illinois, it's just an area of fertile investment for us. The number of campuses is a really only affected by 2 issues, primarily human capital and in the last 12 months, some prudence or caution associated with regulatory uncertainty and then also at this point now you have a little bit of a time lag, too. It takes about 6 to 12 months to get a particular site up and running and so my guess is most of the campuses that we open in 2012 will be back-end loaded from that standpoint.

Operator

Our next question comes from Kelly Flynn with Credit Suisse.

Kelly Flynn - Crédit Suisse AG

Couple of questions. First, related to the admissions advisory expense. I mean that was down 10-odd percent sequentially. It's been increasing pretty consistently, I guess, since last year so that's a change in the trajectory. Can you talk to why that fail in light of your comment that you don't anticipate making any cuts there? And then I guess specifically address the question as to whether or not you did make any changes at all to your compensation policies in reaction to the regulatory change?

Robert Silberman

Let me take those in reverse order, Kelly. We did not make any changes to our compensation policy. At least it would flow through -- actually we didn't make any changes to our compensation policy, period. The quarter-over-quarter comparison, I think, is a little bit affected by timing markets. It's just $200,000 that shifted from second quarter to first quarter

Karl McDonnell

Yes. Q1 was a little bit higher than normal and Q2 was a little bit lower.

Robert Silberman

And then the final issue is that, I think, we talked about this last quarter, we did as we dived into last quarter, because we just switched to this new expense line detail that some of that admissions advisory costs are truly variable, because it's fulfillment cost for students who do enroll. We send them catalogs, new books, information necessary to enroll them in the university. We don't send them unless they do enroll, so as new student enrollment goes down on a year-over-year basis, you're going to see that number move around a little bit. But I think from Q2 to Q1, it's really just a question of timing of some expenses that got pushed into Q1 from Q2

Kelly Flynn - Crédit Suisse AG

Okay. Great. And then, I have a second kind of technical question just about the share count, I think it said in the press release that you ended the quarter at 12 million shares, but the average, both basic and diluted numbers, were in the 11 million, which just seems like it doesn't work mathematically. So, what was going on there?

Robert Silberman

Kelly, the 12 million consists of about 11.6 million in common shares and about 400,000 in restricted shares. So, when you do the DSO on the restricted shares, it's actually the impact is much lower than the 400,000. So that's why the diluted share count is lower than the actual absolute share count.

Kelly Flynn - Crédit Suisse AG

Okay. Great. And then one last one. Rob, the color you gave on the adjunct faculty flexibility is very helpful. Can you give us a sense of what portion of the instructional and ed support line item is made up of full-time -- I mean adjunct faculty expense?

Robert Silberman

I would be guessing, but I mean we have about half the classes are taught by adjuncts. The adjunct costs are lower so I would say it's much less than half, do you have...

Karl McDonnell

Yes, I agree. It's less than half.

Kelly Flynn - Crédit Suisse AG

Less than half of faculty, but faculty is obviously not the full line item. Do you know what portion of that line item is faculty?

Robert Silberman

Well, the only other thing in there are lease costs, academic infrastructure, our President's office, our Senior Vice Provost, or things of that nature. Again, Mark, you have a sense -- We'll get back to you Kelly.

Mark Brown

Yes, why don't we get back to you Kelly

Robert Silberman

I mean, in general, Kelly, most of our costs are human capital costs. So I would guess that well over half of that line item is some kind of faculty cost. But we'll get back to you there.

Operator

Our next question comes from Ariel Sokol with UBS.

Ariel Sokol - UBS Investment Bank

I just have a couple of questions regarding the 2011 business model that was provided in beginning of the year. The first question is can we still rely upon the 2011 business model? And are you thinking about forecast for 2011, given some of the trends that you've experienced?

Robert Silberman

Absolutely, Ariel. I'm glad you asked, because it's something that Mark and I do each quarter and go back and look at it. We are right on or slightly ahead of that model. You'll remember in that model, we said if we were down 5% on enrollment growth, we would be flat to down 1% on revenue growth. The operating margin would be down roughly 750 basis points and at the share count at the time that would lead to $7.50 to $7.70 of earnings per share. If you take out the effect of the lower share count, we're just slightly above that. And of course, a lot will depend on what our enrollment is for the fall term. But mathematically, it's going to be hard to not be down on students, average students for the full year. It's just not our nature to blowout enrollment by such a large number that it would reverse that. So my guess is you're going to end up somewhere between the 0% enrollment growth and minus 5% enrollment growth and in which case, that forecast is what -- I mean, that's why we put it out there, to show you how the business model work and everyone should be frankly be very close to that in terms of thinking about what we're going to achieve in earnings adjusting for the share count for the full year.

Ariel Sokol - UBS Investment Bank

That's very helpful. And I just want to make sure to revisit the point that the December quarter or the fall term alternatively, that's you're seasonally strong quarter with respect to new starts. Is it around 40% of your new starts for the full year, I vaguely recall that.

Robert Silberman

It sounds about right, Karl? I mean, it's more than a quarter, it may not be quite 40%, it might be 35%, generally.

Karl McDonnell

I would say between 35% and 40%.

Ariel Sokol - UBS Investment Bank

Okay. So basically depending -- so as we're building on our forecast depending upon Q4 alternately the fall term that's really going to dictate where exactly it will be with respect to this business model.

Robert Silberman

For the full year, correct.

Operator

Our next question comes from Peter Appert with Piper Jaffray.

Peter Appert - Piper Jaffray Companies

So Rob, you've been very consistent in saying that you're comfortable with lower margins like context of the cyclicality of the business. I guess I was just wondering, if in the context of the weakness in starts that you and others are seeing and sort of the persistence in this weakness, if you've given any further thought to the need to adjust cost structure or think about cost structure.

Robert Silberman

We think about cost structure everyday, Peter. I mean we want to be good stewards of our owner's capital. But from my perspective the way to be the best steward of that is to invest it in what I perceive to be a very high -- inherently very high return enterprise, which is providing postsecondary education to working adults. That requires a cost structure which we've invested in and we're going to continue to invest in. And either the seasonality, the short-term cyclicality even the medium-term cyclicality of enrollment is going to affect those margins, it's not going to affect our view as to what's necessary to provide a great education. You can be certain that any cost that's not necessary, that is truly variable, is -- that we are addressing. And stuff that cost that we feel are necessary to provide the kind of education and the kind of institution we want to have is going to be there without regard to the cyclicality of the enrollment.

Peter Appert - Piper Jaffray Companies

Fair enough. And then Rob, you've been very consistent, I think, also in terms of the pricing strategy, somewhere around 5% a year. Some in the industry have been dialing back, I think that how aggressive they are in pricing, how are you thinking about that longer term?

Robert Silberman

Well, there's 2 parts to that. One is what I perceive to be the inherent pricing power, the real value creation that you have for the users of your enterprise, in our case, our students. And we've always felt that, that is relatively high but the best way to deal with that, is on a stable, predictable 5% increase, which is what we've been over the last 11 years. Clearly, in the last year, there's a fair amount of public policy attention and discussion. And so, I mean, I'm certainly sympathetic or understanding of universities looking at that pricing structure within that context. I don't think it's -- I mean, we're quite comfortable with what our tuition is and our cost do increase and we need to have some of that pass on to our students. And so I suspect that it will be in the range of 5%. It's been a little bit higher in some respects. Mark and I would like to round it to a manageable number, in the 10s or something like that. And it has been a little bit higher than 5%. It's, I think, conceivable it could be a little bit lower but it's going to be in the mid-single digits.

Operator

Our next question comes from Bob Wetenhall with RBC Capital.

Steven Bachman - RBC Capital Markets, LLC

This is Steven Bachman in for Bob. You mentioned the 1,000 basis point impact in operating margin during the third quarter, given what the enrollment level is it seems to imply that revenue per student loss will also need to come down a little bit. Are you anticipating any higher scholarship activity? Is there anything going on revenue per student that you guys could elaborate on?

Robert Silberman

Well, there's a couple of things. One is, if you look back at our history over the last 10 years, you'll see this. In those periods where our mix shift of students moves towards graduates, it has a depressing effect on revenue per student, even though graduate tuition is higher, our graduate students tend to take one course and our undergraduate students tend to take 2, roughly. So that would affect it. We do have, as Karl mentioned, an increased percentage of our students that are coming to us from corporate and institution alliances and in those cases, are routinely we have about a 5% price discount, which really is part of having a relationship with the organization. They bill us, we'll bill them directly, they send us tuition directly, so we pay some cost as well. And other than that, Mark, is anything else on this affecting the earnings per student.

Mark Brown

We have seen our failure rate up a little bit.

Robert Silberman

It's higher drops, which affects revenue per student.

Steven Bachman - RBC Capital Markets, LLC

Got it. That makes sense. Getting back to operating margin, where do you expect to see the largest declines in that 1,000 in terms of line items. I don't know if it's possible to break out some color in there?

Robert Silberman

Sure. I mean, as I mentioned earlier, you're going to see most of that in the instruction and education line because you're going to have less students per professor and per classroom. I would guess that out of 1,000 probably 600 or 700 of that is in instruction or education.

Mark Brown

Yes, I think that's right.

Operator

Our next question comes from Gary Bisbee with Barclays Capital.

Gary Bisbee - Barclays Capital

I guess, first question. I know you're not going to like it but I'm going to ask it anyway. Rob, you continue to say -- state, I guess, comfort with enrollment volatility, at what level of the volatility would lead to you being uncomfortable with the trend? Or are there anything else we could look at that would drive much different behavior from the way you've managed the Company over the last decade?

Robert Silberman

Well, I mean I believe Gary that there's inherent constraints in terms of how we you market, how you approach prospective students. If you want to have a long-lived sustainable educational institution, so there's not a lot. We've been around for over 100 years, and we've had a great deal of success in attracting working adult students. So I just don't -- there's nothing that's being talked about or that we're seeing right not that's likely to affect that. I guess from the standpoint of investing our owner's capital, is we couldn't invest it properly, based on a lack of enrollment then we certainly would stop opening new campuses, stop putting capital to work, if it wasn't achieved in a commensurate return, but the fluctuations in enrollment that we're talking about now-- bear in mind, Gary, we've talked for 10 years about a notional model that adds about 100 students per campus per year. What you're seeing in terms of enrollment comparisons versus last year, is off of a period of years where we were so far above that, '07, '08, '09, most of 2010 that you could have quite a bit less enrollment and still be such a powerful and profitable enterprise that it's unlikely to change our view of what our strategy is and how to invest our owner's capital.

Gary Bisbee - Barclays Capital

In terms of you guys doing your jobs on a day-to-day basis, what are you doing differently today than maybe you've done most days or weeks or months or quarters over the time you've been running the company.

Robert Silberman

I'm glad you amplified the question cause I thought you're saying, what are you doing?

Gary Bisbee - Barclays Capital

Well, it sounds so nonchalant. This is just the way it goes, I guess I'm trying to ask differently than others have sort of how are you guys reacting. I totally understand the long term plan to invest towards your target of a national university. I guess I'm trying to understand if there are things behind the scenes that you're all doing very different that might help us understand how you're approaching this.

Robert Silberman

We're not doing anything, particularly differently. If I appear, sound nonchalant that must be a great deal of training because there's obviously, quite a bit to do in running the company and an enterprise of this nature. The last year has been incredibly busy, because of really the intrusion of the business model of a much increased regulatory public policy, public affairs kind of requirement to deal with, but that's part of the game, we get 70-plus percent of our revenue from students who are financed by the federal government, so they have a legitimate purpose in looking and reviewing what the nature of education is. Beside the fact that we are involved in a public good and so you're going to be a part of the public policy debate. So I would say that over the last year, a lot more of my time has been taken up in that. Certainly a lot more of Karl and Mark's and their senior time has been. We would like to get back to a more balanced application of that time and focus in a little bit more closely on a lot of the academic improvements that we've always been focused on and executing our strategy. But as I said, that's the situation that we're dealt, and then we deal with it. It hasn't changed in any meaningful way, kind of what, how Karl and Mark or I think about our responsibilities, what we have to do, it's just that it's increased in importance, that part of it, particularly for me.

Gary Bisbee - Barclays Capital

Okay. And then just one last one. The decline in new students over the last 9 months or 3 terms has been incredibly consistent in terms of the year-to-year change. I think we all probably at this point, assume there will be a similar fourth quarter number. Is there any reason to believe that, that pace of change would change dramatically and I'm not asking you until growth starts in 2 terms or anything but are any of the leading indicators pointing to sort of further deterioration that would lead to another big down year or rebound? Is there anything you can say as look out at that?

Robert Silberman

We just don't comment on future enrollment, Gary. Mainly because we don't know. The kinds of leading indicators that you're describing don't lead us past the quarter for the most part. So I can't really help you with that. My view has been and continues to be that over time, our rate of new student growth is going to roughly match our rate of capital investment and expansion of the university and at the period of which we fully invested in building the university then what we would hope is we would have relatively stable new student enrolled in and relatively stable total enrollment, but that's a long ways off. We've got a lot of states and a lot of cities to get to before we can even think about that as a long-term operating model.

Operator

Our next question comes from Maria Karahalis from Goldman Sachs.

Maria Karahalis - Goldman Sachs Group Inc.

The question I wanted to ask is to follow up on the enrollment trends, and it seemed that the online enrollments was accelerating at a faster rate when you look at the total enrollment either at the mature campuses or a global online. Could you give us a little bit of commentary on what you're seeing?

Robert Silberman

Sure. Let me focus on global because that's really a discrete market, if you will. The choice that our students make who are enrolled at a campus to take either an online or a classroom-based class really is based on their desire and the way in which they want to access the education. So we don't really spend a whole lot of time worrying about that, besides making sure that we have adequate professors in the classroom and online. But the global is a discrete unit, if you will and that's always been, in my judgment, the most challenging from an academic standpoint. The students are farther away. You don't have the ability for the face-to-face interaction which helps in an educational enterprise. So that is decelerating at a slightly faster rate than the university as a whole. I don't really have much explanatory input from that. Beyond the fact that we've recognized it, the actual enrollment acceleration or deceleration has been less of a concern to us than thinking about how do you manage that part of the academic enterprise? Do you get the same learning outcomes and over years, I said, I think it's more difficult and we found it more difficult. We may not be as good as it as other online providers but it takes more cost per student, both in terms of academic and administrative staff, in order to serve that student and I would also describe it, Karl, as maybe -- I mean, it's not a surprise to us that the impact in overall demand would be felt more there because it's just a student that we have less interaction with or coherence with.

Karl McDonnell

I agree. I mean every part of that operation be it on the administrative side or the academic side is tougher from what Rob just said. You never see the student. So it is unsurprising to us that it has declined a little bit of a faster rate than something we obviously are aware of and monitoring but it's not unsurprising.

Robert Silberman

The other point we make it is as we grow the campus network, it's by definition going to decline because eventually when we have campuses everywhere, that will, that facility will re-purpose other ways to serve the university. It's really a means of administratively serving inquiries that we get that are currently outside of our campus base footprint.

Maria Karahalis - Goldman Sachs Group Inc.

So if I could follow up then -- Understood. If I can follow up then on the mature campuses and sort of the trend between classroom students and online students. You're saying that -- or maybe I should ask it as a question. On the online students, that's more function of perhaps shifting a student from online to classroom as opposed to more online students not retaining as well?

Robert Silberman

No. It's really important to understand, Maria, those aren't discrete students. Those are choices that the student makes in any given quarter. So what's happening there is some higher number of those students versus the prior year have decided to take classes in the classroom versus online. So we just break that out as a facility utilization data. So that you can see the same thing that we see. If you think about the students who enrolled at our campuses, Karl, correct me if I'm wrong with this, but roughly 30% will never take a class online, 20-ish% will take all their classes online, even though they live right near the campus, it's just how they want to access. And then the 50% in the middle are going to take some of their classes online. In any quarter in which they have decided to take all their classes online, they show up in that category, but it's not a business unit or a discrete academic unit that would allow you to sort of granularly look at and see trends with regards to whether online or on campus is growing faster or slower because they're all -- those students are all associated with the physical campus, and we really don't want to try and push even subconsciously those students into one side of the other. We want to have enough investment available so the student can decide in any given quarter without any implication to them whether they want to take a class online or in the classroom.

Operator

Our next question comes from Andrew Steinerman with JPMorgan.

Andrew Steinerman - JP Morgan Chase & Co

Rob, you mentioned the demand is clearly lower for a variety of reasons and I obviously realized rate really doesn't stimulate demand, but could you just go over what specific reasons are affecting demand in the target market that Strayer is going after?

Robert Silberman

Well, Karl, you want to take a shot with what you're hearing with your staff.

Karl McDonnell

I think it's a combination of factors, Andrew. We've noticed that for some students, they are taking a longer time versus what we've seen in the past to ultimately decide whether or not any particular quarter is the right one in which to enroll. As we said, some of these students have concerns just around the general perceptions of for-profit education and we do get those questions throughout our campuses. It's hard to pinpoint one thing because we hear these broad macro sort of themes running through our various campuses and we don't necessarily focus group or survey these students and so it's our anecdotal sense of what's happening.

Robert Silberman

Andrew, I'd say there's probably 4 or 5 things. There's the compounding effect of economic downturn over time. As to the question of whether we're countercyclical, we've never felt that we are countercyclical. We've always felt that we are relatively acyclical but at some level you have to have -- for a working adult student, particularly at the undergraduate level making about $25,000, $30,000 a year, making the decision to commit not so much the dollars but the time necessary to get a undergraduate degree, it's certainly helped by economic uncertainty but it has to be balanced by a sense of faith that there's value at the other end of that, so there's some amount of that. Clearly, there's a lot of the discussion around, the nature of investor-funded universities. Partly, you got a regression to a mean and as I've said with regard to Gary and new students. You had 3 years of growth in new students that was well above what we've always said as our investment model. It's some combination of all those things. We don't have an ability to, in my judgment, gradually pinpoint what percentage is associated with what. As a matter of fact, it's only in the last quarter that I've come to believe that these are semi-impactful trends. I mean, as I've said, the first quarter or so, let's see what happens, we've got 3 quarters in a row of this. It is clearly a diminution in demand. We'll see what happens going forward.

Andrew Steinerman - JP Morgan Chase & Co

Right. And Rob, when you think about all those factors together does it feel like we're moving to the bottom of that?

Robert Silberman

I don't have any idea, Andrew. I don't try and call that.

Operator

Our next question comes from Jeff Silber with BMO Capital Markets.

Jeffrey Silber - BMO Capital Markets U.S.

I wanted to focus on the students in your newer campuses it was a pretty -- in terms of the trend declining, it was a pretty significant change in trend. Is it only because you have fewer new campuses or are you seeing issues that the cohort of campuses that you opened in the 2 years before this?

Robert Silberman

Both. We have fewer new campuses as a percent of the total by going to 8% this year. And some of the new campuses that we opened in 2009 and 2010, particularly up in the upper Midwest, have not enrolled as many students as the cohort that we opened in '08 and '09, and so you're seeing both of those.

Jeffrey Silber - BMO Capital Markets U.S.

Is there any specific reason for that? The latter part of that in terms of some of the newer ones you opened up in the past couple of years? Or is it just general trends that you've discussed. I'm just curious what if there's anything going on differently there?

Robert Silberman

I don't think there's anything going on differently. I mean I think it is part and parcel of the general trends

Jeffrey Silber - BMO Capital Markets U.S.

Okay. Great. And just a couple numbers questions regarding your business outlook. What tax rate and share count is embedded in that for the third quarter?

Robert Silberman

Mark?

Mark Brown

Yes, the tax rate, Jeff, continues to hover around 39.5%

Robert Silberman

He's just asking what do we use, 39.5%?

Mark Brown

39.5%, that's what we're providing at.

Jeffrey Silber - BMO Capital Markets U.S.

And the share count?

Robert Silberman

For the quarter end, right?

Mark Brown

Yes. Our guidance is based on effectively the quarter end share count.

Jeffrey Silber - BMO Capital Markets U.S.

Quarter end share count. Okay, great.

Operator

Our next question comes from Brandon Dobell with William Blair.

Brandon Dobell - William Blair & Company L.L.C.

As you guys broaden the geographic footprint, as well as global online, does that give you any reason to rethink the kinds of programs that would fit with the University or are the geographies not going to make a difference from what you think might serve those local students better?

Robert Silberman

The geography's are not going to make a difference. Although with our 2 new Chicago campuses, I'd like to see you stop by and then come back and tell us if you think that we need to be offering some other types of programs, Brandon.

Brandon Dobell - William Blair & Company L.L.C.

And then, of course, relative to what Karl had mentioned about students taking longer to decide around, which quarter. How much visibility do you have into every student that start the application process or start the enrollment process in the very beginning and either end up deciding not to attend Strayer. Do you have any idea, if they're going someplace else, are they not going anywhere? Can I get a feel for what the alternatives that people are seeing now or taking advantage of now versus what they were looking at maybe a year ago or 2 years ago?

Karl McDonnell

We don't really know if they go anywhere else. As I've said we don't survey these students. The comment I made is in reference to essentially what you're saying students who complete an application and then ultimately enroll, we can just see that, that has taken longer than it has in some quarters in the past. And it's a combination of all the factors that we've just discussed as why that's happening but we don't have a good sense for what's happening if they ultimately elect not to attend. I can say, however, that periodically I look at the transcripts that are leaving the university and we're not seeing any trends in the absolute number of percentages of students leaving Strayer to get to another institution where we would be sending that transcript.

Robert Silberman

That's for an existing student.

Brandon Dobell - William Blair & Company L.L.C.

For an existing student.

Karl McDonnell

Right.

Robert Silberman

Yes. And then Brandon, on the issue of are they going some place else, I think, I said this in the last quarter. You got a fairly consistent and broad-based reduction enrollment across the entire sector. There are some entities that are still adding students, but they're adding them at much lower rates than they were before. So, it's not hard to draw from that, that there's just less overall students enrolling so if they're going someplace else it would have to be traditional universities and we know they're not expanding their capacities. So I think the logical conclusion is they're not enrolling, period, but as Karl said, we don't have a lot of data on that.

Brandon Dobell - William Blair & Company L.L.C.

And then final question for me. If you look at this term's student behavior compared to the previous couple of terms, As the students moves from that application to actually starting class process, I guess, call it a show rate or call it whatever you want to call it. Have you seen any change in kind of that, let's call it the last mile of the enrollment process? Are students showing up at a higher or a lower rate than you have seen previously or -- and I guess, or is that rate remarkably different from what your expectations would be?

Robert Silberman

We haven't really seen any big changes in our start rate. As Mark said, in the last quarter, our academic failure rate was up a bit. And so we have an increase in student that dropped as a result of that and some other number of reasons during the quarter. But to answer your specific question around start rate, that's relatively flat.

Mark Brown

The failure rate is up by 100 basis points.

Robert Silberman

Going from like 9.5 to 10.5.

Operator

Our next question comes from Peter Wahlstrom with Morningstar.

Peter Wahlstrom - Morningstar Inc.

When you mentioned that corporate and institutional alliances were up to about 25% of the student body. Can you remind us if there's a target mix that you're looking at as you look out a couple of years? And is this another variable that you think about as you look at potential new campus locations.

Robert Silberman

We don't have a specific target. When we embarked on this expansion strategy 10 years ago. We were at about 20% here in the D.C. area and we wanted to keep it at about that. So we're pleased with that, the corporate-sponsored students tended to do well with us. They've got the preparation, they've got the commitment, so. Plus we like the affirmation from the corporation that academically we're serving the mission. So we'll continue to work on that without a specific target. It doesn't really have a lot to do with our campus siting or which markets we decide to go to. Our plan is to expand across the United States and over time, get to basically every community that's got a sufficient population to support a campus. And having the corporate sponsored students is helpful in all those places.

Peter Wahlstrom - Morningstar Inc.

And as a quick follow-up, if this trend were to tick up, let's just say, over time. Would you view this as a positive or negative factor in terms of your overall retention rate?

Robert Silberman

I'm sorry. Mark was handing me a note

Mark Brown

What was his question, Karl?

Karl McDonnell

I think what you're asking is do these students continue at a more favorable rate?

Peter Wahlstrom - Morningstar Inc.

Yes, exactly.

Karl McDonnell

Yes, they do...

Robert Silberman

Corporate institution lines. They do continue at a higher rate.

Peter Wahlstrom - Morningstar Inc.

Okay. And just a quick broad-based question about cost and trend of faculty. Looking ahead, are you finding the quality of candidates and faculty with well credential, et cetera, to get them in the right place, at the right price when you're looking at expanding programs, whether it's in the online channel or the physical campus channel?

Robert Silberman

We're not really expanding programs but we are expanding locations. And yes, we are pleased with the availability of faculty. That's one of the things that makes the business model, I think, quite powerful. There's a lot of qualified teaching faculty who are underutilized, particularly in research universities, and who want to be in an institution like ours. So that's a positive part about that. Mark had a clarification

Mark Brown

I just want to clarify my response to Jeff's question on what share count we used for our Q3 guidance. We actually used the Q2 diluted share count of 11.7 million. So I just wanted to clarify that as opposed to the Q2 ending.

Operator

Our next question comes from Arvind Bhatia with Sterne, Agee.

Arvind Bhatia - Sterne Agee & Leach Inc.

I actually also wanted to talk about corporate relationships a little bit. That's been a positive trend for you for sometime and I wonder if you can speak to what you're doing maybe differently? Is that continues to be a bigger focus for you and what's the pipeline looking like? And also as you look at the new relationships versus what you already have, is a lot of the growth coming from new or existing relationships are also yielding pretty positive results?

Robert Silberman

Well, we're not really doing anything differently and I would say that, I would say that all the real growth in it comes from the way we serve our current corporate partners, i.e., a corporation that's bringing us in is going to talk to somebody else. There is a network of HR and benefits professionals who look at these sort of things. So it's like everything else in terms of building the brand of the university. It's an intangible, so the success you have with your existing students and existing partners is going to feed your ability and propel your ability to gain new ones. I mean, I think, a good example is we were asked by the NFL Union to go down and provide some financial management training to the NFL rookies when the owners locked out the teams and that came out of the fact that we had a program for the Washington Redskins that the Union President knew about. And Karl and Mark got to go down and lecture to a bunch of NFL rookies, Accounting and Finance. So all of that's -- it's going to feed on itself, and it's a -- can either be a self-perpetuating virtuous cycle, or if you do a bad job, it can be quite detrimental to the enterprise which is why we always come back to it's how well you teach in the classroom, that over time is going to actually determine the success of the institution.

Arvind Bhatia - Sterne Agee & Leach Inc.

Got it. Another question I have is on new campuses. As you opened these new campuses in new markets. You obviously have the initial start-up costs, et cetera. Are you doing anything to your cost structure, the initial start-up costs in light of the trends that you're seeing in enrollment. Is there any flexibility there, whether it's in the support staff or faculty or any of the costs?

Robert Silberman

No. We open a new campus with the facility and the staff necessary to run the facility even if you have one student. And then the operating losses that you incur over a year or 2 is the fact that you need to get to a couple hundred, 250 students in order for that to breakeven and if it takes a little bit longer, that just affects your ultimate return but there's no way to -- in my judgment, make it smaller or less expensive and have a real university.

Arvind Bhatia - Sterne Agee & Leach Inc.

Final question on bad debt expenses. Mark, can you talk about what you are thinking for the third quarter?

Mark Brown

You can see from our second quarter results were bad debt nudge up to 4.1% versus the same period in the prior year. There are a couple of factors there to keep in mind. One is that, as our revenues declined a bit we have a sort of negative comparison because you have essentially you're reserving or aging receivables from prior quarters and you're measuring it against a lower revenue base. We're also seeing fewer recoveries coming from receivables that we've written-off. Subsequently, we collect a certain percentage of those. We're seeing those slow down but in terms of the balance of the year, I'm not sure we're going to see material change from what we've experienced in the current quarter.

Operator

I'm not showing any other questions in the queue. I'd like to turn it back over to Mr. Silberman for closing comments.

Robert Silberman

Thank you, Sean. Well, I appreciate everybody listening. We look forward to talking to you in October. Thanks very much.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.

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