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Strayer Education, Inc. (NASDAQ:STRA)

Q4 FY07 Earnings Call

February 14, 2008, 10:00 AM ET

Executives

Sonya G. Udler - VP of Corporate Communications

Robert S. Silberman - Chairman and CEO

Mark C. Brown - Sr. VP and CFO

Analysts

Edward Yruma - J.P. Morgan

Amy Junker - Robert W. Baird & Co.

Gary Bisbee - Lehman Brothers

Mark Zgutowicz - Piper Jaffray

Suzanne Stein - Morgan Stanley

Jerry Herman - Stifel Nicolaus & Company, Inc.

Corey Greendale - First Analysis

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

Jeff Lee - Signal Hill

Kevin Doherty - Banc of America

Operator

Good day everyone and welcome to the Strayer Education Incorporated fourth quarter and full year financial results conference call. This call is being recorded. At this time for opening remarks and introduction I would like to turn the call over to Strayer Education Senior Vice President of Corporate Communications, Miss. Sonya Udler. Miss. Udler, please go ahead.

Sonya G. Udler - Vice President of Corporate Communications

Thank you operator. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education and Mark Brown, Executive Vice President and Chief Financial Officer. For those of you that wish to listen to the conference via the Internet, please go to 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 P.M. Eastern through Monday, February 18th. The replay is available at 888-203-1112, pass code 8322948. Following Strayer's remarks we will open the call for questions and answers.

Please note that today's press release contains statements that are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. The statements are based on the company's current expectations and are subject to a number of uncertainties and risks that the company has identified in the press release, and that could cause the company's actual results to differ materially. Further information about these and other relevant uncertainties may be found in the company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission.

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

Robert S. Silberman - Chairman and Chief Executive Officer

Thank you, Sonya and good morning, ladies and gentlemen. As is our custom, I'd like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. I’ll then ask Mark to report on the detailed financial results for the fourth quarter and full year of 2007, after which I'll comment on our enrollment results for the winter academic term, provide an update on our growth strategies, and finally end up with the company's earnings outlook for Q1 2008.

Strayer Education, Inc. is an educational service company whose primary asset is Strayer University, a 37,000-student, 55-campus post-secondary education institution, which offers associates, bachelors and masters degrees in business administration, accounting, computer science, public administration, and education. Strayer students are working adults who are returning to school to further their careers.

Our revenue comes from tuition payments and associated fees. Approximately 65% of our revenue comes to us from federally insured Title IV loans issued to our students. We estimate approximately 25% of our revenue comes to us from our students' employers either directly to us from the employers as payments under one of our many corporate alliance agreements or indirectly to us in the form of tuition assistance benefits paid to our students.

Non-Title IV private loans make up only 3% of our revenue, of which we estimate that no more than 0.25% of our revenue comes from private loans to students whose FICO scores may cause them to be classified as subprime borrowers that was 1.25 of 1% of our revenue coming from those private loans. We do not now nor have we ever had any recourse or risk-sharing agreements with any of the lenders to our students nor do we intend to do so in the future. All of the vendors who participate in serving our students in either the Title IV or non-Title IV market, including Sallie Mae have recently reiterated to us their desire to increase their loan volume with our students and we are confident that there are more than ample sources of credit available to our students today.

Our expenses of Strayer Education include the cost of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies cost. We currently operate campuses in 13 states in the eastern half of the United States, as well as throughout the world over the Internet through our online courses. We serve students in all 50 states and over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Association of Colleges and Schools.

Mark, you want to run through the financials.

Mark C. Brown - Senior Vice President and Chief Financial Officer

Sure. Revenues for the three months ended December 31, 2007 increased 20% to $89.1 million, compared to $74.3 million for the same period in 2006 due to increased enrollment and a 5% tuition increase, which commenced in January of 2007. Income from operations was $29.2 million, compared to $24.1 million for the same period in 2006, an increase of 21%.

Operating income margin was 32.8%, compared to 32.4% in 2006. Net income was $19.5 million, compared to $16 million for the same period in 2006, an increase of 22%, diluted earnings per share was $1.34, compared to a $1.11 for the same period in 2006, an increase of 21%. Diluted weighted average shares outstanding increased to 14,536,000 from 14,452,000 for the same period in 2006. Revenues for the year ended December 31, 2007 increased 21% to $318 million, compared to $263.6 million for the same period in 2006 due to increased enrollment and a 5% tuition increase effective for 2007.

Income from operations was $97.6 million compared to $79.5 million for the same period in 2006, an increase of 23%. Operating income margin was 30.7% compared to 30.2% in 2006. Net income was $64.9 million compared to $52.3 million in 2006, an increase of 24%, diluted earnings per share was $4.47 compared to $3.61 in 2006, an increase of 24%.

Diluted weighted-average shares outstanding increased to 14,517,000 from 14.492,000 in 2006. At December 31, 2007, the company had cash, cash equivalents and marketable securities of $171 million and no debt. The company generated $81 million from operating activities in 2007. Capital expenditures were $15 million for the same period. During the fourth quarter 2007, the company repurchased approximately 102,900 shares of common stock at an average price of $175.86 per share under a previously announced common stock repurchase authorization. During the year ended December 31, 2007, the company repurchased approximately 260,800 shares of common stock at an average price of $146.05 per share. As of December 31, 2007, the company had 82 million of share repurchase authorization remaining under this plan.

In the fourth quarter 2007, bad debt expense as percentage of revenue was 3.6% compared to 3.5% for the same period in 2006. Days sales outstanding adjusted to exclude tuition receivable related to future quarters was 12 days at end of the fourth quarter 2007 compared to 13 days at the end of the same period in 2006. Rob?

Robert S. Silberman - Chairman and Chief Executive Officer

Thanks, Mark. Just a few amplifying comments on the financials from my perspective. Our revenue growth for the quarter was slightly ahead of our model with our previously reported 15% enrollment growth for the fall term, we had expected around 19% revenue growth from the fourth quarter. We had a relatively stable mix of graduate and undergraduate students in the quarter and lower drops versus the same quarter last year and that meant that all of our 5% tuition increase was added to our enrollment growth bringing our revenue growth up to 20%. That extra 1% of revenue growth really flow directly to our bottom line and was responsible for $0.03 per share earnings out performance versus Mark's forecast for the quarter.

We have -- in our own model, we continue to look at between 4% and 5% revenue growth per student, again that assumes that the mix of undergraduate and graduate students will remain stable. We really don't know what that number is going to do and we'll just let you know during the year as we know in each quarter.

On expenses, we were right, on budget for the quarter. The bad debt expense was basically stable at 3.6%. On operating margin, based on the expenses that we incurred in opening eight new campuses last year, much of which was back loaded towards the back-end of the year with our campus openings, we had expected that Q4 would bring slight margin compression versus the prior year. However, that out performance on revenue, as I said fall into the bottom line, we ended up with almost a 40 basis point increase in operating margin.

A couple of key points on the full-year results. First, on the income statement, in 2007, 16.5% average enrollment growth led to 21% revenue growth, 50 basis points of margin expansion, and $4.47 per share of earnings. What I really take from that is the relationship between our enrollment growth, our revenue growth, our operating margin, and our earnings per share during the year were all basically consistent with the financial model that Mark and I have developed.

Secondly on cash, although, net income was up 24% for the year, distributable cash was up a healthy 36%. As Mark mentioned, we generated $81 million in cash from operations. We also had $27 million in proceeds and tax benefits from stock option exercises, which we don't calculate in terms of our distributable cash flow. We also generated $6 million in proceeds from a building sale. With that $114 million of total cash, we invested $15 million in CAPEX in growth. We invested $38 million in the repurchase of our common shares during the year. We've returned $19 million to our owners in dividends and we added the remaining $42 million to our balance sheet, which as Mark said, brought our cash and cash equivalents at the end of the year to $171 million, which was up from $129 million the year before.

So in retrospect, as we look at that, we really come to a conclusion that there is really nothing changed with regard to the model. We continue to be a fairly efficient generator of cash relative to our net income. Now, we did use $29 million of that $171 million on our balance sheet at year-end to pay a special dividend in January of this year, the effect of which will show up on our March 31, 2008 balance sheet, although I guess you do have the dividend payable in the December 31, although the cash is solid.

Turning to the winter term enrollment results, we had a pretty strong quarter. Total university enrollment increased 16% on a year-over-year basis, that's up from 15% for the fall term. Our continuing student enrollments were up 16%, so our retention rate was up approximately 20 basis points on a year-over-year basis. Our new student growth was up 17%. With regard to the student mix, business administration, accounting and economics degree-seekers continue to make up 65% approximately of our student body for the winter term, with computer science degree candidates at about 20% of our total student population. Our graduate population remained at 28% of our student mix in the quarter. Again, that was the... that causes an uplift on revenue per student, because the undergraduate students actually take more classes than the graduate students.

Turning to an update on the growth strategy. Many of you may remember that our strategy is based on five objectives. The first is to maintain enrollment in the company's mature markets; second is accelerated rate of growth as new campuses, particularly in the new states; third is to invest in and build up our offerings; fourth, increase our corporate and institutional alliances; and the final objective is to effectively redeploy our owner's capital.

On our first objective for the winter term, we were ahead of target at our mature campuses showing 5% growth. With regards to new campus activity for the winter term, we opened a third campus each in two existing markets, that's the Raleigh and Charlotte, North Carolina markets. We actually just went down couple of weeks ago and hosted campus opening events at both of those facilities. We announced today our intention to open two campuses for our spring academic term. That will be a third campus in the Orlando, Florida market as well as a sixth campus in the Atlanta, Georgia market.

In the Global Online unit, our growth rate was 32%, on capital redeployment we announced this morning our regular quarterly dividend of $0.375 per share. We also announced that we had repurchased approximately 18 million worth of our common stock during the fourth quarter of 2007.

On the business outlook for the first quarter of 2008, based on the universities strong enrollment growth for the winter term offset partly by the increased expenses associated with the new campus openings, we estimate our first quarter EPS will be in the $1.57 to $1.59 range and in the first quarter, we actually expect a slight increase in operating margins versus the prior year.

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

Question and Answer

Operator

Thank you. [Operator Instructions] And our first question today will come from Edward Yruma with J.P. Morgan.

Edward Yruma - J.P. Morgan

Hi. Good morning and thanks for taking my question. New business continues to generate cash in excess of your ability to kind of redeploy back to owners, or do investment in the business. How do you think about a minimum cash balance and should we expect to see you continue repurchase shares and increase the dividend throughout the year?

Robert S. Silberman - Chairman and Chief Executive Officer

Well I would say, we continue to generate cash at a rate... at a healthy rate. I would say it was in excess of our ability to redeploy its owners because we are redeploying owners and we are certainly investing as much of it as we can as quickly as we can in growing the business. But again the cash is not the limiting factor on that. It's the growth of our internal management pipeline, which we think is key to maintaining academic quality. I don't expect that we would increase our common dividend during the year. We tend as a Board to look at that once a year when we have got our... pretty close to our year-end results and a pretty good idea of what the next year's activities are going to be.

We do expect to be a repurchaser of our common stock at any time that we have excess capital and that we think that the stock is trading at a discount with intrinsic value and that's an ongoing activity. Each quarter we look at that as a Board and then Mark and I look at it during the quarter in the open period with regard to market activities. But one of the really attractive things about this business for us as owners and as managers is that it really doesn't seem to matter how fast we grow we are not going to put a dent in excess cash because the speed with which our new investments, our new campuses ramp to profitability and then become very high generators of cash doesn't... hasn't seem to slow down. So the faster we redeploy the cash, the faster it is going to grow. And so effective redeployment back to our owners in a value-enhancing way is really a focus we have to maintain as well.

Edward Yruma - J.P. Morgan

Great. And one follow-up if I may, I know that you have added significant talent over past six to nine months including Dr. Stallard. I think you have introduced a new Dean of School of Arts and Sciences and I think a new Student Affairs professional. Are there any other open positions and how do you view kind of your talent bench going forward? Thank you.

Robert S. Silberman - Chairman and Chief Executive Officer

We do have open positions. The one significant one that... I know Dr. Stallard is in the market for us as a Dean of our School of Business. Those particular areas in the senior leadership of the academic structure that Dr. Stallard runs really haven't been a bottleneck with regard to our growth because we actually had individuals who were, if they weren't precisely in those roles fulfilling those functions working in our university leadership. The real bottleneck has been the growth of lower-level managers, campus deans, individual campus deans and directors and those we don't look to fill from the outside. Those are ones which we think are quite important to promote from within from our own faculty and our own administrators because that's really what's going to be necessary to maintain the culture and keep the focus on the academic quality as you get a farther, a wider geographic expanse of our campus network.

Edward Yruma - J.P. Morgan

Great. Thank you very much.

Robert S. Silberman - Chairman and Chief Executive Officer

Thank you Ed.

Operator

And next we’ll move to Amy Junker with Robert Baird.

Amy Junker - Robert W. Baird & Co.

Good morning. I just had a quick question with respect to the selling and promotion line. You saw some good leverage there in the quarter, and I guess I'm curious, is this a function of you getting, I guess, more efficient with your marketing spend, have you shifted your mix around to some extent or is it a matter of perhaps just opening more campuses in existing markets, which is helping you out?

Robert S. Silberman - Chairman and Chief Executive Officer

Well, I think it's a combination of the growth of the campuses that we've already opened. The ramp to profitability of those campuses and that's where we tend to see the most leverage is on the selling and promotion line because we generally spend about as much in advertising in a market at the very beginning that… when we open it as we do several years later when we have a lot more students. I think that our marketing team continues to be quite efficient in terms of how they employ the dollars that we earmark for that and in terms of changes within the quarter that team really changes each quarter and in each market. There is nothing really specific about the last quarter that I would point to. They are constantly looking for the most effective means of building the brand in a given market. And mainly I think the leverage that you see is just the increase of profitability of campuses that we've opened in the last two or three years.

Amy Junker - Robert W. Baird & Co.

Great. That's helpful. And then I just had one other quick one. As Congress is really focused on affordability of post-secondary education, does that change at all your thoughts on tuition increases going forward or is that something you've looked at that you might change?

Robert S. Silberman - Chairman and Chief Executive Officer

No. With regard to tuition it is really quite simple for us. First off, we are at the lower end of tuition for bachelors and masters degrees, really across the country, certainly within... with regard to the four-profit sector and with the exception of some in-state students at state schools significantly below most of the educational establishment. I think actually somebody had a fees in the last year or so that broke down the tuition by providers and it kind of attracts the data that we have as well. We are really at the low end of that.

The second and more important issue is that the degree to which you can command real price increases with any product or service, I think, is the degree to which the value, the utility of that product or service provides is continuing to increase, and we have a high degree of confidence that the need for education is not going to get less in future years. It is actually going to get more, it's going to get higher and the value of education that we provide appears with regard to our own research with regard to our students and alumni to continue to provide significant increases and value to them. And so that 5% rather predictable stable tuition increase, I think is something that works for us, it works for our students. It allows us to continue to invest more dollars with regard to our faculty, in our facilities and increase the benefit and the value of education we provide, at the same time it is providing a significant value to the students.

So, as long as, we are right sort of in the middle of that value chain, I don't really foresee much concern with regard to that. The only thing that could significantly affect that would be for some reason we stop shifting from a manufacturing base to a knowledge-based economy and education as a factor of product -- factor of production stops increasing in importance, then we would have take a look at pricing strategy, but I think that's relatively low risk, myself.

Amy Junker - Robert W. Baird & Co.

Great. Thanks for the color. I appreciate it.

Robert S. Silberman - Chairman and Chief Executive Officer

Thank you Amy.

Operator

And next we will move to Gary Bisbee with Lehman Brothers.

Gary Bisbee - Lehman Brothers

Hi guys, good morning.

Robert S. Silberman - Chairman and Chief Executive Officer

Good morning, Gary.

Gary Bisbee - Lehman Brothers

I guess the first question just -- Rob, what's your take on how you expect the weakening economy to impact the business and in particular versus the last recession where I think your business grew nicely through it and that the consumer's balance sheet in lot more shape you might add some people given that you're focusing in all those students, mortgages aren't going well. Have you heard any feedback or anecdotal commentary from students that they are less willing to take on the debt even at attractive government rates? You go to college or do you think it is really not an issue?

Robert S. Silberman - Chairman and Chief Executive Officer

We haven't heard that Gary. I mean I don't think I could speak to the full universe of consumers, but we certainly haven't heard it and we certainly haven't seen it with regard to our enrollment statistics. In general, I think that a weakening economy doesn't have a whole lot of an impact on our business either positively or negatively. There is this kind of natural internal hedge that we have. One is that I think that particularly for a working adult the drive to return to school is first and foremost based on a sense of economic insecurity, a desire to improve their earnings potential in an economy that is limiting opportunities for them. And so weakening economy I think tends to accentuate that motivation.

On the other hand, a weakening economy may make it more difficult for corporations to continue to invest in their human capital and that can have a negative impact on our direct Corporate Alliance program. But in general it tends to balance out and I have always believed that our business is dependent on the broader economic shift of the economy from a manufacturing base to a knowledge base. It's not that affected by the more cyclical shifts associated with GNP or employment or interest rates or any of those other things. And so we are pretty sanguine with regard to that.

Gary Bisbee - Lehman Brothers

Okay. Moving on to P&L, it looks like over the last two quarters G&A has grown a bit faster, high-20s, a bit faster than what's the trend line has been, is there anything in particular going on there from these new people you have brought on board, or anything else, or is it not nothing out of the ordinary just maybe a few extra cost?

Robert S. Silberman - Chairman and Chief Executive Officer

I think we have been paying Mark too much. No, I actually think that probably the biggest contributor to the G&A line is bad debt and bad debt is up over the previous year although not so much this quarter 3.6 versus 3.5, and that's probably what's driving that.

Gary Bisbee - Lehman Brothers

Okay. I saw the in press release you issued restricted shares this year is that the new policy instead of options or is that going to be a mix of the two and then just technicality question, is the expense for the restricted stock, is that in the stock-based comp line that you break out in the press release or is that only the option? Thanks.

Robert S. Silberman - Chairman and Chief Executive Officer

Let me take it in reverse order. It is in the stock-based comp line, which we break out. It is what makes up our equity compensation plans. Our plan is based on restricted shares as opposed to stock options and it is not new. We've been doing that for three or four years now and we switched from stock options to restricted shares.

Gary Bisbee - Lehman Brothers

Okay. And then just one last one do you know Mark if your bond fund that you've got your money in owns any of these auction rate securities that have been front-page news over the last few days?

Mark C. Brown - Senior Vice President and Chief Financial Officer

I don't think they do, Gary.

Gary Bisbee - Lehman Brothers

But no change from your perspective in terms of the liquidity of that fund where you found your excess cash?

Mark C. Brown - Senior Vice President and Chief Financial Officer

Correct.

Gary Bisbee - Lehman Brothers

Okay. Thanks a lot.

Operator

And next we move on to Mark Marostica with Piper Jaffray.

Mark Zgutowicz - Piper Jaffray

Hi, guys. This is actually Mark Zgutowicz for Marostica. Just a question regarding the categories of your funded revenues, in last recessionary periods did you see any fluctuations in the corporate funding piece?

Robert S. Silberman - Chairman and Chief Executive Officer

We didn't, it stayed at about 20%. What we did see occasionally, I think this was in the summer of 2002 we’d have situations where Corporate Alliance partners would suggest they were concerned there was going to be a problem. But it didn't manifest itself really in 2002. I mean, I think it's a realistic issue if a corporation is quite concerned about expenditures and is reducing but the thing that I actually feel, again fairly confident about is most of the corporations that we have these alliances with tend to be pretty heavy investors in human capital and most of the tuition assistance programs are really designed to limit turnover in some of there lower-grade employees where that cost of the turnover is pretty significant to them.

So I mean… my answer to the previous question, I feel fairly strongly about. I do not believe we are going to see much of an impact with regard to our business should the economy enter a recession. But then that's also I don't really think we're going to get much of a positive impact either. We get a lot of questions as to whether we are counter-cyclical I really think we are acyclical.

Mark Zgutowicz - Piper Jaffray

True. That makes sense and just one clarification. The remaining 7% of funded revenues, is that all lot of pocket student funds?

Robert S. Silberman - Chairman and Chief Executive Officer

Out of their own pocket or family pockets, I mean we've got about 4% or so internationals students that don't qualify for any sort of Title IV loans. They tend to be direct payers and then it’s smattering of other things.

Mark Zgutowicz - Piper Jaffray

Okay. And the 3% private funds, how would you characterize that as a percent of enrollments?

Robert S. Silberman - Chairman and Chief Executive Officer

I think it's probably pretty similar. Yeah, may be slightly higher because I think they each borrow slightly smaller amount. I think it's pretty consistent with enrollment.

Mark Zgutowicz - Piper Jaffray

Okay. Great. And just one final question, in the election year, I'm just curious are you planning any shifts in your medium mix and should we expect advertising as a percent of revenue to be up year-over-year?

Robert S. Silberman - Chairman and Chief Executive Officer

No.

Mark Zgutowicz - Piper Jaffray

No, no. Okay.

Robert S. Silberman - Chairman and Chief Executive Officer

The marketing team is always planning tactical shifts in individual markets quarter-to-quarter but I don't believe that the election... cost of media associated with election is going to have a significant impact on how we do that.

Mark Zgutowicz - Piper Jaffray

Okay. Great. Thanks, guys.

Robert S. Silberman - Chairman and Chief Executive Officer

Thank you

Operator

And Suzanne Stein with Morgan Stanley will have our next question.

Suzanne Stein - Morgan Stanley

Hi. Most of my questions have been answered but I guess just quickly back to the funding issue. Let's say, for example, that the 25% declined in an environment that may be some of the corporations were pulling back on the aces where we have reimbursement programs. Do you have room on the Title IV side given the students that you serve to increase that or are you setup on the private loans side to increase that, where would that come from?

Robert S. Silberman - Chairman and Chief Executive Officer

We certainly have room on the Title IV side, because I mean as an institution, we are about 20 points… 25 points below any kind of regulatory limitation on that. I think you got to 90% of your revenue. The individual students have room because our tuition is not near the caps that they can borrow under. There are a lot of private lenders who have expressed an interest in lending to our students. So I'd say that there is significant availability there and then ultimately on the Title IV side, I mean you would always have the… as I said, you got to 90%. So I mean, I just, no I don't think there is plenty of availability, yes, plenty of capacity.

Suzanne Stein - Morgan Stanley

I was just thinking, kind of where the age of your students and what their entitles do, how much [inaudible], but okay, that has been pretty much it?

Robert S. Silberman - Chairman and Chief Executive Officer

I don't think there is a limitation with regard to the age of the student than their entitlement. The amount of students entitled to is independent of their age, under the Title IV program.

Suzanne Stein - Morgan Stanley

Okay. Thank you.

Robert S. Silberman - Chairman and Chief Executive Officer

Yes.

Operator

[Operator Instructions] And next we'll hear from Jerry Herman with Stifel Nicolaus.

Jerry Herman - Stifel Nicolaus & Company, Inc.

Good morning everybody. So, I'd like to go back to the selling and promotional line item?

Robert S. Silberman - Chairman and Chief Executive Officer

You remember the phone number, Jerry?

Jerry Herman - Stifel Nicolaus & Company, Inc.

It's in memory.

Robert S. Silberman - Chairman and Chief Executive Officer

Go ahead.

Jerry Herman - Stifel Nicolaus & Company, Inc.

Selling and promotion, it was actually down for the first time for the year since you've got there, you and your team. Should it start to level off at this point, now that you have some economies and critical mass in terms of where your position in the states?

Robert S. Silberman - Chairman and Chief Executive Officer

It really depends on our rate of expansion into new markets. That is the single biggest determinant. And hopefully, in the future, that rate of expansion will remain high. So I don't anticipate that it'll level off significantly or start to drop significantly, unless, we really concentrated for a period of time in markets where we've already had built a brand presence. But our desire is to expand to a national presence, and that entails requires us investing in building brand in a lot of markets that we have not operated in before. So over the mid term, the several year horizon, I would not look to see significant downward leverage on this line. I think it's going to remain a significant area of investment for us.

Jerry Herman - Stifel Nicolaus & Company, Inc.

Great. And then Robert, with regard to the program mix that you mentioned earlier, I think you said 65% business economics and accounting and then 20%, I am sorry, what do you say 25%?

Robert S. Silberman - Chairman and Chief Executive Officer

20% to 25%.

Jerry Herman - Stifel Nicolaus & Company, Inc.

20% to 25%?

Robert S. Silberman - Chairman and Chief Executive Officer

Yes.

Jerry Herman - Stifel Nicolaus & Company, Inc.

And then the rest should be education, healthcare and healthcare administration, public administration.

Robert S. Silberman - Chairman and Chief Executive Officer

Mainly, we’re up to about 10% of our population is that are those new masters programs. We also have, I guess economics is included in that, Jerry, that's basically it

Jerry Herman - Stifel Nicolaus & Company, Inc.

Any new news on program introductions, I know you guys talked a little bit about that at the Investor Day?

Robert S. Silberman - Chairman and Chief Executive Officer

Yes. I think that we will... first off within our existing programs, we are in the midst of a complete retrofit of our MBA curricular, and that should be hopefully completed by the fall term. And we have this three-year, so this tri-annual review of our key curricular will move on next year into our arts and science curricular. With regard to new programs, we actually do have a staff that's looking at one additional under graduate program, we are still aways from finalizing that but if something that we could see by the end of the year announced or hopefully by 2009. But it would be consistent with our focus on professional management competencies. We are not going to get great far feel from what we do now.

Jerry Herman - Stifel Nicolaus & Company, Inc.

Okay, great. Just one last one. I know you're proud of the increasing graduates last year in your shareholders letter. Can you care to update us on the number for '07, and just generally, can you speak to the graduation rates, any movement there?

Robert S. Silberman - Chairman and Chief Executive Officer

Yeah, and my… we'll print my letter to shareholders, put it on the website in a couple of weeks. But yeah, I do reference that again. I think it's over 7,000 students this year and it continues to be a significant increase over the previous year. Our graduation rate is something that we focus on quite a bit, and a large amount of investment attention from Dr. Stallard and her staff in terms of looking at across all of our programs. And from an administrative standpoint, it makes Sonya's job a little more difficult because we are up to about eight ceremonies in five or six different cities now, but that's the end game, that's really what we are trying to accomplish.

Jerry Herman - Stifel Nicolaus & Company, Inc.

Is there any specific percentage change year-over-year?

Robert S. Silberman - Chairman and Chief Executive Officer

I would think the percentage change is probably up 100 or so basis points. It's had a steady, but slight increase as our increase in continuation rate kind of moves through multi-year programs, but I don't have that right in front me Jerry.

Jerry Herman - Stifel Nicolaus & Company, Inc.

Great, thanks guys.

Robert S. Silberman - Chairman and Chief Executive Officer

Yeah.

Operator

And next we'll hear from Corey Greendale with First Analysis.

Corey Greendale - First Analysis

Good morning.

Robert S. Silberman - Chairman and Chief Executive Officer

Hi Corey.

Corey Greendale - First Analysis

Talking actually around philosophically I guess, about bad debt, I know those kind of question where you should target it, how close is it to the target or where do you… what are you aiming for at this point?

Robert S. Silberman - Chairman and Chief Executive Officer

What we target is rate of change. We want to make sure that our bad debt expense is not growing at a faster rate than our growth in students’ revenue, because that to us is a indicator that may be the quality of the student or the satisfaction of the student and their ability to complete the program is suffering. So we have run this business for a long period of time at around 2%, it's… over the last several years jumped up into the mid-threes. It was the jump itself that was of most concern to us about a year ago. I think a lot of the steps that we take and the focus that we've had on it has caused it to stabilize. I mean, ultimately we would like to see it go down and be zero, but what we really want to do is just watch it closely and make sure that it's as a percent of our revenue it's not increasing any faster than our growth of our business.

Corey Greendale - First Analysis

So the fact that it is stabilized and the fact that it is a little higher now than it was a few years ago is that a function of credit standards that slightly broader through the system, or what would you attribute that to?

Robert S. Silberman - Chairman and Chief Executive Officer

Well now that the credit standards actually have been tighten down. That's what I think has got it under control. I would attribute it to... there's really a couple of different major causes. One is the administrative efficiency with which you process your financial aid applications, your Title IV, your loan processing and we are certainly working closely at that. And then separately once you get it at a stable level so that it’s not changing it's really a question of, are your students that you are enrolling satisfied with the programs, do you have high continuation rates, low dropout or no shell [ph] rates and that for us over the last year has been quite positive. We have seen that stabilized.

Corey Greendale - First Analysis

Okay. Given that that has stabilized and I think you made nice strides in retention and I think your new campuses generally continue to ramp at least according to your plan and generally ahead of your plan, are there any leverage points you see where there is room for meaningful improvement or is your job at this point really to make sure it's tough, kind of keeps going as is and stay the course?

Robert S. Silberman - Chairman and Chief Executive Officer

Well, one thing, Corey that I really want my shareholders to understand is that with everything running perfectly, the single biggest challenge is expanding the university. Expanding an educational institution and maintaining a level of academic quality is not an easy thing to do. So I would characterize as our focus here, the Corporate Office and the University President's office is the idea that we want this organization to run as efficiently as possible both as an academic institution and as a company. And at the same time to be able to expand at a very rapid rate, very healthy rate, and we have a long ways to go. We have a lot expansion to do in order to accomplish that. We're only in 13 states out of 50 and we're probably only fully invested in three of those 13 states. So staying the course, I just don't want to minimize that as a focus or an obligation of this management team because we think we've a pretty attractive and aggressive growth profile ahead of us.

Corey Greendale - First Analysis

Yeah, and I understood. I think it's understood that it's a nontrivial task to maintain the consistency as you keep expanding. The last question I had, do you guys participate in the direct lending program at all and is that something that you would look at if there is disruptions to the self-program?

Robert S. Silberman - Chairman and Chief Executive Officer

We are available to participate. I don't believe any of our students have done so Mark, is that correct?

Mark C. Brown - Senior Vice President and Chief Financial Officer

I think that's correct, yeah.

Robert S. Silberman - Chairman and Chief Executive Officer

We would certainly, if for some reason private sector participants in the Title IV program were no longer available we would assist our students in dealing directly with the Federal government.

Corey Greendale - First Analysis

Great. Thanks very much.

Robert S. Silberman - Chairman and Chief Executive Officer

You bet. Thank you, Corey.

Operator

And next we move on to Brandon Dobell with William Blair.

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

Hi, guys.

Robert S. Silberman - Chairman and Chief Executive Officer

Hey, Brandon.

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

Couple of quick ones for you if you look at the, I guess, some of the demographic of the students that's wholly online versus out of area online, any difference there on what those students look like? Or what kind of courses they're taking? Or any shifts you're seeing in the directions that those people are taking?

Robert S. Silberman - Chairman and Chief Executive Officer

No. They tend to be very similar types of students.

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

Okay. Any difference between those students, how they are paying for education versus kind of the core on-campus students?

Mark C. Brown - Senior Vice President and Chief Financial Officer

Don't think so.

Robert S. Silberman - Chairman and Chief Executive Officer

I don't think so either. No I would say, no.

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

Okay. In your conversation with community colleges recently given there’s about an economic downturn recession, property tax issues, are they rethinking how they're going to approach their local market opportunities or they are looking to you guys for more potential opportunities? Just trying to gauge a sense... gauge their current level of expectations with their own enrollment base and how that might impact what you guys see?

Robert S. Silberman - Chairman and Chief Executive Officer

Yeah, that didn't happen back in 2002. We had a number of situations where community colleges came to us and said we got to shutdown this program, because we don't have the funding. And when we shift the students to you, or you build up, we weren’t… in 2002 we were really only in Maryland, Virginia and North Carolina. That was sort of the only places that we had visibility into that. I have not heard any of that to date. We do have a pretty expensive program of aligning ourselves with community colleges, do our articulation agreements, and in fact we have one campus, which is co-located on a community college in New Jersey but to date, Brandon I have not heard that raised.

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

Okay. And I think I might have missed your comments about corporate reimbursements or what their outlook or perspective is right now. If you could… just trying to get some more color there, I guess, in particular are there any particular states where you've seen outlier response is good or bad relative to your question about what their commitment is for tuition reimbursement?

Robert S. Silberman - Chairman and Chief Executive Officer

We have not seen anything negative. I think my response to previous question was a hypothetical, somebody asked that where would you anticipate there to be a problem if there was a recession. We have not seen anything to date. As a matter of fact, the sort of increased growth in the Global Online division really in large measure is driven by pretty healthy and significant improvements or increases in enrollment for many of our Corporate Alliance partners.

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

Great, thanks.

Robert S. Silberman - Chairman and Chief Executive Officer

You bet.

Operator

We will hear from Jeff Lee with Signal Hill.

Jeff Lee - Signal Hill

Hi, good morning.

Robert S. Silberman - Chairman and Chief Executive Officer

Good morning, Jeff.

Jeff Lee - Signal Hill

Over the last couple of years, total enrollment growth has been pretty consistent, but I know you've always said, you are sort of agnostic about the division between online growth and ground growth. But I think online growth has sort of kicked down over the last two years and on ground growth has kicked up over the last couple of years. What do you think is sort of driving that?

Robert S. Silberman - Chairman and Chief Executive Officer

I'm not sure I understand the question, Jeff, as you're referring to our Global Online or the number of students who in our campuses are taking all their classes online?

Jeff Lee - Signal Hill

Sort of Global Online, both of those combined?

Robert S. Silberman - Chairman and Chief Executive Officer

Yeah. Well, that actually is up, 32% growth is significantly higher than it's been in the last year or so and so…

Jeff Lee - Signal Hill

I mean the online enrollment as a total, both the online enrollments coming from campuses and the out of areas is down as a percentage… a growth percentage over the last couple of years?

Robert S. Silberman - Chairman and Chief Executive Officer

Yeah, the problem with that question, Jeff, is that we really don't think about it that way, because when we report those students who are enrolled at a campus, but take a 100% of their classes online that is a measurement of that quarter. They are not discrete students, i.e., that same student next quarter may take half their classes in the classroom or half online, or may take all of them in the classroom. So it's really a capacity utilization, kind of an inventory measure for us. Do we have enough professors who are prepared to teach accounting 100 online, and do we have enough in our Nashville campus and in our Tampa campus, in our Philadelphia campus. So that rate of growth as an individual item, it's almost not measurable, because the base is going to constantly changing.

The way we think about it is that the online classes are a fully integrated and integral part of Strayer University, it’s part of the value proposition we offer a student when they enroll, which is you enroll in Strayer University we're going to make it as logistically convenient as we can for you to attend, i.e., you can take classes at any of our physical campuses or you can take any of your classes online. And our focus is to make sure that the academic quality in all those venues is equivalent, because we do want to be agnostic. We do want to make it just available to our students and let them decide how they want to take it.

The only area of online, which is a discrete growth parameter, if you will, is the Global, because we don't have an opportunity to offer them classroom classes because we don't have a classroom there. But that as a strategy for us is frankly to bring that number down to zero, except for international students because over time we want to have a campus throughout the United States, and really every venue or someone would need one. So, that's how we think about it. I mean, it's... all I can do is, tell you how we look at it and why it is that we think that being agnostic as you put it and focusing on the needs of the students and the desires of the students is really the best approach on behalf of our owners.

Jeff Lee - Signal Hill

Okay, great. Then one more question. It looks like revenue per student growth is sort of kicked up a little bit over the course of the year. Is there any sort of seasonal impact there?

Robert S. Silberman - Chairman and Chief Executive Officer

There is no seasonal impact. The impact is the more stable mix of graduate and undergraduate students.

Jeff Lee - Signal Hill

Okay, great, thank you.

Robert S. Silberman - Chairman and Chief Executive Officer

Thank you, Jeff.

Operator

And we'll take a question from Kevin Doherty with Banc of America.

Kevin Doherty - Banc of America

Great, thanks guys. I know last quarter you talked about when about half of your new campuses would be opened up in new markets and about half in existing markets and it looks like the first four you have done already in existing market. So, is it still fair to assume that the balance of those will be in new markets and I guess, particularly I am trying to think about the impact on S&P and why that might pick up a little more in the next couple of quarters?

Robert S. Silberman - Chairman and Chief Executive Officer

The answer to your first question is, yes that is a fair assumption. I think for the reminder of the year, we will be in new markets. And the answer to your second question is, that can have a… that may require a slightly higher investment of... actually... probably the right way to answer that is, we are going to make the same amount of investment with regard to brand building and advertising, we will have less students in those new markets to amortize it over. So as a percent of revenue it can have an impact but I don't expect to see it to have a material impact as I said. In the first quarter, we actually expect some margin expansion. And I think that only opening nine campuses this year, opening nine, even though it's an increase versus eight, the year before, I think we should be able to handle that with fairly stable operating margins.

Kevin Doherty - Banc of America

Okay. And then just what's the good tax rate to use for the rest of the year, it kicked down in the fourth quarter, I'm just curious, if we should really use 38%?

Mark C. Brown - Senior Vice President and Chief Financial Officer

Yeah, Kevin, I think 38% it’s a good number to use.

Kevin Doherty - Banc of America

Thanks guys.

Robert S. Silberman - Chairman and Chief Executive Officer

Thank you.

Operator

And we have no further questions, at this time I will turn the call back over to Mr. Rob Silberman for any additional or closing remarks.

Robert S. Silberman - Chairman and Chief Executive Officer

Thank you operator, and thanks to all of our shareholders and interested participants. We look forward to talking with you again in our first quarter earnings call in May. Thank you.

Operator

And that will conclude today's conference. We thank you for your participation.

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Source: Strayer Education, Inc. Q4 2007 Earnings Call Transcript
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