The Washington Post Company Shareholders Day Transcript

| About: Graham Holdings (GHC)

The Washington Post Company (WPO) Shareholders Day September 9, 2011 8:30 AM ET


Donald Graham – Chairman and CEO, The Washington Post

Andrew Rosen – Chairman and CEO, Kaplan, Inc.

Katharine Weymouth – Publisher, The Washington Post and CEO, Washington Post Media

Hal Jones – SVP, Finance and CFO, The Washington Post

Alan Frank – President and CEO, Post-Newsweek

Tom Might – President & CEO, Cable ONE

Matthew Seelye – Chief Financial Officer, Kaplan, Inc.

Donald Graham

Good morning. I know I’m also talking to people on the Internet, but I can’t help looking around this room and thinking what a pleasure it is to be here. One of the disadvantages of the lighting is I can’t see each and every one of you. But in this room, there are a lot of the most interested longest term, sharpest, at times most critical, but always in a constructive way of the shareholders of the Washington Post Company.

This is our sixth shareholders day. And I’m proud of the tradition. We don’t do a comparable day on Wall Street. We don’t do a comparable day for the greater investor community, and you are not invited to come here unless you own stock in the Post Company. Our focus in all our shareholder communications and our focus in management is we run the place for the benefit of the shareholders. And I say that in the face of the stock price that’s much lower than it once was and much lower than I wish it were.

I’ll talk a little about my own financial position in a minute. But as CEO of this company, I have one objective, which is to increase the long-term value of the company for those who are our shareholders, and shareholders are always advised that our primary financial goals have nothing to do with short-term financial objectives and everything to do with long-term financial objectives. That will be the focus of the morning and that’s the focus of everyday at the Washington Post Company.

I really appreciated that so many people have turned out so early. This program will go on for 3.5 hours with a break. It will – the purpose is to take people through a great deal of the core information about the businesses that make up the Washington Post Company. We tried to do some of this in our written financial communications and we tried to do this in interim and quarterly financial communications.

But we have four businesses – four big businesses and several small ones. All of our businesses are changing. None is the kind of business that our largest shareholder, Mr. Buffett, said he wants to accumulate that it’s just going to roll on unchanged for 20 years. In fact, I think it’s a considerable determent to our own shareholders day that we’re not in the food and beverage business.

And assuming we’re not going to be in two years, and I think the odds are very high that we’re not, I think we ought to adopt See’s Candy as an indirect part of the company since we own some Berkshire shares. And I really envy the amount that Warren and Charlie eat in the course of one of these meetings in Omaha, and the tea is a core substitute. But all are welcome.

In addition to nearly expressing appreciation for those of you who are here, I have brought along a thoughtful gift for some of the shareholders who are present. To enjoy the full benefit of this gift, you also have to be the possessor of an iPad 2. But I have caused to be designed these attractive Washington Post iPad covers featuring portraits of two of the leading residents of Washington, both of whom happen to be pundits. And I have four of these up here.

So the first four shareholders who are iPad 2 possessors, and shake me out at the break, are welcome to one. They have a nifty little – they have a switch on the back. They flip into nine different standup positions and you can – if you can figure out the diagram on the back, you’re better than me. So there we go. I think turning out at 8.30 deserves something.

The business part of the meeting is going to last till, what is it, 12.30. And we’ll be followed by – we're also offering lunch that you saw we’re setting up for it outside. The lunch will be accompanied by a reporter panel. A big part of the company’s business is news and journalism. It’s been a big two days with the Republican debate on night before last and with President Obama’s speech last night.

And the panel to be moderated by Ann McDaniel, a career journalist, who is now a corporate executive with us; will include Dan Balz, the Post’s Chief Correspondent, who has an absolutely terrific piece on the political reaction of President Obama’s speech in the paper this morning; Susan Glasser, the Editor in Chief of our amazing magazine and website Foreign Policy, which I cannot recommend you to highly; and Post’s Financial Reporter, Neil Irwin, who is in charge – as far as we are concerned, Neil is in charge of the United States Economy and takes a little occasional questioning about that from us and this will give you an opportunity to questioning too.

So here is how the morning will work and here are my purposes in having such a meeting. I will give a very brief introduction and overview with the company. The principal purpose of the morning is not for me to talk to you. The principal purpose is for you to hear from the four people who run our major businesses, and those are Katharine Weymouth, publisher of the Washington Post; Alan Frank, the CEO of Post-Newsweek television stations; Andy Rosen, who runs Kaplan; and Tom Might, who runs Cable ONE.

Also here and available to take your questions, and here is where it comes that I wish I could see everybody in the audience, but if you got questions for others, Ronnie Dillon, our General Counsel, is here; Bo Jones, our Vice-Chair and Chairman of the Washington Post; Hal Jones, our Chief Financial Officer, is here along with Wally Cooney, who keeps the corporate books; and Matt Seelye, the Chief Financial Officer of Kaplan; Chris Ma is out there somewhere who is a corporate vice president, Senior Vice President, but also is the publisher of Express and El Tiempo Latino; Vijay Ravindran, our Chief Digital Officer, who by the way is excused as soon as he wants to leave because he’s crashing on a big project; and Melissa Mack from Kaplan. There are others I’ve seen coming in in the course of the morning, including Marcus Brauchli, the Editor of Post, who is sitting in the back.

However, because our Annual Meeting of Shareholders is dominated by questions about Post journalism, I am not going to entertain questions about journalism, about whether we print some news stories somebody didn’t like, we really do a lot of that at the annual meeting, and the focus today is business.

One other matter. I would like your questions submitted in writing, please. And Rima, that means asking you and others who are here, Rose [ph] and Bernie that collect the questions and bring them up to me, the purpose of this is simply that I will sort through the questions, I will make sure the hardest ones get asked, and at the end of each presentation by the four people I have assigned – the four people I’ve already introduced, send up your questions for them, I will ask them to cover the questions and we’ll get to it. I think we really should have time for just about every question that all of you have, but we’ll see.

Now, talk about embarrassing situations, I see at least four members of our Board in the audience and I want to introduce them. I’m not sure if there are more because I can’t see everybody. But I see Larry Thompson, the former Deputy Attorney General of the United States and just retired General Counsel of PepsiCo. I see Chris Davis, who is our lead director, right behind Larry, and is the Head of Davis Advisers. I see Tom Gayner, the Chairman of our Audit Committee and the President of part of the Markel insurance firm in Richmond.

And I saw Rick Wagoner come in. OK. Rick Wagoner, who has joined the Post Board a year ago and who is of course the retired CEO of General Motors. And I also want to introduce a former member of our Board of Directors, who I think went on roughly the same time I did at 1974, George Gillespie, who is in the second row and whose contributions to this company are incalculable, as you can read in Katharine Graham memoir.

If you are on the web and listening in on the webcast player, there is a questions tab. Just click on that, type out your question and click Submit, and that question will also be given to me to blend into those being asked of our folks. So we started these shareholder days 11 years ago with the aim of telling you, the people who care most directly about the future of the company, about our view of the futures of each of our businesses and about our plans in general. It’s been two years since we had such a day, and that’s roughly the interval at which these have occurred in the past.

Attendance seems to show that that’s a good cycle that people are interested enough to come every couple of years and people want to talk about having them more often. We’re open to that, but this seems to work. Since our last meeting in 2009, it’s funny, it’s interesting that we met in 2009 because it was just an awful year. It was an unspeakable year from a financial point of view. And that was particularly so at the Post and its Post-Newsweek television stations, which are advertising-based.

We looked – Alan Frank has been in the television broadcast business in his entire career, and I think it’s safe to say that we’ve never seen a year like 2009. Nobody in the television business had lived through a year when advertising was down by the percentages that it fell in that year. And we looked at what happened, and Alan and I really were not too sure of what was going to happen in 2010 and 2011. We didn’t know how much and when broadcast advertising would come back.

So Post-Newsweek Stations is the business that has improved the most since we met in 2009. There are undoubtedly different views in this room of long-term prospects for local television stations. The last two years results at least for Post-Newsweek have turned out to be far better than I for one would have predicted two years ago.

Alan will be reporting to you on the year we’ve had so far in 2011 and the outlook to the extent we can forecast to you. You certainly say that in 2012 there’s going to be a Presidential election and the summer Olympics. So that automatically means two major sources of advertising we didn’t have in 2011. But I know on the minds of some of you are the long-term outlook for local television stations such as ours. And Alan will also address your questions on that.

Again looking back to two years ago, you heard Tom Might on that occasion describe a strategic review then ongoing at Cable ONE. The environment has changed so dramatically in cable that our review in 2009 was before Netflix was a major factor. It was before a whole lot of things that have happened since.

As shareholders, Warren likes to say that he does not want shareholders at Berkshire who give themselves as owners of a piece of paper with a price that goes up and down in the market every day. He wants them to give themselves as people who own a percentage of a company, a share in a company that has a value and that you can figure out your own definition of what that value is.

Cable ONE is a complicated business. When you say the cable business, it brings to mind all kinds of creased up positions and expectations that really don’t apply to Cable ONE. Cable ONE is a very different business to most of the other publicly traded companies. And as Tom was talking to the Board of Directors yesterday describing the recent events at Cable ONE, I was struck by the number of times he said, unlike the rest of the industry, we’re not positioned to what everyone else is doing.

Because we serve different markets, not because we’re clustered or think we’re smarter or whatnot, but because we have customers who are a little different than most where our markets are different, so our technology is different, our capital spend is different and our plans are different. You need to – if you want to know what the value of the Washington Post Company is, you need to spend a little time and understand Cable ONE and understand Tom’s sense of its likely future, which he will be talking about a bit later.

Katharine is also going to be talking. And again, we talked in 2009, and 2009 was the worst year in the history of the Washington Post newspaper. The newspaper lost $164 million in GAAP reported earnings. About $96 million of that was from plant closing expenses, buyout costs and accelerated depreciation, true one-time costs largely related – not entirely, but very largely related to the closing of our College Park plant, which I still feel enormously sad about. I was there on the last night those presses were running and it – there's no point reminiscing about that. But much of that 2009 loss was a plain old loss.

And again, it was the result of a drastic decline in ad revenues just like Post-Newsweek Stations’ experience. In 2010, Katharine, Steve Hills, the President of Washington Post newspaper, who is the second row; Marcus (inaudible), our chief financial person at the Washington Post, got together and put the Post back on its feet by cutting expenses so effectively that the Post had significant positive cash flow for the year only 12 months later after the terrible outcome in 2009.

Now, what do I mean by positive free cash flow? And I am normally a – we don’t go in for fancy statistics in the Washington Post. I hope you’ve never seen the locution EBITDA in one of our shareholder communications and I hope you never will, but because we have capital expense and we are in businesses from slightly in the case of Post-Newsweek Stations to very capital intensive in the case of Cable ONE.

And so reporting when we – there are companies who present their reported financial statistics in a lot of different ways. I’m basically Mr. GAAP. So why am I calling your attention to the free cash flow at the Washington Post Company? Because again, if you want to understand the value of what you own as a shareholder in this company, you have to focus on the fact that we have an over-funded pension plan.

Now, this is not something shareholders in many other companies have to focus on. Our pension plan is significantly over-funded – I'm smiling at Rick Wagoner as I say this. This was a new experience for Rick coming here. But the reason we have an over-funded pension plan is summed up into two words, Warren Buffett. Again, K. Graham describes in personal history how in the late 1970s Warren sent her an extensive memo about corporate pension funds, urging that we change from our then investors to investors he recommended who just knocked it out of the park for the ensuing 35 years.

The result is that if you look at the segments, the segment reporting in the back of our 10-K, you will see that the Post reports overall a pension credit owing to the fact that the pension fund is over-funded. It is a lesser pension credit that we reported in past years, but it is overall – we have not put money, have not put cash into our pension fund for years because it is so over-funded. However, the actuaries dividing up the extent of our pension credit for reasons that I cannot explain.

And if there are questions on this subject, I’ll have to refer them to Hal Jones or to the Pricewaterhouse folks who are present. But the lion’s share of the pension credit is booked in corporate, if I’m correct, Hal. And a pension expense is booked at the Washington Post newspaper. It is a non-cash pension expense. It is booked there only for actuarial reasons, and the Post has not – I'm the former publisher of the Post. Post hadn’t put a dime of cash into the pension fund for decades because of the superlative performance of our investors. By the way, the Pricewaterhouse represented it was present, or John, me and Kevin Mitchell, and I’m pleased that they are here and glad to introduce them.

So if you study the Post results every year, you want to look back at the segment reporting and check the effect of the pension credit as well as just looking at the reported numbers from quarter-to-quarter. Now, the Post is also pursuing a raft of digital projects – the Post Company is, and a couple of which we think have some serious potential.

I’ll describe and demonstrate the performance of our WaPo Labs team on a little site called that we initiated earlier this year and that I demonstrate at our annual meeting, but that’s changed a little bit since then. The team’s work under Vijay’s leadership could be of great importance to our news business, and I’ll talk a little about that when I introduce Trove.

At Kaplan, the biggest changes have taken place as a result of two things. First, our Test-Prep business, which was still profitable in 2009, was not profitable in 2010 and has not been so far in 2011. The second, of course, as I’ve repeated in frequent shareholder communications, was a drastic change in the political climate affecting for profit education companies, including Kaplan.

The US Department of Education initially drafted regulations that would have made it almost impossible for profit education companies to lower income students. These students have been important to Kaplan’s enrollments both at our campuses and our online university. I thought the Department’s efforts at regulation were wildly misguided and said so as wildly as I could wherever I could.

I don’t think my arguments had any effect at all. But in response to more than 90,000 comments on the proposed regulations, mostly adverse, the Department agreed to soften its provision somewhat while leaving the basic framework of regulation unchanged. The train was slowed down, but it stayed on the same set of tracks. And to me, it’s the wrong set of tracks.

The Department will regulate for profit universities in great part by comparing the debt incurred by students taking the programs with the incomes of the same students a few years after they graduate, to save only the most apparent problem with this former regulation, the income of our students would have been far different in 2007 than they would be this year because more of them had jobs and because the economy is at such a different level.

And a definition of the value of education that fluctuates with the national economic cycle doesn’t strike me as much of a definition. The value of an education is in what you learn and not necessarily in what you’re earning two years later – two years after graduating from college. Some of us older folks were in the United States Army and not earning very much, but that didn’t define the value of our education.

Another challenge for Kaplan Higher Education has been the economic cycle. In 2008 and ’09, as the recession hit, there was a huge influx of students. Since then, the number of students is down dramatically as unemployment has remained fairly constant and for-profit schools have generally increased student selectivity, eliminating lower income students due to the Department’s regulations. The company and I remain strongly committed to this business, and I underline strongly.

I think it is a business that serves a valuable societal purpose, but I also think that going forward if we run it right, it should be a very good business for our shareholders. Nobody knows it better than Andy Rosen who built the business as the Head of Kaplan Higher Education through the early part of the 2000’s and he’ll be talking to you in some detail.

In Test-Prep, I think Kaplan’s management team under John Polstein is making significant progress, improving the programs we offer and increasing our market share among students in these high stakes exams. At international, we continue to make solid progress in Europe, Asia and Australia, building businesses that will have some sustained value.

In our Higher Ed business, I talked about this a moment ago, we continue to remain profitable although not nearly as profitable as we were last year or two years ago. But I’m confident of the value of the education we are offering and of the future of that business. I do not – again, back to first principles. I do not in any sense run Kaplan or the Washington Post or Cable TV or our television stations, and I want to make that clear. The leadership-wise with the people running these businesses, the people you will hear from immediately after me.

But given the impact of the regulations that were proposed and those that were eventually adopted, I’ve obviously spent a lot over the last two years analyzing and thinking about how Kaplan is performing and how we feel about the quality of the products and the student outcomes. I myself am more convinced than ever that what we offer is important and valuable and that the business is a good one.

Shareholders’ Day gives you, people who own this company, the opportunity to hear from our management, size up the people you hear from, form your own conclusions as shareholders about what is the potential of our business. My own role during these proceeding would be the same as always. I will review your questions for each person presenting, including myself. You’re welcome to ask questions as well of people who are not presenting, if you wish, to people – company officials who are not presenting. And I will put the questions to the presenters.

Since I do have the microphone today, I want to address one story that’s been reported from time to time to my own frustration by a variety of reputable news organizations. I have not sold a share of Washington Post Company stock in over 30 years nor has any trust for my benefit. You should know if you own Post Company stock that more than 90 percent of my own net worth is in Post stock. So it is totally important to my own financial picture.

I am also a trustee of several trusts for the benefit of other members of my family. From time to time, these family members who also started out life heavily concentrated in Post stock have asked their trustees to sell stock when, for example, they want to buy a house. And the trust then sold the stock. Because I am a trustee and the CEO of the company, I signed an SEC report, which always reports that the trust has sold the stock, but that it is not a trust for my benefit.

However, from time to time, news organization, who are perhaps understandably confused by this, report that Don Graham is selling stock in the Washington Post Company. On each of these cases, Ann McDaniel or Rima tell their own contacts, the news organization, and ask them to correct it. Sometimes they do, sometimes they don’t. If you see any such stories in the future, you may safely assume they are not true. I am – as I say, I have not sold any shares in the Post. I do not intend to sell any shares in the Post. I have on rare occasions made charitable gifts of Post shares, but here the reporting is generally quite clear.

So I’ve talked a little about short-term and long-term values, but I’m obviously disappointed about the price of our stock relative to where it’s been in the past. But it is also obvious to readers of our financial reports that given the recent stock prices, we’ve been very aggressive repurchasers of our stock in recent years.

Yesterday, the Board of Directors authorized the company to acquire, not at one time, but when we see fit, up to 750,000 shares of its Class B common stock. This has been a recurring – such authorizations have been a recurring event over the decade. The number of shares outstanding in the company has now shrunk from 20 million when we went public in 1971 to just below 8 million today with more than a 14 percent reduction in shares outstanding since the end of 2009.

What this means to you and to me since is that your shares of Washington Post Company stock, however many they are, own a proportionately greater share of our businesses, Kaplan, Cable ONE, Post-Newsweek Stations, the Washington Post or whatever. And this may be important if these businesses turn out to be as valuable as I think they may. I have been a shareholder since 1971 and there are others in this room who are the same. Since there were then 20 million outstanding and there’s now just under 8 million, as I wrote in the annual report.

That means that each shareholder owns 2.5 times the proportionate interest in the companies without themselves putting up any money. Most of these repurchases were done by K. Graham at a time when the logic of share repurchases was much less widely understood. There weren’t that many companies repurchasing stock. It was a simply brilliant thing to do in the late ‘70s and early ‘80s. And if we’re right, it’s also a reasonable thing for us to be doing now.

Our balance sheet continues to be strong. At the second quarter, we had about $400 million in long-term debt, which does not come due until 2019, about $300 million in cash and more than $325 million in marketable securities.

Now, Andy Rosen, the CEO of Kaplan, the former long time CEO of Kaplan Higher Education, will give you a picture of what we teach when we teach it to and what we think the results are. Are we into the wrong order here? No, we are right. We’re not going to indulge in a retroactive argument about the Department of Education’s regulations. That is – those have been adopted and we will live with them in the future.

As shareholders, you should want to know whether our commitment to this business is as sensible as we in management think it is and what the prospects for this business may be immediately and in the longer term. We think the prospects for this business are good. We think education is a field that cries out for innovation and that’s something we can offer. We have some technology confidence and we have a raft of very able managers eager to make the contribution to the future of their students.

We also, I think, have particularly outstanding leadership. A couple of people from Kaplan are here. But the leadership of Kaplan is very centered in Andy. He’s been with Kaplan since 1991 or ’92 in a variety of roles. He was the Head of Test-Prep at one time. And he knows the business inside and out. And I’m going to repeat myself a little this morning as I introduced these folks. I cannot tell you how proud I am that he is the leader of a business that’s so important to the future of the company and I also think this has such a potentially good future. Andy Rosen.

Andrew Rosen

Well, thank you, Don. I want to correct on one thing. You said centered in Andy. I mean, yes, I’m the CEO. But we have a very deep and broad management team that you will be proud of, and at various times I’d love for you to have a chance to meet. It has obviously been a pretty eventful couple of years since the last Shareholders’ Day.

And I want to try to spend a little time explaining to you where we are today. And in doing so, I’m conscious to the fact that we are sort of akin to traditional education here. There’s some people who know a lot about Kaplan in the audience, and there’s some people who really are just getting to know Kaplan and a lot of what you all know about Kaplan will come today.

Now, we’re going to have a question-and-answer session afterwards and we’re going to give you a chance to ask your specific questions. But I want you to know that a Kaplan education would try to personalize this process so that the people who know a lot about Kaplan can go very deep and the people who don’t know as much get the background that they need. And so I’m going to try to do the best I can to do what traditional teachers do, which is teach to the middle of the room and wait for the question period. But a Kaplan education would be more adapted than this.

OK. Let’s – Kaplan is obviously a very diversified education company. In fact, it’s the largest diversified education company in the world. At least we believe it to be the case. And it includes vocational education, people who are trying to change their careers or build a new career. It includes test preparation for which Kaplan has been known for many years. It includes professional education. So your real estate broker or your insurance broker or your securities broker probably came through a Kaplan program to get their education.

We have a very substantial international operation. About, as you’re going to see, a quarter of our business is outside of the United States. And of course, we have university degree granting institutions. All of these institutions function under this mission statement. Kaplan helps individuals achieve their educational and career goals. We build futures one success story at a time.

And that’s been an important mission statement for us for coming up on two decades because we serve over 1 million students a year across our various companies. And it includes people who have access to shorter-term programs or books at many millions. But we think of each student as an individual because each person has his or her own goal. And we are a great company to the extent that we could be responsive to the fact that each individual is seeking their own future.

We’re made up of four units; Kaplan Higher Education, Test Prep, International and Kaplan Ventures. And just to give you a relative sizing, based on the first half revenue. Kaplan Higher Ed is 60 percent of Kaplan. Kaplan Test Prep, the sort of original part of Kaplan, is 12 percent. International, as I mentioned, is a 25 percent; and Kaplan Ventures is a smaller piece, 3 percent.

We often have liked to show this graph because it really is entrancingly beautiful. And there’s a few things that you should know about this graph. And I always tried to explain them. First, in the early years when the Washington Post Company owned Kaplan, there wasn’t a lot of growth for many – I mean, I’m talking about for over a decade. There was very little growth.

A lot of companies would not have accepted that kind of performance over many years. There was a lot going on. The business had to be transformed several times. But you can see that that patience, the long-term orientation that Don talked about, has been well rewarded over the years.

The other thing is that this creates the feeling that Kaplan is an ever upward kind of phenomenon. And that hasn’t been the case. And I think it’s – we don’t talk about the future, but I think it’s fair to say that in 2011 we will be stepping down in the revenue. But this is the revenue picture. The operating income picture has always been a little more choppy.

So you can see in the first few years that the Washington Post Company owned Kaplan, it was essentially the only game in town when people wanted to get test operations. But that started to change in the late ‘80s and early ‘90s as test became available – other companies entered the market and there was a disruption. Kaplan had been built for a world in which it was the only player.

When competitors came in, they were able to take market share and really cause hurdles that lasted for quite a few years. So we were – by the late 1990s, we were getting to a place where I had to get back on to the right track and that’s when the Internet bubble started hitting. There were people who were entering the test prep marketplace, because we were still mostly test prep. And we felt the need to build some businesses that were responses to those. And you can see from that disruption we had other problems.

Now, having said that, Kaplan University was born. It was one of those businesses that we created during this period. And so it paid off well. But you as shareholders, if you were trying to come in and out of the business might have been frustrated during this period. So then, things got much better. But in 2005, we started to be more weighted in Higher Ed. The economy changed. The economy got better, and we had excess capacity.

Our student counts in Higher Ed dropped, and you can see we had a drop-off. And then we’ve had some great years since, including financially a spectacular year in 2010 but is undescribed. We got hit with a very significant disruption in 2010, driven first by a political environment that was quite adverse to for-profit higher Ed.

So I’m going to talk about that disruption and the impact that it has had on us. But you should know that Kaplan has not been that graceful upward-slopping institution as it appears on the revenue line. We have actually dealt with a whole series of disruptions along the way. Kaplan has always had to adapt itself to new environments, as Don was suggesting. And we’re doing that right now. But it’s had a big impact. I mean, I don’t want to sugar-coat that this disruption has had.

Just to set this for you, I mean, Don just showed you this, but this is 2009/2010 full year and you can see we had just a wonderful financial year last year, but the disruption was emerging. And you can see that our revenues down and our operating income down significantly in the first half of this year.

One of the things you should understand about our business is that it has what analysts would call leverage. Meaning, look at last year. 11 percent revenue increase and a 66 percent operating income increase. It’s equivalent – what we described since I was filling the back of the classroom, the students in the back of the classroom don’t cost you very much more, but they are very good for your margins. The reverse is also true.

So let’s go through in detail each of our businesses. But I’d like you to understand something about how we deal with disruption and business in general. And that is, we are focused first and foremost on excellence in our student outcome. Our student experience and outcome is paramount for the people at Kaplan.

And second, we want to be a great place for our employees to work, because we feel if it’s a great place to work, then our employees will use that energy and enthusiasm with our students and help make their experience great. We believe that we’re able to accomplish both of those, then we’ll have a strong shareholder return.

But as shareholders, you should understand this is sort of the order that we think about it. We think it first, especially when the storms hit, as they have over the last year. The first thing we’re going to focus on is protecting and enhancing our student outcomes. We’re not going to be taking money away from delivery of the students because we want to add a little bit more money in the short-term to our returns.

And we believe in the long run, and that’s how we think about the business. That is what’s going to be best for our shareholders. But if you are thinking that maybe we’ll just lop some money out of the investment that we make in our students’ experience so that we can get that return, then you’re going to be disappointed over time. And sometimes that means that the results will be a little more choppy than elsewhere. But we think in the long run, this is the right approach.

So let’s talk first about Higher Education. Just to set the scene, the typical Kaplan Higher Education student to – these are people who are going for post-secondary education, is different than the traditional college student that many of us think about our children has gone to college, we’ve gone to college.

The average age of a Kaplan student is 33; mostly women, working full-time, often with kids. Most of them have some previous college experience. Meaning, they’ve gone to college somewhere else and for whatever reason it hasn’t worked out, they haven’t finished. Those students may have been to multiple institutions before they come to us. They are viewed as failures by the system in each of those previous institutions, because if they didn’t complete in that institution, they are dropped.

Some come to us and then move on and go to another institution over time as they patch together their education over a lifetime because they’ve got all kinds of other things going on in their life. But their goal is career advancement as a general matter. These are not people who are coming to school just because they love school. They are coming because they want to do better in their careers.

We deliver through our 79 campuses around the United States and through online. And the majority of our students are pursuing their education at Kaplan Higher Ed entirely online. We are accredited by major crediting agencies, and our environment is such that our students typically don’t have the cash in their pockets to pay for their education. So they are borrowing money from the federal government in order to get their education. We are, of course, highly regulated and have long been highly regulated.

And as Don suggested, our business is countercyclical. Meaning, as a general matter, when the economy gets bad, more people come to school. When the economy gets good, people take the jobs that are available. I say generally that’s the case, because when you have a long recession like the one we are having right now, there is a degree to which students start losing confidence that there’s going to be a job at the end of their education. I think we’re just seeing what the impact is of all of that.

Academically, a little over a third of our students are pursuing their Bachelor’s degree. A little under a third are pursuing their Associate’s degree, about a quarter are pursuing their diplomas, and about 10 percent Master’s degrees. And we are predominantly 45 percent allied health focused in terms of the types of course the people are pursuing. Then legal and business are the next largest with information technology being another key area for us.

So I wanted to show you – this is the sector – we had been part within higher Ed of a sector, a group of private sector institutions that has grown quite a bit over the course of the last decade. And they have done so because of a couple of reasons. One, the economy has been shaking over the period, but really the information economy has created a lot of demand for further education. But our traditional system has not really been able to expand capacity to provide for the demand.

The only place for that increased capacity is coming from is for-profit institutions. And so that has – what it means is there’s a lot of demand going to a narrow whole and it’s driven pretty significant growth. Now, Kaplan has actually grown over this period. And this is – you will note that it ends here in June 2010. So we’re going to come back to that.

But Kaplan has actually grown faster than the sector as a whole. And we like to think that this is because we’re delivering particularly strong value to our students. And a lot of you have seen these slides that Don had put them in his shareholder letter and has talked about them in a number of forms. But I just want to remind you of some of this information. These are what’s called – what the Department of Education calls Risk Factors. There are specific factors that the Department has determined based on data are more likely to lead a student to drop out.

So if you are single parent or if you are financially independent of your parents, you are not getting money from your parents or you’re older or you work full time, you’re less likely to graduate. And what you can see from this chart is that the for-profit sector, which is the light blue here, is much more likely to have students with risk. That is they are much more likely to have students who are less likely to graduate. And Kaplan is more likely still than the market as a whole. And yet, we’ve also been much more effective in graduating students with risk.

So what this graph shows you is the graduation rates – the blue line is the graduation rates across all of American higher Ed. And what it says is the students who don’t have risk factors, the American higher education system is pretty decent to graduate at 60 percent. Some people think it must be 90 percent because they went to topnotch schools that have that kind of thing.

But all of American higher Ed, for students, these are 18 to 24-year old kids whose education is being paid for or supported by their parents. They don’t have children of their own and not working. Their graduation rate is a little over 60 percent. But look at how much it drops. You add just one of those risk factors and when you add two or more across all of American higher Ed, only 17 percent of students graduate; one in six. That’s really a pretty shocking figure, I think.

Now, Kaplan deals mostly with students with multiple risk factors. So we have very few students with zero or one. But at two or more risk factors, our graduation rates are almost double the rest of American higher education. This is for undergraduate degree seeking students or Associate’s and Master’s degree. The same is true of shorter term programs.

So people who are going to two years or less, here the American graduation rate across America higher Ed is 30 percent. It’s higher because these are shorter term programs. But ours is almost double at 58 percent. So we’re doing, I think – we're very proud and I think you as shareholders can be proud of the work that Kaplan does with its sets of students who have their challenges in getting and graduate.

And I’m not going to spend much time on this, but I want to say in terms of taxpayer contribution, for-profit institutions – for two-year, institutions are getting about $3,600 in taxpayer funding. And I’m not going to go into all the calculations here. But it includes loan defaults and things like that. $3,600 – public institutions, it’s almost $7,000. So we’re actually a very good deal, and we get to four-year, the gap is tremendous.

And so we’re getting higher graduation rates for much less contribution in the part of the taxpayer. In fact, if all of American higher Ed had Kaplan’s metrics, the country would have 800,000 more graduates a year and would pay – the taxpayers would pay $41 billion less. So we have felt that those are the kinds of dynamics that are leading to the growth in the sector and in Kaplan in particular.

That view of the world is not shared by everyone. And what we had in last year was another big disruption. And the disruption was a political one, in that the Department of Education got worried that more and more companies – more and more for-profit companies and their students were accessing federal funding. And they became nervous about that and put together a whole set of proposals for regulation.

These are – there are a number of publicly traded stocks. This seemed like a good opportunity for short sellers to drive down the prices of those stocks. They got into the mix. Then the media got into the mix. The Senate got into the mix. And that was a fairly unpleasant period. And we are faced across the sector it had an impact on enrollment. And you will see that the sector that has been growing very steadily has declined over the last year.

We at Kaplan took a number of steps to make sure that this environment that we could be protected in an environment that was very difficult. It wasn’t just a sector generally. It was individual companies that got targeted, and we were among them, by the media, by short sellers and so on. And we took some steps including, as Don suggested, changing the nature of the students that we are seeking to attract.

We’ve been very successful with lower income students. We said we’re proud of how we perform with low income students. But the changing regulatory environment makes it punishing to deal with lower income students, and so we have adjusted the types of students that we seek to bring into our institutions and we’ve done that. We’ve also added with the Kaplan, which many of you have heard, it’s been called the most pro-student innovation in American higher Ed in a number of years.

That – the Kaplan commitment enabled students to enter a Kaplan program. And for the first four or five weeks depending on the program, they can assess whether they are getting works for them, whether they are getting what they were promised. And if they decide that it’s not right for them, they can withdraw without any tuition obligation. That’s a very unusual system, and it’s very costly.

US shareholders are bearing the burden for that program. But I told you that regarding principles, we’re going to put our students first, and we feel like this is something that is good for students, and in the long-term, will be good for our shareholders as well. But you can see that it hit us – in terms of enrollments, it hit us particularly hard.

And if you are sort of tracking performance, you will see that our new student entries over the course of the last several quarters have trailed the rest of the market. It’s because we’ve taken, I would say, more dramatic and more decisive steps to put ourselves in a position that the new regulatory environment is seeking. We don’t necessarily think that the new regulatory environment is a good idea, but it is the environment that exists and we’re going to deal with it appropriately.

So, this is Kaplan Higher Ed. Again, Don just showed you this. But I just want you to see the impact of some of these things, as we’ve become more selective in the kinds of students that we attract and we’ve brought in the Kaplan commitment. Our revenue year-to-date at Kaplan Higher Ed is down 24 percent, and you can see that the operating income down 56 percent.

So, going forward, what we’re going to be doing with Kaplan Higher Ed? Well, first, as I say, continue our focus on academic excellence. We think that even though these results that I described of graduation rates are quite good and very powerful within the overall American system, we feel like we’re in the first to second inning here, and we are investing heavily in technology and pedagogy that we think will drive Kaplan to be an outstanding place for all students to go to school.

And so we – again, we think about this over the long-term. We’re proud of what we’re doing and what we have done, and we’re not pulling away from the kind of investment in academic excellence. We’ll continue to add new programs in campuses. We are actively engaged in balancing our expense base. We have fewer students. We have less revenue, and it’s incumbent upon us to take care of the expense line, and we’re doing that. We are taking seriously the issues that we have to make sure that we continue to be a good business.

Differentiate the renovation. As I mentioned, we’re investing heavily in innovation. And obviously, we have and we will maintain our regulatory compliance focus. That’s important, our students to get access to federal funds. And the federal government does have the right to be sure that we are compliant with the rules.

So, how do we – it's been a rough year because there’s been a lot going on here. How do we sort of sustain ourselves during all that period? How should you all sustain yourself as we think about the ups and downs of this business and line of work? Well, we sustain ourselves with this number. 300,000. That’s the number of graduates of Kaplan Higher Education Institutions over the course of the last decade. 300,000.

That’s 300,000 people who have improved their lives, who are getting better jobs, who are being better role models for the kids, who are providing for their families better because of the impact that we have had on them. Not many institutions – I’m trying to think if there are any traditional institutions that have 300,000 graduates over the course of the last decade. But we can all be proud of them. And because you don’t have the opportunity to sort of see who it is that we are working with, I just want to take a minute or so and show you who our students are. If we can...

[Video Presentation]

That’s an accomplishment. And so when times are tough, it’s really thinking about each of these students for us and I hope for you that makes you feel like – well, I feel like I’m just a really lucky person to be able to work and help enable what we just – what you just saw here, and everything that goes into that.

So, let me go to Kaplan Test Prep. As Don said, Kaplan Test Prep has been a wonderful business over many years. It is still by far the largest test preparation company, but it is in the process of a transformation. The market has changed and we’re changing with it and we’re investing to make that change happen. Let me tell you about – the typical test prep student I think most people in this room have an idea, in preparing for high sec exam and they wanted to move on in their education and in their career.

We deliver – this is something that’s quite different from what you saw at the last shareholder meeting. We deliver this to 68 centers and online. Couple of years ago, it was 150 centers. So, we had been changing the nature of our test prep delivery because of the rise of online. We are deemphasizing our center-based delivery and we’re still offering lots of place-based education, but it’s through more temporary space, and we’re directing lot of students online. That a lot of the expensing you see is coming from the expense of closing a lot of those centers. The operating environment, it’s a mature market and it’s highly competitive.

And at your discretionary you can’t depend in the sense that in this economy, people are less willing to pay for an LSAT class or an SAT class, and that’s just something that all of the competitors in this space are facing. Dozens of programs, you are familiar with most of these. The pre-college SAT, PSAT and so on then, the course education – the test education to medical school, law school, business school or to get your – if you are a medical school, to get your licensor in law schools to get your license and or nursing done.

About half of test prep is we call graduate, that’s the – again, the test again, the business school, the law school helps pre-college and legal. This is a market – that’s a pretty good one. What I mean, you don’t go off demand, yeah, there’s been a little of dip in high school graduates, but it’s a school dip across – after many years of growth. So, we feel like there is plenty of demand. This is the number of high school graduates. We’re in a world in which education is increasingly important and that’s not going to change.

And test prep – or test takers in the core courses that we teach have been going up over the years. So, we are dealing with a good overall market, but there are disruptions, and the key disruption here is online. Historically, Kaplan has had an advantage because we had a presence on – in every major cities in the United States and every major college campus. That big advantage that others couldn’t replicate is less useful to us now when a lot of students want to go online.

Online, you need a computer and you can start to offer program that compete at very low prices, and so we’ve had to deal with that change in the marketplace. And our response has been a strategy in which first we seek to protect our market share and on that, what you can see is, even though there’s been entrants into the marketplace, we will have more students in 2011 than we’ve ever had in the history of Kaplan Test Prep. The problem is I say is not demand and it’s not desire for Kaplan program. The problem is that those students are at a lower margin than we’ve had in the past.

We’re changing our model. Previously, as I said, we were geographic focused. If you were running Ann Arbor, you’re responsible for all programs from the medical licenseship awards to the test to get into medical schools and the SAT. Now, we’re more product focused. That’s because online it doesn’t matter where you are located, we’re focused on the GMAT team and the LSAT team are really separate case, we’re more built around products as opposed to geography.

And as I say, heavier reliance on online and we expect to win in online, that is we’re very focused as this market increasingly moves to online, we expect to be the leader there as we have been historically in the on-ground. And you can see as a percentage of our enrollments, online continues to grow.

There are lot of advantages online. It’s a larger market that is you’re not limited by your specific geography, you can deliver it at actually lower cost because you don’t have all the cost of the real estate, you can maximize your class size, you don’t have sort of classes of six, you can aggregate students a little better, and you can control the consistency of the delivery. So, there is some advantages and I think we’re seeing the advantages in that we’ve had very, very high satisfaction rates for Kaplan Test Prep programs face to face. But you can see, they are actually even higher online, and that’s a very good sign for us and differentiate, we have all kinds of programs that we’re building and we’re investing quite heavily in making sure that in the world of online, Kaplan will be the leader. And so there is not many competitors who – you can go in and create a sort of a simple standard issue program, but not many competitors are going to be able to compete with the – our ability to invest in this market. So, that’s Kaplan Test Prep.

International; we’re focused on test preparation, particularly in the county area. English language, we’re among the largest English language instructors in the world, particularly for academic purposes and higher education. We have our own institutions and we work with other institutions to provide local campuses or online or their first year of education. Our primary markets, we’re in – we have some presence in essentially every country in the world. I mean, we get students from North Korea. We don’t have a presence in North Korea, but we’ve reached students out. I mean, it’s really quite remarkable how many – how deep Kaplan goes around the world, but our primary presence is in the UK, Australia, Singapore China and Hong Kong.

What I want to do – I’m not going to give you a comprehensive view of our international programs. I wanted to give you sense of two pieces of it, and the first is our Kaplan Global Solutions for universities. We – in the United States, we’re more viewed as having our own institutions. Internationally in particular, a lot of our business is about enabling traditional universities to succeed. So, we will host branch campuses of universities in our locations and cities that they outsource their – the delivery or the hosting of their program. We have embedded pathway programs, meaning on a college campus, at top universities, the international students will come and spend their first year with us and if they can succeed in that first year, then they will matriculate into the home university. It removes the risk to the university as students come in.

We provide the online programs or enable online programs for traditional universities. And we do this – we have 21,000 students , and you can see this is an organic business for us. There’s a couple of tiny acquisitions in here, but it’s mainly businesses we’ve built ourselves and there’s been a pretty good revenue business over time and a good margin business. So, this is a little piece that’s embedded within Kaplan.

I also want to mention that – and people take Kaplan as an American company, but in Australia, they think of it as an Australian company because we’re much more highly penetrated in countries like Australia or Singapore than we’re in the United States. In Australia, we’re the largest private provider of vocational education. We’re in professional education with private professional education with a larger provider, and we have our own higher ed programs.

And so there’s a lot of things going on in Australia. If you know anything about Australia, you know this is where every – every map of Australia looks like this, this is where the people are. We have a lot of very heavy presence and we’re looking forward to continue to grow in countries like Australia, which has favorable regulatory environments and government funding for domestic students, but they are attractive places for international students to come. And so it’s – one of the things where capital will go to places that welcome capital and Australia is one of those countries.

You can see that that revenue has grown, and the operating income at the mid-year point, there’s some aberrations here, because we’re investing with the way the accounting rules work when you – as you grow, you’re investing in your recruitment costs for students early and then you get the revenue over time. This is a good business and I think we’ll be a nice growth engine for Kaplan over time.

And finally, Kaplan Ventures; and I’m not going to spend a lot of time on this, but this is sort of an incubator area and in order for a business to be in Kaplan Ventures, there’s to be something that we think could be meaningful to Kaplan for The Washington Post Company. And we’re always evaluation the businesses that are in here and we’re in the process of doing that at all times.

So, these are the four businesses of Kaplan. I want to leave time for questions. I did want to – I’ve just mentioned – you saw the video, I have the good fortune that pretty much every day I get – poured into me or send to me some message from our students or from students that say my life was changed by what happened at Kaplan, and that’s – again, that’s nothing that savvy.

I got one this morning and since I got (inaudible) it’s not like unusual or remarkable assistance, I got it sort of on the way in and is this guy and a 48-year old single dad (inaudible) Ohio went to our campus there, Kaplan College after losing his job in an auto assembly plant after 14 years. Three sons, single dad, he want to be a role model and he’s trying to figure out what to do and so he went back to school and he had challenges with his sons and see who could have a better grade point average and it’s really a very high energy motivational thing for the whole family. But it turns out he – one of his 16-year old son was killed in a car accident, it is in David’s third semester. And he really faced a crisis as to whether to continue his education, he just was so disconsolate. And this is what we said.

All I wanted to do is focus on dealing with the loss of my son and be there for his two younger brothers. I didn’t care about school or anything else. My instructors were so understanding and in contact always. Almost two weeks went by and I knew I had to make a decision about my college career, what would my son Michael want me to do. Michael knew how important it was for me not to quit, he was back in school. It was so hard to focus on my studies, but I did it.

With the help of my classmates, instructors and Kaplan school officials, I graduated on July 22nd and heard my boys yell way to go dad, I’m proud of you. I knew one thing for sure. Michael was smiling down on me. Now, this David is – continues his education, in two weeks he starts school for his bachelors grade.

300,000 – he’s one of our 300,000 graduates. All those stories are people that your investment has helped, and that is something that makes all of the Kaplan team proud. Kaplan – The Washington Post Company has long been a mission-driven organization. We’re proud of the journalism that we deliver, but we’re also proud of the education that we deliver.

So, that is Kaplan, and what I would like to do now is take any questions you have.

Question-and-Answer Session

Donald Graham

As it happens, we have some thoughtful questions. You’ve got your (inaudible), so I’ll take this one. I have to say that the question for many are really underscore the value of shareholders day and also how just smart our shareholders are in general. We’ve got questions as you described from general about the mission of Kaplan to highly specific, most of them falling in the latter category about regulations. We have only about 15, 20 minutes. So while some of these questions are detailed in complex, let’s you and me focus on trying to answer them – answer the central premises and keep our answers short.

I also have one question for you, Hal, and some questions for me, which I think I can put off by having Andy answer all these upfront. I’m going to try to start with a couple of more general ones and then go to the more specific. Walter Beebe who is a – you could say, has a quite a deep connection with The Washington Post Company asks, you’ve put some slide showing differences between Kaplan and others in the for-profit sector, would you briefly describe the ways Kaplan Higher Ed is different from those other companies. I think that student body was the main.

Andrew Rosen

Yeah. Kaplan Higher Ed is really made up of Kaplan University, which is students pursing university and what we call Kaplan Higher Education campuses which is much more vocational in nature. And because it’s more vocational in nature, it tends to have a student body that is lower income and sort of more – has more risk factors. And so we tend – that’s what drives us towards the lower income part of the population in primarily the campuses.

And so we have not thought to move – I think when we got into higher ed, we liked the idea that we’re working with a broad population that really could use our help. We had been in test prep for many years. We were dealing with people who were trying to get into Georgetown and Harvard. Now, we are working with a broader population. Some schools were trying to work their way up the chain and they – Strayer will be a good example, they were working mainly with working professionals, we are working more with a more vocational population and there’s some things that made – that we’ve had to shift to work our way towards, unfortunately, away from students who don’t have access towards students who already have access to other alternatives.

Donald Graham

The question from Tom Russo, what lessons have you – has Kaplan derived from the success of Khan Academy and would you describe Khan Academy?

Andrew Rosen

Yeah, Khan Academy, if you haven’t taken a look at it, it’s a wonderful website where this guy who is a very intelligent and charismatic guy teaches almost every topic you can imagine. I mean, he has little short – short program in which you can – if you want to understand how to calculate a derivative or the history of Rome or almost anything, or if you are a fourth grader, wants to learn how to multiply three-digit numbers, you can go to Khan Academy and learn that all for free.

We’re looking, I would say, Kaplan’s programs are driven by having people pay for their education, but we’re very conscious of the fact that over time, the world is going to go to free where it can go to free. And so we’re introducing some free programs and finding sort of back-end ways for – to get revenue from it. But we’re nearly (inaudible) Khan Academy is not a – really a business, it’s a concept right now, just as an open field and courseware movement, it’s not a business, but it’s courses that are provided free online.

And I think there’s actually quite a bit of opportunity in being a packager of some of these free programs and a validator of free programs, that is you can take a course from MIT, but nobody is declaring that you have learned what that course is teaching…

Donald Graham

That you are not getting credit for.

Andrew Rosen

In other words – pardon?

Donald Graham

That you are not getting credit for in other words, correct?

Andrew Rosen


Donald Graham

Related question, that a couple of shareholders asked, do you expect that the opportunities for expansion for Kaplan and the for-profit sector will be limited by traditional universities offering similar programs.

Andrew Rosen

Well, I would say that since we entered the higher education world, we thought that traditional universities would surely expand capacity and take – and seize the opportunity that we were grabbing. But that hasn’t happen, it hasn’t happened because they don’t tend to have the funding to do it. So, if University of Michigan decided that they wanted to open their doors online, let’s say, for 100,000 students, they probably could do it, but somebody has got to fund that initiative. And I’m guessing that the – right now the tax payers of the state of Michigan are not ready to incur that cost. And so there’s more movement online, but we’ve worried about this for a long time that hasn’t happened to any substantial degree yet, and – but it’s always a threat.

Donald Graham

I said we wouldn’t look back, but this is the question from Robin Lorein that I think is in fact several people must be wondering as a result of our presentation. So, be brief, you and I normally are. Can you please elaborate on the specific regulations you refer to that make it more difficult for you to work with low income students, what’s your forecast about how this will play out over the next three years? And at last, the last line is, is Kaplan lobbying to change any of that? No, Robin, we lobbied like hell to prevent that option, but I don’t think anybody is going to visit the issue for profit regulation for years.

Andrew Rosen

Yeah, I will try to be brief on this and as Don said, we can talk a long time on this topic, but there are all host of regulations. One that has been most important is, one that essentially sets a debt service to income ratio for your graduates, meaning it evaluates how much you are making and compares it to how much you borrowed for your education in the years immediately after you graduate. And the problem with that is, if you have low income, you are more likely to have borrowed more and you are more likely to get a less lucrative job after your education. So, you are inherently going to be on the wrong side of that calculation.

The way to put yourself on the right side of that calculation, you have to get people who have a little more wealth and who either start off with – in a better position, they are going to borrow less and they are going to borrow less and they’re going to tend to get jobs that make more and they are going to be in the right side of that calculation. And so we don’t like it, but the best way of dealing with the gainful employment rate is to avoid low income students, and that is horrible social policy, but it is what the regulatory environment requires. So therefore we are…

Donald Graham

There are several questions about the future – about student enrolment in Kaplan Higher Education and I’ll give you three. Tom Russo basically has – when is the trough, when is the bottom in student count? (inaudible) asks, in three or five years, what is Kaplan Higher Ed looks like, what’s the population size, could you see the business go from 110,000 students to 50 and if can Washington Post so make a positive return of 50,000 students? And Brian Herseweld has almost the same question. That is the trough question, go ahead.

Andrew Rosen

Right. So, as you know, we don’t project the future here at The Washington Post Company, but what I can tell you is that first, some of the metrics that we’re seeing on new student enrollment meant to be – our effectiveness at attracting students at a reasonable cost and at a reasonable ratio for an enrollment advisor is coming back to pretty close to where it was a couple of years ago, which is I think a good sign. We’re seeing that – we’ve been able to take our expense base and be profitable at a smaller size. And then we noted that market demand continues to exist, that is through all of this process there are still people who need to get education in order to have the life that they want to live.

And the traditional system is not providing increased capacity in order to do that. So we have good demand conditions. We were finding some pretty good internal metrics that we feel good about, but I wouldn’t say that problem solved, but we have some optimism on that front. And – but what we can’t do also is predict, is there any other sort of regulatory issues that might come out of this administration.

Donald Graham

I’ve got 20 good questions for Andy. And for this session to have value, I want to make sure that I ask the questions in enough detail, and that while Andy keeps his answer short, we focus on them in enough detail. So if you’ve asked one of these questions and you’re not completely satisfied with the way that he and I are addressing it, shoot up another message. And if I can’t get to it now, we’ll try to do it later.

Alan McPherson [ph] has a very good question and I’ll be interested in your answer too. Why would allied health be seeing such a significant decline in starts not only at Kaplan but across the industry? I thought we were in this business because it was somewhat countercyclical.

Andrew Rosen

Yes. We’re in a funny place. Getting an education is a statement of optimism that the economy will be able to provide a job on the – at the outside, when you’ve finished your education. So people sort of hideaway in education for a period because they figure that it will be good for them in the long run. If that optimism deteriorates, that is people think, you know what, no matter what I do it’s going to be hard to get a job. Then people don’t necessarily take the step of incurring debt to get their education.

And I think that right now this economy is in a funny place where it could get better, and that would be – getting better is not necessarily good for our business, but it could get worse and that’s not good for our business because I think there has to be sort of a reset in the economy. So we don’t have any – there’s no economy changes that I can see right now that are good for our business in the short-term. But in the longer term, the demand for our products and our programs are quite good.

Donald Graham

Please describe the early results of the Kaplan commitment, as Matt (inaudible) specifically, roughly what percentage of students that take advantage of Kaplan commitment ultimately enroll. Andy described the Kaplan commitment, our five-week course before any tuition is old. How does this percentage compare with your expectations? And at what point does a student who utilizes the Kaplan commitment get reported in published enrollment numbers?

Andrew Rosen

Yes. So, the Kaplan commitment has perceived about as we’ve projected, and we’ve given information in the Qs and Ks, and you can refer to for specifics. As a general matter, about a quarter of students come out of the system as a result of the Kaplan – who come in for the Kaplan commitment, don’t make it through that period.

Most of those students are because we’ve assessed them and determined that they are unlikely to succeed. That is, part of the Kaplan commitment, the part that people talk about is that students get the option. But the way we run the program, we’re also assessing students to be sure that we’re not enabling students to come into the program, see that they are likely to go just for a few terms and then drop out. That’s not good for them. In the long run, it’s not good for us. So we’re screening a number of students out. So I think the Kaplan commitment has been a great program. As I say, it’s an extensive program. But it’s one that is very pro-student. And pro-student steps are going to be in our long-term interests.

Donald Graham

There are several questions from Drew Wilson [ph] and Andrew Friedberg [ph] among others about costs at Kaplan. And to summarize, Andrew [ph] asked, what’s Kaplan doing to change more of its cost base to variable from fixed? And could you better mitigate the revenue decline then you have by cutting costs more? Given what we know about education is true about regulations, how will Kaplan’s cost structure change over time? I think this is specifically a Kaplan Higher Ed question.

Andrew Rosen

Yes. Yes. I would say, I mean, if you look at the Test Prep where we’ve shifted expense to more variable basis, that’s sort of a model for which you can see – well, I shouldn’t say it’s a model, but shifting towards variable is the model. I don’t want to suggest that we’re in the process of closing a number of campuses because we’re not.

The thing you have understand about higher Ed is, we enroll a student, you have an obligation to that student to deliver the programs that they had rolled in over the period of time that they are intended to be enrolled. So it’s a nine-month program. You got to deliver that program for nine months. If it’s a two-year program or four-year program, you got to deliver it for that period of time. So even if you are down to six students in a class, you must have that the instructor to support services in classroom to do it.

Now, when that ends, if you start enrolling students, then you can take those costs out. But it’s not the kind of business where you can say today, let’s just get rid of 20 percent. You have an obligation that extends over time. But I would say that we’re quite focused on the expense line. I think they were – if you watch our financials, you’ve seen it already, and I think you will continue to.

Donald Graham

OK. Now I want to wave my arms and say, we’re now going to get into the weeds a little bit. There are people in this audience and in this room who really follow education companies closely. And they are asking technical questions about specific parts of higher Ed regulations. They are important to in understanding of the business. So I’m going to go ahead and ask them.

And I hope we put the questions and Andy gives the answers in ways that everybody can understand. But they are important to the highly sophisticated members of the audience. 9010, several questions. They can say actually as to what extent is it’s still possible to raise tuition to avoid 9010 issues, given the new gainful employment rules and the question I love. To what extent does 9010 actually prevent competition in the industry? Prices are artificially raised by 9010 to prevent failing the 9010 test.

Andrew Rosen


Donald Graham

There’s another set of questions that basically say, is the companies heading for 9010 problems.

Andrew Rosen

OK. Well – so I’m going to try to do – I’m not sure it’s possible to answer that question and let everybody understand what 9010 is. But if I can leave it at...

Donald Graham

Yes, give a little clarity [ph], please.

Andrew Rosen

Yes. If I can leave it at this that the law says that no more than 90 percent of revenue at an institution – a for-profit institution can come from the federal loan program. So you have that 10 percent. It seems logical, right? I mean, if people can’t come up with 10 percent of the cash, what does that mean? But the fact is, in a very low income area, people are entitled to whatever the government provides. And so we can’t say to a student your program costs $10,000. We’re only going to let you borrow $5,000. If they are entitled $12,000, they can borrow $12,000 for a $10,000 program. So that’s a challenge for us because people can borrow even more than the cost of their tuition.

So there’s a number of questions. The way people deal with 9010 is you have to have a gap above the price – above the loan limit in your price. It’s getting – I’m trying to figure out how to do this in a way that’s understandable. 9010, in a normal world, would drive prices down. But we’re actually – I'm sorry. 9010 ends up driving prices up, but the elimination of 9010 would drive prices down. Gainful employment fits drive prices down.

Donald Graham

OK. The – since we’ve had a deep course in federal regulation of for-profit education last year, I would not want to be assigned the job of writing these rules. It is tough. But we understand, you as shareholders should understand, and above all, federal regulators should understand and I think do understand that one core key aspect of current federal regulation revolving around this 9010 rule is that current federal regulation of the for-profit industry actually drives tuition up. Then some of our critics complain about the tuitions we charge relative to those of other institutions. And we have written – I have written and said we would happily reduce tuition in some of our programs tomorrow if the government would offer us the opportunity for relief from 9010 for those programs.

Andy, I’m going to let you sit down for the moment. We have many more questions for Andy, and I’m going to put you on later to respond to some of these questions. But I’m going to address some of the questions addressed to me, and I’m actually going to start by – there is one specifically asked of how – this is from Tom Russo [ph], and I’ve got to (inaudible) this. The question is, would you comment on the state of Kaplan’s assets, particularly its share of the over-funded pension values? The question essentially is, where does Kaplan stand vis-à-vis the allocation of pension credit or pension expense in the Post’s over-funded pension plan? I think people can here you...

Unidentified Participant

Kaplan never participated in the defined benefit plan. They have a defined contribution plan, which is also funded by the trust. But it’s a very small amount. So when you allocate the surplus, and I guess you’d say the surplus is the difference between the amount we have in the plan and our projected benefit obligation, runs about $600 million to $700 million depending on what the market is. That was what it was at the end of last month. You really wouldn’t allocate any of that to Kaplan. Kaplan’s expense basis is very pure. Most of the over-funding actually rose at Newsweek over the years, and that’s no longer part of the company.

Donald Graham

And at the footnote, and tell the audience by roughly the Post pension plan was over-funded at the time of our last published reporting, roughly.

Unidentified Participant

It’s roughly $600 million over-funded.

Donald Graham

OK. Now, again, I’m not going to answer at this point all the questions addressed to me, but I’ll get started and address some and perhaps these will provoke other questions. Specifically, I would like questions that propose new ideas, and I have one from Michael Barry of Barrier Island Capital Advisors who’s on the web.

And he writes, Washington Post’s Berkshire stock – we own quite a bit – we own some stock in Berkshire Hathaway – is illiquid – I wouldn’t say that – and give us the company a little benefit. Warren has retired from the Board. Why not swap Washington Post’s $250 million or so of Berkshire stock for the equivalent, say, 750,000 shares of Washington Post stock owned by Berkshire and then Washington Post could raise the dividend significantly, keep a smaller buyback authorization. This – unlike the sale of parts of the company recommended by others, this bit of financial engineering would not involve a breakup of the company and would be highly accretive.

This is a genuinely creative idea. I think it would immediately – both we and Berkshire would pay a lot of tax on the stock. I don’t think we could do that stock tax-free although. Given what Warren has written about successful manipulation of the tax code by wealthy people and companies. Maybe that is possible. But I would say – but this gives me a chance to talk a little bit about our balance sheet. We own stock in a couple of other companies that we have mentioned publicly. One being Berkshire and the other being a for-profit education company called Corinthian Colleges. In effect, holding the stock on our balance sheet is like holding cash.

Warren, in describing to Berkshire shareholders what they own, always quantifies the amount of cash in stock per share that wouldn’t be a very large amount in the case of the Washington Post Company. But we own cash and we own marketable securities. And as I described in talking about the balance sheet, I tend to view them as equally important strengths of our balance sheet. So getting rid of our marketable securities is like getting rid of cash. You just have a slightly weaker balance sheet among other things. And the transaction that Michael recommends, obviously I have said – you know, we have been from time to time in the market for – we have been from time to time repurchases of our own stock.

Warren wrote in this year’s Annual Report that Berkshire itself – at the time of the publication of the Annual Report at the end of last year, Berkshire held $98,000 in cash and stock per share. The prices of some of those stocks are down. Warren may have spent cash on insurance claims or other intangibles, but he has also collected quite a bit from Goldman in the course of the year. I don’t know – the price of Berkshire yesterday was $104,000 a share.

So I’m looking at Berkshire at $104,000 a share. I’m quite pleased to own it. And I’m quite pleased as the company to own it, and not in a rush to own less. I also quite like the idea that Berkshire owns a percentage of the Post Company that they do, and I’m not in a rush to diminish that. But – so – but I think Michael’s idea is a creative one although I will not pursue for the reasons I described.

Anybody else with creative ideas, please send them in the Shareholders’ Day. I’ve got questions, comparable questions from Andrew Friedberg [ph] and Tom Russo [ph] and some others of you. Into which of the Washington Post Company’s four divisions – which of those divisions offer the best opportunities to consume the most amount of capital investment at the highest prospects, say, for five or 10 years? And Andrew [ph] asked, what do you think the company will look like five or 10 years from now?

It is the essence of our philosophy that I can’t answer that question, because we review investment opportunities one at a time and look at the long-term returns that any given investment offers on the money invested over, not in one year, not in two years, but over the long-term. We can be wrong in evaluating those investments. People have a couple of questions about investments where we’ve definitely been wrong. And – but we can – when we’re right, we enter without preconceptions. I have no concept about which division over the next five or 10 years is going to offer the best possible investments.

In 1994, there was a flicker of a moment in time when television stations fell to – which had been priced in the stratosphere for years, fell to sort of normal business valuations, and we were lucky enough to buy our stations in Houston and San Antonio. So, at that time, television stations offered the best opportunity. For much of the rest of the 1990s, cable systems were out of favor and we were able to accumulate half of what’s now Cable ONE at an average price of $1,350 per share. It’s just unbelievable looking back.

The same type systems in recent private market transactions have sold for on the order of 4,000 – I just said $1,350 a share, but I meant $1,350 a sub. So if somebody – but obviously that was a long time ago. Returns are now different. And we’re going to look hard at the expected long-term returns relative to the sale price. In recent years, education, a growing field worldwide, has obviously consumed most of our investment dollars. In some cases, we’ve invested wisely. In some cases, we’ve made mistakes.

And – but on the whole, Kaplan is a very valuable company that we built almost all of by acquisitions, including Kaplan itself, which we bought from Stanley Kaplan in 1985 or ’86. The exception, the one we’ve built from scratch is Kaplan University, which Andy built, which is probably the single most valuable thing Kaplan owns and operates. But all the rest of Kaplan pretty much entirely was built from investments. We obviously are going to focus on education investments, but not on those alone.

Jonathan Simon [ph] asked, in the second quarter, the stock buyback saw to a trickle. Was this because the company is running low on financial firepower because the stock was no longer deemed as attractive as in 2010 or ’11, or because the Board authorization was exhausted?

We never comment on when we are or are not repurchasing, but it’s worth talking a little about this in concept. Basically, the repurchase program has worked very simply for the last 30 years, the 20 that I’ve been CEO. I would call Warren and say, at this price, do you think it’s worth repurchasing? He would say yes or no, and we’d act accordingly. We never – we never have been a daily day-in day-out, no matter the price, repurchaser of our stock.

We’ve acted on the principles set forth by Warren repeatedly in the Berkshire annual reports, which I urge you to read, which are basically when you’re able to repurchase stock at prices that are advantages relative to intrinsic value, you’re making money for shareholders. When you buy them at higher prices, you’re losing money for shareholders.

And it seems Michael Barry raised the question of Warren’s no longer being on the Board. Warren is no longer on the Board, but he is still on the telephone. And Warren, Chris Davis and Tom Gayner are the people I now consult about capital allocation decisions of the Post, and I’m lucky to be able to talk with all three.

Anita Lakshmi [ph] on the web says, Don, you said the company’s stock was undervalued now at $2.6 billion. How much do you think it is worth?

I did not say that. I never – I have said that we have from time to time been repurchasers. But the one question I’ll never answer is what do you think the intrinsic value of the Post Company is. But it is very important for each of you to try to answer that question you had and say, what do you think the intrinsic value is and do I think it’s more or less than the stock is trading for now, and have an idea of what the company is worth.

Same questioner. What steps are you going to take to boost the stock price? Will you consider sale or spin-off of any of our businesses?

We’re not in the financial engineering business. And if you want companies that engage regularly in sales and spin-offs and restructuring, you’re better off looking for other companies. I don’t take any steps to boost the stock price in the short-term. In fact, I don’t consider it productive for me to even worry, even think about we’ll try to influence the stock price in the short-term. If you want a company where the CEO is trying to take day-to-day steps to boost the stock price in the short-term, you should not own stock in this company.

What then am I trying to do? I am trying to build a collection of assets and a collection of managers so that in the long-term – I plan to hold my Washington Post stock for the long-term – it will have significantly more value. And I hope to be successful in that. OK. There are many more questions for Andy and many more questions for me. But you’ve been very patient. We are now going to take a break, return to other presentations, and questions will be strewn around throughout the morning. So – and we’ll be around here in the break to talk to you as well. We get together what, 15 minutes? 15 minutes – 10. 10 minutes.



Donald Graham

All right. Could we take our seats again and we will get started.

Slightly over 40 years ago. I began my career at the Washington Post Company. I was a city reporter at the Washington post. And by good luck I have just seen in the audience two of my fellow members of the 1971 metro staff Dorothy Russell and Maurine Beasley, and I said if we only had Woodward and Bernstein and Leny [ph] here we would have a majority.

But I want to start introducing Katharine by saying how much I love this newspaper and why. Why, is easily defined.

Thoughtfully provided for you and sitting outside we have copies of this morning’s newspaper. I love the Post every morning. This morning’s is extraordinary. You can happily spend an hour reading it. I will help you.

The proper way to read the Washington Post is from the Sports Section out. And right here is a Mike Wise column about something that I find quite unbelievable. Mike describes how two famous figures in the Washington D.C. sports scene; John Thompson, the elder, the long-time coach of the Georgetown basketball team; and Bruce Boudreau, the coach of the Washington Capitals both had reservations on one of the flights that crashed into the World Trade Center and the Pentagon on September 11, and changed them for whatever reason. I don’t think anyone knew that before now but it is shaking and just a reminder of all the huge and small things in the lives of people that happened on that day.

I then proceed to the style section where Hank Stuever’s review of President Obama’s speech last night is emphatically worth reading. Outstanding in the proud tradition of Tom Shales who used to do day-after pieces on these presidential speeches that everybody in Washington had to read.

But the most extraordinary thing in this morning’s Post is Steve Hendrix’s piece on a woman named Heather Penny, a career Air Force officer – sorry a D.C. National Guard pilot of an F-16. One of the first woman F-16 pilots, F-16 being a combat aircraft. On September 11, 2001, once air traffic controllers identified that Flight 93 had been hijacked and was headed for Washington – Heather Penny is now at Lockheed – was sent into the air with one other pilot in an F-16 with the assignment of bringing down Flight 93 before it could hit the Capitol or the White House or whatever its target was.

Her plane was unarmed; no guns, no missiles. The only way she could bring it down was as a kamikaze, was through putting her plane, in effect committing suicide by steering her plane into Flight 93. She and one other pilot were given this mission. She was a brand new pilot.

And reading this story is just shattering and I am astounded that this story has not been told until now. I put this story up on my Facebook page this morning and it attracted this sting of “I can’t believe this” comments from people, but that is how unprepared we were on those days.

The metro page has a perfectly wonderful piece on the best street musician in Washington, a guy I have never – whose existence I didn’t know about because he plays by the Silver Spring metro station, which I don’t happen to visit. But it is a marvelous story.

The front page not only has Zach Goldfarb’s and Dan’s – Dan Balz’s coverage of the President’s speech last night, Allison Klein and others coverage of the flash floods in the region and our story on the newly reported September 11 threat this year, which you will want to read. But it also has a perfectly extraordinary story by Sally Jenkins, who is normally a sports columnist, about the famous cross that was found in the wreckage of the World Trade Center by construction workers and rescuers after September 11, what has happened to it, where it is now, why it is there. The reason this evokes memories in me is Sally was in New York on September 11, 2001 and some of our best stories in the papers of September 12, 13 and 14 were filed by Sally, a sports writer, from interviewing survivors and rescue workers, and I still remember those stories.

On the op-ed page there’s a lot of commentaries on the President’s speech and terrific canoodling [ph] columns from Charles Krauthammer on the right and Gene Robinson on the left. On the last 10 years has the global war on terror, our conflict with Al Qaeda, has this been an enormous success for the United States as Charles writes; or a disaster as Gene writes? I have my own views but I put both columns on my Facebook page this morning just thinking people might like to read both and make up their own mind.

And I am only giving you the headlines. There are probably 30 stories in this morning’s paper that I call your attention to and say this is the work of sensational journalists. And it is not only interesting to read, it’s important to read and highly enjoyable. I love being associated with this newspaper and with this news organization. When the printed – thank you. When the printed Washington Post arrives at my door in the morning, the computer sitting there, I happen to read the printed issue – the printed paper every day. My children who are in their 20s and 30s and everybody their age would make the opposite choice. We want to and have to be the best at both. It goes to leadership. And the leadership at the Washington Post, all of it is – much of it is here this morning.

I want to talk about the publisher. You are going to hear from Katharine Weymouth and you can weigh what you hear and what you see against my own evaluation. My own evaluation is that the Washington post is so lucky to have a publisher as passionate for the business, as committed, as smart, as modest and as devoted to the institution and all of the people who work for it and its core values. As you can read in the book I have been referring to all morning, my mother’s autobiography, Katharine was very close to Katharine Graham whom some of you have been nice enough to talk to me about this morning and you will see why. Katharine.

Katharine Weymouth

Thank you, Don, for that kind introduction. He may be a little bit biased as my uncle. But there couldn’t have been a better introduction for the Post. And as Andy [ph] referred to earlier, we are very much a mission driven organization. And the journalism that our journalist publishes every day that Marcus Brauchli oversees is something everyone in the building is motivated by and so proud of, and something we want to continue for generations to come. At the same time it is supported by a business. And that has – that is what drives the journalism that is what allows us to put the profit from the journalism back into the journalism that we want to do. So I am going talk a little bit about our journalism today but I am going to focus primarily on the business.

As I need not tell you the world around us has changed and changed really radically over the last 10 years. When 9/11 happened 10 years ago nobody was posting on Facebook, YouTube didn’t exist, the Huffington Post didn’t exist, people were not using smart phones the way they are today.

Not long ago, I was driving my then eight year-old to school and she was on my iPhone and I just could not help myself. I said, “Madeline, you know when I was growing up we didn’t have GPS devices, we didn’t have cell phones, we didn’t have iPads and DVDs and Connect.” And she looked at me really seriously and she said, “Wow, mommy, it must have been hard growing up in the olden days.” Yes. But what that means for us as a business is also that the world has changed and that we need to change with it and we need to adapt. It has completely disrupted our business and changed our business model. We depended for so long on the revenues and profit generated by our classified advertising as I am sure you know.

We now face competition on every front, whether it’s for our political coverage or our local coverage or whether it’s our job section or our card [ph] section or what not. And we are in a real transition period. Our print publication is still incredibly strong and I will show you the readership and the penetration that we have in the area and it still makes us a lot of money and it still works not only to illuminate our readers about the journalism we publish but also to connect readers and advertisers. At the same time we are aggressively building our digital business and investing on our digital business because we all know that digital is going to be a significant if not all of our future, and we are working on doing that. So let me just start it.

So this is what we are going to cover today. The commitment we have made to you as shareholders, which I will reiterate to you; the strategy that we are working on; our financial performance over the last two years since we last met; the trends behind it; how we are getting back to a reasonable cost structure and building toward the future. And then we will take questions at the end.

Just for your purposes, I am sure you know the newspaper division, which is what we report out includes all of these publications in print and online. I am going to focus today on the Washington Post but when you read the results it’s the newspaper division.

So let’s talk about commitment. This is the commitment that we made to you, that the leadership team of the Washington Post made to you the shareholders and that we are reiterating today. Our job was, two years ago, to return the Washington Post to profitability. We did that last year. Our job today is to get it to a sustained profitability. We are doing that by aligning the cost and our revenue to make sure that the Washington Post is stronger for years to come and we are doing that by creating a robust economic base. And at the same time it is critical to us to maintain the quality of the journalism that is why people come to the Post. That is why people trust the Post.

And so I will talk about in a minute about our strategy but we are making the cause that we are making in a way that we believe will preserve what is unique about the Post and what people rely on us for.

This is our strategy statement. There is a longer statement, but in effect the statement that guides everything from our cost cuts to investments is; The Washington Post must be the indispensable guide to Washington. We must be an essential to readers and to advertisers alike.

And our audience – we are really in a unique position as we really are a major metro newspaper but we are a major metro newspaper in the nation’s capital. So we have two very different audiences. We have the local audience in Washington and that is the greater Washington area; so D.C., Maryland and Virginia. And that includes people who come to us for everything from the obituaries to what is going on in the local system, to what is going on in their local government and who may also be interested in what is going on in the Capital and what Obama administration is doing et cetera. We serve that audience both with advertising and with news and information. Then, thanks to we had a large and growing national and international audience.

For years and years if you live outside of the Washington area you could not get the Washington Post unless you subscribe to our national weekly print edition. Today millions and millions of readers, 90% of our audience on is outside of the area and roughly 15% of that is international. That audience primarily is coming to us to understand what is going on in the nation’s Capital, what is the administration doing, what are the new government regulations and policies, and how do they impact me and my business. So we work hard to serve both of those audiences. You can see on our website we have a national homepage and a local homepage. They are two very different experiences. You can toggle between them.

And increasingly, in order be the essential guide to Washington, we know readers are reading our content and want to access our content in every platform. So we are doing that on every platform; whether you want to get it in your mobile phone, on your laptop, in paper, whatever. So here in a nutshell is the essence of our strategy, as I said, serving local and national audiences.

But what we were doing outside [ph] we want to take a step back. What it makes us unique? How are we going to differentiate ourselves from the competition? And that is by focusing on Washington. We have more feet on the ground in Washington than any other local news operation here. And we have the best journalist in the country. So focusing on Washington is our strategy; engaging our audience with the tools online and available today to help them live their lives, and as I said earlier making sure that we optimize our content for each of the platform. On your smart phone you may want to access the headlines in the morning but you are less likely to read a full Washington Post story, but on you iPad you might. You might want to Tweet it out, you might want to put it on your Facebook page, et cetera.

So now let me revisit the 2010 economic results. This is as you know I am sure read, but now I’m talking again about the newspaper publishing division. This is ‘09 versus ’10, ‘09 as Don alluded to and you already know was just a terrible year for us. And we took that year to take a hard look at everything that we could cut without harming what we do in our core. 2010 was a much better year. Revenues were basically flat but we did a very good job of cutting cost including closing down out plants. So we now have one plant in Springfield, Virginia, and that is part of what we need to do. So 2010 was a much better year.

Here is the picture going back to 2001. As you can see operating income improved until 2004 that’s when we started to see the real estate market decline. Then we saw results get worse until in ’08, and ‘09 was the particularly terrible year; starting to rebuild in 2010.

Here, the ad revenue trends, ‘09 and I should clarify that QWP refers is print basically. Washington Post become digitalized and this is the total. So just wretched year in print down – print ad revenue down 23%, down 10% online, and in 2010 the trends moderated, online started to grow again and the total was down 2%.

Here’s the expense picture. I already told we worked really hard to cut cost across the organization and preserving – trying to cut the newsroom as little as possible. And that’s what contributed to our results.

Now I want to turn – we talked about ad revenue. We talked about (inaudible) circulation pricing which is another piece of our revenue and a growing piece. Part of our strategy has always been to be a paper for the people, for regular people, and so for a long time we kept our cost. I know you can’t read this, but at $0.25 for a long time we’ve been gradually – the yellow is the single copy price, the price you pay as you go by the sale box and down here is a home delivery price. We’ve always created a differentiator so that there is advantage and incentive for people to subscribe for home delivery. Home delivery is the vast majority of our newspaper circulation.

So we have gradually been pushing up on a price. We still remain one of the cheapest newspapers in the country over the major metro set but we have pushing up on that lever. Circulation revenue as a result is growing. At the same time we’ve been very careful on pushing on that lever but that as we raise prices we know the price sensitive part of audience starts drop off so we’ve been balancing that.

I’m happy to say that despite those price increases, our penetration is still unmatched in the country. We have the highest print reader reach of any major metro paper in the country. We are number with 53% reach and you can see our peers here. And I am not including the New York Times which is really a national newspaper, but in their own market has reach in the single digit.

We are also now the second highest circulation news major metro in the country in actual number. LA is number one and they in a market as I am sure you know that is roughly two-and-a-half times the size of the Washington D.C. market. So this is very impressive.

Digital in 2010 had our strongest year ever. As I said a lot of our focus is on digital. We know that’s the future and we’re putting a lot into building that. digital revenue grew 11 percent year-over-year in 2010. We have one of the best sales teams in the country.

And here were our performance in visits. We pay a lot of attention to our traffic, to the number of times people come back to the site and how many unique visitors and how much time people spend on the site. So in 2010, our visits to the site increased 9% year-over-year, unique visitor was up 19% .And you can see that the trend was a good limit [ph], trend is going in a right direction on both counts. And 2010 was a great year.

We remain also the number one news website in the Washington D.C. market. That is our focus. That is our audience. We beat out CNN, Fox and New York Times in our market. We are the number one news site in this market.

So what about paywalls? A lot of our peers are putting up paywalls of all different sorts, some harder, some softer. We remain now the premium online newspaper that is available for free on the web. And you can put up paywalls, the people who were doing it are seeking to get circulation revenue from their digital subscribers. We have taken a look at it, we will continue to look at it, but we firmly believe that the future for us lies in growing our audience, growing the amount of time the audience spends with us, not putting up barriers and that putting up paywalls offsets your traffic and you lose revenue. We will continue to look at it but for us we don’t think it makes sense and we believe it does make sense for us to be the premium quality newspaper online that is available for free to our readers.

Now I want to turn to 2011 performance. You’ve seen if you looked at out reports Q1 and Q2 in the first half of the year, 2011 is looking to be a tougher year and I’m sure – we all read the newspapers you know what we are facing. The first quarter was looking fine. I think we all expected we would start to see some growth after 2010. Q1 in ‘11, we were basically flat to last year and again this is newspaper publishing division revenues not the Washington Post. Q2, we hit a wall and we were down 6%, so overall year-over-year we are down 3%. Here the ad revenue trends, but I don’t we will surprise you, and again this is print on the top QWP in ‘10 was down 7%, the trend is getting worst, digital up 6%, down 1% and total down 8%.

Now, I am going to talk about our journalism a little bit later but I wanted to focus on the business priority because it is the business that props up the journalism. These are the company priorities identified here for 2011P: Improving our trends in print circulation, growing our digital business and developing new revenue centers that will continue to support our business and give us sustainable cost ability going forward. And at the same time we know we have to continue to reduce our cost structure. And I’m going to address each of those one at the time.

So how have we done against our goal of improving the trend in print circulation? We have actually had a very good year thanks to I would say the best circulation department in the country, as well as a great paper. So last year on daily we were down 11%, this year we are down 5% daily. Last year Sunday, we were down 10%, this year we are down 4%. So that’s important. We are retaining our mass. We are keeping prices at a reasonable price we think, and keeping our readers and keeping our advertisers.

At the same time we also serve the elite audience in Washington, and that is critical to us. This is a Nielsen study. It’s a third party study. And the question that was asked is unaided. What if any daily newspapers do you read at least three or four times a week? The Washington Post blew everyone away. Three quarters of all leaders and this is congressional and executive leaders on the Hill read the Washington Post at least three or four times a week. More leaders are reading the Washington Post than the next four most read newspapers combined, which is The New York Times, Wall Street Journal, Washington Times and USA Today. And our readership is two times that in Washington elite of The New York Times and more than three times that of the Wall Street Journal.

Now let us talk about growing our digital business. This is second quarter over our first quarter this year. We focused for a long time on growing our traffic. We maintain that focus but we are also focusing a lot as I said earlier on the amount of time people spends in our site, getting the people to come back. Time spent by users on increased quarter two over quarter one by 110%. We moved from sixth and this is among our major metro peers online, we moved from sixth to fourth and people who are coming back to the site. And our national page views increased by 20% since March.

At the same time – so this the Nielsen study for congressional leaders on the Hill of the website. Again, it was an unaided question done by the third party. The question was; what if any websites do you access at least once a week for public affairs news and information or opinions on politics and policy. is the number one top of mind website visited by government leaders. We toped both Politico and CNN by a factor of two to one and we more than doubled the mention of Washington – sorry, of Huffington Post. So when we look at our metrics and how we are performing against our strategy, this is something we are very proud of. Both in print and online, Washington Post dominates.

Mobile is obviously growing. Washington D.C. is one of the most highly penetrated smart phone markets in the country. Our readers want to access us in all of those devices. We know it is important to be there and we – so I hope all of you have our iPhone app. For those of you who have iPads we have an iPad app and it is really terrific. We are also adding – so we will launch a new app on a droid for Washington Post shortly. For people who do not want to use an app, we have Washington Post Mobile of course.

We also – we have something called the Going Out Guide for people who want to look up restaurants, movies, et cetera. We already have a Going Out Guide app. We are launching a new Going Out Guide shortly and it is really great. You can do everything from research restaurants, book a table, buy tickets to movie theaters, et cetera. We want to be – as part of a strategy to be indispensable in Washington, we want to not only to provide people with news but also help them with live their lives. So if you want to look at clubs to go out, you can do that on the Going Out Guide.

And then we have a politics upcoming just in time for the elections. It will launch with all kinds of tools, polling, the latest stories, everything. And our iPad version two is coming out. This one – we announced with the version one that we are going to charge. We are going to start charging with the launch of iPad 2. So I talked earlier about the paywall and our website remaining free. We are – we already do charge for experiences that we think are unique. So we already charge on the Kindle and we are going to charge on the iPad 2. We believe – we will charge for unique experiences we can create for people and iPad 2 will be one of those. It will be free for seven-day subscribers and it will be discounted for Sunday subscribers. But for people out of the area who want to access that they will pay for it.

Now I want to talk about new businesses. I have mentioned earlier the classified that we used to really derive a significant part of the portion that we then reinvested in the newsroom. As classified has taken a hit, we have focused on maintaining our classified in print and also growing our classified sites online. We have the number one job site in Washington, but at the same time we also want focus on new businesses. But businesses that make sense for the Washington Post and that leverage the assets we have. So I am going talk a little bit about those.

We launched a little what – maybe a year ago Washington Post Live, which is our conferences division. It makes perfect sense for us that leverages the reporters we have, it leverages the business people we have but these conferences get – we do everything from – we have a conference on China coming up, we have one on the economy, we did a local conference. So there a whole range and they create news and we cover them and they are also doing well.

We launched about a year ago, maybe two years ago, a business tabloid for the local market which we call Capital Business. We launched a deal site, a group couponing site for the Washington area called the Capitol Deal. We have a service site. For those of you who are familiar with Angie’s list, it is comparable but it is free to users. So if you are looking for a plumber, if you are looking for a carpenter you can go to Service Alley. And we launch very recently MasterClass which is online classes. We actually use one of Kaplan’s entity and they have helped us put this together. So it is an online class that uses our reporters, and does classes on everything from learning about red wine, to of course on economic literacy, to of course on photography and it is available to users, anybody, for a fee.

While we do all of this, while we build our digital future and we invest in the newspaper, we know we have to reduce our cost structure. It is not fun, but it is just part of what we need to do in order to maintain the business and support the journalism we do.

Expenses for the first half of 2011 were down 3%, and part of the reason they are not down more is because we are investing in businesses that we think will be revenue basis for the future. So we are down across the board, we are focused on payroll of course, other expenses, print newsprint and agency fees, which is our circulation distribution system.

This you saw earlier but this is on top of significant cuts that we did in ‘09 and in ‘10. So on ‘09 we cut $75 million, in ‘10 we cut $81 million.

So in closing I just want to say we know we have a lot of work to do but we have done a lot in the last two years. Part of what we have done is we have integrated our newsroom and we have integrated, you may know used to actually be a separate company across the river. The newspaper was here. We have put everybody in one building. Marcus Brauchli is the first editor to oversee both online and print. And we did that in part for cost cutting reasons but really more because I view it as our job to build the Post for the future, and in my mind I suddenly believe that the best way for us be competitive is to have one newsroom and one business so that everybody is focused on the same thing.

So under the newsroom today under Marcus we invested in a new content management system, which effectively means – in the old days we had a lot of different systems and they did not speak well to each other and so when the print closed their paper or their story they would send it across the river and then an editor over there had to edit it and then they had to put it – use one system to publish it to the web, use another to publish it to cell phones. Today we have a new content management system that allows us to publish on one system to all platforms. All of our editors are now versed in how to use the system and it has made us more competitive. We have had more breaking news alerts this year than we have ever had. As I showed you earlier traffic is up, page views are up, visits are up and people are spending more time on our sites.

We are investing in new businesses. We will continue to focus on that but we will never lose sight of the core, which is we connect readers and advertisers and we connect readers with our journalism. As Don alluded earlier whether stories that make you cry or make you laugh or interesting or educate you. That really is our mission. It will remain our mission but we understand we have to be a good business to do that.

I wanted to close with my grandmother’s quote, which I talk about often in meetings internally, which is; “In order to do good, you must do well.” In order to publish the journalism of which we are all so proud we have to be a viable business.

And I cannot close without addressing our journalism. So our focus is as I said earlier on getting to sustainable profitability. And we are doing that with an aggressive focus on digital while investing and in maintaining our print, focusing on new revenue opportunities but cutting our cost structure to a reasonable level. Our journalism has not only not suffered – I think that our journalism is better under Marcus Brauchli and his team than it has never been. Don gave you an example of today’s paper but I – you can find stories like that every single day in prints online. We have agenda setting local coverage. Our team that covers the District of Maryland and Virginia is unlike any other. We have more feet on the ground than any of our local competitors. We have the definitive political and national coverage. We had Karen Tumulty, Dan Balz, Phil Rucker, Chris Cillizza, you name it

And as Don alluded to we publish everyday meaningful stories, human interest stories that really – we want people not to think of the Post as something that they have to do, right. I mean if we are going to survive as a business it has to be not only essential because you think it is good for you but because you want to do it, because it enlighten you. It helps you live your life because it illuminates you, because you are talking about it at the water cooler, whatever it is.

And we don’t focus obsessively on this but Pulitzer Prizes are always the highest honor in journalism and under Marcus’s leadership we have actually won six Pulitzer Prizes in the last three years, and we are very proud of that. But I am also very proud of the beat journalism that we publish every day, those kinds of journalism that does not get Pulitzer Prizes.

And I think for those of you who travel around the country there are really – there are fewer and fewer newspapers of the caliber of the Washington Post. And Andy said earlier how proud he is to be at helm of Kaplan. And I am equally, equally proud to be at the helm of the Washington Post, and serving our readers. I have a team on the buzz business side and on the news side that I feel so incredibly lucky to work with. And so in short we are working very hard to build the company that will be valuable to you guys for years to come and to generations of readers for years to come. So thanks.

Question-and-Answer Session

Donald Graham

Thank you, Katharine in a shameless bid to curry favor with our shareholders since people snaps up the first four iPad 2 cases with the handsome Washington Post cover. I have brought four more which are available after the meeting. In another shameless bid to curry favor with our shareholders, I would say, that the question you are sending up are sensational. And we have just a few for Katharine, a couple of which you actually answered in the of course your presentation, but I will throw out one or two.

Heather McPherson asks, “Do you think there is an aspect of this business that is underappreciated by investors, a good part of the business that may not show up in day-to-day operating results?

Katharine Weymouth

I think there has been a lot of focus on what is happening to the newspaper industry and there is certainly is a lot of tough news. We are definitely in a very difficult transition but we believe firmly and we think the readership that we have; the penetration that we have; and the advertising that we have shows the value everyday of the Post. People advertise in the Post because it works. And as I said earlier, I think we have unmatched journalism around country. The best business team and best journalists we have in the country.

Donald Graham

I would draw an arrow to the last thing Katharine said. If there is an underappreciated asset at the newspaper it is the newsroom. And I don’t know what – I wrote in the annual report this year that there is going to be a new side to the future. People 10 years from now, 20 years from now are going to get their news from some news organization delivered in some way probably none of us can imagine. I think it is a tremendous edge to start with a great team of reporters and editors no matter how the news is distributed. And we will see. And (inaudible) is trying to invent pieces of that as best as we can and we will talk a little bit about that in a minute.

From Clara Anderson, “You mentioned that in engagement metrics on the Post, online sites are improving. So why did online revenue decline 13% in second quarter given that online is still less than half of print revenue? Do you anticipate that online can ever eventually support such news gathering activities? How much it is? And finally and importantly, how much additional capacity is there to cut cost without harming the news product?

I would make my usual speech and say there is a lot of ways to judge us. Looking at any aspect of revenue for a given quarter in my opinion is not the right way. Whether online revenue grows importantly in the long run, year-over-year-over-year that is important and whether – but the engagement number equally, you ought to watch us on that too. It was good last quarter but that does not mean that – it has not been as good as we wanted it to be in previous years, and ought you to watch us. But go to the – how is online revenue doing? Can you grow it faster in the long run? And is there more room to cut cost?

Katharine Weymouth

We have been focused on growing online revenue since we have started the site. It had grown very healthily year-over-year. I think in Q2 we saw what we have seen in the economy globally which is, it is just tough out there and advertisers are – the first thing you generally cut is your marketing budget, in particular your branding budget, which is a lot of the ads that we get. So I view it as a tough quarter and not reflective of a broader trend.

Donald Graham

Dave Green asks, “For the foreseeable future, does improving the trend in circulation mean losing print readers more slowly as growing circulation likely a thing of the past?

Well, we know the answer to that one.

Katharine Weymouth

Yeah, I mean I think circulation is going to continue to decline. Whether or not there is a base, I do not know. But our goal is not to change the trend to positive but rather to slow the trend.

Donald Graham

Greg Fernandez, the circulation VP of the Washington Post was here. Look, I still cannot see the back of the room so I do not know if Greg is here anymore. Yeah, but Steve Hills is here who also (inaudible) the circulation department reports.

The circulation department has always been the secret weapon of the Washington Post. It isn’t just that we sell more papers relative to the size of the market than everybody else. It’s that the quality of delivery by our agents and carriers in the morning is unbelievable. We compare our records of circulation complaints with a few other papers that are willing to share with us. And one time it is – that record is amazing and it isn’t a tribute to the executives of this company. It is a tribute to the delivery force. This is the number eight market. As Alan Frank in television sees it Washington is the number eight market in the country. So when Katharine puts up that slides and says the Washington Post is number two in print circulation to the LA Times and pretty close to them, as way more circulation in print than the papers in Chicago or Boston or – those are bigger markets, much bigger markets. And we have got hundreds of thousands more circulation than some of the leading papers in those markets. It is an unbelievable performance but as Dave’s question implies it.

I will take the last question which is; under any circumstances would sell or divest the Washington Post? Well, in general – there is a lot questions in the pile about why don’t spin off certain businesses? Why don’t sell certain businesses?

And I will go back since the years have taught me the value a (inaudible) imitation of Warren to the annually published owner’s manual, the Berkshire Hathaway. And I have said that we adapt the same value in this respect. We are – as I said when we sold Newsweek, we are exceptionally reluctant to sell any business. We would only contemplate it if a business is losing money and you cannot see a way out or if labor relations are terrible. That is quoting Warren not quoting me. Warren also says Berkshire, and I would have adopt this for the Post company, does not play what he calls gin rummy management in which you discard a business at every turn to try to do something with the stock price. We like to own businesses and make the most of them in the long run.

But a Reuters reporter asked me the other day if we would sell or divest the Post and my answer was no and that is spelled N-O-period. And that was the full extent of my answer.

And I think that’s it for newspaper questions. I have got one or two more corporate questions and we are now running hopelessly behind. But I got a couple of corporate questions one of which I will bounce – I’ll trade off with you Hal. Heather McPherson and Evan Wax [ph] over the web both asked questions about the pension fund. Evan’s question is; “Is there any way to extract part of the excess pension fund and use the cash to buy the…” he says, “to buy back stock or for other reasons.” So why don’t you answer that?

Hal Jones

Well is that…

Donald Graham

Pension accounting is not one of my strongest points.

Hal Jones

Theoretically you could buy some stock in the pension plan but that’s viewed very dimly by the department of…

Donald Graham

With good reason, we are not going to do that.

Hal Jones

We wouldn’t do that.

Donald Graham

But the second – or the question as Heather frames it is; “You noted that we should pay attention to pension surplus, great point, but is that pension surplus a true asset of the company? Can the Washington Post use that surplus cash in its business?”

That answer to that, that last sentence is absolutely not. We do of course – but we do of course have it available to pay the retirement of our employees including using those funds. In fact, Heather alludes to this in her question, to pay severance, to pay part of those buyouts, some of those buyouts as people retire. So that is a cost we absorb. But why then is it a true asset of the company?

To answer that, you have to look at a part of our annual financial statements that I beg all shareholders to take a look at not only for our company but any company where you own a little stock, which is the cash flow statement. And in the cash flow statements of many S&P 500 companies, many public companies in general, who have defined benefit pension plans you will see in the last years extraordinary payments into those pension plans to bring – to try to affect under – to try to affect the status of pension plans that do not have surpluses but have the opposite.

In addition, most public companies that have such pension plans make annual contributions to them or they make reincash [ph] balance pension plans or putting big company matches in 401Ks so that their employees have some form of retirement if they don’t have defined benefit pension plans.

We have a defined benefit pension plan into which our company is making no catch up payments and does not make annual payments. So it makes the businesses of our company that cannot contribute to these defined benefit pension plans better businesses. And if you look at the publicly traded newspaper companies, you will see some of them making very large contributions to pension plans in the last few years. Obviously in 2009, the values of the assets went down. The companies were then in the position of having to play catch-up.

We are so fortunate that thanks to Warren Buffett’s very good advice and Katharine Graham taking that advice we are in the opposite position. It doesn’t mean that we are extracting money from the pension plan but it does mean that our annual expenses are less than they otherwise would be and it does mean that we are not in the position of having to kind of play catch-up expenses to a pension plan.

Final two other corporate questions; one from Clara Anderson that several other people asked. Would you contemplate spinning off Cable One?

No, we don’t do spin offs.

But first question winds up saying, why would you not do something like spin it off to realize that value for shareholders?

Our ownership for Cable One does realize that value for shareholders. If you own one percent or one-tenth of a percent or one-thousandth of a percent of the Washington Post Company, one of the things you own is the proportionate share of Cable One. And when you say to yourself, what is this I own? What is the value of it? You have to look at all the pieces. Cable One, television stations, Kaplan and the Post and the other businesses we own and say, “What is the value of them?” And you do own that proportion of value of Cable One. Does the market currently recognize that value in full? No. Will it in time? I again go back to our source around here which is Katherine Graham’s autobiography.

In the late 1970 – Mr. Buffett and Berkshire bought their stock in roughly 1974, maybe 1973 but roughly then at about six bucks a share in today’s value. And he told us, he told Post Company management, I think he said so in public that at the time he thought it was the cheapest stock he’d ever seen relative to the assessable value of the company.

My mother, who was the most self-critical CEO in the history of CEOs, year after year would say to him, “You keep telling me that these stocks are undervalued and you keep telling me what I do makes sense. So why doesn’t the stock price move?” And Warren’s answer was, “You know if you keep doing all the right things as I think you’re doing, it never happens that a company has real value and the stock market doesn’t essentially recognize it.” He used Ben Graham’s quote about it. “In the short run, the stock market is a voting machine, but in the long run it’s a weighing machine.” And she records in the autobiography that at one time he asked her, “Why is no analyst recommending the stock which was at 20 bucks a share?” And he said, “They will at a hundred.” And when the stock got to a hundred they all were, but at 20, Warren saw the value. So that is a long and overly complicated answer to a good question.

Last question from Dan Baldini [ph]. “Please explain the investment rationale for the Avenue 100 media and the Corinthian Colleges investments, and quantify how much has been lost on these investments.”

This is a really rude question. Yeah. The Corinthian investment, I made in a very short time after Corinthian years ago missed a quarter and its value fell below at the time, the value that we were paying for for-profit colleges. And we announced at the time that we were making the investment but it was purely for investment purposes and the investment did well for many years. The investment has done less well in the current regulatory atmosphere as Andy showed you the stocks of all for-profit companies have plummeted.

I would say not speaking of Corinthian. I’ve never talked about that company or other investments we own individually. But I would say of the pro-profit industry generally that I don’t think it’s a fair statement that the market as a whole could hardly be more pessimistic about the outlook for these companies. Andy has given you our own outlook broadly, and in the long term. And it is an outlook that applies specifically to Kaplan but much of what Andy has said is true that the industry as a whole.

I don’t comment on the future of our stock price or anybody else’s stock price, but I guess that’s the most complete answer I can give.

We now – I’m teeming with other questions. I am going to do not a 15-minute, but a five-minute demo of part of the work of the Jay’s [ph] team. And for those of you who are at the annual meeting this will be a bit of a repeat. This is Greg Barber, the editor of the site in question. And okay. This is Trove. And Greg, I can’t find a cursor here, and I am not sure the mouse is connected.

Okay. So I’m going to sign on to Trove using Facebook to see how quickly this works. Thank you. All right, let’s try again. My typing is famous.

Why do you have to sign in to Trove via Facebook? That will not be the case for long. But Trove is our first stab at a highly personalized new site. I have personalized it for me and I have personalized it in the correct manner from the sports section out, but the value of Trove is that you can personalize it for you. So what’s on the left – Greg just stepped up here to log me on.

These are the leading stories of the day as chosen by a team of human editors. It is a sort of Google news with a little editorial intervention. If there is an earthquake in Japan you are going to read about it on Trove even if you don’t have a channel on earthquakes or the channel on Japan.

Over here you can personalize Trove to reflect your own interests. I know the Zagats and I knew they were trying to sell their company. They sold it yesterday so I quickly created a channel on Zagat to cobble up the news of their sale to Google and what came next and what Google said about it because I’m interested in it. And here we have three or four news stories on Google acquiring Zagat.

I have a channel called war in Afghanistan because I was in the army in Vietnam and I am kind of interested in how the war goes. I have done something called tuning that channel and you can too. I have entered a few sources like Al-jazeera and our website’s foreign policy in the Washington Post that I want to make sure are referred to. And these will not be the only sources consulted by Trove but I want to make sure we favor those sources a little bit.

And I probably overload Trove with channels. I got 50 different channels on here including ones on all the local sports teams because I do read the paper in the correct manner from the sports section out. But I am on the Board of Facebook so I have a channel on them. I have a channel on hurricanes for obvious reasons. On Amazon. On the debate over the debt ceiling and a bunch of others.

The purpose of Trove is that you follow the news interests that are yours, not just the broad interests like sports or entertainment or business, you can follow those, but the specific interests. If you are a shareholder in Berkshire Hathaway you could follow Warren Buffet. I most certainly have a channel on him. For other companies you follow or other countries, the businesses – you know the cities where you live, where your kids live, political figures you admire or loathe. You can shape the news to your own interests, but because of editor’s specs you will also get the leading news of the day.

Trove is an experiment. I think it would be fair to say that it is currently in something approaching a public Beta. It is out there. We are not making any great effort to attract readers to it because we don’t think it is quite as good as it should be before we start trying to attract readers to it. But Jay’s [ph] team has improved it a ton. I am demonstrating it today. I demonstrated it at the annual meeting. It is so much better today than it is at the annual meeting, than it was at the time of the annual meeting. But it will be a lot better six months from now.

First, if you say what is the news site of the future going to be like? I will flat promise you it is going to be personalized. That is not going to be the only attribute, but if you think about your own Amazon page and you think how Amazon irritatingly tells me that an author whose last book I bought has published a new book, and like a fool I go ahead and buy that book although I already have 20 books piled up on my bedside table. But that demonstrates how effective personalization can be if done right. We are trying to get it right in news. It’s actually harder in this than in something like books. But Jay [ph] is a ten-year Amazon veteran. But the book titles don’t change that much from morning to night, the news changes completely and it’s harder to sort it, it’s harder to define it.

So that is a very brief view of Trove, this is not the only nor is it the most necessary, the most important thing that Jay [ph] and the labs team are working on. But if you do engineering, you will take note that Trove is hard, that we are trying to take on something that is both important for the future of the company and really challenging.

And we are taking on other hard problems because I think that one of the things this company ought to be doing is trying to skip a generation, trying to create news products that are going to be – going to offer some things that we think readers might want in the future.

Greg, thanks for the demo.


Donald Graham

We’re now going to go. We’re not too far behind to the other two business leaders who are presenting this morning.

I am in danger of repeating myself too much in this. Alan Frank did not begin his business career in Post-Newsweek stations but he has been at Post-Newsweek for a long time. It was when Alan took over our Detroit television station, then our largest, that Detroit began to realize its potential as a news organization and as a business. Managing a TV station in Detroit that for reasons Rick Wagner will fully understand, has not been the easiest assignment in the television business in recent years. But our company with its variety of markets, there is enough public local television companies that you can compare our operations to those of others.

And I want to tell you as shareholders, you are so fortunate that Alan Frank has been running this company for the many years he has and that the leadership under Alan, also a veteran, he is also experienced and also including many lifelong or close to it Post-Newsweek veterans has been running those stations. And after you take a look at the numbers you will understand why. Allen Frank.

Alan Frank

Good morning. I will give you a quick review of where we are but first I want to briefly detail our stations and our websites. We are in major markets. We have ABC, CBS, NBC and of course The Great Independent and Jacksonville. The last time we talked a few years ago, as Don said it was 2009, we are in the midst of the year like none of us had ever seen and it proved out to be true. This is our – revenues we were down 16 percent, 42 percent off the bottom of operating income. But I did think there were some good signs that I was seeing, and so let’s talk about what’s happened from then till now.

One of the things that happened in 2009 was our largest category, our largest advertising category, auto and truck. And it fell off dramatically. We have been over 110 million of advertising revenues, and of course in two years it was cut in half, our largest category. And then so what measures did we take? What did we do when times were bad? And how does our company differentiate from some others? Well, we made some personnel decisions. We stopped our 401K match. We reopened our Talon contracts. We went to our folks on the air and we said, “It is tough time, we want you to help us, we want you want to work with us.” We shifted some salary increases. We kept some positions open.

What didn’t we do? We did not do furloughs like many other companies did. We did not do unpaid vacations. We did not flash and burn. We negotiated some syndicated shows where we could –syndicated shows are the shows like Oprah, Wheel of Fortune, Jeopardy, Regions, et cetera, et cetera.

Some we – we at least put the strategy in place for what we do. It’s a major cost, expense for us. And most importantly, we focus on best practices in a number of areas; in news, in engineering, in IT, in sales, in business. And you’ll see as we go through the results of some of those best practices that we instituted when times got tough.

Two other things happened we’ll talk about as I go on where you establish a design hub and we restructured our digital operation. This is all in ‘08, ‘09 and hear the results. So, the first thing to look at is revenues and operating income.

I did feel 2010 would be better, but as Don said, "I didn’t think it would be this much better, this quickly." We were up 25 percent in revenues and 72 percent in operating income. And 2010 was – we came back very strongly and we’re pleased to it. And it’s so good (inaudible).

So, what were the positive factors, there were three big ones; auto is our largest category, Olympics, of course, every other year and political. And so, let’s talk about each of those for a minute.

Auto, I showed you how it dropped. Well, it came back not as much as we saw in 2008. But certainly, a $22 million increase in that category. Olympics, again, we were selling off of a really bad environment. In 2009, we couldn’t get ahead of it like we usually do, but still it was almost $5 million of new incremental revenue, and then politics. I just want to show you this for a second to give you an understanding of how robust political spending was last year.

These are the presidential – this is our gross spot, gross spot for the last few political campaigns in 2006 to 2008. And there were the non-political campaigns until last year we went through the roof. And this is a non-presidential year, of course. Why? Let’s take a look at just Florida where we have three stations. As Jacksonville, Orland and Miami, these are the last three – over 15 to $12.5 million in a presidential year, almost $25 million.

What happened? Well, if you look at the racist that were there and if you remember, Charlie Chris [ph] was running – was the governor. He decided to run for the Senate. Rick Scott [ph], a billionaire who ran for – it’s a general role, if a billionaire is running and he’s really in a race, it’s a good thing for political spending.

And so, Charlie [ph] was the fourth candidate here. Marco Rubio [ph] was very effective (inaudible) in the primary, another billionaire Jeff Green [ph]. So, we had two billionaires. And it was – and then there were many congressional racist issue advertising. It was quite a year.

So, the other thing to look at, and you – hopefully, some of you notice, these are expenses went up in 2010, why did it go up so much. And you need an explanation on that. Well, for one thing, when we took away – when I took away the 401k match, I did say to Oliver Folks [ph], "Look, we’ll consider if times get better."

And so, we put the 401k match back in February of 2010. Salary, of course, increases, bonuses were back, sales increases were back, and that was money. In addition, rep commissions were up, which is a good thing, pay more because of a structural difference in our websites to internet broadcasting depreciation, etcetera. And that was our 18 million.

So, how are we doing so far this year? The first six month is done. I showed you this a minute ago. Total revenue is up a million dollars for six months of this year versus last year for six months. But there are number of factors in that that make it more positive. So, one, of course, we don’t have in 2011 the Olympics, it’s every other year.

And we don’t – the difference in political – we had some political this year first six months, but the difference is four point three million, so that nine million there, a million dollar here. In addition, as you know, auto suffrage somewhat after the tsunami in Japan not just with the Japanese cars, but the computer parch that are made in all cars. And so, that’s down three million dollars.

So, in effect, we really had a much better quarter – a much better half year than just this one million dollar if you look at – if you pull out those figures. But the core business was up seven percent when you look at that.

It is one of reasons it’s good to have this meeting every two years, is that we are – you really have to look at our business on a two-year cycle. This is like a (inaudible) and this is – just what happens, if you don’t look at our business every two years, you don’t get the effective political, which is a major effect for us.

What are our positive revenue factors in first six months? We have a lot of new business initiatives, and I’ll just tell you briefly about some of them because they are – they really are going to be (inaudible) as far as they’ve been. We started doing a series of expos at all of our stations where we bring together category of advertisers, whether it’s healthcare, whether it’s education, we sell booths to them all, we have advertising on TV.

That’s going to represent on an annual basis about two and a half million dollars for us. We do a program where the company out of Dallas will recreate, we take local retailers and help create brands for them, and we make commercials for them with new brands, music, animation, etcetera. That will represent about four and a half million dollars for us across our stations.

Our web revenue is going to be up about two and a half million dollars are increased. Retransmission consent is up about three million dollars. So, all of this add to our positive factors. And we do expect for the second half of the year, I said that auto was down. As you all know Toyota has a significant number of watches this fall [ph]. All the automakers are very active. So, we expect that category to be active as well.

So, when you look at that 2011 first six months, which you see is our operating income, is up about two million dollars, a million eight cash flow and margins up. We’re building on a year without political and a year without Olympics. You all read – you all read what’s happening and consumer confidence, etcetera, etcetera, but we had a good first half.

Expense savings, there are a number of things I want to talk about; syndication – I told you we got into a plan for cutting that. We’re going to be down 60 percent from 2010 to 2013 and we’ve kept all the shows we want to keep. I’ll talk about our headcounts reduction, our hubs, our control automation. Syndication, this is what it looks like this versus last year, and here it’s where it will end up being.

Our staffing, because of certain efficiencies, because of certain things we’ve done, our staffing is down 13 percent from 2007 to 2010 as we continually become more productive. Let me talk about one of the things that we did is we design hub. In fact, it was not started for cost reasons. I was concern about the look at all our stations and how sometimes we were getting crowded.

And we invest heavily in our on-air anchors. We feel strongly that they’re important for us. We feel strongly that they’re key for us, our key anchor people. And sometimes, the graphics of secure where we’re going – we don’t want that to happen. So, we put together design hub which controls a design to look at all of our stations. We put it in Miami, which is a great center for creativity and design.

The station is located – they’re in the process of having a better look across all our stations. We were able to basically eliminate the station art departments and even with staffing of the hub. That will be a million and a half dollar savings over five years.

This year, we started a traffic hub. Traffic not being cars on the road, but it’s the scheduling of commercials, promotion, public service announcements, programming on a log exactly what airs when. One of the benefits of that is we get best practice on inventory control, that you recognize them.

Things like one station is doing well, another might not. We put that in our station in Jacksonville. We have a great head of that there. We build up the hub and that eliminated the station traffic departments and will save two millions dollars over five years.

In addition, we’re really into now control automation. That is buying equipment in the production controls, for news, and every other thing we do locally that enables certain efficiencies in those control rooms. In fact, better control over the product.

We’ve had robotic cameras at most of our stations for some years. It gives you a cleaner look, a better look, more controlled, and now the efficiency in the control room. And that will resolve in – that’s being rolled out. We have one or two stations to go this year; one next year. Eventually, that will save us 35 full-time equivalent FTEs across all the stations. So there’s a number of expense savings that are already put into effect that will be good signs for us as we go along.

One other reason that our syndicate goes down is we started a number of additional newscast. When Oprah went out of business on our airs, on – across – no longer a syndication, it open up opportunities. A station in San Antonio at (inaudible) was an Oprah station the day after she went off the air, May 25th, we replace her with the half-hour newscast at four o’clock followed by inside edition.

And that’s already number one out of the gate, a great station. Really, new general manager there, by the way, Phil Lane [ph], the (inaudible) at South Carolina just started a month ago, two months.

And soon next week, we’ll start a – we’ll expand the late news, the ten o’clock half hour to a full hour. That starts next week. Our station in Miami WPLG, we started three weeks ago, two more newscast at five and five thirty right out of the gate. Their second place strong increased ratings from what we were doing before.

In our station at Atlanta, we started a five o’clock news...

[Audio Gap]

Another interesting big station is KPRC in Houston. That station had some problems. You all know from Rick Perry that Texas is a state that’s doing better than most in this economic time. And so, there’s a lot of money they made, and particularly in Houston. And we were not performing as we might.

We were – except for the morning news, which have been second, third or fourth in all our newscast. And that’s not a position that we are – typical for our stations. Our VP news Deborah Calare [ph] last November, she went down there in short-term basis to try and help change – took the promotion manager from Jacksonville with Mike Guererri [ph]. And he move there and then put a new general manager in February with Gerry Martin [ph].

And the difference in six months is really remarkable. The morning news is still second, but every other newscast is now second. And in the sense of increases, you can see for yourself. This is a station that is on the move and important market for us with a lot to gain. And this is going to be a really great story for us moving forward.

I am bullish about the future and I’m bullish about local TV. I’m bullish about where we’re going for a whole bunch of reasons. Let’s start with political. Next year in 2012, obviously, it’s a presidential. Things like that, race is now been going around for five years already. But – and it’s going to go more.

We have four new congressional seats in Texas that will be active for us. There are senate raises in all of our stations. Michigan has a senate raise. Florida has a senate raise. We have three stations. And Texas has a senate raise.

In 2014, governmental raises in all of our states. Senate raise in Texas and Michigan. 2016, the presidential raise again and Senate raise in Florida. Of course, there are congressional raises in all areas. Some of them get really active and there issue advertiser. So, political will be a major category looking forward.

In addition, I’m bullish because NBC resigned the Olympics. As you know, our two biggest stations are NBC stations. We have five Olympics over ten years coming up, London next year, then southeast Russia. And then Rio de Janeiro, same time zone. That will be a good one for us.

South Korea in 2020 is unknown yet. But those will be important for us going forward as well. Their transmission revenue used to be less than a dime. Now it’s over 50 cent. And at some point, it’s moving towards a dollar as we go forward from cable and from satellite.

I’m bullish because NBC is now owned by Comcast. We feel strongly positive about Steve Berg [ph] by bringing life with people programming primetime for NBC that will turn around instantly. But we do figure we’ll turn around. They have the Olympics. They have a great new position with Steve Campus [ph] and Brian Williams [ph]. So, we think NBC is going to be stronger for some years to come.

Bullish because CVS is in a great position. They’ve had great primetime and they move with his team. The news division has been restocked with Jeff Sager [ph], who was running 60 minutes taking over and David Roads [ph]. They’ve already (inaudible) CVS Evening News With Scott Pelley. It’s better. The audience has recognized that already ratings are coming back. They will attack the morning news at some point. That’s a good sign.

Bullish because ABC, the one sport they have that moves ESPN is basketball NBA. We have two ABC stations in San Antonio and Miami. They both have great basketball team. This year, for instance, the Heat, Miami Heat, being in the finals meant three and a half million dollars more for us because the Heat made it.

So, those are all good reasons for us going forward.

I’m bullish because our web revenue – we’re about four percent of local revenue. Most of our web revenue is local and growing. All of our sites are leaders in their markets. Internet broadcasting, which were part owner of. We have a new CEO Elmer Baldwin, a very impressive guy with a lot of background, including Oracale for many years.

We made a deal with CoreMedia, which is in major city out in Europe. We think that’s going to make a big difference also to help the tourist part of our new – the video moving forward. We migrate to these sites which will look that different, but they’ll be significantly different user experience this fourth quarter. So, we think our sites have a lot of room to grow, and they’re very successful already.

In a number of markets, we are the top site in the market, top – lead in newspapers, which is not usual in most markets.

I’m bullish because I’m mobile. As you know, I think in the future mobile, well, it may be for broadcasters. Open mobile vote video collision, OMVC was started about three and a half years ago. Thirty-six stations was one of the leaders. Over 900 stations to put together what could we do to see that we wouldn’t have a problem with standards.

It’s – the best example I can give is if you think of this – your VHS machine for years, there was this fight between beta and the DVD beta and VHS. And it took ten years, and it was – we didn’t want that to happen in our industry. And so, we got together all the broadcast, as many broadcasters and manufacturers. And we agreed on standards.

It was a test last summer in Washington, which was a major success for mobile over the year. But it wasn’t a business plan, so how could we put together a business plan. So, a number of groups form what is called the Pearl, LLC. And these companies are the usual suspects to ourselves, (inaudible), Hurst Media, General Merit [ph], Tricom and Scripts.

Once we form Pearl LLC, then we get together with NBC Universal, we get together with Fox, we get together with ION Station, 56 stations (inaudible) station group and form mobile content venture, MCV. And mobile content venture will be rolling out product at the end of this year, early next year, a minimum of 40 percent of the country, a minimum of two or three channels a market, focus will be on tablets and smartphones.

I believe that mobile content venture is the leading effort to see if we can get a realization of business and mobile. We feel good about our prospects. And that will – you’ll see it as next year rolls out as to the business model over the next few years. That could be significant for us.

So, that’s a brief look at what’s happened to us over the last few years, and I’d be happy to try and answer some questions.

Question-and-Answer Session

Donald Graham

Alan, I have several thoughtful questions for you. I have three or four that are basically the same question, which is what’s the future of retrace? And I have to say I’m sure some of you will ask the same question of (inaudible). And you may see, since one is a broadcaster and one is a cable operator, ever so slight differences and outlook, which we – not only tolerate but encourage in our company.

But, I’m sorry, what’s the future of Retrends and what’s the future of local affiliate network relations?

Alan Frank

That is tied to the other question. It’s a very good question. Retrends is growing. We see our philosophy at our company to do this as a business. It’s a fact. It’s – and so we work with our supply, we work with our distributors, whether in satellite or cable to work with them and plan with them and we’ve never had a disruption in the industry.

They're very rare, actually. And the rates are increasing. I showed you some numbers and they are increasing. The networks, they’ve been very clear that they want piece of the retransmission consent revenues as they come in.

They made the case that part of the reason that stations get – the numbers they get is because of the network parts of that product and stations are working with them in various ways different companies doing different things.

Donald Graham

It’s uncharacteristically polite answer. Tom Ruse [ph] asks, how did KPRC find itself so uncharacteristically for WPO poorly positioned in all new slides. I mean, my own answer would be, why are we so far behind. I think my own answer would be Houston and Orlando sort of taught us a little humility about competing with – and really, news markets were everybody’s good.

And when we took over Houston, it was at disc number four. But that was many years ago. And it – the competitor operators in Houston, Bellow and ABC chiefly are sensational. The ones in Orlando are also outstanding. But you saw the rate of improvement.

You want to comment further?

Alan Frank

When things go badly, they can go badly quickly. And if you make a couple of wrong decisions, they can – we’ve promoted the news director at KPRC to be a general manager. And the difference of the replacement, it is a mistake and it really hurt us. And hurt us quickly. And so, we’re recovering quickly. OK.

The final question, which I’m going to ask, first to you and then to Tom about his part of it is from James Span [ph], who basically asks, the Post-Newsweek, after many years in which its operations deteriorated and – James [ph] says I’m not saying this – maybe it should be a little bit sooner.

It – you talked about the two-year outlook, the four-year outlook for local television, but local television – television viewership generally has some of the same audiences in the newspaper business as lower – with younger viewers and with many, many alternatives including now over the top or computer viewing (inaudible) take two clicks on his computer and see a movie. So, what do you think is the future of the business that Post-Newsweek is historically been in in the face of all these new forms of competition.

I’d say we take the tough questions here.

Donald Graham

I think, some of what we’re seeing is actually very positive for younger viewers. For instance, one of the things that they do is just sitting here thinking when was the last time I thought to myself as a younger viewer because I refer them (inaudible). It’s been a long time.

They Twitter or they want to talk to their friends while they’re watching. The result is that they’re watching more live television because that’s the way they can share. What we’ve used to do is we’d be in the same room. But we’re not in the same room. They’re wherever they are in the world. But they’re communicating with all their friends at the same time as they watch something live.

That’s been a good sign for us. That’s been a good sign for you’ve seen the numbers all of (inaudible) video viewing continuous to increase. Now it’s increased across a lot of different platforms. It’s not just broadcasting, which used to be – have a lot of cable channels, a lot of satellite channels.

[Audio Gap]

Donald Graham

...more barbarous entry in that business than there were. There are so many good competitors in the student lead aggregation business and Avenue100 and CourseAdvisor will never be worth what we paid for. We addressed that and mentioned, I’m thinking, earlier reports that we’ve written as part of the value.

However, the team at Avenue100 includes a lot of the smartest people in the Washington Post Company. I mean I do not want to be taken IQ test against this crowd, which is a bunch of MIT (inaudible) math PhDs and others. And the knowledge they have of Web search and Facebook advertising, of Google advertising and search advertising, generally, and Facebook advertising of search engine marketing and search engine optimization has been very valuable to a lot of our businesses.

And having their insight into student aggregation is also obviously of great value to our business. The team under Brian Everman [ph] is a sensational team. I’m proud to have him as part of the company and we’re going to try to make the most of the asset, although it is not – I’ve already commented on this value relative to what we paid for it.

Again, from Andrew Freeberg [ph], please discuss the impact on your business of Google and other social media tech firm’s efforts to get more local content, like the acquisition of Zagat.

It’s also written repeatedly that my son-in-law Tim O'Shaughnessy as this founder and CEO of LivingSocial, a locally-based startup which is the number one competitor to this famous (inaudible) to Groupon. And so I get a close-up view of exactly how well these Web giants are penetrating – and, well, LivingSocial have gone from nothing to a giant in a couple of years – are penetrated into the local commerce business.

Newspapers have to watch this like ox. I mean, these companies – Groupon and LivingSocial – have changed the nature of local commerce and Google would like to join them in doing the same. That’s the rationale for Google deals and it’s part of the rationale for Google buyings to get their other rationales as well.

This is very important to the local commerce area, so it’s very important to the future of news organization, and Katherine made a comment about a couple of initiatives that Post has undertaken and as we probe around the edges of that.

I’ve got a couple of other questions from me, but I’m going to introduce Tom. Now, I can’t claim credit for the first three people who spoke here. The great Bill Ryan, a long time CEO of Post-Newsweek Stations has hired Alan and certainly moved him up through the ranks. And so I can’t take credit for the initial hire of Alan Frank.

Bo Jones, one of the most modest and self-effacing person in history, who was, first, the general counsel of the Post and then the publisher, actually hired both Andy and Katherine first into the company as lawyers. And Jonathan Grayer, the long-time CEO of Kaplan, when he moved from Newsweek to Kaplan in 1991, the first thing he did was send for his friend, Andy, who was down in a legal shop at Newsweek.

And so, others get the credit for those careers. But I hired Tom Might. Now I would like to say when I did so, I knew I was hiring the future CEO of Cable ONE. But the truth is, we didn’t know him since Cable ONE at the time, and I hired Tom.

His first assignment at the Washington Post Company was to learn about newsprint waste. We are meeting in a building that was formerly occupied by newspaper presses and waste was a – so in two weeks, Tom knew more about newsprint waste than I did or more than anybody in the Washington Post did. And it soon became apparent that this was a uniquely valuable person.


Donald Graham

Your heads are now about to spin. Remember that as shareholders in the Washington Post Company, you are, among other things, proportionate owners of Cable ONE. And Tom will now describe to you the business you own, which it certainly looks a little different than it did two years ago, and they look a little different than you think.

Tom Might?

Tom Might

Thank you, Don.

So these are the topics. Probably, it would be better to call them themes for my talk this morning with you. It’s in vogue today to quote Warren Buffett. So here’s mine. Warren, one of his many things he said, it’s much better to own a great business run by mediocre managers or something to that effect than a mediocre business run by really great managers.

Hopefully, in Cable ONE over the last 25 years, you’ve gotten both. The average tenure of the executive team that runs Cable ONE with the company is 19 years. They and a group of associates with almost similar tenure item systems have done a terrific job managing the purchase that Kay and Dick made 25 years ago.

We’ve done it, as I told you, time and time again with very contrarian thoughts about how to run the place. We’ll talk a little bit about that and see how that’s evolving. We will talk some about the enormous amount of change that we are happy to cope with, competitively and technologically, and how that’s impacting our strategy, again, in a quite contrarian way.

Sadly, we can’t talk constantly about the results of some of our changes because it’s too early to know where it’s going. But we’ll have some hints later on on some of the slides. It is our 25th anniversary. We’re in our 25th year. And here is what we own.

Cable ONE is not the part of the company most of you own stock for or come to these meetings to learn about. So each time I get up here every two years, I feel compelled to remind you what it is you do own in the cable space. This is what you own – a lot of second tier markets I call the large towns and small cities.

All the hollow circles are systems we acquired since we acquired cable originally 25 years ago. Most of this was done, as you’ll see, the late 1990s when prices were very advantageous. You probably also do remember the few tidbits you remember about Cable ONE. We were the bull’s eye of Hurricane Katrina since we own the entire Gulf Coast of Mississippi, 80 miles of waterfront cable property, and we took a $50 million to $70 million hit in 2005, about two weeks before the 2005 shareholder meeting where I gave you a longer presentation.

You may not know, since you don’t know much about your portfolio, you also own Joplin. So we were the bull’s eye for the worst hurricane in American history and the bull’s eye for the worst tornado in American history.

I have a hundred of slides but these, the last two are just one of the homes in each marks. Our associates were badly hit. About a third of them suffered major total losses. Fortunately, Joplin was much smaller than the Gulf Coast of Mississippi. Proportionately, it was the same to that size market.

But in both cases, some of you fellow associates, many of our vendors stepped up and helped us raised a lot of money to fill the gap where the insurance companies fell short in those markets, and we’re doing fine.

So I’ll talk about trends, again, to give you long-term perspectives, since you may not have focused on Cable ONE much in your ownership proportion imposed shares over the years. I’ll cover from the year we bought it, in 1986, with a few trends to give you the big picture. And it is important because there are some shifts we need to focus on.

This is cash flow, operating cash flow. This is not after CapEx. This is before CapEx. This is operating cash flow. And you see some dips. The Cable Act of ’93 caused us to go flat momentarily. In 2001 we had a major trade where we traded a lot of our systems to AT&T for almost all of Idaho, and they made a lot less money, but it put us on a nice upward trajectory as you can see.

Later that, Katrina knocked us down. Now, look at over in the far right. We’ve had our continuous climb until recently. We were having a prolonged flat to slightly down period and I’ll focus a lot on that in my comments.

This is the margin view of that operating margin view of that. And back in the old monopoly cable days, cable companies had margins approaching 50 percent. In the more recent period, they’ve been more like – rate is more like 40 percent. The dips you see in the last 10 or so years were, again, Idaho, Katrina.

We built our way back from Katrina to a 40 percent margin. By the way, in the publicly traded arena, until recently, the only people that had margins in the 40 percent range were Comcast, Cablevision and Cable ONE. We’ve always been a top financial performance on a margin basis.

But the slide to 36 is no accident. We’ll talk a lot about that and this is a trend that we will have to live with.

Again, looking at history, it is a great business. It has been a great business to be in for a variety of reasons and, hopefully, we’ve run it well for you. This is a video business. You can see how it grew nicely the first 10 or 15 years of ownership and has been down, flat to down since then.

However, part of being a great business is being lucky sometimes and managing that luck well. As soon as video started to slow down for cable, along came high-speed Internet business. We’re an ISP, an Internet service provider as you know. And then as that started to slow slightly along came the telephone business, VoIP, video over Internet protocol. So we’re now in three primary businesses.

Accumulatively, you can see the long continuous growth and each of these units is as valuable as a newspaper subscriber. We have gone from 350,000 units – by the way, we call them PSUs, primary subscriber units. Video count is one, Internet count is one and phone count is one. That’s of a new industry standard for counting units – to around 700 and 750,000 when video plateaued. And now we’ve added almost an equal number of Internet and phone units.

This is the ranking, where we were in size in the cable space during this period. It is not that we grew so much as we went from 25 to 10. We did grow as you can see, but they shrank, or actually they got out of business. People just exited the business out of fear that the business was over.

They saw it as a blue business and the vast, vast majority of the cable operators, almost all the cable operators large than us, sold out to others, and we were acquiring some of them as they sold out. Most of them sold out to Comcast and Time Warner.

As the result of the growth of Internet and phone, this year, I believe, is statistically the year where we are now only one-half video. The Internet and phone unit counts, our PSUs equal our video count. So we’re no longer a TV business, even statistically.

Here’s the same slide but in a incremental view, year-to-year what’s changed. You can see the big acquisition years when we were buying up subs, it has gone up for an average of $1,350 when they were still a smoking deal. Immediately, after that, we went to $4,000 a sub and we stopped buying. And you can also see the internal growth stops. We went up and down year-after-year, slightly negative in total.

But again, this is when the new businesses kicked in and propelled our growth forward. So we have been growing even though video has been as slightly flat. We have been growing PSUs or units at a range of 40 to 50,000 incremental per year for quite a long time. And those units are every bit as valuable as video units. So it’s been a good business as Warren would say. Even a mediocre team could have done pretty well. But hopefully, we’ve done better than well.

The ratio of loss of video units roughly over the last decade to the growth of Internet and phone units just for note-taking purpose is up five to one. So every video unit we loss, we grow five of the units historically. Very much unlike the telephone business where they’ve not been able to replace their wired losses, which you’ll see in a minute, with Internet or video subs.

Just to remind you, we pride ourselves in taking in our strategy, taking great care of the customers. I want to show you two data points or the two most recent, while this one is a (inaudible) – the Consumer Reports is only once – put this report out on cable bundles. And these are the other publicly-traded cable companies. There are others not publicly traded and the telephone companies that have done better.

But to those who have a discipline of reporting to Wall Street and happen to have a good operating margin as well, we’ve led this pack. We did not do enough phone customers for us to show up in the Consumer Reports, a version of this report. In the last JD Powers report, which usually comes out every October, so there should be one next month. We were at the top of that list as well.

As Don mentioned, we’ve had to be agile in our strategy. Here is a conceptual picture of what’s happened in the cable space in the 18 years that I’ve been running the cable division. We have gone through the real true monopoly with great motes around us to being almost a pure commodity. We’re not quite there, but we’re getting very close.

Here are the competitive movements that have happened over time in the 20 years, past 20 years or the 18 years that I have been there and here are the strategic responses we’ve made. It’s not my topic today to detail these out, but it’s constantly changing and we have to be constantly vigilant and agile and proactive in adopting our strategy to meet these technological changes, these competitive changes, and to take advantage of the technological changes.

So our current strategy of broadband value is quite extensively documented internally. I don’t have time to go over that. These are some of the headlines of what that strategy entails. I’m really only going to have time to talk about the top two, our product packaging strategy that goes after market share rather than milking the businesses other cable companies are to a degree.

We are trying to grow market share as rapid as possibly in the last several years, in the next few years going forward to see if that’s a better strategy, what other cable companies are doing. Warning, adviser to investors, our numbers are where we used to be one of the leaders in the cable industry statistically, we are deviating by choice strategically from the pack. Here are some of the significant packaging changes.

A year ago, we introduced this deal, a year ago May, where we have a $75 bundle, and this is not an economy product where you’re getting a cheap service or for a short period of time. For a full year, for 12 months, you can buy our standard cable, our standard phone, with free long distance, and our standard Internet product with unlimited capacity for 75 bucks, at half price.

Our normal price to these products would be $150. We’re trying to steal the business from the telephone companies and from the DBS companies as best we can, to gain market share in all three businesses. This has a dramatic impact on our financials and our volume.

So here’s what happened to our year-over-year monthly subscriber numbers, our PSU numbers. You can see when we introduced this product last May, a year ago May, May 10, May of ’10. And by the following year, we were seven percent up where we had been flat.

The recession had knocked us down to flat and in the face of still a pretty stiff recession, we pushed our volume up to seven percent. Now it is coming down because it’s the anniversary as many of those people who had a one-year commitment, and they are able now to cancel their contract or to drop the unit.

What’s happening, many of them are cancelling the phone part because they say, “Well, gee, I’d rather not pay what is now $105 rather than $75, I’ll drop the phone and I can get the other two for $90.” So, you see some fallout. But we also dramatically changed our offer again. We kept the $75 apart but dramatically expanded our offerings this past May. And now we have Cable’s best Internet offer as part of it.

We have introduced 50-meg Internet service, nothing new. Most other cable companies have done this, but it’s free. As long as you sign a contract for one, two or three products, we will upgrade you from our standard’s fee to five meg, which you could see in Consumer Reports outrank in quality. The Internet service of any of our publicly-offered competitors, we will now – if you sign a contract for one, two or three products automatically give you a 50-meg speed at no additional charge.

Every other cable company will charge you $100 or more for this kind of speed. So they’re getting very little take rates. We’re getting an 80 percent rate. Eighty percent of our customers are signing a contract to get 50-meg rather than five-meg. Now what do we get a return for that? A couple of things.

I should mention Internet growth rates consumption of Internet is doubled, the bits, the number of bits an average consumer is using, largely because of video. A third of our traffic now and the whole industry is just Netflix, one use. Not video, but just Netflix is a third of the consumption of Internet in this country and with us.

That (inaudible) just caused our consumption and our infrastructure then has to double to cope with that. So we have introduced data plans. If you want this really terrific speed for free, you have to agree that you’ll limit your use, perhaps, to a certain level, or pay more if you go over. So for free, you get the high speed, but you’re either going to get a 50-gig monthly limit or a 100-gig monthly limit, which probably means nothing to any of you, except that – if I give you a reference point, the average consumer is about 10 gigs a month.

So this only impacts the top ten percent or so of our users, and it’s voluntary. We’re forcing no customers to give up their unlimited plan. But if they want the high speed, they have to agree that we get the benefit of some higher consumption rates. But even if you consume quite a bit over the 50 or 100-gig, you’re very likely to be way less the $100 you’d be paying any other cable company for the flat rate or for the flat (inaudible) of using this kind of speed.

So many other interesting benefits that we’re seeing from this. Before we introduce the $75 offer for 20 percent of our customers, we’d sign a contract for six months, one year, two years, and the average length of all starts, since most of them didn’t sign a contract, it was only two months. When we tipped in the $75 offer a year ago, a third, over a third of our customers started signing contracts. And the average length of all starts was six months.

In the last three months – and this is way more than we anticipated – I think because the 50-meg speed, two thirds of our customers are signing a long-term contract with us, and the average start is 11. This should have long-terms and dramatic impact on return rates for our customers compared to other cable operators, but we’ll have to wait and see.

Another new change, as we’ve tipped in, as other cable companies have, a lot of effort on business sales and (inaudible), it’s also filling some other void during the recession and while we are taking a breather on rate increases for residential customers, it’s helping out nicely.

Now I’m going to talk about what’s happening in the industry. You should be concerned and knowledgeable as shareholders of the cable company what’s happening in the cable space generally and how we are doing relative to that.

So I’m going to show you three of these slides – one for video, one for phone, and one for the Internet business. Just show you three years of trends of the industry. And rather than showing annual years, which should be then six months dated, if I showed you ’08, ’09, or ’10, I’ve shown you the more recent 12-month periods of the second quarter each year to the third quarter so I could show you numbers as of the second quarter financial reports from all of these companies.

I want to give you a big headline, which is the most important thing to take away, some small headline and then some bullets. The big headline is, video has matured – there’s no question about it – and shares are shifting. As you can see here, video has stopped growing. That’ll be the combination of cable, DBS, satellite and the telephone company subscribers, and you can see the three components on the left, how the shares that are left are shifting pretty significantly.

The actual last quarter, there’s no video growth. It went negative last quarter for the first quarter ever. So let’s look at some of the detailed headlines.

It’s not just the businesses turning bad. The economy has turned bad. We depend on housing starts. A lot of our historical growth is housing starts. We’re growing in the nice clip. And we also do have some OTT or over-the-top competition, Netflix, Hulu, and other ways of getting your video, some of your video needs through the Internet. I think that’s a little minor at this point compared to the first bullet point.

In any case, our losses are accelerating at an alarming rate. DBS, though, has lost their glow. In fact, they were negative for the first quarter ever as an industry, as a subcomponent of the industry in the second quarter. The Telcos have spent tens of billions of dollars to roll out markets and they’re enjoying the benefits of the first few years of those rollouts. So they’re continuing to steal share. But that too will stop within a year or two, I would predict.

Now, the other element of these charts that I’ll put up for each flat rate [ph] – well, how are we doing relative to this cable space? So our year, the industry year, this is down three point six percent for the industry. We were only down two point two percent because of our more aggressive pricing.

So better but not great. We like to get that up like the post – to flat so our core business, which shows up as half of our performance unit, our primary service units, is at least flat, and hopefully we can continue to get better. But at least we’re outperforming the industry, who is raising their rates every year pretty aggressively.

Let’s look at the Internet or Internet service provider business. It is our future. This is where we have to build our long-term viability. And I think we’re heading in a great direction here. Big headline is this is maintaining strong – unlike the Internet business, looking at the totals. Yes, it’s down, but we’re in a big recession. Home occupancy and growth is (inaudible).

It’s not bad to go from four-and-a-half million to three-and-a-half million unit growth, particularly when cable, looking at some of the details, cable is still maintaining its volume growth. Telco is collapsing. DSL, and this counts DSL and FiOS and AT&T U receiving their fiber to the home or fiber to the (inaudible), they’re just not keeping up, resolving, keeping up on video, they’re Internet products are inferior to what Cable can do, actually with these high speeds and high capacities.

So this is real good news for us. Also you would think it be slowing here in total because saturation is starting to set in, although even with 78 percent, the U.S. is only 27th in the country in penetration per home. There are some homes that have more than 100 percent penetration, like you don’t have a cell phone. That’s the case of Internet accounts as well for some countries.

This is good news. This is our future. And you could see the telephone companies, I already mentioned, is not doing that well.

Now, how are doing compared to our peers in cable? And I’m glad to say we’ve done much better while this two-and-a-half million unit rise over here represents a six percent growth, our growth rate in that 12-month period because of our more aggressive pricing was 90 percent. And this is all pre-50 launch of our 50-meg service.

I’m hoping with that, on top of being pretty aggressive on rate control, price control, we keep this trend up, maybe even improve on this trend in the next 12 months. And the last is phone.

Well, the headline for years has been now the phones, wired phone services are in an absolute freefall. (inaudible) really entering the business, though we’re not losing units. It’s a very steep decline and the enormous losses here are the telephone company.

Interestingly, 78 percent penetration, it’s the same penetration of Internet service in the country they’ve matched. The Telcos have been losing 10 percent per year. While it looks like they’re actually getting a little bit better, on a percentage basis, they’re not. Their base is shrinking so rapidly, this is still double-digit annual losses.

They now, as you can see, only have 56 percent of the homes they have. They usually have – if it wasn’t 100 percent, it was 99 percent of the homes had a wired telephone. That’s how bad the business is.

Unlike cables, as you could see, has not eroded anywhere near that fast, in the video space, the first slide I showed. So the growth is slowing here. We knocked it out of the park. Our $75 offer, the primary beneficiary of that was our phone business.

We lag behind, we launched behind the rest of the industry. We launched into the teeth of people substituting cell phones for their home phone. We made up a lot of that difference with our aggressive offer. But this growth, we’ll have, probably, no phone growth over the next year.

As I said, a lot of people, as their contracts expire, the $75, they’re saying cheap for $90, I’ll just take two products and they’re cancelling their phone service. But we have enough new people signing up for the triple play to sort of sustain the level, that 44 percent. And then I think a year from now, we’ll see that starts to go up again in a slightly slower rate.

This is the fourth charge. It adds them altogether, so you can see it in total. Now this excludes the wireless business that the telephone company lives by, right? I’m talking about where we have comparable products. So a telephone company would be out of business if they didn’t have wireless. But if you exclude their wireless PSUs, since we’re not in that phase, and look at their products where we have comparable competitors. This is not too bad a picture for our space.

Yes, we’re growing. I mean, yes, it’s slowed down, but we’re still growing much better than our two primary competitive companies in the space where we have comparable products.

This total picture is dominated by the loss of wired Telco phone units. And DBS is now facing some pretty stiff headwinds. They are a single-product company in a triple play or quadruple play world. And here’s how our totals look.

Compared to the cable industry, they’ve gained two and a half percent in total PSUs in the last 12 months there. We’ve gained six and a half percent, (inaudible), which is you can see we were outpacing them nicely, and Internet as well. It’s our objective to at least get four or five percent a year and stay well ahead of the industry pack.

So this is a slide you saw at the beginning that showed (inaudible). It’s a little different that Cable ONE land. And as you can see a lot of this itself and just the rest of the industry is growing rates, video rates aggressively still, and therefore slightly milking [ph] the business like showing positive operating cash flow growth and we've chosen not to. This last slide is a bit complex, but if you try to look at that slide period on a more analytical basis, for those who are interested in diving that deep, here is how flat – flattish revenue per PSU for the last four years.

And that's one point seven percent growth total, not annually in our revenue. We've been – discounts are growing at an enormous clip, the discounts associated with that $75 offer. Here is our expense control. To do this, you have to have strong control over your expenses, there are three point five percent per unit, and that's total, not per year. That's an imbalance and that causes your operating income to go down per unit whereas everybody else is – I'll put up everybody else's in a minute why tell you verbally.

So this drives your margin down. We are consciously moving our business from a 40 percent margin business to somewhere in this range. We think it's the place to be. Cable is somewhat out-pricing the purchasing power of the lower part of the U.S. economy right now. We're not raising our rates so hopefully we're not doing that. Here is how the – I should – (inaudible) rest of the industry. There were our last price increases. P is for phone, I is for internet and V is for V.

We've gotten raised our phone or internet pricing and through years, we've not raised our video pricing in over two years. Here's how the industry has performed during this period based on the positive – the few – these four (inaudible) reporting cable companies other than us, they raised their rates seven percent, almost eight percent, they raised their cost to go with that, but they've raised the rates fast enough to keep ahead of the cost growth, and thus they've had a nice move in their operating cash flow per PSU, and their margins have actually gone up slightly while we deliberately pushed ours in.

Will this work? Stay tuned. If it doesn't work, we can change strategy. We have to be very agile as new technologies are thrown at us or queued up for us in some cases to take advantage of. And also with competitors they change course before the economy continues to worsen. So this strategy we've been on for three years, we will continue this until we determine it's just a wrong strategy, but so far, we're modestly encouraged by what we've seen with a lot more internal metrics that I can share with you today. Questions?

Question-and-Answer Session

Donald Graham

All right. So I am going to apologize and run this long. And I told Reema [ph] so the lunch panel is going to start a little late. These questions are so good and a couple of them at the end are sort of lovapalooza type of questions. So I want to – I want to make sure we address them. The shareholders have been paying attention in class. And here's four quick questions, and then a couple of big ones.

“It looks from your numbers as if you might – as if the video offers, the data offer is so attractive that you might be getting appreciable numbers of data subs who are not video subs. People who take satellite for their video but then wants you for data, is that so and is that a future opportunity?”

Tom Might

It is so, it's definitely an opportunity. We historically, we do have now growing large percentage of customer who do not take video. They're DBS customers. It's been very hard for us to penetrate DBS household. We think this product is an opportunity for us because they take DSL for their internet; they're DBS customers, that's sort of an unwritten rule. This changes the game. There'll be second class internet customers that they don't take our internet products now.

Donald Graham

Merging questions from Claire Anderson [ph] and Heather McPherson [ph] whom – neither of whom I know, but both of them I want to hire as a result of all these except I fear they're too expensive, so – competition. “Have your $75 bundles and other – other value bundles enable you to gain traction in competing against direct TV or video losses slowed?” And other aspect of the same question, “Are you worried about direct TV or the phone companies to (inaudible) your price for?”

Tom Might

The first question, yes, this year is much better than last year. Our video, we were – with the recession, and we had taken a price increase for video, we were doing very poorly between middle 09 and 010, when we – that we introduced the $75 dollar offer. Sadly, we still saw some negative numbers but they were far smaller than they were the prior 12 months.

Don't worry about the – us inducing a video competition with the other two players because they – they don't have local pricing, they price nationally, and they're stuck with that model, so they won't react just to us, they might react to pricing to the cable industry in general, but not just to us.

Donald Graham

“Please explain the rationale behind the data consumption taps you use, and how many data speed products do you provide?”

Tom Might

The primary rationale is it's way more than our typical customer uses. You have for – they're in the 10 gigabytes range per month, and the first level is 50 gigs, and if you take a triple play, you get 100 gig of ten times the typical user. Ten percent of our customers, if they were all in the 50 meg – 50 gig plan, would be tripping over at slightly – if that's all in, this is a voluntary more, people who are huge consumers will probably stay in their five slow speed, slower speed, five meg unlimited plan.

Donald Graham

The lovapalooza questions which is part of James Penn's [ph] question is this, “the media business in which Cable ONE is sometimes lumped by analysts, you see readership with newspapers declining, you see viewership of network television and local television in different ways, declining,” James [ph] again mentioned disability to access Netflix and Two Clicks [ph] on his computer, “Should shareholders think of Cable one as that type of a business? Should they think of it as a media business that's challenged by new forms of competition and whose long term future should be thought of in the same bucket with say, the newspaper business?”

Tom Might

I don't think so. Whenever you have a product where demand goes up 100 percent in one year, that's a good business to be, and you just have to figure out how to monetize that. But internet demand, wired-internet demand, demand that cannot be met with the mobile wireless applications, you cannot watch all your video wirelessly and afford the bill whoever your supplier is.

It is only going to keep – maybe you're not going at 100 percent, but it's going to keep going up annually, 40 or 50 percent. That's a good position to be when no one else can supply that kind of broadband capacity to their homes. We are over-built by wired competitors at about – we estimate roughly 14 percent of our homes. So there, we do have another wired company who can in some cases provide some of the capacity we can.

But the rest of them, there is no one else in town who can provide that kind of largely demanded broadband capacity.

Donald Graham

By the way, you the taxpayer are thoughtfully paying for some of the over-building in these markets. Do you want to explain that? Universal service funds and ...

Tom Might

I'm sorry – giving me a – start. There's – there are taxes on your phone bills called universal service funds, or $7 billion a year, they're supposed to be used to help get phone to the rural farm lands, so the places you can't afford to build phone in the United States primarily, that are no longer appropriate.

In many cases, cable operators – or by a competitive phone service there – but these local phone companies are still getting that money. Sadly, the largest – annual universal service fund payment in the United States is over $300 million to the small phone company in Mississippi named AT&T who has over-built us in most of our Mississippi markets using that universal service tax that you – your tax dollars work.

Donald Graham

Tom, thank you so much. I'm going to give one other lovapalooza answer on cable later, but if you got a comment on it, when I do, you can say so. Tom's presentation, if you don't – I know a lot of your were paying close attention to what Tom presented, if you don't think this is both extra ordinary interesting, a little head-spinning and brilliant, then we're in a different place, and that should affect your interest in owning part of the future of the company.

We are so lucky to have the Cable ONE team that we do. As Tom said, it's a deep team, although a lot of people who understand technology deeply but who really – you got to understand, to understand Cable ONE, you got to look at the markets we serve. Don't think of Washington; don't think of where you live if you live in New York or Chicago or L.A. Look at our markets and think about the differences that that brings up. Andy, will you pick up a mike? Reema [ph] has one for you.

I mentioned that there were several, I think very important questions for Andy remaining. I'll give you some small ones and some bigger ones. From Clara [ph], “What is then the impact of the capital in commitment on retention rates?”

Andrew Rosen

Well, it's early, but – as we – one would expect, the retention rates are far superior from students who come through the capital and commitment.

Donald Graham


Andrew Rosen

Well, we're assessing students who we believe are not likely to succeed, and soon they're opting out themselves if they don't feel like this is the right program for them. Those are the students who would have fallen on our on our drop list previously. Now, they're just coming out of the system, they're not counted as students. And so their retention rates are improving.

And by the way, the underlying retention rates at – if not all of KHE have been improving through separate initiatives. But the capital and commitment is having a very...

Donald Graham

Yes, I know. We want to give you a lot of information, we don't want to give away competitive information, but that's a very fine answer right. Complex question from Tom Russo [ph], I again apologize for getting in the weeds here. “Which is more challenging to Kaplan Higher Education's mission, the new gainful employment regulation? Or the old cohort default rates standards?”

Andrew Rosen

Gainful employment. Cohort default rate is an ongoing challenge. We feel like we have a handle on it. We will keep on working on it. Gainful employment is new and gainful employment pushes us away from serving the students that we very successful.

Donald Graham

OK I'm starting with very specific ones, but I'm building up to a couple of large ones. Specific, “Why do higher risk students experience higher graduation rates at Kaplan? With the same students who are enrolling at universities all across the United States and the non-profit sector and the poor profit sector, how is it that Kaplan is able to graduate more of them?”

Andrew Rosen

We build around a particular type of student, and adult student, a student who has a lot of other things going on in his or her life. We build an entire environment that's built with student advisers, with financial aid advisers and so on who understand that student and help them succeed. We use technology, we use convenience of our classrooms and our – the timing of our programs.

Everything we do is build around the type of student. And I think that much of the traditional system, is built around a one-size-fits-all assumption and, really, is not as focused on helping students get to their end goal.

Donald Graham

A real good question from Andrew (inaudible), “Why are new students starts down so much? You mentioned two ways in which this is self-inflicted, the Kaplan commitment, and the changing enrolment standards, how much is self-inflicted, and how much is lower demand roughly?”

Andrew Rosen

The way I would think about this is this way, there's some companies out there that said they really haven't made any change. They thought they didn't have to make any changes with – in the new regulatory environment. Those companies are – tend to be down around 20 percent. You know, some higher and some lower, but roughly 20 percent. And so I think you could probably say, that's the sad point for how much the market as a whole is down.

We're down significantly more than that. And I think you can attribute it to the fact to these specific steps that we've taken. Other companies that have taken more significant steps also are down more. And some companies have taken advantage of the fact that there's – that there's been sort of a pull back from a certain segment of the market and they've gone after that segment, and they – they're down less.

Donald Graham

OK, (inaudible) think how the advisers has – a big series of questions. And I want to draw you back to the picture Andy painted. We serve very needy students for whom the value of – of – the need for college education is extreme. And Andy compared our metrics and the cost per student of taxpayer investment compared to the cost in traditional colleges. So Bryan [ph] asks, “Can you discuss the cost and value to the student and to the taxpayer of Kaplan Higher Ed versus community colleges?”

And I would say at the outset, I'm also the head of a big scholarship fund for all the public schools students in Washington D.C. we are not running against community colleges. Community colleges serve a very valuable role in society. And for a lot of the – a lot of people used to work in those (inaudible) in community colleges to take course to further their technical skills. And we're well aware of their value.

But they're funded in a completely different way than we are.

Andrew Rosen

Yes, the cost to deliver an education at one of our two-year institutions is a little bit lower than the cost to deliver a comparable education of the community college, but the allocation of that cost is different. So students are incurring the majority of the cost – at our institution, many of them through loans, that they're having to repay, whereas the community colleges, the taxpayers, is putting most of the bill.

So that was the taxpayer – the comparative taxpayers. So we are much less expensive to the taxpayer, but we're more expensive to the student because they have to borrow the money and pay it back. So what's the – what is the relative values to the taxpayer, we're a much better deal. We're the best dealer in all of higher ed, and when I say we, I mean the private sector.

You're getting students coming in, they're – you're paying less as a taxpayer, you're getting a higher graduation rate, I mean it's – it really is a homerun which is why it's ironic that there are parts of the government that are – that – specially in these economic times, that are frowning on it.

For a student, the only reason you will incur more cost is if you think that you're getting better value. And graduation rates are example of value, more convenient schedules, more convenient location, better lab equipment, all kinds of – in the case of online, a better interface and experience. Those are all things that students would make the rational decision to pay more for.

Some people don't, I mean there's – there's ten million students in community college who've made the other choice. They've – go to a community college either because the cost is low, or because they feel that they're getting a good value there, and that's fine. But there's a lot of students who are finding that we're a better alternative.

And our view is, they should have that choice.

Donald Graham

Here's a question I'm embarrassed not to know the answer to. “On the slide that showed cost of the taxpayer per student, was that for enrolled student or for graduate?”

Andrew Rosen

That's for enrolled students who would actually – the gap is wider for graduate – on a per graduate basis.

Donald Graham

“How much step does the average KHE graduate end up with? How about the non-graduate?”

Andrew Rosen

Matt, would you have the exact numbers on this? Matt Seelye, our CFO.

Matthew Seelye

The average step for a graduate is just shy of 30,000, for a drop student, the average stands around 4,000.

Andrew Rosen

And if I can just continue with that, so – what Matt, referred to is the average graduate of a four-year degree – I think it was $28,000, the default rate on – for Kap university, for graduates is three and a half percent. So the people who are experiencing the education, and getting the value of education pay back. The people who are defaulting are students who come, spend a short period of time, decide for whatever reason it's not for them, they drop with a modest – on average some – might be about $4400.

Donald Graham

Wind you up with a soft ball here, “Do you have any job placement statistics showing the benefits of what Kaplan Higher Ed offers?”

Andrew Rosen

We do. And with one of – where we're highly regulated to business, we have to report job statistics. And in fact, on our website, for each one of our campuses, we have now – it's part because of a new reg, we have all kinds of data about graduation rates, placement rates and so on.

But as a general matter, across our campuses, two years ago, we were at about 80 percent placement rate. That number has been coming down over the course of the last year because the economic situation isn't backing our students, and it's more in the 70 percent range.

But it's the campus by campus issue.

Donald Graham

Yes, the closest campus to Washington D.C., and if anybody wants to email me, I'm happy to arrange a tour (inaudible) town his whole life, he's connected with all the employers there, the job placement reg 95 percent, just the definition of what Kaplan wants to be shooting for. But there's not better definition of the value of what Kaplan and (inaudible) offer. Andy thank you. I know people are ready to pounce on you with more questions as soon as we break which will be in about three minutes.

But I did want – I said I had one lovapalooza question at the end which is a follow-up question from Heather [ph], “On the cable business, I'm going to press you on this reluctance to spend,” remember Heather's [ph] first question was, “Why don't you spin off Cable ONE?” and she writes, and I want to neither contradict Heather's [ph] math here, nor to endorse it, I want to make clear that the numbers in this are hers, not mine.

“You have about 650,000 basic subs, and there are some recent transactions suggesting nearly 4,000 per sub valuation or higher, but this implies the WPO cable valuation of two point six billion. Your enterprise value today is seven point nine million series outstanding times 325, is two point five seven eight billion,” it's great to have people doing four digit – go to the fourth decimal place, “less about in that cash – less 200 million in that cash, (inaudible) two point four billion, why don't you spend it off?”

Again, this is the way you think if you're thinking about today's prices in today's market. The shareholders sitting in this room and the others sitting in the larger room, all the shareholders of the Washington Post Company, we own these businesses, Kaplan, Cable ONE, those stations and the post and the rest of them. If these businesses come through, if they make the profits that underlie the values assigned to them in the market, you as shareholders will recognize those values.

Why will you? Because you own them. If we were to take Heather's [ph] implicit advice and spend off Cable ONE, we would spend it off to our existing shareholders, so the same shareholders would own the same set of businesses. The only thing we do is add a new set of top management to Cable ONE Corp or whatever we call that which would increase their expense. And so why would we do that?

We do it to try to cross the gyration [ph] in the stock price. Well, in the long term, if people are right about the implicit value of cable companies, and Tom just gave you a case for why they might be, the perceived value of cable companies, then this company will realize those gains in the form of future profits. We're realizing from the cable company, we're realizing from Kaplan, and Andy gave you some reason to think that Kaplan's short term profits maybe down, but their long term prospect may be better than that, we're not telling you they are, but they may be.

So you, the shareholders own all the businesses represented by this company. If you own a thousandth of a percent of the company, you own a thousand of a percent of Cable ONE, and you will loan it in the future because we don't do now and we don't loan in the future, go deep in the financial engineering.

And if we manage these companies well, if the people you met this morning and in some cases, those who succeed them, that turned out to be good, then you'll recognize the benefits. If we do a terrible job, you won't. But that's the best answer I can give to an excellent question. Happy to talk about it more. The last question, from one of Heather's [ph], from Andrew, prices – building this up – “Despite your spritely [ph] appearance, I see you've reached the milestone of 65 years,” that's actually somewhat understated, “Give us how your shareholders think about your succession plans for the CEO role.”

I plan to be here a few more years, but this is a family company, and I'm family. And both in terms of having family members – who care about the company and will reflect the family role and ownership, and in term of future management of the company, I would say my most important job or tied to my most important job, is preparing the company for succession.

The family owns the A [ph] in the company, but we went public in 1971. I'm going back to (inaudible), we take that very, very seriously. I have viewed myself as serving at the pleasure of the board of directors, and you met some of the board members this morning, we have a strong-minded, even opinionated board. And if the board tells me I'm not doing the job, I will not, again I'll say that, I will not second guess it, but in the mean time, I expect to be here.

We are growing a management that I think is pretty damn good. And I think that'll continue to be a big focus of mine. My mother worked until she was 75, and I will not necessarily do the same, but I didn't set us back in – that role to a time. The panel has gathered outside. I apologize to Neil [ph] whom I saw in the back, and the other panel members for delaying this, but I wanted to address all of the hardest questions you addressed, and you really did this.

I want to thank everyone of you, and all of the people who have been here through the morning. I want to thank our four division head presenters, and the other post people who would be here, and I want to again offer that if anyone of the owner of a high-powered iPad 2 or if your children or grandchildren are – we have four more of this handsome Washington Post iPad covers, which I will cheerfully give away to reward you for having sat through a morning of some detail. Thank you once again.

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