Strategic Education, Inc.
Q1 2008 Earnings Call Transcript

Published: 1 May 2008

[Operator:]

Good morning everyone and welcome to Strayer Education's Incorporated First Quarter Earnings Results Conference Call. This call is being recorded. Following today's call, we offer the opportunity for questions-and-answers. At this time, for opening remarks and introduction, I'd like to turn the call over to Strayer Education's Senior Vice President of Corporate Communications, Ms. Sonya Udler. Ms. Udler, please go ahead.

[Sonya Udler:]

Good morning. With us today to discuss the results are, Robert Silberman, Chairman and Chief Executive Officer for Strayer Education and Mark Brown, Executive Vice President and Chief Financial Officer. For those of you that wish to listen to the conference via the internet, please go to strayereducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1 P.M. Eastern Time through Sunday May 4th. The replay is available at 888-203-1112, pass-code 436-8500. Following Strayer's remarks, we will open the call for questions-and-answers. Please note that today's press release contains statements that are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. These statements are based on the company's current expectations and are subject to a number of uncertainties and risks that the company has identified in the press release and that could cause the company's actual results to differ materially. Further information about these and other relevant uncertainties may be found in the company's Annual Report on Form 10-K and its other filings with the Securities and Exchange Commission. And now I'd like to turn the call over to Rob. Rob, please go ahead.

[Robert S. Silberman:]

Thank you, Sonya and good morning ladies and gentlemen. As it is our custom, I'd like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. I'll then ask Mark to report on the detailed financial results for the first quarter of 2008, after which I'll comment on our enrollment results for the spring academic term, provide an update on our growth strategies and finally end up with a company's earnings outlook for Q2 2008. Strayer Education, Inc. is an education service company, whose primary asset is Strayer University, a 37,000 student, 55 campus, post secondary education institution which offers associates, bachelors and masters degrees in business administration, accounting, computer science, public administration and education. Strayer's students are working adults who are returning to school to further their carriers. Our revenue comes from tuition payments and associated fees. Approximately, 65% of our revenue comes to us from federally insured Title IV loans issued to our students. We estimate approximately 25% of our revenue comes to us from students employers, either directly to us from the employers as payments under of our many corporate alliance agreements or indirectly to us in the form of tuition assistance benefits paid to our students. Our expenses at Strayer Education include the cost of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies cost. We currently operate campuses in 13 states in the eastern half of the United States, as well through the world over the internet through our online courses. We serve students in all 50 states and over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Association of Collages and Schools. Mark, do you want to run through the financials?

[Mark C. Brown:]

Sure. Revenues for the three months ended March 31, 2008 increased 21% to $97.1 million, compared to $80.2 million for the same period in 2007. Due to increased enrolment and a 5% tuition increase which commenced in January of '08. Income from operations was $35.6 million, compared to $28.9 million for the same period in 2007, an increase of 23%. Operating income margin was 36.6%, compared to 36.1% for the same period in 2007. Net income was $23.5 million, compared to $18.8 million for the same period in 2007, an increase of 25%. Diluted earnings per share was $1.64, compared to $1.30 for the same period in '07, an increase of 26%. Diluted weighted average shares outstanding decreased to $14.34 million from $14.49 million for the same period in '07. At March 31, 2008 the company had cash and cash equivalents of a $119 million and no debt. During the three months ended March 31, 2008 the company sold its $77 million investment in short term, tax exempt bond funds and invested the proceeds in money market funds. This sale resulted in a gain before tax of $800,000. The company generated $34.2 million from operating activities in the first quarter of '08, compared to $19.4 million during the same period in '07. Capital expenditures were $5.1 million for the three months ended March 31, 2008, compared to $3.9 million for the same period in '07. During a three months ended March 31, of '08 the company invested $56 million to repurchase approximately 353,000 shares of its common stock at an average price of $159.36 per share as part of a previously announced common stock repurchased authorization. The company's remaining authorization for common stock repurchases was approximately $26 million at March 31, 2008. During the three months ended March 31, 2008, the company paid a regular quarterly common stock dividend of $5.3 million and a special common stock dividend of $28.9 million. The company also received $3.4 million upon the exercise of 100,000 stock options. For the first quarter 2008, debt expense as a percentage of revenues was 2.5%, compared to 2.6% for the same period in '07. Day sales outstanding adjusted to exclude tuition receivable related to future quarters was 12 days at the end of the first quarter of both 2007 and 2008. Rob?

[Robert S. Silberman:]

Thanks Mark. Just a few amplifying comments on the financials from my perspective. Our outperformance of $0.06, versus our predicated EPS for the quarter was a little larger variance than we'd normally expect just three months outside. I think it deserves a little deeper explanation. First off, our... we had a combination of higher revenue and lower bad debt expense than Mark and I were expecting which gave us 50 basis points of shift margin expansion in the quarter, a little bit more than we were expecting. And that contributed roughly $0.03 or about half the EPS outperformance. The higher revenue was a result of both the stable mix of undergraduate and graduate students, versus last year, which is eliminated what was a downward pressure on our revenue growth for students as graduate students take less classes. As well as our revenue was helped higher application fee income in the quarter are based on very strong spring term new student enrolment. Now the remaining $0.03 of outperformance came below the operating line, $0.01 was due to a slight lower tax rate and $0.02 is on, Mark showed as a result of... we had the lower share count and we did have a larger than normal share repurchase in the quarter. But in addition to that, even though we have less cash, we actually have higher interest income due to the one time gain from liquidating the tax exempt bond fund position that Mark described. On distributable cash flow growth, and again which we defined as cash generated from operations, minus all CapEx including all growth CapEx, we actually show a 90% increase year-over-year for the quarter. Over that comparison is benefited by a reclassification of tax benefit associated with stock option exercises in the first quarter of both years, now when you adjust out those benefits and if you are keeping score at home, the way to do that is align on the cash flow statement excess tax benefits from stock-based payment arrangements. Our distributable cash flow in the first quarter was still up a pretty healthy 40% on 25% growth in net income, so that relationship between cash flow growth and net income growth is remaining quite strong. Turning to the spring term enrollment results, we had a strong quarter. Total university enrollment increased 19% on a year-over-year basis. That's up 16% from both the winter of 2008, the sequential previous term, as well as spring term 2007 the year-over-year comparison. Continuing student enrollments we're up 17%. Our retention rate was up approximately 100 basis point, which definitely help that. Our new student growth was up 28%. With regard to student mix, business administration, accounting and economics degree seekers, make up almost 70% of our student body for the spring term. Computer science degree candidates are at around 20% of the total student population. The graduate population is up only slightly as a percent, to 29% of the student mix in the quarter. Now turning to an update on the growth strategy, many of you will remember that it's based on five objectives, the first is to maintain enrollment in the companies' mature markets. Second, accelerate the rate of growth in new campuses, particularly into new states. Third, invest in and build up our online offerings. Fourth, increase our corporate and institutional alliances and the final objective is to effectively redeploy the owners' capital which we are generating through operations and our investments. On our first objective for the spring term, we were well ahead of target, of amateur campuses showing 7% growth. With regard to new campus activity for the spring term, we opened two new campuses, our third campus in the Orlando, Florida market and a six campus in the Atlanta, Georgia market. We also today announced our intention to open two campuses for the summer academic term as well, both of them will be in new markets for us Jacksonville and Palm Beach, Florida. In the global online unit, growth rate was 45% for the quarter and on capital redeployment we announced this morning our regular quarterly dividend of $37.5 per share and we also announced that in the first quarter we have repurchased approximately $56 million worth of our common stock. On the business outlook for the second quarter of 2008 based on the university's strong enrollment growth for the spring term, offset partly by increased expenses associated with the accelerated rate of new campus openings, as well as lower interest income due to lower cash balances and lower interest rates, versus the prior year. We estimate our second quarter EPS will be in the $1.45 to $1.47 range and the second quarter we again expect a slight increase in operating margins, versus the prior year. As we continue to roll through the costs and investments of the new campuses. And with that operator we will be please to answer any questions. Question And Answer

[Operator:]

Thank you. The question and answer session will be conducted electronically. [Operator Instructions] We will go first to Edward Yruma with JPMorgan.

[Edward Yruma:]

Hi, thanks for taking my question and congratulations on a great quarter.

[Robert S. Silberman:]

Thanks Ed.

[Edward Yruma:]

Embedded in your 2Q guidance, have assumed that bad debt ticks up to kind of more historic levels, or do you expect they will be able maintain this performance throughout the rest of the year?

[Unidentified Company Representative:]

Well the bad debt expense tends to be somewhat seasonal, because the way our algorithm works, you are writing-off 180 day old receivable, so in the case of the first quarter, we are writing-off summer receivables which is our lowest enrollment quarter, against one of our highest revenue quarters Q1, because we have high enrollment in that quarter. So Q1 is always a seasonally low bad debt expense. Q2 and Q3 are generally higher seasonally, the more important statistic for Mark and I is on a year-over-year basis comparing the same quarter year-over-year, how that looks and that was pretty healthy this quarter because, it's at the most 2.5, versus 3.5 last quarter, it's 2.5 versus 2.6 the year before quarter. We would like to be similar to where we were last year we. I think we sort of stabilized the bad debt improvement over the last year would be nice, but we just don't know, it's a question of the collections. But it was 3.5% last year.

[Unidentified Company Representative:]

At the end of the second quarter, right.

[Unidentified Company Representative:]

Yes so that's kind of a guide that we are looking at.

[Edward Yruma:]

Great and if you could give us a quick update on your role in Criminal Justice program. Thanks.

[Unidentified Company Representative:]

Sure, we've got a team working hard at it under the President Stallard, and our Curriculum Development Group. We hope to have the actual development of the curricular done by the end of this year and in time to go through our process of regulatory approvals in the various states and ideally by sort of the midpoint of 2009 we will be offering the actual classes.

[Edward Yruma:]

Great thank you very much.

[Unidentified Company Representative:]

Thank you Ed.

[Operator:]

We will go next to Kelly Flynn with Credit Suisse.

[Kelly Flynn:]

Thanks, can you give a little more color on the new season growth and also retention which were both very strong, particularly the new student growth of 28%, anything going on there in the market place. I know you don't consider your self converse typical, but may be kind of comment on that theory and anything else. And then is that sustainable in the even over the next couple of quarters?

[Unidentified Company Representative:]

Our, view Kelly, is that our student growth is going to match over time the rate of our capital expansion rate at which we opened new units. It will... it has been and I expect it will be somewhat bottle around that trend line. We can not get too excited on the upside or the down side with regard to that. I mean, I think if you really think about students and the decisions they are making to enroll back in school and trying force them into colander quarters that help your reporting as a company. You are sort of loose side of what we are all about as an institution. So we sort believe the students are going to come when they come and we've had quarters where it's quite high. We have had quarters were it's lower. I really couldn't began to comment on what it's going to for this summer of all term. I am quiet confident that the investments we made over the last three or four years in accelerating our rate of campus openings certainly assist our ability to attract more and more new students. We just have more locations on the ground in different areas and particularly the experience that our students have had in those new locations in the brand that we are building in those markets, the reputation that were gaining among our students and faculty is clearly quite helpful. But, I would expect that over time we can't have a very long term view of this. The rate of new student growth and the rate of total student growth will match the rate at which we are able to expand the university through our units. The retention rate that you mentioned actually was a very positive sign for us. We look at that retention rate, as a much clear indication of the quality and the impact of our academic offerings, because when a student first enrolls, they don't really know what it's going to be all about. If you can get them to get through from class to class, from semesters to semesters and ultimately to graduate, that's the feedback they were looking for, that the quality of our academics is really hitting the mark in the classroom and that students are satisfied and are encouraged by the progress that they are making.

[Kelly Flynn:]

Can I ask another one on, the lending bill that a lot of folks are talking about. If loan limits are increased federal loan limits, how would you look at that? I think its tempting to assume, it would be a great opportunity to raise prices, I know your views on your value proposition. I think somewhat may be different than others in state, so relative... price relative to what you offer. How do you think about that and any sort of thought for us on and how we might think about that for rates of other states?

[Robert S. Silberman:]

Well, I certainly couldn't comment with regard to how other companies or universities are addressing it, if the increase in loan limits passes, I think that's generally a good thing to make more access to credit available to students. It will have no impact on our pricing policy. I mean our pricing policy is well established. It's 5% a year, its well within our loan limits now and I would not use an increase in loan limits, as a opportunity to increase prices. Is that Okay?

[Kelly Flynn:]

Yes, I got it.

[Robert S. Silberman:]

Okay. Thank you.

[Operator:]

And we'll go next to Mark Marostica with Piper Jaffray.

[Mark Marostica:]

Hey thank you, nice job on the quarter guys.

[Robert S. Silberman:]

Thanks Mark.

[Mark Marostica:]

A couple of question for you, I just want drive down on the star growth question that carried out, specifically did you see any strength from your business accounting economics or vice-versa your computer science or was the strength of this star growth kind of even across those two categories?

[Robert S. Silberman:]

It was generally even Mark I mean, that the mix of computer science and business accounting economics has been pretty stable for last couple years now Mark, its got a high 60% in the business in accounting in 20-ish percent of the computer science. So, I wouldn't attributed more to one rather than other.

[Mark Marostica:]

Fair enough. And on the subject of lead costs, could you give us sense for what you're seeing in the market as you acquire web leads, are you seeing any change in lead costs?

[Robert S. Silberman:]

Well we don't really think about the web advertising differently from our whole advertising media. We spend about the same amount in each market, each year. We allow the regional and local marketing managers to decide the mix between advertising on the internet versus advertising on TV or in the newspaper. They make those calls based on what they foresee the efficiency of the advertising spends going to be. I didn't hear anything in our last quarter as Mark can review that suggested that internet advertising was anymore or less expensive over the last quarter then it has been over the last year or so. And any way it's an important part of how we try and build brand particularly for our type of student, who tends to be doing a lot of research on the internet with regard to several help [ph] what programs are all about. But I would not say that we saw I thing market was drastically different than we have over the last couple of years with regard to that.

[Mark Marostica:]

And one last question Rob, we've obviously been hearing about Title IV lenders becoming more selective as particularly on the higher default rate loans. With that said, and understanding your default rates are lower, I am just curious are you sensing or feeling the impact of any of that selectivity with the banks that fund your students that will grantees to loans at this point?

[Robert S. Silberman:]

We have not seen or felt the results of any of that selectivity from a standpoint of they've all encouraged us to send more students there away. I mean they were asking for more of our volume. Even I have heard bank officials describe that, as the fund cost for the student lending goes up and as the return they receive on the interest rate goes down and particularly as the amount that they are on hook for net of the guarantee goes up that... that business is less profitable for them and it's a lot less profitable for students who do not re-pay their loans. And so that they are looking at ways in which to legally discriminate towards those institutions that provide better business opportunities to them. And that's... I've heard that describe, it's... from our standpoint it's always been under the rubric of, could you please send us more students. But beyond that, I think we have to talk to the banks themselves.

[Mark Marostica:]

Great. Thanks very much.

[Robert S. Silberman:]

Thank you, Mark.

[Operator:]

We'll go next to Amy Junker with Robert and W. Baird and Company.

[Amy W. Junker:]

Good morning. You have some pretty good leverage on the selling and promotional line and I am just wondering was there anything that happened in particular this quarter that maybe got pushed back into the second quarter? Or if that's... that level of improvement we should expect to see going forward. Are you just seeing more perhaps efficiency coming out of that line item?

[Robert S. Silberman:]

I can pretty much assure you that Mark accounts for the advertising cost in the quarter was just supposed be to accounted for. The... there really wasn't anything out of the ordinary or different, as the campuses grow and as we gain maturity in markets, as I said I think that Mark... we spend about the same amount each quarter on building the brand. The spend doesn't change, what changes is the number of students who enroll and then therefore the revenue and so the spend as a percent of revenue goes down and that's what causes the margin expansion as the university grows. But there really wasn't anything special on the spend side, we ended with a growing number of students, particularly in newer markets where, you are reaching that break even point and then moving to increasingly high levels of profitability, and that's what drives that leverage.

[Amy W. Junker:]

Great. And then just, regarding the last three campuses that you are planning on opening for this year, can you share if those are... if you know if those are going to be a new or existing markets?

[Robert S. Silberman:]

I believe they all be in new markets, Amy the... we have got a lot of internal competition for those resources and we have pretty heavily invested in existing markets on the first half of the year. So I suspect that the... well the two for the summer will be in new markets and I think the final three will also in new markets.

[Amy W. Junker:]

Great. Thanks so much and good job.

[Robert S. Silberman:]

Thanks Amy.

[Operator:]

We'll go next to Jerry R. Herman with Stifel Nicolaus.

[Jerry R. Herman:]

Hi, good morning everybody.

[Robert S. Silberman:]

Hi Jerry.

[Jerry R. Herman:]

Well I want to ask a little bit more about this student metrics as they seem to be pretty healthy here and maybe explore what influenced the campus age demographic is having. I know you talk a little bit about in a shareholders letters and I know in our Analyst Day you have talk about a growing numbers so they in that two to seven year old time frame how important of now going influence is that, on the volume metric?

[Mark C. Brown:]

Well I think is its definitely important if you think about our business and you break account into right we have... right now we have 55 units on we are pretty helping about the fact that we believe this units behave in the certain way now they grow at about 100 to 150 student a year until I get to a round of 1000 students then they sort of top off, so the higher number for higher percentage of your units that are in the age group where they are growing that the higher you rate of growth of institution as whole is going be. And that's really but the benefit that we are seeing is this adjustments that we made over the last three or four years. Of really accelerating the ramp of our new campus openings and frankly given the demand for what we do and increasingly high academic performance of the students the increased for retention rates increased graduation rates and then, what's the students are doing with those going out come in the lives we like to put on those capital work as quickly as possible and open units. We just... we cant do any faster then we can grow the academic leadership necessary to really provide post graduate education in the class room. But as soon Karl McDonnell and his team and the people that are focusing on really maturing these campus director as soon as we get in a greater supply we will continue to increase the rate which we pen those units, as always we do that over time, your going to see metrics that increase at some point in the future I suspect it's a long way off in the future and when we fully penetrated the opportunity in the United States and the rate of campus unit opening slows down those metrics will start t slow down in terms growth of students because. Of course at that points the operating losses your incurring with regard to the new un its will go what way as well and your margin will start to expand as a business your operating margin will start to expand but at lower rates of unit growth. But as I said we're only in... what is it Mark, 12 states 13 sates, we got another 37 big to go to and we're going as fast as we can but I suspect its going to be long time before we get to that.

[Jerry R. Herman:]

Given all those challenges but in late of some of those positive developments of put in spot you really thought about adjusting the notional model enrollment target.

[Robert S. Silberman:]

Well the notional model enrollment target is based on the number of new units that we've opened and if we end with a year in which we can greatly accelerate the number of new units than in subsequent years the mathematics will describe what that notional rate of enrollment growth will be. And but until we've made those decisions and announce those kinds of investment there's really no reason to do that and we right now if all of campuses behave their way that we expect unto where a point where we can be it sort of break-even margin no margin expansion or contraction and add about 15% rate of enrollment growth. When we have higher than 15% we're going get a little margin expansion if it's lower there will be some contraction but that kind of notion the way that the business runs right now.

[Jerry R. Herman:]

And just one quick one was there any the start growth at 28% was there any geographies that perform particularly well?

[Unidentified Company Representative:]

The global online unit, performed particularly well... but all the regions actually were pretty healthy and we showed a spread on new campus opening around in the regions as well it's sort of helps even that out.

[Jerry R. Herman:]

Great thank you very much.

[Unidentified Company Representative:]

Thank you John.

[Operator:]

We will do next to Gary Bisbee with Lehman Brothers.

[Gary Bisbee:]

Hi, guys good morning.

[Unidentified Company Representative:]

Hi Garry.

[Gary Bisbee:]

Just following up in that last point you made Rob that online out of market the global online was really strong it looked like enrollments were up sequentially when normally dipped this quarter any thing different you are doing or any thing you can you can assign that to better up date to the market and whatever?

[Unidentified Company Representative:]

Well I mean I suspect on the minority on this but I have never felt that the marketing is really all that relevant to that kind of enrollment decision it's just too big approaches and too big life change, the advertising really is just getting so much attention what's going to cause the student to enroll is not the advertisement, not to say that we are not really happy and proud of the efficiency and the effectiveness of our marketing team, I think the real impact is the fact that our online academics continues to improve, the experience of our students in online classes is very healthy and you are starting to get a little bit of vital communication and chat associated with that which allows students to get excited about enrolling and then as happened last quarter, as well we are also getting in our global unit a real push from some of our corporate partners who have facilities that aren't anywhere near to one of our campuses and which we manage to the global online organization. So it's a combination of lot of those things but it's something that we're pleased with and we're going to continue to support with investment and with more importantly with sort of the academic focus and over side. I mentioned in my letter to shareholders that we got a major initiatives going on in upgrading all of our online courses, next generation online courses. All of hat I think ultimately carry well play into the help of that unit.

[Gary Bisbee:]

Okay, one other question I've got a lot recently is how can the corporate imbursement hold up in this slowing economy, I remember last time through it wasn't a initiative for you at all but one of the things I think I remember correctly is that you'd have a lot of success was like that department of defense and some other government groups that might be less likely to look at that as a costs cut. You want to quantify or give us any senses as to what percent of the corporate relationships you have with government or military?

[Unidentified Company Representative:]

All we can try its about 3% of the students which would be for three added 20 or 25% would be counted the. What about 10%.

[Gary Bisbee:]

Yeah.

[Unidentified Company Representative:]

You don't like that. I mean that's very rough Gary we can try and pin it down to get you more exact number.

[Gary Bisbee:]

Would that include non-military government, the 3% of students or is that just the military.

[Unidentified Company Representative:]

I think that's active duty. The government would be maybe another couple of percentage points above that. But some of our fastest growing corporate partners, well all of the fastest growing corporate partners are not in government. There are not military or government entities they are groups, banks, telephone companies, things of that nature so theoretically in a cloned down turn some companies are going to restrict their expenditures and their investments in human capital, its possible that we could see that, we certainly haven't seen it today and for the most part that people that are go out of their way to enter into these kinds of arrangements with us are once that are really focused on human capital investments and trying to lower turn and training for their entry level positions and you tuition reimbursement in having an alliance with the university like ours is a big part of that, so I would not say Gerry that is we look at the business risks over the next 24 months even in a rather prolonged recession that I see that is having a major impact.

[Gary Bisbee:]

Okay, great then just three quick clean-up questions for Mark, the tax rate was a bit lower than not expected, is that a good number to use for the rest of year?

[Unidentified Company Representative:]

We still think 38% is try your best bet Gerry.

[Gary Bisbee:]

Okay.

[Unidentified Company Representative:]

Just because our investment income over the balance year although is not easily predicted, it's a smaller percentage of our total revenue given lower yield... the lower yield environment we are in,

[Unidentified Company Representative:]

And also the cash that we have argued...

[Unidentified Company Representative:]

And the cash that we have used for various activity so I think 38% is still a, the best number to use.

[Gary Bisbee:]

Okay, do you often what the interest rate is that the new money market fund their year's earning right now, is that the rate you earn on your total cash likely to be fair amount lower?

[Unidentified Company Representative:]

Yeah... its in the... yeah on average, its bouncing current hungry but on average its most of it in tax exempt funds, its in the neighbor hood of 2 to 2.5 %.

[Gary Bisbee:]

Okay and then the last one, I noticed you have changed disclosure on the press release a little bit around the stock comp, that wasn't, it wasn't the schedule that broke out where what that was with in the three expense line are you going to put that in the 10-Q or is that you just decided for some reason not to?

[Unidentified Company Representative:]

No... no absolutely Gary since this is the third year of past we just thought it was a bit support for us so I... but however will foot dotted in the 10-Q and the same level of detail that we used to have in the press release.

[Unidentified Company Representative:]

Yeah the actual numbers for the... for those direct stay you can get some of this offer cash flow statement but the actual amount of stock based comp that we booked in the first quarter was 3.2 million in a way compared to I think 2.5 to 2.6 million in FYO7, then all this will be detailed in the... in the foot notes of the 10-Q which we have to file with in the next day or so.

[Gary Bisbee:]

Okay

[Unidentified Company Representative:]

We can certainly keep it in the press release is that some thing that people are interested in.

[Gary Bisbee:]

From my perspective it's helpful because I know... I know the SEC does not want you guys back in, we like to look at it as its own separate line item... but I just want.

[Unidentified Company Representative:]

Well that's good feed back, we are happy to keep it in the first quarter.

[Unidentified Company Representative:]

Yeah that's good feedback

[Gary Bisbee:]

Okay thanks a lot guys.

[Operator:]

And we will go next to Brandon Dobell with William Blair.

[Brandon Dobell:]

Hi thanks, Rob if you looked at comparing new markets for the existing markets were you opened schools how much of the differences there in the new school model either in terms of time to profitability cost marketing expenditures based on enrollment just trying to get a feel for how different terms might especially over the first year or two?

[Unidentified Company Representative:]

It's not significantly Brendan and it's slightly better, it can be slightly better in an existing market just because the incremental advertising expense is not isn't quiet as high you have also have personnel in the area so as you are staffing, the new campus you not going to have re-location cost, a lot of the times you got whole stable of edge on fact either you can pick from right away but none of those are really, relevant our fastest ramp to profitability of any of our campuses was a single campus in the brand new market. So the effectiveness of the leadership team can swamp any of the differential impacts or weather you are existing on a new market.

[Brandon Dobell:]

Okay, and earlier you mentioned a lot of competition for internal resources when it comes down to you got a choice in the back half the year newer existing market you probably got good opportunities in both...what tips the scale to say you are going to put in or you are going to put in Atlanta again

[Unidentified Company Representative:]

Well, we try and stay balance, we know we have more opportunity and more demand then we are currently able to supply and so which try not to get too focused on one area versus the other, we have a slight preference some of us have more then a slight preference I hope to say towards expanding the brand and expanding the footprint and then back falling more slowly, on the other hand if your doing a good job in a market and you got students who are claim in to enroll but really don't want to drive 45 minutes now you got the issue if you got a brand then you've got, existing students and potential students that you want to satisfy so you can't leave them behind, so its really just there is no real hard and fast rule there is no science to it. It's more of a judgment call and trying to stay balanced.

[Brandon Dobell:]

As you look that the incoming students over the last couple of year, any change in what their options were before they chose to go to Austria or any change around the margin in terms of what people were looking or what they chose not to do versus signing up with you guys?

[Robert S. Silberman:]

No actually we just... we had a board meeting yesterday and we still I think I gave a presentation on a new survey that we had run. It was similar to what we seen for last seven years. There's always a lot of competition from local either public or private institutions that have neither extension programs at bachelors level. There is a much broader set of competition at the graduate level because almost every university has a student year up, sort of part time or an executive graduate program. And then the other sort of large national brands who you all follow are almost always in every market that we go into as well. We're generally the new comer at any markets. So, students are... prospective students are looking at broad cross sections of those kinds of opportunities and the amount of those competing opportunities really hasn't seen that much of the impact on our ability to attract the kinds of students that we want to and fulfill the expectations we have with regard to how these campuses will ramp.

[Brandon Dobell:]

Right. And from a different perspective, as you think about the economic impact on either provider ability to enroll students or students choices, state funding institution or state subsidies institutions, any noise are you hearing out there or any color on how those institutions are thinking about their prospects looking out the next year is as the subsidies maybe tougher to come by in a slowing economy?

[Robert S. Silberman:]

It's not as severe as I saw it in summer of 2002 right now. We were much smaller than... we really and only had a couple of states that we were dealing but I do remember in that period, states shutting down both community college and Public University particular programs in directing students our away where we can be helpful. What I hear now talking to the heads of the public institutions is sort of a slight anxiety but no real data points that their funding is going to be cut significantly.

[Brandon Dobell:]

Okay. And then a final one from Mark I think leveraging off Gary's question if you got the stock based by a line item on our pre-tax basis, we take otherwise we can wait for the queue?

[Mark C. Brown:]

of course the numbers that I have given out... I am sorry I didn't make the clear, actually we are on a pre-tax basis... sorry, thanks for that clarification.

[Brandon Dobell:]

Got that. Thanks guys, I appreciate it.

[Robert S. Silberman:]

A much better for us if it was after tax.

[Mark C. Brown:]

Yeah that's right.

[Operator:]

And we'll go next to Corey Greendale with First Analysis.

[Corey Greendale:]

Hi, good morning.

[Robert S. Silberman:]

Hi Corry.

[Corey Greendale:]

Good job on the quarter. I just had a couple of quick questions.

[Robert S. Silberman:]

Thank you.

[Corey Greendale:]

Just got to getting back I think what Jerry Herman was getting at, ramp of new campuses, obviously the growth number at newer campuses was pretty strong. Is it fair to assume that, new campuses are generally ramping at least a little bit ahead of the notional model?

[Robert S. Silberman:]

Yes, yes that would fair.

[Corey Greendale:]

Okay. And is that true across the border or are there any outliers on the upside or the down side?

[Robert S. Silberman:]

There are, there is none that are below the norm, there are some that are closer to the norm than others. The numbers are pretty small on a brand new campus, you are talking about several dozens of students in that first year. So there is a normal variation that doesn't really attract our attention that much, can have kind of a out side impact on the short term EPS just given the small share count that we have but, not really well than I think to the larger issues of building in intrinsic value in the organization.

[Corey Greendale:]

Okay. And then as some one asked earlier about the criminal justices, is that... I imagine that your going to be a marketing that or may this side the different groups of then with selecting other way out and the accounting program or a IT kinds of programmer there any start up cost associated with that in terms of marketing through different channels an thing like that going.

[Robert S. Silberman:]

They aren't significant or material measurable from the company stand point we actually don't have a whole lot of specific marketing associated with any individual programs and we basically try and build the university planned but how about adjust this we keep track of the students who come to us who get understood think about and rolling and then decided not to enroll because it bit on the program that we are looking for we just going to answer and those kinds of surveys the program that was most often mentioned what's criminal justice. So we were attracting the students any where with our existing brand and activities and we just want to able to serve them took a flow while kind of occurs the sticking point of to weather we have the academic have still offer a realistic program. But after some of the higher over the last couple of year we got more confident in that and that's really were the decision for where came from.

[Corey Greendale:]

Okay. So no even think that the pay introducing the new program changes there will be may be one or two years or some thing like that.

[Robert S. Silberman:]

Correct, I would not anticipate us being a major developer of new programs. Certainly not anywhere near the rate that which we are focusing on energies on expanding the existing university to geographic and online expansion.

[Corey Greendale:]

Thanks very much.

[Robert S. Silberman:]

Thank you, Carl.

[Operator:]

Will go next to Kevin Doherty with Banc of America Securities.

[Kevin Doherty:]

Thanks just a couple of follow up about some of the question on your geographic expansion. When we think about I guess the to the cluster approach taken particularly maybe some markets like Philly and D.C., when you're moving into market has hat strategy change it all know obviously with all the attraction you gain with online is there at the point now or maybe you could move in and you might only need two or three new campuses in the given market or maybe five or six historically?

[Robert S. Silberman:]

No it hasn't and its kind of key point because it I mean owners and investor still understand this is how we think about. We don't thin of beyond line as I separate NTT we don't thin it is sort of a standalone business or higher growth business. We think if as been fully integrated in both our academic and our business structure. And we think that the best way to serve the student in a metropolitan area. The physical campuses become areas of community building is where you have your faculty has a place where they can come together even if a student decide to take all of their classes online, once or twice a quarter being able to come to the campus. See other students, see faculty talk to their advisors. Its really I think an important part of how are universities going to expand. So the use of the online is helped us in innumerable way so I mean it help serve students much better than we could 10 years ago. It doesn't elevate from my standpoint and in the company standpoint the idea that the way to expand this university is by having a disaggregated physical model with the number of campuses in any given location such that it's very-very convenient even if it's only once or twice a quarter for our student to get that campus.

[Kevin Doherty:]

Okay. And that's fair and then may just another way you look at it has you have said with the current expansion is that really changed my question is that how you approach this market historically?

[Robert S. Silberman:]

No we try and learn some thing they cheer but the broad out lines which Karl and Kristin Jones are head of new campus openings provided our Investor Day is what we put together in 2001 and it's we are continuing to execute.

[Kevin Doherty:]

Thanks Rob.

[Robert S. Silberman:]

Thank you.

[Operator:]

We will go next to the Trace Urdan with Signal Hill.

[Trace Urdan:]

Hi good morning. Rob I hope this isn't too big of a so far. But I am wondering if... yes obviously there was no impact on the quantitative involvement results related to weakening economy but I am wondering is your only campus finding id that nature of the conversation has changing at all in terms of student anxiety over these are there employment status to are there a kind of ability that pay their bells and go school to save time any thing that points to any kind of increased things that are related to entering in to their education given what's going in economy?

[Robert S. Silberman:]

Well students always have a significant amount of anxiety coming back to schools as well as that only the single biggest thing we hear from our admission officers that they are dealing with there is a fear that can I actually do this? Can I sit in the class room again after 10 years and have any kind of positive experience in to and the to do it. But I have not heard and I spend a lot of time over the last six months talking to our campus directors and our admission officers on this exact issue, I've not heard any anxiety associated with the general economic situation. And so I just really couldn't tie in anyway what we're hearing right now to what you read in the papers with regard to broad aspects of the economy whether it's housing or banking financial services. The crisis were our students work are for the most part at least from what we've seen from our students are not having that kind of impact that its causing our students anxiety.

[Unidentified Analyst:]

Okay fair enough and then second question kind of more minor point, but as said the in seeing media spending that took price around the democratic was essential primary in Pennsylvania is that likely to cause any kind of blur be there in terms of marketing costs for your schools in that area or I guess the side would enrollment in those schools for the second quarter.

[Unidentified Company Representative:]

No I mean our marketing teams knew 3 years ago that they're to be presidential primaries and presidential elections this year. So their planning includes that I don't expect that to have any impact.

[Unidentified Analyst:]

Fair enough although they may have been the only one to knew that the primaries is going to be contested in Pennsylvania in April but.

[Unidentified Company Representative:]

I bet they did know that actually lose their points. But regardless of that I just those kind of short term things really I don't see having an impact on a quarter-to-quarter basis for us. We've got a pretty stable plan and it just keeps going and it works for us so, we are not going to be that tactical honestly.

[Unidentified Analyst:]

Okay good enough thank you.

[Unidentified Company Representative:]

Yeah.

[Operator:]

[Operator Instructions] Kelly Flynn with Credit Suisse.

[Kelly Flynn:]

Hey, thanks for taking my second question,

[Unidentified Company Representative:]

No problem

[Kelly Flynn:]

On the, the one time gain you mentioned I think, I am confused by the impact of that it was 0.8 million, which I though was pre tax was $0.03 or so but kind of opposite you described in fact it was last of you help me understand that missing...

[Unidentified Company Representative:]

Yeah, it's the combination of what happened is we ended up buying back a lot more share last quarter then we normally do. And that we had sort of forecasted and so and you don't get the benefit of the buy back until really future quarter as you buying back through the quarter your share account on the weighted average basis doesn't go down as fast as you buy them. So we actually shouldn't had a lot left combination of impact of interest income along with the upside, lower impact from lower interest income upside impact because lower share account but more of the upside impact of lower share account happens in Q2 and Q3 and Q4 to the balance of the year. What happened was that mark, very currently noticed that are the time that we were funding both our special dividend, our share repurchase, we were getting a lower yield on our short term bond funds and we were on money market funds. And it was just a normally that was going on there and so he traded out of the short term bond fund the lower yield associated actually with the higher a net aspect so we had to gain the inner thousand and so that really offset the lower interest income from the lower cash balance, we will get the benefit of the lower share account in Q... more the benefit through the balance of the year and one time gain kind of kept us from having the foot side out of the lower interest income in Q1, we will have it in Q2 and Q3 because I do not think he has any restraints to us in his pocket but It was... it was a nice move at the time and at this point actually given that the rates have shifted back around and you are getting a higher yield on a longer term investment were... he is training back you are going back into the short term bond funds now right so that what that is.

[Kelly Flynn:]

As you basically speaking kind of the net impact is that?

[Unidentified Company Representative:]

Correct.

[Kelly Flynn:]

Okay and but to be clear there the result did include 800 grant from that gain.

[Unidentified Company Representative:]

We... our results include an $800,000 one time gain on the sale of that bond portfolio they also include the lower interest associated with the fact that interest rates were lower and we have less cash.

[Kelly Flynn:]

Okay, I got.

[Unidentified Company Representative:]

And to be clear Kelly that gain is before tax

[Unidentified Company Representative:]

The 800,000.

[Kelly Flynn:]

Okay, right thank you very much. I appreciate it

[Unidentified Company Representative:]

You bet

[Operator:]

And we will go next to Jack O'Hare with Sentinel Funds [ph].

[Unidentified Analyst:]

Hi actually Mike thanks for taking the question my question was why... why exactly you have made the portfolio shift which you just answered and but it had nothing to with what the peculiarities on the auction rate market now or is just a matter of what we get relative yield.

[Unidentified Company Representative:]

It was relative yields, we have no exposure to any auction rate securities what so ever.

[Unidentified Analyst:]

Okay thanks an great quarter thank you.

[Unidentified Company Representative:]

Yeah, thank you.

[Operator:]

And we have a follow up with Corey Greendale with First Analysis Securities.

[Corey Greendale:]

Hi thanks, sorry to end so much about the cash but given what you have said about shifting back into bond funds, Mark, give a suggestion of what interest rate we should model on your cash going forward.

[Unidentified Company Representative:]

It was two to three.

[Unidentified Company Representative:]

Yeah I mean you guys try have a better idea to what interest it can be than I do.

[Corey Greendale:]

Okay thank you.

[Operator:]

And it appears to there are no more questions at this time, Mr. Silberman, I'd like to give it back to you for closing or additional remarks.

[Robert S. Silberman:]

Thank you Christine and thanks everybody for participating, we look forward to talking to again in July on our second quarter call. Thanks very much.

[Operator:]

And once again this concludes today's conference, we do appreciate your participation, you may now disconnect.