Strategic Education, Inc.
Q2 2008 Earnings Call Transcript

Published: 24 Jul 2008

[Operator:]

Good day everyone and welcome to today's Strayer Education, Inc. Second Quarter Earnings Results Conference Call. Today's conference is being recorded and following today's call, we will offer the opportunity for questions and answers. At this time, for opening remarks and introduction, I would like to turn the call over to Strayer Education's Senior Vice President of Corporate Communications, Ms. Sonya Udler. Ms. Udler, please go ahead.

[Sonya G. 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 through Monday, July 28. The replay is available at 888-203-1112, pass code 4492436. Following Strayer's remarks, we will open the call for questions and answers. Please note that today's press release contains statements that are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. The statements are based on the company's current expectations and are subject to a number of uncertainties and risks that the company has identified in 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. Good morning ladies and gentlemen and thank you for joining us today. As is our custom, I'd like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. I'll then ask Mark to report on the detailed financial results for the second quarter of 2008, after which I will comment on our enrollment results for the summer academic term. I'd like to provide an update on our growth strategies and finally end up with the company's earnings outlook for Q3 2008. Strayer Education, Inc. is an education service company whose primary asset is Strayer University, a 37,000 student, 57 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 careers. Our revenue comes from tuition payments and associated fees. Approximately 65% of our revenue comes to us from federally insured Title IV loans issued to our students. We estimate approximately 25% of our revenue comes to us from our students' employers either directly to us from the employers as payments under one of our many corporate alliance agreements or indirectly to us in the form of tuition assistance benefits paid to our students. Our expenses at Strayer Education include the cost of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We currently operate campuses in 13 states in the eastern half of the United States, as well as throughout the world over the Internet through our online courses. We serve students in all 50 states and over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Association of Colleges and Schools. Mark, do you want to run through the financials?

[Mark C. Brown:]

Sure. Revenues for the three months ended June 30th, 2008, increased 24% to $97.9 million, compared to $78.9 million for the same period in 2007 due to increased enrollment and a 5% tuition increase which commenced in January of this year. Income from operations was $33.6 million compared to $26.4 million for the same period in 2007, an increase of 28%. Operating income margin was 34.3% compared to 33.4% for the same period in 2007. Net income was $21.3 million compared to $17.4 million for the same period in '07, an increase of 23%. Diluted earnings per share was $1.50 compared to $1.20 for the same period in 2007, an increase of 25%. Diluted weighted average shares outstanding decreased to 14,248,000 from 14,509,000 for the same period in 2007. Revenues for the six months ended June 30th, 2008, increased 23% to $95 million compared to... increased to a $195 million compared to $159 million for the same period in '07, due to increased enrollment and a 5% tuition increase, which commenced in January of this year. Income from operations was $69.2 million compared to $55.3 million for the same period in '07, an increase of 25%. Operating income margin was 35.5%, compared to 34.8% for the same period in '07. Net income was $44.8 million compared to $36.2 million for the same period in '07, an increase of 24%. Diluted earnings per share was $3.14 compared to $2.50 for the same period in '07, an increase of 26%. Diluted weighted average shares outstanding decreased to 14,294,000 from 14,486,000 for the same period in '07. At June 30th, 2008, the company had cash, cash equivalents and marketable securities of $118 million and no debt. During the three months ended June 30th, 2008, the company invested $30 million in a no-load short-term tax-exempt bond fund. The company generated $43.5 million from operating activities in the first six months of '08, compared to $44.6 million during the same period in '07. The company's cash flow from operations for the six months of '08 was negatively affected by the timing of employee stock option exercises in '08. That negative timing effect will reverse itself in the third quarter of '08. Capital expenditures were $10 million for the six months ended June 30th, 2008 compared to $7.4 million for the same period in '07. During the three months ended June 30th, 2008, the company used $13 million to repurchase 66,599 shares of stock at an average price of $195.45 as part of our previously announced stock repurchase authorization. The company's remaining authorization for stock repurchases was $12.6 million at June 30th, 2008, having invested approximately $69 million during the first six months of this year. During the six months ended June 30th, 2008, the company paid regular quarterly dividends of approximately $11 million and a special dividend of approximately $29 million. The company also received $10.3 million upon the exercise of stock options. For the second quarter 2008, bad debt expense as a percentage of revenues was 2.8% compared to 3.5% for the same period in '07. Days sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 12 days at the end of the second quarter of '08 compared to 12 days at the end of the second quarter of '07. Rob?

[Robert S. Silberman:]

Thanks, Mark. Just a couple of comments on the second quarter financials. It was pretty straightforward quarter. At a $1.50, we were $0.04 ahead of the midpoint of our predicted EPS range. Three of those $0.04 were generated by a combination of higher revenue per student and lower bad debt expense that Mark just noted, and that led to about 90 basis points of increased operating margin in the quarter is a little more than we were expecting, but pretty much within the range. The remainder of the out performance, the other $0.01 was really the result of lower share count, which was caused by share repurchases, which we accomplished during the quarter. And as Mark mentioned, our distributable cash flow growth looks a little flat for the first six months of the year, but that really is the impact of the timing of the stock, stock option exercises and I guess more importantly, there was open cash tax benefits, which are reclassed out of operating cash flow this year versus last year. That negative timing effect will reverse itself next quarter. Indeed, I think we are pretty confident that our rate of cash flow growth for both the first nine months of the year and indeed for the full year will be at or above our rate of net income growth for those same periods. Turning to the summer term enrollment results, we have one of our stronger quarters. Total University enrollment increased 20% on a year-over-year basis, that's up from 19% last quarter and 16% for the same quarter last year. Continuing student enrollments were up 21%, as we increased our retention rate by approximately a 100 basis points. And so, the 19% enrollment growth last quarter translated with an increased retention rate and the 21% increase in continuing student enrollments. Our new student growth was up almost 18%. Our student mix for the summer term is very similar to last quarter, business administration, accounting and economics degree seekers make up approximately 70% of our student body, computer science degree candidates at just below 20%. And our graduate population remains approximately 30% of our student mix for the summer term. Turning to a brief update on the growth strategy, many of you will remember that our strategy is based on five objectives. The first is to maintain enrollment in the company's mature markets; second, open new campuses, particularly in new markets; 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 these operations and also our investments. On our first objective, for the summer term, we were well ahead of ahead target actually this quarter, at the Mature Campus, it is showing 8% growth. Again, part of that is the reclassifications of campuses that are growing at a fairly rapid rate in years four, or five, six, seven of their maturity that are reclassified into our Matured Campuses when they reach here for, although we did have some pretty strong growth actually even at our significantly older campuses as well. With regard to new campus activity for the summer term, we opened two new campuses, both in new markets, Jacksonville and Palm Beach, Florida. We also today announced our intention to open three new campuses for our fall academic term. Now these campuses will also be in new markets for us, one will be in Savannah, Georgia, and two in the Fort Lauderdale, Florida area, and that will bring the total number of campus openings for the year up to the fall '09 that we had budgeted. In the Global Online unit, our growth rate was 51%. On capital redeployment, we announced this morning, our regular quarterly dividend of $0.375 per share and as Mark just mentioned, we also announced that we had repurchased approximately $13 million worth of our common stock during the second quarter. On the business outlook for Q3, based on that strong enrollment growth that I mentioned for the summer term, which is the... summer term matches up against our third-quarter financials and that's offset partly by some increased expenses associated with the new campus openings that I just mentioned as well as lower interest income due to lower cash balances and lower interest rates versus the prior year. When you all that in, we estimate our third quarter EPS will be in the $0.79 to $0.81 range. In the third quarter, notwithstanding these costs associated with the new campus openings, we do expect a fairly healthy increase in operating margin versus the prior year. And finally, Mark, I guess I should mention that between those lower cash balances, the lower interest rates and the fact that you've been partially invested in tax flows during the year, we could feel a upward pressure on our tax rate for the full year. And with that operator, we'd be pleased to answer any questions. Question and Answer

[Operator:]

Thank you sir. The question-and-answer session will be conducted electronically. [Operator Instructions]. Our first question comes from Mark Marostica with Piper Jaffray .

[Mark Marostica:]

Yes. Thank you. Rob, I just wanted to ask a question I think it's has been asked on many calls, but given the economic situation that we are in, I'm curious whether you're not getting any push back on tuition reimbursement among your corporate alliances?

[Robert S. Silberman:]

Mark, we haven't so far. We've been pleased with that. As a matter of fact, a fair amount of our new student growth in each of the last two quarters has been associated with a couple of particular corporate alliance partners. And so far so good on that, we really just haven't seen any downturn and we've been watching very closely for it.

[Mark Marostica:]

Great. And then I wanted to touch on conversion rates in the quarter, if you could comment on how those would have been trending?

[Robert S. Silberman:]

You mean that the rate at which our increase become new students?

[Mark Marostica:]

Correct.

[Robert S. Silberman:]

Well, it was up. I mean, we did quite well on new student enrollment and the... there was quite a bit of interest obviously. We had a large number of increase, but the economics of that and just in terms of the selling and promotion expense would indicate that it was up. Part of that is effected, actually negative pressure on that is created by the fact that we are... as you get into newer markets, we expect that conversion rate is going to be lower. It takes... in a brand new market with a new campus before you have any real brand identification, you... it is a little more difficult to convince a prospective student that it makes sense for them to commit so much of their time and money, and to that kind of enterprise, but notwithstanding that it's a... the direct answer to your question is, it was up on a year-over-year basis and it's pretty healthy.

[Mark Marostica:]

Great. And one last question, I think you touched on this, I mean, I would have got the point, but student retention in the quarter, can you go over that point that you raised, I think, on the commentary?

[Robert S. Silberman:]

Sure. Our student enrollment for our spring term was... increased by 19% over the previous year. If our retention rates stay stable, then you would expect a 19% increase in our continuing student enrollment for the summer term. It was actually up to 21% and when we went back and looked at that, that calculated about a 100 basis point increase in our continuation rate or retention rate from a spring to a summer term. That was actually the best news of all from our standpoint with regard to the quarter. I mean, we had a very strong start of new students last spring and to see even more of them than we had at the year before successfully complete their classes for the spring term and decide to enroll for the summer term suggests that the quality of our academics in the service that the students are receiving is something that they are pleased with and excited about, and getting them to actually enroll for a summer term is not always the easiest thing also. So, the fact that we had an increase in retention rate going into the summer and that healthy growth of continuing students was for us probably one of the more significant statistics with regard to the quarter.

[Mark Marostica:]

Congratulations.

[Robert S. Silberman:]

Thanks, Mark.

[Operator:]

Our next question comes from Suzi Stein with Morgan Stanley.

[Suzanne Stein:]

Hi. A couple of questions. I know the number is very low, but have you updated what your private loan exposure is following the passing of HR 5715?

[Robert S. Silberman:]

Have you looked at it, Mark on this?

[Mark C. Brown:]

No. I don't think it has changed significantly from what we discussed before.

[Robert S. Silberman:]

It's still below 3%, but I don't know exactly what it is.

[Suzanne Stein:]

Okay. And also can you just be more specific about what you're doing to drive down bad debt and how long do you think that number can go?

[Robert S. Silberman:]

Well, I mean, it's possible to make bad debt zero in a business like this because you know all of our students are supposed to pay a 100% of their tuition before they start the classes. So, the only reason that you get bad debt is in those circumstances where the campus leadership, the dean or the director allows a student to enroll without perfecting their payment mechanism, whether it's on a cash payment or finalization of their loan agreements. We only have four starts per year. So, it's somewhat inconvenient if the student doesn't have all of their payment methodology finished to make them wait another three months. So, we'd like to give our campus deans and directors the authority at the campus level to basically extent a small amount of trade credit, if you will, for a week, two weeks whatever is necessary. Bad debt really comes from situations where you've done that and then the student drops out after starting, but prior to completing their payment mechanisms, and so for us, the issue is making sure that at the local level, the deans and the directors are making appropriate decisions. They are motivated by the right sensibilities in terms of what we want to accomplish at the campuses and then keeping a close eye on that. When we see it get out of hand at the campus level, we just pull back their credit authority, makes it a little harder to enroll students, but it brings it under control and then where it stays under control and by definitions for us, it means basically not increasing at a rate faster than the your rate of enrollment growth. Then we're happy delighted to actually provide that credit authority at the local level because it is better for the students. So, it is really just a question of monitoring it closely and deploying the credit authorities in and out as necessary to get the results that you want.

[Suzanne Stein:]

Okay. Great, thank you.

[Robert S. Silberman:]

Thank you.

[Operator:]

And our next question comes from Bob Craig with Stifel Nicolaus.

[Robert Craig:]

Hi guys, congratulations.

[Robert S. Silberman:]

Thanks Bob.

[Robert Craig:]

Rob you mentioned in your commentary the better-than-expected growth from Mature Campus structure. Is your existing Mature Campus footprint right sized for current demand? In otherwords, are you undertaking any increases in existing campus seat capacity?

[Robert S. Silberman:]

Well, we have a couple of Mature Campuses that we've renovated in the last two years and a couple more that we're going to be going through this year, where... whenever we do that, we look at the actual seat demand and make sure that we've got the right amount obviously and then in some cases, several years ago, when we started to do this when the...there was a marked increase in campus based students taking online courses, much of the campus was renovated in those circumstances to support that kind of students. So, there was more advising and tutoring capacity put into the campus, faculty, facilities, things of that nature. But, in terms of the numbers that we report from our mature campus enrollment in that 8% growth, that include students who are taking all their classes online. So, there really isn't... they are almost by definition always right sized because we can... it is very easy for us to expand or contract physical seat capacity and it's really just a means of... as part of a budgeting process looking out a year or so and making sure that you have the right number of classroom seats. It doesn't constrain our keep us from growing the student population at those campuses, and so it's not really that relevant to the rate of growth issue from that standpoint.

[Robert Craig:]

Hopeful. Total enrollment has pretty consistently topped your notional model here for a few quarters. Are you at all being structurally challenged by this level of growth from any aspect of your business?

[Robert S. Silberman:]

Well, by definition, we hold the level of growth to a level at which we are quite comfortable that we can add academic capacity, professors and deans in a way that we'll ensure the maintenance of academic quality. When we start the year, the number of campuses that we decide that we are going to open is really a derivative of that analysis. So, we are never challenged during the year. We won't add more units than we can, when we put that budget together. If during the year, we end up with slightly higher than trend line growth in enrollment, what's basically happening is you're ending up... filling out more of your existing classrooms which also is how you end up with margin expansion in those circumstances relative to the model that Mark and I would have put together. And we cap the classrooms, whether it is virtual or physical at a student-to-teacher ratio that we're comfortable we can maintain academic quality at. So, I... we are by definition not feeling the strain, but that's because we structured our budget for 2008 in a way that we didn't put more physical capacity or virtual capacity in place than we've felt like we could handle.

[Robert Craig:]

All right. Rob, I know you mentioned you'll give more color on next year's opening program in October time frame, but any color on next year's openings from the standpoint of new versus existing markets?

[Robert S. Silberman:]

I would expect Bob, it's probably going to be similar to this year. It's probably relatively evenly mix, it's just because we have high demand in both of those circumstances, it's hard to turn down one for the other. So, I do feel like we are... our... the bench strength that Karl McDonnell, our President and Sondra Stallard, the President of University, have been working on, I think it's fairly healthy. I feel better about this now than I have in many quarters in the past. And so, I think that the concentration that we're doing right now, the attention that we are paying to the issue of developing human capital has put us, I think, in a pretty strong position.

[Robert Craig:]

Then last one, would you... would you consider leapfrogging into a high-growth potential market as opposed to the contiguous state expansion that you've been doing historically?

[Robert S. Silberman:]

Well, the thing is that the contiguous expansion is really a means of managing the academic risk, and we are pretty wedded to that. The other sort of aspect to that is I don't think you give up much because regardless of whether a particular community is growing quite fast or relatively stable, the number of working adults in that community that have a high-school degree, have a job, and don't have a college degree is almost always very high. And so, we have campuses that have grown very successfully in communities that might be considered much slower population or economic growth. And so, it's just not that relevant to the decision process. To a degree it is, it is relevant, it's overmatched by the commitment to the... lowering the academic oversight risk. And the only circumstances that I could imagine leapfrogging would be one in which for some other reason, we already have so much academic content or management in a market that it alleviates that risk.

[Robert Craig:]

Okay. Great. That's very helpful, Rob. Thanks.

[Robert S. Silberman:]

Thank you, Bob.

[Operator:]

Our next question comes from Andrew Steinerman with JPMorgan.

[Andrew Steinerman:]

Hi there. Hi, Rob and Mark.

[Robert S. Silberman:]

Welcome Andrew.

[Andrew Steinerman:]

Thank you. A question about the sales and marketing percentage by some... [inaudible] I want to dive down underneath that just look at on the advertising part, selling and promotion hopefully benefiting somewhat favorable on the ad rates in the outside [ph]?

[Robert S. Silberman:]

Andrew, I had a hard time hearing that, but I think the question was, is our selling and promotion being benefited by lower ad rates in the quarter. And I wouldn't say that. I mean, I... we have a fairly broad geographic exposure. I think that advertising rates as a percentage of spend in the economy over the last five years... over the last ten years are going down, particularly in some of the traditional media that we use, but I wouldn't point that out on a quarter-to-quarter basis is any different from the first or second quarter of this year.

[Andrew Steinerman:]

Thanks. And just a follow-up. Obviously sales and promotion line percentages was up modestly this quarter. Do you have a similar assumption in your third-quarter guidance?

[Robert S. Silberman:]

It was up modestly compared to what Andrew?

[Andrew Steinerman:]

Year-over-year? The sales and promotion percentage year-over-year was up modestly in the second quarter, is that also assumed to continue into the third?

[Robert S. Silberman:]

I don't really know the answer to that Mark, but in general, the area where we are most affected by investment in new markets is on the sales and promotion line. You have a significant exposure to new markets in the latter half of the year. So, to a degree that we have upward pressure that I would probably be in that line.

[Andrew Steinerman:]

Sounds good. Thanks so much, congratulations.

[Robert S. Silberman:]

Thank you Andrew.

[Operator:]

And our next question comes from Kelly Flynn with Credit Suisse.

[Kelly Flynn:]

Hi. A couple of questions. First related to the federal loan limit increases, have you heard anything about or seen any indication that you'll have to reprocess students as a result of this and that could result in timing delays on the receipt of federal core funds? And then I have a second question after that.

[Robert S. Silberman:]

No.

[Kelly Flynn:]

No, okay. Thanks. And then, just related to the macro environment revenue, you are not a big proponent of the counter cyclicality fees, but I think there is a lot of concern out there that the credit environment broadly, not private loans, but just broad pressure on the consumer's credit profiles would hurt the consumer's ability to go-to-school, it appears from your numbers and some others as well that the opposite is happening. Could you shed any light on some of the theories that you probably heard out there and also what you think generally might be going on relative to those things? Thanks.

[Robert S. Silberman:]

Sure. I'm not a proponent of the counter cyclicality theory with regard to Strayer University. I couldn't really comment on it with regard to some of the other programs, beyond to say that in some cases the way it's been explained to me I think it has maybe some relevance to those programs, based on the students who are trying to attract. I spend a lot of time this last quarter frankly just trying to gather anecdotal datas to your question with regard to Strayer students. I mean I talk to a lot of students and a lot of prospective students as to whether they are access to any kind of credit was affecting their decision-making and the answer was uniformly no. The nature of the economic pressure on our students driving them back to school tends to be both independent of the short-term macroeconomic cycle and not particularly affected by their access to sources of credit beyond their ability to access the credit necessary to support their payment mechanism, whether it's a government guaranteed Title IV loan or in those cases where the students are employed by some of our corporate alliance partners and they have tuition assistance benefits, obviously that's a key factor. But, the drive to go back to schools is really created by the long-term secular shift, secular maybe the wrong word, but the shift in the economy from a manufacturing base to a knowledge base which continually raises the importance of education as a factor of production. And my view has always been that credit will flow to those parts of the economy that are increasing in importance and for which there is an ability to serve that credit. And that certainly has been the case with regard to the students that we are attracting.

[Kelly Flynn:]

Okay. And what about...what about our gas prices, I mean anything you're hearing from the anecdotes about the impact of that. I know you have a lot of online recognized courses [ph], but the short-term feelings about that and even just longer term, if they were to remain high or give the theories on the impact on that?

[Robert S. Silberman:]

It's possible, but if gas prices remain high or get higher than they are now that we could see a more of our students opting to take online classes. And that's been a pretty steady trend over the last few years anyway. And a lot of it I think maybe age-related, as you get more of the students in their late 20s or early 30s that are fine into our age group are individuals who may just be more comfortable and confident with online activities. But, on the physical side, remember we deliberately build rather small units that are very close to where students either live or work. Our students are commuting a long way to get to one of our facilities, we don't have one central campus in a metropolitan area and so the impact of high gas prices at least with regard to their own commuting would be mitigated by that. And then the overall increase at gas prices are all aspects of inflation really rolled into the first part of your question which is that a situation where cost of living is going up is actually probably going to drive more strength behind the motivation to go back to school at least for our target students because they are finding it more and more difficult to meet their ends meet without a college degree.

[Kelly Flynn:]

Okay, great. Thank a lot, that was really helpful.

[Robert S. Silberman:]

Thank you Kelly.

[Operator:]

Our next question comes from Amy Junker with Robert Baird.

[Amy Junker:]

Good morning. Rob, just a quick question on the global online. It continues to do very well, and I guess just the thoughts from your perspective on what you think is driving that? Is it... following up to Kelly's question, do you think maybe partially relates to gas prices, is it the corporate relationship you think, what are your thoughts there?

[Robert S. Silberman:]

Well, I think that the impact of gas prices would be more felt on our... you would see it more clearly on our campus-based population taking more of their classes online. Those students who are tracking through global really don't have a choice with regard to us, but they've decided to come to school with us, that's how by definition have to be fully online because they live in markets where we don't have campuses yet. I think the biggest impact over the last six months has been both the increased brand awareness and the success of our solely online students who are living far away from a Strayer facility and you are starting to communicate with other types... other prospective students online, and it's just a... just like in a metropolitan market, in the online arena, in the virtual arena, our success of our students and faculty and their satisfaction with the program is... generates a favorable impression which I think makes it easier to attract other students. And then secondly, as you said, we've definitely benefited over the last six to nine months from several corporate relationships that have driven a lot of students our way and that we are serving through the global online.

[Amy Junker:]

Great. Rob, that's helpful. And then just lastly Mark, on the tax rate, Rob has said you should expect some upward pressure. What are you kind of assuming for the year?

[Mark C. Brown:]

Yes. We... Amy, we still think it will be in the neighborhood of 38%, but we're... it depends on yields through the balance of the year. We thank for modeling, somewhere in between 38% and 38.5% would be sort of where we think we will net out. We are trying to be upfront on this, because the last couple of years, we've modeled the 38% and then we would come in at like 37.5% or something. I don't think it's going to be below 38% this year just because... I mean, if you look at the percentage of our income over the last couple of years that came from tax-exempt securities. So it's not taxable obviously. This year, we have less of that because we have lower cash balances, we bought back a lot of shares. The interest rate on those balances is lower and then Mark was actually invested last quarter for a long period of time in taxables. On an after-tax basis that was the best security to be in, but it means your tax rate will be a little bit higher.

[Amy Junker:]

Great. Thanks, guys.

[Mark C. Brown:]

Thank you, Amy.

[Operator:]

Our next question comes from Trace Urdan with Signal Hill Capital.

[Trace Urdan:]

Hi, guys.

[Robert S. Silberman:]

Hi, Trace.

[Trace Urdan:]

If you take us to back and look at where your enrollment growth was this quarter and your revenue growth in even kind of what the earnings did. We've been moving steadily up to what is... what is a pretty, what I would maybe characterize as something at the high-end of what you all like to talk about as a regular run rate. You have to go all the way back to 2004 as I see it as sort of see a quarter that had enrollment growth on the year-over-year basis that was as strong as what you're seeing in this quarter. So, I guess I am going to push you a little bit on this idea that there is nothing related to the economy that affects your business and it's all about academic quality and just... is just really ask you to... how do you think about the fact that these numbers are so strong this quarter and have been kind of trending upward to this level?

[Robert S. Silberman:]

I guess, the way I think about it is, I am pleased by it.

[Trace Urdan:]

Well. Yes, sure.

[Robert S. Silberman:]

And I think it is more than anything else a reflection of the investment over the last two to three years we made in new campus growth. So, we're in probably eight or 10 new markets over that time frame. So, you've got more capacity to attract students in a meaningful way and most importantly, you wouldn't see it. You certainly wouldn't see it on the retention rate and on the continuing student growth, if you weren't doing a really good job in the classroom. And so I do believe, that that is the most important indicator and I forget you asked the question earlier, but with regard to the corporate reimbursements, I do not think that we are much of a counter cyclical player because you know we are internally hedged from that standpoint. In a situation where students or prospective students are more concerned about their economic viability than yes, we're going to... the incentive or the proclivity of the students to enroll might be slightly higher, but for our student base, if they are not working, they are not likely to be enrolled. And some 25 or so percent of the revenue comes in terms of reimbursements from employers. So, I would not suggest that any of our enrollment growth in the last couple of years has been benefited by the slowing economy. I think, if anything there is a slight negative, but it's more than offset by the long-term demand of the shift in the economy from a manufacturing base to a knowledge base.

[Trace Urdan:]

Okay. So, its given that then in kind of accepting that at face value, is it fair to think that these sort of structural improvements are strengthening in the business, it's something that is sustainable and we might be able to sort of see a slightly more elevated level of growth going forward?

[Robert S. Silberman:]

Well, over the long-term, it will be dependent upon on our rate of capital expenses. If we are able to continue to open new markets at a rate similar to what we've done in the last couple of years then I would suggest that that our rate of enrollment growth is going to reflect that. It may not in any given quarter and they are certainly... we are comfortable with volatility around that trend line, but it's not going to be markedly different from that, and by the same token, at the point in which we fully prosecuted this opportunity, we have a presence throughout the entire United States, then we've... this is decades from now probably, but it's... it's a point at which we would expect that our rate of enrollment growth would moderate significantly. So, it's really nothing more complicated than that and so it always comes back from our standpoint is to what is our capacity for developing human capital and an ability to... our ability to expand the University, a rate commensurate with maintaining academic quality and then the enrollment growth and revenue growth, I'd have track that fairly closely. The only other point I'd make with regard to 2004 as well is that we're also benefiting this year from a higher revenue per student than Mark and I budgeted early in the year. We budgeted essentially the same metrics that we had last year which were slightly negatively affected although less so than years before with regard to an increased percentage of our students being graduate students. We talked about this several times in the past that graduate students take less classes per term on average even though they pay more. And so, if your mix is shifting towards graduate students, your revenue growth per student will be moderated somewhat. That's been fairly flat the couple of quarters and we've gotten I think Mark with a full 5% on top of our revenue growth, on top of our enrollment growth is revenue growth, right? So that's adding a little bit on the revenue growth as well.

[Trace Urdan:]

Got it. Okay. Thanks

[Robert S. Silberman:]

Thank you, Trace.

[Operator:]

Our next question comes from Gary Bisbee with Lehman Brothers.

[Gary Bisbee:]

Hi, guys. Good morning.

[Robert S. Silberman:]

Good morning, Gary.

[Gary Bisbee:]

A couple of quick ones. I'll take one different tact on the questions on the economy here, just to beat this one to death. But I've been hearing from a few companies out there that maybe their business had something counter-cyclical in terms of the enrollments, but just due to people's job prospects not being as strong or feeling like their jobs are more at risk that more people are responding to the messages you put out there, have you seen any change in leads you are receiving per advertising fees or however you think about that or is that really not being... how do you see?

[Robert S. Silberman:]

I wouldn't say that anything in the last... certainly last three months was significantly different from the previous 12 months and probably going back even... even further. What happens is... the proclivity of the prospective student to respond to our message tends to be increased with the amount of time we are in the market. And as our reputation and brand built in that market, it becomes easier and easier. In a brand new market, it's somewhat challenging. They've never heard of Strayer University, they don't have anything to... any students who are... allowing faculty to compare that to... that's a fairly large decision to make under those circumstances. But, we always get a few and then the satisfactory experience of those few kind of build on themselves and compound themselves. So, if you adjust for the age of our markets, I would not say that the proclivity of increase or people who respond to any part of our marketing message was more or less than it has been over the last couple of years and certainly you know going back really gauge years that I have been here, it's a fairly steady predictable pattern for us.

[Gary Bisbee:]

Okay. Another question on the enrollment side. I know the summer is your smallest absolute enrollment numbers, so the numbers tend to jump around a bit more, but anything you can point out in general that droves that strong year-over-year growth? That's the highest number we've seen in years and is... are the new campuses doing better? Is it across-the-board, is it... I don't know any color would be helpful?

[Robert S. Silberman:]

Well, I think the most important, as I mentioned, was the continuation rate, the higher retention rate which drove very high continuing student growth. Our new student growth is... has been healthy all year and is I think a reflection of really excellent job that our marketing team does and really equally or more importantly the... high level of service that our administrative and operational staff at the campuses is providing and then finally, most importantly the fact that we are in markets that we opened a year or two years ago where the reputation of our program is starting to really create a fair amount of positive reception and that really... that's a virtuous cycle Gary, that just kind of drives all parts of the business. I mean... easier to recruit faculty, it's... the better faculty cause the students to learn better and retain better and it just kind of feeds on itself.

[Gary Bisbee:]

Okay. And then just one clean up question, the stock comp, when you add it all up from the three lines, it looks like it was down quite a bit sequentially. Is that... is that number likely to stay at this lower level or was there some timing issue there?

[Robert S. Silberman:]

Well, we had some exercises of stock options in the quarter. And that's... it's really a decision of our Board and it's not something that we really try and predict too much beyond the fact that the Board has been pretty clear about that it's not aligned, it's going to get out of control on the upside. So, I don't know what else to tell you. I mean you could... from our standpoint it's a... it's a part of our compensation expense which I would not expect over time to be significantly higher than it is now, if it is lower over periods of time, we are after a level of exercises. It's probably investments we are going to make going forward in retaining people. So, I wouldn't move it around too much in your model.

[Gary Bisbee:]

Okay. I mean it seems to me, it's sort of a formulated calculation? Right. You issue options and then they are expensed over the... over the life of the options and so it's... unless you'd issued less?

[Robert S. Silberman:]

Yes, that's true.

[Gary Bisbee:]

I'm not sure that it would have dropped as much. But is it right to say what you are saying is that the number shouldn't change a whole lot in the recent trend, if this is a bit different maybe there is an anomaly?

[Mark C. Brown:]

Correct, on your guess here.

[Gary Bisbee:]

Okay.

[Robert S. Silberman:]

And you're correct because once you exercise an option by definition it has already vested, so it is already and hopefully expensed, but...

[Gary Bisbee:]

Right.

[Robert S. Silberman:]

But, yes.

[Gary Bisbee:]

Okay. All right, thank you.

[Operator:]

And our next question comes from Brandon Dobell with William Blair.

[Brandon Dobell:]

Thanks. Guys if you looked at the online population, both at global and as well as wholly or even part-time online students, maybe some color on what kind of programs they are taking, where you see them leading, and I'm kind of curious to understand how much leverage you get from the on-ground campuses to the online students especially to ones that are wholly online and if you're seeing that the global online population coming from areas especially recently areas where you just didn't see them maybe six months or 12 months ago?

[Robert S. Silberman:]

Well in the global, it's fairly spread across United States and somewhat around the world. And the areas that we draw from the global is continue with strength as we opened a new market. For instance, we are going to open in Fort Lauderdale, Florida. I mean I don't know we probably had few dozen students in Fort Lauderdale who were part of our global online. They will be administratively managed by our Fort Lauderdale campuses once they are open, so they will come out of that base.

[Brandon Dobell:]

Okay.

[Robert S. Silberman:]

The... within the campus footprints, they are the same students... I mean, it's really a question of whether the student in any given quarter wants to take an online course or wants to take a classroom course. So those, we report these numbers so you get a sense of facility utilization, asset utilization. But the same student within the campus based population can be reported as an online student or a campus-based student, three different types... ten times during their career, it's their decision. With regard to what classes they take, the... whether they are global or already [ph] online or campus-based students taking online classes, it tends to be fairly reflective of the broad cross section of the classes that all the students take. I mean, more of our students would take business administration or accounting than anything else, and I think that's certainly true with regard to the online classes. All of our students have to take a fairly high percentage of liberal arts types of courses to fulfill their requirements for the degree and all of those are offered online and in the classrooms, so I would get the best fairly well represented. And then our computer science programs are heavily represented at both in the classroom and online, and then you've got the three graduate programs. So, I don't think that we could draw any distinction between our online curricula or the... and the campus-based curricula in terms of relative usage. And as a matter of fact, we are trying to set it up that way. We wanted to be completely opaque to the student and have no impact on the students’ decision-making process beyond their own preferences as to which courses they take when.

[Brandon Dobell:]

Okay. If you were to compare the relative contribution of corporate alliances or... corporate alliances or matriculating your community colleges to new student growth this quarter or last quarter, the previous quarter, any major deltas and what those contributions were from those particular drivers for new students?

[Robert S. Silberman:]

Well, last quarter, for the spring term, we had a very large driver from corporate alliances, and it was pretty healthy this quarter, but it wasn't as high as last quarter. Community colleges, I would guess, has been strong really both times... it's increasing in strength. But it's... again there is going to be volatility around that basic trend line and we try not to get too excited about it one way or the other.

[Brandon Dobell:]

Right. Say, if you look at a trend line, would it be fair to say the contributions to new student growth from community colleges or corporate alliances or just your own organic marketing efforts, how do those three contributions trend over the next couple of years. Do you see one category getting materially larger as an importance for your business or is it they are going to all maintain the same relative strength?

[Robert S. Silberman:]

I really don't know, Brandon. I mean, from our standpoint, they are all really important, we're going to focus on all three of them. I would… I just don't have anyway of predicting which one will get more or less important, and we are certainly not using that in any factor in terms of how we manage the business.

[Brandon Dobell:]

Right, okay. And then final question, if you look at the next several quarters, any major changes in the timing of graduations or frequency that we should be aware as it relates to how we look at the persistence?

[Robert S. Silberman:]

No.

[Brandon Dobell:]

Okay.

[Robert S. Silberman:]

And then... and Brandon just on that last question, I guess the one point that I should say is that of those three categories of students, I would say that academically which is ultimately the most important, we are somewhat partial for the community college graduates just because, we found that coming in with that associates degree, they tend to better in the classroom. And so we are certainly pushing that quite hard at our campus level, but I wouldn't say... to the exclusion of any other source of this new student from that standpoint.

[Brandon Dobell:]

Okay. Thanks guys.

[Robert S. Silberman:]

Thank you Brandon.

[Operator:]

Our next question comes from Kevin Doherty with Banc of America Securities.

[Kevin Doherty:]

Thanks. Just a follow-up on one of those questions. You talked about the growth last quarter in corporate alliances, how much of that might stand come from employers in new market versus of in existing markets and obviously like it become more comfortable with your graduates over time just kind of curious... how much of a benefit you get from corporate alliances when you do move into new markets?

[Robert S. Silberman:]

If it is an existing corporate alliance, it's a huge benefit because there is an employer in a new market that knows us and it's actually one of the places where in a brand-new market we probably do best. There is some familiarity that the employee or the prospective student has with the University. The... with regard to our existing markets, that's obviously very important and in terms of our global online what happens is we end up, I don't know if any corporate alliance that we have which is solely reserved by our global organization. Generally what happens is we'll get a large national account that has some overlap of our campus footprint and because of the success of that, they push it out to their facilities which... for which there is no overlap of footprint and then we serve that to our global online.

[Kevin Doherty:]

Okay. And then guys switching gears back to some questions around the marketing spending. Could you maybe just remind us what is the incremental spending when you do go into some of those new markets? I mean, in other words, some questions kind of about the growth of the S&P is being somewhat above your revenue for the first time in several quarters. Was there any kind of meaningful maybe upfront spending for some of the new markets that you talked about that you are going to be heading into?

[Robert S. Silberman:]

Yes. I mean in the last year at this time for the summer term, we didn't open any new campuses in our markets. This year, we are effectively opening, if you count Lauderdale, Savannah, Jacksonville, probably there is four of them and there is a significant upfront spend. I mean that's... you lose money in a new campus because for the first year, you've got all of your expenditures, including advertising and marketing promotion and that total expenditure, when you net out the small amount of revenue that you get, generates about a $1 million loss for that year per market or per campus. So, you can take those four new markets that we are operating this year versus last year and kind of mathematically prove to yourself that the overall investment in brand building is fairly stable or actually down a little bit outside of those new markets.

[Kevin Doherty:]

Okay. And I know some of the marketing decisions... there is some autonomy down to... at the regional level, but overall what is kind of the media mix for your spending on a company-wide basis?

[Robert S. Silberman:]

Well, the mix at the local level, there is a lot of autonomy. The amount that's spent, there is an whole lot of autonomy. And it varies across markets, but we tend to have a fairly heavy presence in traditional media whether it is TV, radio, and newspaper, as well as direct media, whether it is direct mail or Internet presence, outdoor activities. It's a fairly broad cross section of trying to get the name of the University out early on in the life of the University in the market in a favorable way.

[Kevin Doherty:]

Yes. Thanks, Rob.

[Robert S. Silberman:]

Thank you.

[Operator:]

[Operator Instructions]. And our next question comes from Corey Greendale with First Analysis.

[Corey Greendale:]

Hi. Good morning, guys. I'll keep this quick. I just have one follow-up question. Rob, you were talking about the way you use global online to serve corporate partners. We saw a couple of stories over the course of the quarter about a partnership that Strayer has with Verizon where you are teaching onsite in Salt Lake City. Is that a model that you think... first of all, is that a one-off with Verizon and secondly, is that a model that you see expanding to other corporate partners?

[Robert S. Silberman:]

We do have other partners Corey, where we provide onsite instructions. I don't think we have one as big or as remote to our current operations as Verizon Wireless. In addition to Salt Lake City, we actually have several other of their facilities around the country where we do the same thing, and it is an important way of... method of our reaching students. Verizon Wireless has been one of our long and very supportive corporate partners. We for several years had a large number of our students... their employees come as students. They came to us a couple of years ago and asked us if we would consider providing that onsite instruction at many of their facilities, and we were delighted to support it. So, in those cases, we have both onsite instruction and then it just sort of naturally flows that you end up with a lot of global online because the students there end up, going to taking more courses than we're providing at their particular site and so, they've sort of naturally flow into our global online organization. But we are quite pleased with that and we think it is... it is a great model for us. It is not so much whether it is online or in the classroom. For us, anytime a large employer recommends us as a University of choice, we just think that's a positive event.

[Corey Greendale:]

Great. Thanks. I feel we are bumping up against an hour. So I'll follow up with you offline?

[Robert S. Silberman:]

That's fine, Corey.

[Operator:]

And there are no further questions at this time.

[Robert S. Silberman:]

Thank you, Elisa. And thanks everybody for participating and look forward to talking to you in October.

[Operator:]

And that concludes today's teleconference. Thank you for your participation. Have a good day.