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Capella Education Company (NASDAQ:CPLA)

Q1 2008 Earnings Call Transcript

May 1, 2008 9:00 am ET

Executives

Heide Erickson – Director of IR

Stephen Shank – Chairman & CEO (Chancellor and Director, Capella University)

Lois Martin – SVP & CFO

Ken Sobaski – President and COO (Director, Capella University)

Analysts

Amy Junker – Robert W. Baird & Co.

Marc Marostica – Piper Jaffray

Kelly Flynn – Credit Suisse

Trace Urdan – Signal Hill Capital

Brandon Dobell – William Blair

Jeff Silber – BMO Capital Markets

Corey Greendale – First Analysis

Jerry Herman – Steifel Nicolaus

Operator

Good morning and welcome to Capella First Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Ms. Heide Erickson, Director of Investor Relations for Capella University. Please go ahead.

Heide Erickson

Thank you, Cindy. And, again, good morning, everyone, and welcome to Capella Education Company's First Quarter 2008 Earnings Results Conference Call. Please note that this call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor provisions to the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risks and uncertainties.

Also, the Company believes that the expectations reflected in such statements are based upon reasonable assumptions. The Company's actual results could differ materially from those described in the forward-looking statements and are subject to a number of uncertainties and risks that the Company has identified in the first quarter news release. These and other factors are discussed in the Company's most recent 10-K filed with the SEC. Other unchanged factors may also be discussed in future 10-K and 10-Q filings. All filings are and will be available for viewing on our Web site at capellaeducation.com.

And now, I would like to turn the call over to Steve Shank, Chairman and Chief Executive Officer of Capella Education Company. Steve?

Stephen Shank

Thanks, Heide, and thanks to all of you for joining us this morning. With me today are Ken Sobolski, Capella's President and Chief Operating Officer and Lois Martin, Capella's Senior Vice President and Chief Financial Officer.

To summarize our performance for the first quarter of 2008, enrollments grew by 22.7% year over year to 23,500 learners. Revenue grew year over year by 23.5% to $65.3 million, and operating margins improved 140 basis points to 10.9%, a significant accomplishment given that we continue to invest in our business infrastructure and growth initiatives. In addition to our financial performance, we received reaffirmation of our accreditation by the Higher Learning Commission of the North Central Association, an important accomplishment for our university.

Our first quarter results demonstrate the soundness of our strategies, the differentiation of our business model and our ability to execute in a period of significant internal change related to our enterprise resource planning or ERP implementation. Our results reflected our talented team of Capella faculty and staff, as well as solid alignment with the needs of our adult learners.

Capella is highly differentiated in the post-secondary education market offering online degree programs specifically designed to serve adult learners in targeted professions. Our learner profile serves us well in the current time of economic uncertainty. The principle points of differentiation are we are exclusively online with 83% of our learners enrolled in graduate programs. We focus on serving targeted professions across three markets, education, health and human services and business management and technology. And we are committed to providing our learners with a superior educational experience and superior learning outcomes.

Our five operating strategies are driving growth and differentiation. We are now in our second year of delivering upon the three to five-year objectives we laid out upon going public in 2006. We continue to track well against these objectives, which are annual enrollment and revenue growth of 18% to 22% and year-over-year operating earnings growth of 25% to 30%, driven by a combination of revenue growth and margin expansion. As we grow and continue to increase efficiencies, we would expect operating margins during this timeframe to progressively increase into the high teens to low 20% range.

A key reason for the resilience of our business model is our positioning in three attractive markets, education, health and human services, and business management and technology. Within those markets, we focus on professions that value advanced degrees, have attractive employment patterns, and offer our learners a tangible benefit from achieving their academic credentials. This market positioning, combined with our focus on graduate adult learners, positions us well during economic uncertainty.

To date, developments in the student lending environment have not affected learners’ access to a Capella University education. While we have seen, and except to continue to see changes in Title IV lenders, we have strong Title IV lending relationships with nine recommended FFELP providers. Our lender lineup is well balanced with no one lender accounting for more than about 15% of our total loan volume. In addition, our learners' reliance on private loans is insignificant, less than 1% of revenue. We are proactively meeting with all of our recommended FFELP lenders to reinforce the point that Capella students are among the most attractive borrowers in the industry and that our lenders should prioritize Capella students in their lending decisions.

According to our recommended lenders, Capella students are particularly attractive due to their credit profiles, low default rates, and relatively high household income levels. We have received positive feedback from our recommended lenders regarding their intention to continue to lend to Capella students. We think we are well positioned with our FFELP lenders.

That being said, and as a proactive measure to address any potential future disruption in FFELP lending, Capella applied for and was recently approved to participate in the federal direct loan or FDL program. We believe this is a prudent step to support the educational financing needs of our learners. At this point in the process, we should be able to facilitate some level of lending through FDL as early as Q3 2008 if we decide to do so.

In summary, we believe that the attractiveness of our learners as borrowers, combined with our positive relationships with several strong financial institutions, positions us well to successfully navigate potential disruptions in the guaranteed lending program. We will continue to monitor developments in the credit markets, as well as any legislative actions in Washington.

Let me turn now to two other matters. First our ERP initiative, which is an important foundation piece for Capella's future growth. While Ken will provide a detailed update later in the call, I would like to give a brief overview. We are continuing to work through the task of adapting all of our work and information flows to the new student administration module we installed in January. This is a healthy process which will mature our organization, systems, and processes to support a growing business with industry-leading service and information capabilities.

As you may recall, our first quarter guidance took into account an expectation of a certain productivity and cost impact from this large-scale effort. We are progressing as expected but we do want to be clear that we will still be working through this substantial learning curve during the second quarter. As we move into the second half of the year, we would expect to be able to improve productivity and reduce costs related to the ERP and to begin to realize the substantial operational benefits from this infrastructure.

On a final note, I would like to briefly comment about our succession planning process. As I have communicated, my objective is to transition to retirement in an orderly and seamless manner for the Company. We have a committee of the Board of Directors which is leading a thorough and customary succession planning process. Our goal is to name our new CEO by the end of 2008.

Once a new CEO is appointed, I will be available to serve in any transitional role the Board deems appropriate to facilitate the succession. I'm confident that this is the right time for Capella's transition to our new leader. We have a deep and talented team and our strategies are working well. We are well positioned to continue executing successfully our long-term objectives.

And with that introduction, I'll now hand the call over to our Chief Financial Officer, Lois Martin.

Lois Martin

Thank you, Steve. Capella had a strong beginning to our fiscal year 2008. We were pleased with our enrollment and revenue growth, operating performance, and earnings for the first quarter of 2008, especially considering the magnitude of our ERP module implementations during the past two quarters, specifically the CRM and the student administration module.

Revenue for the three months ended March 31, 2008 was $65.3 million, an increase of 23.5% from the previous year, and slightly above our expectations, primarily due to stronger new enrollments in February and March and higher attendance at our first quarter colloquia. To provide additional color on year-over-year first quarter revenue growth, 20.3 percentage points of the growth came from enrollment, including (inaudible) new enrollment and improved persistence, and approximately 4.5 percentage points came from pricing. These increases were partially offset by year-over-year mix shift due to a larger proportion of Masters and Bachelors learners. However, despite the continuing mix shift, revenue per learner has continued to increase.

Total enrollment at the end of the first quarter of 2008 grew 22.7%, year over year. As Steve mentioned, 83% of our enrollment is in graduate programs, learners in doctoral programs made up 38% of our total enrollment at the end of the first quarter, masters 45%, and bachelors 15%. There was virtually no change in our overall mix by degree since December 31, 2007.

Enrollment in all of our degree programs increased in the double-digit percentage range. Our masters program increased by 29.4%, year over year, based on the strength of our differentiated programs, particularly those with special state licensures, accreditations, and affiliations, which are very attractive to our learners. The Masters programs are our largest and fastest growing, with nearly 10,700 learners.

First quarter Ph.D. and doctoral enrollment growth increased by 13.3% year over year to approximately 8,900 learners despite an approximate 35% increase in Ph.D. graduations during the fourth quarter 2007. We are delighted to report increased graduation, which is a reflection of our growth in the Ph.D. program and our efforts to support our learners in achieving their credentials. We have removed barriers and improved processes for our Ph.D. learners, particularly in the last phases of their Ph.D. program. This has resulted in an increased level of graduation which should run its course over the next two to three quarters. As previously shared and reflected in our long-term financial targets, we expect our Ph.D. and doctoral program to continue to grow in the low to mid teen.

Bachelor’s enrollment, which totaled approximately 3,800 learners, increased by 28.7% compared to last year. This increase from the prior year's bachelor growth rate was driven by the successful introduction of our public safety program during the latter half of 2007. We are pleased with the bachelor program's growth as it offers incremental enrollments in revenue from markets we have not historically been in, offers a solid future enrollment source for our graduate program, and positively contributes to our margin improvements.

In fact, we are very pleased with the continued increase in the bachelor's program profitability over the past several quarters and specifically quarter one's margin improvement. Not only does bachelor’s offer superior educational opportunities to adult learners, we see it as a key contributor to long-term growth, profitability, and shareholder value.

Operating income improved by 42% to $7.1 million for the quarter. Operating margins improved year over year by 140 basis points to 10.9% of revenue for the first quarter of 2008, which was at the high end of our expected range. We continue to deliver significant operating margin improvements as we absorbed mix changes and made significant investments in the ERP, our learners support services, and our strategic growth initiatives.

Instructional cost services as a percent of revenue was 44.5% of revenue, consistent with our expectations and with first quarter 2007. While we continued to achieve good leverage within this expense category in the first quarter, it was offset by our investments in persistence initiative and higher IT and learner support expenses related to our ERP implementation. To minimize the impact of the student administration module implementation, we focused on strengthening academic advising, financial aid counseling and other functions to support our learners during this time of significant transition.

Also as planned, marketing and promotional expenses decreased by 190 basis points to 32.8% of revenue for the first quarter 2008. The decline reflects the ongoing refinement of our quarterly new enrollment spend with the unique enrollment patterns of the professions we serve along with better alignment of lead generation with the capacity of our enrollment counselors. The decline also reflects our strategy to allocate our marketing investment towards higher performing initiatives that drive total enrollment.

General and administrative expenses increased 50 basis points to 11.8% of revenue in the first quarter of 2008 versus 2007 due to planned spending on ERP risk mitigation strategies, the timing of recruitment expenses, as well as an expected increase in bad debt expense. Bad debt expense increased from 1.3% to 1.7% year over year, primarily related to a condensed collection period and to change to a more conservative credit policy resulting from the student administration module implementation.

Earnings before interest, taxes, depreciation and amortization was $10 million during the first quarter 2008, up $2.5 million from last year, an increase of 33%. Other income for the quarter was $1.4 million, an increase of $300,000 versus prior year. The positive variance was driven primarily by an increase in interest income resulting from higher levels of cash and investments as compared to the prior year, partially offset by year-over-year lower interest rates.

The tax rate for the first quarter 2008 was 35.4%. This is down from a tax rate of 36.9% for the first quarter of 2007, reflecting our continued focus on tax mitigation strategies and a decrease in the impact of non-deductible stock-based compensation expense. Net income for the quarter was $5.5 million, a 43% increase over first quarter 2007.

Diluted earnings per share for the first quarter were $0.31, up $0.08 per share from last year. The actual number of shares outstanding at the end of first quarter 2008 was 17,010,235. As part of our $50 million share repurchase program, which was authorized by our Board of Directors on March 3, 2008, we repurchased a total of 394,000 shares for total consideration of $21.8 million.

This share repurchase reflects our ongoing commitment to using our capital in a disciplined matter to maximize value for our shareholders. It also reflects the strength of Capella's business model, including our ability to generate significant cash from operations even during a period of heavy investment. During April, we repurchased an additional 264,000 shares for a total consideration of $15.9 million.

Shifting our attention to the balance sheet, as of March 31, 2008, we had cash, cash equivalents, and marketable securities of $132 million compared to $144 million at the end of calendar year 2007, reflecting a generation of $10.1 million in cash from operating activities, a 61% increase year over year, offset by cash used to repurchase shares.

Capital expenditures were $4.4 million for the first quarter 2008, up from $3.6 million in first quarter 2007. The increase is primarily due to the implementation of a larger and more capital-intensive ERP module during the first quarter of 2008.

To summarize, we met our first quarter revenue and earnings objectives while continuing to make a long-term investment in our ERP implementation and our strategic growth initiative. We believe that these investments, combined with our strong financial condition, will enhance our foundation for ongoing future revenue growth and operating performance improvements. With that, let me hand the call over to our President and Chief Operating Officer, Ken Sobolski. Ken?

Ken Sobolski

Thank you, Lois, and good morning, everyone. Thank you for joining us. As Lois and Steve told you, we delivered solid performance during the first quarter. Highlights include the implementation of the students’ administration module of our ERP system, which was not without its expected challenges, and the continued success of our 2007 new program and specialization launches.

As you may recall, in 2007, we launched an unprecedented 31 new degree programs or specializations. After one to three quarters in the market, the revenue and enrollments from these launches are meeting our expectations. We are particularly pleased with those new launches that represent new niches or segments within the vertical markets we compete, such as public safety leadership, emergency management, gerontology, and early childhood education. With any new introduction, we build awareness and market penetration over time.

As a result, enrollments grow slowly as the series of courses offered as part of the new specialization build during the first year of the introduction and the number of courses within that series increase, all reasons why revenue and enrollment build over the first six to eight quarters of a new program introduction. New program and specialization launches will be an ongoing part of our future growth. In 2008, we expect to launch 8 to 12 new degree programs or specializations.

Our new product introductions had a modest impact on degree mix in the first quarter. Our mix shift expectations are reflected in our annual guidance and our three to five-year financial targets. The masters program is expected to continue to grow in the high 20% range above our overall Capella average. Bachelor’s is expected to grow at or near the overall Company average, and our Ph.D. and doctoral growth is expected to be in the low to mid-teen level.

In addition, and as we have historically experienced, we anticipate quarterly fluctuations in growth rates related to graduation rates, the timing of new product launches or shifts in our marketing spend from quarter to quarter and year over year. Specific to our Ph.D. and doctoral growth rate in the first quarter, our results were in line with both our three to five-year expectations and our own Q1 expectations.

Let me now focus on the investment we made this quarter in the implementation of our student administration module of the ERP system. The student administration module was the most comprehensive and, as expected, the most challenging module in the course of our entire ERP implementation.

This module covers all aspects of student records and supports the admission process, as well as billing, advising, and reporting. It also includes direct learner access to their financial statements and accounts, financial aid status, and their individual degree plans. Student records are connected to almost all major processes within Capella with more than 100,000 records involved.

Therefore, this implementation touched every learner and almost every process and employee of Capella. Given that virtually everyone connected with Capella was affected by this changeover, I am pleased to report that we successfully managed the impact to our learners with minimal exceptions and our staff did a fabulous job identifying and addressing these exceptions.

To prepare for the implementation, we went through extensive planning and evaluation of all of our processes. In many cases, that meant we completely reengineered and changed processes to work within the operating platform of PeopleSoft and to support automation and future scalability. The transition to the new system is going as planned, and technically, the system has been very stable. As expected, however, this transition has temporarily impacted both revenue growth and employee productivity.

In the 12 weeks since the deployment, this impact has lessened as we continue to move up the learning curve and also make needed changes to processes, software, and reporting. With our earlier ERP module implementations, it took an average of six to eight weeks to get back to previous productivity levels.

We expect the student admin implementation because of its breadth and comprehensiveness to require a longer time period to get back to previous productivity levels, particularly since it is based on quarterly cycles and we've yet to complete a full quarter cycle with the new module. With each additional quarterly cycle, the ease of use of the new processes will increase and so will efficiencies. As a result, we believe that in the second half of the year, we will begin to see improvements in productivity.

The implementation of our final ERP module, the student financial aid module, is much smaller and more gradual. We have been using this module since March 1 for processing of financial aid applications for the upcoming 2008/2009 academic year. Most learners don't apply for new financial aid until May or June. However, as of April 30, we had already completed almost 6,000 learner applications with the new student financial aid module.

Starting in July of this year, we will have the first distribution of funds processed with the new system. At that time, our ERP system will be fully implemented. Our organization went through a very significant amount of change, which has not always been easy, but our faculty and staff remain focused and executed the implementation very well with minimal impact on our learners.

We are looking forward to coming through this transition period so we can realize all the improvements in effectiveness, efficiency, and the learner experience that come with the new platform. With that, I would like to hand the call back over to Lois to discuss our outlook for the second quarter.

Lois Martin

Thank you, Ken. For the second quarter of 2008, we are expecting revenue to increase by 21% to 22.5% and total enrollment to increase year over year by 18.5% to 20%. Quarter two revenue growth will be driven by enrollment growth, pricing, larger colloquia, and the one week of carryover revenue from quarter one February start. As we discussed in last quarter's call, we moved the February monthly start back one week to minimize the potential impact of the ERP implementation on our new learners.

While quarter two enrollment growth is projected to be slightly less than quarter one, it is not unexpected, as it reflects the quarter one enrollment conversion cycle in which we had the greatest productivity impact from our ERP implementation. As Steve and Ken have mentioned, we are pleased with our enrollment counselors' and advisors' ability to maintain enrollment growth at or above our three to five-year target even during this period of significant change.

Operating margins for the second quarter is expected to grow over 30% to approximately 12% to 12.5% of revenue. Included in our quarter two earnings will be expenses associated with our final ERP module implementation and expenses to increase future efficiency levels within the learner enrollment and records processes, offset by the inherent leverage in our business model.

With regard to specific P&L line items in quarter two, we expect to see year-over-year leverage in marketing and promotions and G&A, reflecting our more effective alignment of spend with our enrollment pattern and continued leverage of fixed costs. With regard to quarter two instructional expenses, we expect this line item to be flat to slightly up as a percent of revenue, year over year, reflecting our higher staffing levels in learner support functions related to the ERP implementation.

We expect bad debt expense as a percent of revenue to be relatively flat with the prior year bad debt level of 1.7% and our effective tax rate to be approximately 36%. Other income for the second quarter is expected to be down sequentially due to lower interest rates and a lower net average cash position due to our share repurchase program.

Year over year other income is expected to be relatively flat during the second quarter. Reflecting first quarter's results and second quarter's guidance, we continue to expect full year revenue growth to be in the range of 20% to 22%, enrollment growth in the range of 21% to 22% from 2007 to 2008, and operating margins to be in the 14% to 15% range consistent with our previous guidance. As is our practice, we will provide more detailed quarter three guidance during our quarter two earnings call.

With that, I would like to hand the call back over to Steve.

Stephen Shank

Thanks, Lois. Our strategies are based on balancing growth and margin improvement and also based on balancing short-term and long-term investments in order to create value for our shareholders. In the first quarter, we delivered strong revenue growth and operating margin improvements while executing on our short-term goals and making significant investments to enhance future leverage and growth opportunities. We made major progress in working through the heaviest phase of the ERP implementation.

This is a very important long-term investment, which will support our ongoing margin improvement objectives and we have taken proactive steps designed to address potential developments in the Title IV lending environment based on the high attractiveness of Capella learners to FFELP lenders. We have sound strategies, strong execution and continued momentum to deliver on our short and long-term goals. That concludes our prepared remarks. We now will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) And we'll take our first question today from Amy Junker with Robert Baird.

Amy Junker – Robert W. Baird & Co.

Good morning. If I could just start with perhaps the ERP implementation and a couple of questions just along that, can you just share with us what are the real issues with the productivity? Is it that the enrollment counselors were spending time in training so they weren't on the phone or what's the – I guess the question is what's the complication there? Is it that they're taking a slower time to ramp people up? If you could just help me understand that, I would appreciate it.

Ken Sobolski

Hi, Amy. This is Ken Sobolski. Thanks for joining us this morning. Let's start by saying there are no issues other than those we anticipated and the things that you've described are in fact exactly the kind of issues that result in productivity levels declining. So, think of it in term as time away from training, the time it takes to learn a new system, you're used to using something for the last five years and now you've got five weeks into using it. It really isn’t simple as that and all were reflecting is what we've been trying to communicate each quarter for the last two quarters and we're seeing what we expected and just talking about it.

Lois Martin

Amy, this is Lois, just one other thing to add to maybe add some color to that. In addition, underneath the business rules of PeopleSoft, in some cases there are now different departments doing pieces of the process than they did it before. So, again, not only is it people getting used to doing what they did before in a different way, in some cases groups have taken on pieces of the process that they never did before.

Amy Junker – Robert W. Baird & Co.

Great, that's helpful. And if I can just ask a follow up, and Lois, I guess this is directed towards you. With your second quarter guidance, how much spend, even if it's just broadly numbers, are you anticipating for the ERP? I'm just wondering what the operating margin would be if you stripped out that ERP component of it? How much we're really seeing that drag down in the margins? And if you can give the context both, I guess, in second quarter and first quarter, it would be helpful.

Lois Martin

Sure. Amy, we don't actually disclose that in detail but I will share that it's a substantial amount in the hundreds of thousands.

Amy Junker – Robert W. Baird & Co.

Okay, great. I'll pass it on. Thank you.

Operator

And we'll take our next question from Mark Marostica with Piper Jaffray.

Mark Marostica – Piper Jaffray

Lois, thank you and good morning. First question actually relates to, Lois, your comment where you saw stronger new enrollment in February and March and I'm curious whether that continued into April.

Lois Martin

Actually, our new enrollment to date has actually been in line with our expectations, which has been as we mentioned on last quarter's call, our expectation was for new enrollment in '08 to mirror or be similar to '07.

Mark Marostica – Piper Jaffray

And in conjunction with that and the statement also that you've seen increasingly improving productivity since the implementation, would it be fair to say that your conversion rates have been improving along that same line?

Lois Martin

Clearly, conversion rates are part of the productivity impact and yes, I would say you could look across the board at all the different processes that we are continuing to see literally by the week. Improvement again is small at first but we continue to make improvement across the board.

Mark Marostica – Piper Jaffray

Great, thanks for the color on that. And then in regards to the leverage that you achieved on the selling and promotion line this quarter is pretty significant. I'm curious whether you changed your lead mix in any way, shape or form and if you could describe any changes on that line item that drove the efficiency there?

Ken Sobolski

No, there really weren't any change. Mark, this is Ken Sobolski. There really were no changes in the way we spend money to generate leads. The leverage comes from things like non-working and just normal changes in quarterly fluctuations as I described.

Mark Marostica – Piper Jaffray

And then, last question and I'll turn it over. I'm also wondering whether or not through the remainder of the year you anticipate the timing of the start periods to be altered compared to the year-ago period or if we should be in sync with '07 for the remainder of the year?

Lois Martin

Mark, this is Lois. Actually, no, we don't anticipate any changes in our start times. We only made the one exception to February and that was again to reduce the risk associated with the FA implementation.

Mark Marostica – Piper Jaffray

Oka, great. I'll turn it over.

Operator

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

Kelly Flynn – Credit Suisse

Thanks, just more on this ERP implementation. I'm a little confused. You said that the productivity drag is waning from here forward. Having said that, I'm confused as to why you expect Q2 enrollment growth to be so much worse than Q1. I know you explained a lot and I appreciate that but maybe just on that particular point, a couple more answers would be helpful. And then also that all said, do you think Q2 will be the worst enrollment growth for the year as far as of the four quarters?

Lois Martin

Good morning, Kelly. This is Lois.

Kelly Flynn – Credit Suisse

Hi.

Lois Martin

I'll start with the question and then if Ken or Steve want to jump in, they can. I actually don't think quarter two is significantly worse but, also, if you think about the lead conversion timeframe, our lead conversion timeframe is between three to six months. So, if you think about when those leads came in, when they would normally convert to enrollment, you can see or you can see the lag effect of why that impacts and why we are mentioning it as an impact into second quarter because it was those leads that came in the end of '07 and in the first quarter of '08 that would normally in our timeframe convert into enrollments in second quarter, and that was clearly the timeframe of the largest change in productivity impact.

Kelly Flynn – Credit Suisse

Okay. So, just a second question based on what you said, do you think Q2 should be the worst quarter for enrollment growth, at least relative to the impact of the ERP?

Lois Martin

We believe that any remaining productivity impact is still including in our annual guidance, which we gave last quarter, which we are maintaining.

Kelly Flynn – Credit Suisse

Okay. Thank you.

Operator

And we'll take our next question from Trace Urdan with Signal Hill.

Trace Urdan – Signal Hill

Hi, good morning. Just I'm wondering if you suggested that the slightly lower rate of enrollment growth was anticipated and I'm wondering if there's a corresponding lightening up in the marketing spend around lead generation activities to correspond with that that we might see in the quarter as well?

Lois Martin

Good morning, Trace. If I don't answer your question, if I'm misunderstanding it, let me know. But we had anticipated the level of marketing spend that we had in first quarter. We believed it was the optimal level again, based on the items that I mentioned both. It’s continuing to refine our strategy of understanding when, where and how to target the professions we serve along with just continuing to better understand and monitor and track the capacity of our enrollment counselors. Having said that, we do expect, in our annual guidance, we mentioned that we do expect some decrease in marketing and promotion even for the year. So, as I mentioned first/second quarter guidance, I would continue to expect some modest decline, maybe not as much as the quarter one year over year, but some decline in second quarter year over year in marketing and promotion.

Ken Sobolski

If I might add a little bit to that, Trace. This is Ken Sobolski. It's also important to note that when you think about the risk mitigation spending that we have put in for ERP, that some of it in fact, directly affects enrollments but it doesn't necessarily show up in the M&P line. It might show up in instructional because it might be early hires or training of our advisors, it might be spending against persistence. So, you shouldn't always assume that changes in M&P relates to changes in enrollment. There's a lot of ways we drive enrollment throughout the P&L.

Trace Urdan – Signal Hill

I understand that, Ken. My question was just much simpler than that, which is just to have you tell us that you're not buying more lead than you're going to be able to process, given the challenges that you described around ERP. And I think I heard Lois say that that was the case?

Lois Martin

You are correct.

Trace Urdan – Signal Hill

Okay. We also noted that one of colleagues that covers IT securities saw that you guys had a presence with this recent RSA show in San Francisco promoting your IT security programs. I know this is part of the marketing activity that you engage in that's sort of unique relative to a number of the other companies that we look at in this space. I'm wondering if you guys might be able to quantify how many of those types of industry-related shows you participate in on an annual basis or maybe how many you did last year?

Stephen Shank

Trace, this is Steve. And I don't know that we can quantify that in response to your question but I would say that if you broaden your question also to our participation in professional events like Society of Human Resource Management having our faculty out speaking at gatherings, it is a significant piece of our academic or our activity to build brand and build awareness and build leads because reputation for our university is a big thing.

Ken Sobolski

It also is a way in which we make sure that we are in tap with the profession and understanding how the professions are evolving because that has impact on competencies and how we design our curriculum. So, when you see us at events like that, it's a twofold effort, one to market but also to make sure that we are tapped into that profession fully.

Trace Urdan – Signal Hill

Okay. But is it the case that your booth might be busy a couple of times a quarter or is it the case that do you have booths that are in constant motion, 52 weeks a year? (inaudible)

Stephen Shank

I don't know that we can provide more guidance than what we said on that. We have an active program of being present and in front of the key professions we're building reputation with. And I think that's about the best we can do right now in responding to your question.

Trace Urdan – Signal Hill

All right, I'll let you move on. Thank you.

Operator

And we'll take our next question from Brandon Dobell with William Blair.

Brandon Dobell – William Blair

Hi, thanks. Going back to your comments about the program launches and the special accreditations and associations and things like that. If you take a look at the entire breadth of program you have now by Ph.D., Masters, and Bachelors, how many or what percentage have something that you think is a special, difficult to get, one-of-a-kind aspect in accreditation and association, nobody else has something like that. And is there an opportunity to increase that percentage to a much larger number?

Ken Sobolski

I don't think we want to reveal something like that but it is something that we are in fact, trying to continue to increase. So, we have an array of existing programs and specializations that we're trying to either get some kind of an affiliation or some kind of an accreditation, some kind of an endorsement with. As we have announced, quarter after quarter, we gain those on a regular basis and build those into our programs. We also, as we develop the eight to twelve new programs and specializations we want to launch this year, try to build those things in from the beginning. But, in many cases, those are things that you actually can't achieve until you're teaching the course and have learners in your programs. But it is an active part of our efforts because it's that kind of differentiation at the profession level that we think matters most.

Lois Martin

And, Brandon, this is Lois. Just one other final point is, as we've talked before even, for example, with our CACREP specialized accreditation, even if the degree you're speaking is not CACREP specialized accredited because it doesn't apply, the fact that you have CACREP on a certain degree actually provides a halo effect, provides additional credibility to other degrees within that same portfolio.

Brandon Dobell – William Blair

Okay, thanks. On the marketing side of the ledger, it sounds like there's maybe perhaps a minor shift away from the historical focus on branding the institution or branding the experience to maybe more of an execution perspective. Am I overstating that or do you feel like you've got enough momentum with the money you spent on branding it, now you can start to shift over to being a little bit more tactful on the enrollment marketing spending?

Lois Martin

Great question, Brandon. Actually, when we look at the breakout of where we're spending the money in marketing, it's actually remained relatively consistent as far as within our different buckets of direct, lead acquisitions, selling, branding, and then our overhead piece. So, I've not seen nor am I anticipating a significant change in the makeup.

Ken Sobolski

It might appear to be that way because we are really getting better at targeting the professions and focusing our spending at the profession. As you've heard us say before, if you're a part of the human resource profession, we want you to know about us. If you're not and you don't know about us, that's okay. So, we're very targeted with how we spend our brand, building an awareness, building dollars within the specific professions that we've targeted.

Brandon Dobell – William Blair

Okay. And I think, Lois, one of the comments you made was hiring some extra people in Q1 and Q2 just to make sure that nothing fell through the cracks as people ramped up on productivity. Would it be fair to expect that those are temporary hires or are those just hires that would've happened throughout the course of the year but you just push them into an earlier timeframe to compensate for some of the ERP issues or will those people be going off the payroll as the year progresses?

Lois Martin

Actually, it's a combination, Brandon. There are clearly some contractors and temporaries that we brought it, and in some cases that we also have just hired slightly ahead of the curve. So, what we anticipated hires that maybe, for example, maybe you traditionally do in third quarter or late second quarter, beginning of third quarter as you ramp up for your seasonality, we've actually pulled those forward by let's say, a couple of months, several weeks in order to be able to have those resources during this more critical time.

Brandon Dobell – William Blair

Okay. And then final question related back to the leads from the previous question. If you look at the progression of leads in January, February, March, and into April, I would assume from your enrollment guidance that you are quite confident with how those lead flows look and your expectations around conversion rates in the back half of the year. Anything on the lead flow side, timing, sources, prices that we should be aware of that maybe caught you by surprise?

Lois Martin

No, we haven't. And we've not really seen any significant change in for example, our cost for enrollment, etcetera.

Brandon Dobell – William Blair

Okay, great. Thanks.

Operator

And we'll take our next question from Jeff Silber with BMO Capital Markets.

Jeff Silber – BMO Capital Markets

Thanks so much. I appreciate the update you gave us on the lending environment. I just was wondering in terms of corporate tuition reimbursement, can you remind us roughly either a percentage of revenues or percentage of students what the impact of that typically is and have you seen any changes due to the economic environment right now? Thanks.

Lois Martin

Good morning, Jeff, it's Lois. Actually, about it ranges between 15% to 17%, 18% by quarter how much of our learners have some form of corporate or come through our cap corporate alliance agreement. Now, each company obviously, has different tuition assistance levels but we actually keep a pretty good pulse on that corporate relationship, what we're seeing there, and we have not heard any indication of at least our corporate alliance partners or those that we are currently in negotiation with, talking about reducing their tuition assistance or pulling back on that. So, we've not seen it.

Stephen Shank

And, Jeff, this is Steve. I would just say again that our corporate reimbursement relations tend to be with Fortune 1000 companies. The attitude that they have is that this is a benefit and we have not seen in prior periods of downturns or potency to cut that benefit back.

Ken Sobolski

And I'll just add one additional piece of color, if I could, Jeff. This is Ken. We also continue to expand the number of institutions that we have those agreements with and we're not seeing a slowing in the pace of adding institutions. And in fact, as our health and human services market business grows, we have actually done a real good job this year of adding healthcare institutions, healthcare providers, those kind of things to the mix of people who are in fact providing tuition reimbursement for their employees.

Jeff Silber – BMO Capital Markets

Okay. I really appreciate the detail and the color. Thanks. I hate to go back to this ERP implementation, but I just had a follow-up question there. Lois, you had mentioned, in terms of your guidance, the impact was roughly in the $100,000s range. Was that about the same that we same in the first quarter in terms of incremental costs and how was that split between instructional costs and services and G&A?

Lois Martin

Actually the rate between first and second quarter is actually relatively flat between the two but actually it split a significant amount is up in instructional. As we've talked about where we've really put in the risk mitigation is in our learner facing departments and processes and staffed those up. So, whether that's advising, whether that's learner support, whether it's financial aid counseling. So, clearly, a more significant piece of that would be up in instructional.

Jeff Silber – BMO Capital Markets

So, in theory when we start to get into the back half of the year and next year, that's where we would see probably more significant leverage at least in terms of this issue?

Lois Martin

I think you would see it there, along with obviously G&A.

Jeff Silber – BMO Capital Markets

Okay, great. And one more follow-up question. Can you give us what stock-based compensation was in the quarter?

Lois Martin

Sure. It’s about $1 million.

Jeff Silber – BMO Capital Markets

All right. Fantastic.

Lois Martin

And that compares to about $700,000 last year, first quarter.

Jeff Silber – BMO Capital Markets

Okay, great. Thanks so much.

Operator

And we'll take our next question from Corey Greendale of First Analysis.

Corey Greendale – First Analysis

Hi. Good morning.

Lois Martin

Good morning.

Corey Greendale – First Analysis

First of all, I wanted to ask about the difference in the Q2 guidance between the enrollment growth and the revenue growth. Is that differential entirely explained by the one week in revenue shift or is there also pricing in that?

Lois Martin

Another factor of it is as you pointed, it’s that one week. But in addition, the colloquia that we are having in second quarter, while the same number as the prior year are significantly larger this year than they were last year. So, that also obviously doesn't impact enrollment but it clearly impacts revenue.

Corey Greendale – First Analysis

Okay. And if you look at the full year guidance, it calls for enrollment growth and revenue growth to be at the same level. Is there something going on with the colloquia, for example, that would result in revenue growth being below enrollment growth in Q3 and Q4?

Lois Martin

Yes. I'm not anticipating that the size difference that we are seeing in second quarter will continue in the last half of the year.

Corey Greendale – First Analysis

Okay. So, in other words --

Lois Martin

Expect those to modulate. But then in addition, we have highlighted that we expect lower pricing in the back half of the year as far as price increases – that our price increase for the coming academic year will be lower than it was in the prior year, in line. And, again, all that's reflected in our annual guidance.

Corey Greendale – First Analysis

Okay. And then, also, again, back to the ERP and I apologize for that. Is it reasonable to assume given that it sounds like you're through the worst parts, the inefficiencies in these couple of quarters that you would see more margin expansion year over year in the back half of the year than you're going to see in Q1 and Q2?

Lois Martin

I think there is – that's a logical explanation. Again, we will continue to work through this as Ken mentioned there is a little longer tail to the student administration module than the other modules. But, in addition, as you remember, the third and the fourth quarter are typically our highest quarters and again as we've seen in historical years, there is usually a significant change in the operating margin in the last part of the year, especially fourth quarter than there is in the first half of the year.

Corey Greendale – First Analysis

Okay. And I'm trying to think about whether there are other longer-term impacts to this other than the positive ones. Has there been any change in employee turnover as a result of the ERP? People just getting fed up with it and leaving or anything like that?

Lois Martin

Our actual annualized employee turnover is running right now about 13%, which is very comparable to last year at this time.

Corey Greendale – First Analysis

Great. And just last one. Could you I don’t have the copy you disclosed, so as a reminder or tell us what's the duration of the re-accreditation and when are you next up for re-accreditation?

Stephen Shank

Corey, this is Steve. We follow the accreditation format of AQIP. So, this is actually an annual review followed by a more major review and I believe that reaffirmation cycle is seven years. Sometimes that can wander around a little bit, but we are actively engaged in accreditation process all the time on a continuous improvement program, which is why we like this format.

Corey Greendale – First Analysis

Understood. Thanks very much.

Operator

And we'll take our next question from Jerry Herman with Steifel Nicolaus.

Jerry Herman – Steifel Nicolaus

Good, thanks. Good morning, everybody. Questions about the program introductions, obviously a key driver to your growth, but are you willing to quantify in any way the impact that those new programs had, either in terms of contribution to year-over-year growth or percentage of total population currently in those programs? I realize it's early but just some measure of productivity?

Ken Sobolski

Actually – good morning and thank you for that question. But, Jerry, that's not something we're willing to disclose other than the comments I made that the launches from last year are in fact, meeting our expectations and we're particularly pleased with those that take us into new niches and segments that we weren't in. Beyond that, I'd really rather not go into more detail.

Jerry Herman – Steifel Nicolaus

You won't even say less than 10% or more than 5%?

Ken Sobolski

Bigger than a bread basket but smaller than a toaster kind of thing?

Jerry Herman – Steifel Nicolaus

Yes, that's the idea.

Ken Sobolski

No.

Jerry Herman – Steifel Nicolaus

All right. We'll have to bribe you or something, I don't know. Any new color on the fourth vertical programming?

Ken Sobolski

As we said before, our learners and prospective learners will be the first ones to learn about what the fourth vertical market is that we are entering, which is exactly as it's been. As we launch new specializations and new programs, we are in the midst of finalizing that decision and putting in place the resources to begin executing into that market. And as we've also said, we don't need to be into the fourth vertical market within the next two years to achieve the growth target that we've guided to, but it's going to take us that two to three years to really fill the pipeline with the programs and specializations to enter that market.

Jerry Herman – Steifel Nicolaus

Okay, great. Thanks. And then I just want to talk a little bit about marketing and promotion. The year-over-year increase in dollar terms was the lowest since fourth quarter of '06 and I know there was a bit of an anomaly there. Is sort of the 17% year-over-year growth rate in the first quarter more of a reasonable run rate growth rate going forward? And as part of that, I'm wondering if you're seeing any influence whatsoever of a slowing economy even though I don't perceive you guys as particular counter-cyclical but are you seeing anything there?

Lois Martin

Jerry, this is Lois. We do expect some shift in the timing of our marketing spend, as I mentioned, just as we get more and more refined in both understanding the professions we serve along with the capacity and monitoring and even the ERP will help us take that to a new level of monitoring the capacity of our enrollment counselors. But I do, as we've mentioned, in total, we expect some leverage within that line for the year. I do believe you'll see that at a higher level in the first half of the year than you do the back half of the year.

Jerry Herman – Steifel Nicolaus

Okay, great. And just one housekeeping question, Lois. With regard to the second quarter revenues, you mentioned the February start shift. Will the second quarter benefit from any additional revenue recognition period or am I not understanding that right?

Lois Martin

The one week of revenue from February starts because we moved February starts back one week. One week moved into the second quarter. So, a additional week moved into second quarter, so there's one more week of revenue from the February start sitting in second quarter revenue and in the guidance that I gave you.

Jerry Herman – Steifel Nicolaus

Okay. That's great. Thanks, guys. I appreciate it.

Operator

And at this time, the scheduled time for the conference is almost concluded. So, I would like to turn the conference back over to Mr. Shank for any additional closing remarks.

Stephen Shank

We look forward to continued execution against our short and long-term objectives and strategies. Before we sign off, I would like to remind you that we have our first Investor and Analyst day scheduled for June 4 in Minneapolis. Please contact Heide Erickson for more information on this event or if you have further questions regarding the quarter we were unable to deal with on this call. Thank you for joining us today and have a great day.

Operator

Thank you. That does conclude today's conference. You may disconnect at this time.

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