Strategic Education, Inc.
Q4 2009 Earnings Call Transcript

Published: 11 Feb 2010

[Operator:]

Good morning, everyone, and welcome to the Strayer Education Incorporated fourth quarter and full year 2009 earnings results conference call. This call is being recorded. Following today's call, we will offer the opportunity for questions and answers. At this time, for opening remarks and introductions, 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 Udler:]

Thank you. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education; Karl McDonnell, President and Chief Operating Officer; 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

[Rob Silberman:]

Thank you, Sonya. And good morning, ladies and gentlemen. As is our custom, I’d like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. Mark will report on the detailed financial results for the fourth quarter and full year 2009, and then I’ll ask Karl to comment on our operational results in the fourth quarter and our enrollment statistics for the winter academic term. Finally, I’ll provide an update on our growth strategy and the company’s earnings outlook for Q1 2010. Strayer Education, Inc. is an education service company whose primary asset is Strayer University, a 54,000-student, 74-campus, post-secondary education institution, which offers Bachelor’s, Master's, and Associate's degrees in business administration, accounting, computer science, public administration, and education. Strayer students are working adults who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. Approximately 70% of that revenue comes to us from federally insured Title 4 loans issued to our students. Our expenses at Strayer Education include the costs of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs. We serve students in 15 States through physical campuses as well as 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 Brown:]

I’d be glad to. Revenues for the three months ended December 31, 2009 increased 29% to $147.2 million compared to $114.3 million for the same period in ‘08, due to increased enrollment and a 5% tuition increase which commenced in January of ‘09. Income from operations was $52.4 million compared to $39.4 million for the same period in ‘08, an increase of 33%. Operating income margin was 35.6% compared to 34.5% in ‘08. Net income was $31.9 million compared to $24.2 million for the same period in ‘08, an increase of 32%. Diluted earnings per share was $2.32 compared to $1.71 for the same period in ‘08, an increase of 36%. Diluted weighted average shares outstanding decreased to 13,751,000 from 14,143,000 for the same period in ‘08. Revenues for the year ended December 31, 2009 increased 29% to $512.0 million compared to $396.3 million for the same period in ‘08, due to increased enrollment and a 5% tuition increase effective for 2009. Income from operations was $172.4 million compared to $126.9 million for the same period in ‘08, an increase of 36%. Operating income margin was 33.7% compared to 32.0% in ‘08. Net income was $105.1 million compared to $80.8 million in ‘08, an increase of 30%. Diluted earnings per share was $7.60 compared to $5.67 in ‘08, an increase of 34%. Diluted weighted average shares outstanding decreased to 13,825,000 from 14,242,000 in ‘08. At December 31, 2009, the company had cash and marketable securities of $116.5 million and no debt. The company generated $141.8 million in cash from operating activities compared to $88.6 million in ‘08. Capital expenditures were $30.4 million compared to $20.7 million in ‘08. During the year ended December 31, 2009, the company invested $80 million to repurchase 452,000 shares of common stock at an average price of $177.34 per share. During the year ended 2009, the company paid regular quarterly dividends of $31.6 million. For the fourth quarter of 2009, bad debt expense as a percentage of revenues was 4.3% compared to 3.8% for the same period in ‘08. Days sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 14 days at the end of the fourth quarter of 2009, unchanged from 2008. Rob?

[Rob Silberman:]

Thanks Mark. Karl, you want to shoot at the highlights on the operational results in the winter term enrollment?

[Karl McDonnell:]

Sure. I’d be happy to. For the winter term, our total student enrollment was up 21%, our new student enrollment was up 16%, and our continuing student enrollment was up 22%. Continuation rate for the quarter was up slightly and our new student enrollment was slightly affected by the fact that our enrollment period was one week shorter than the prior year. In fact, it’s likely that we may see a similar impact in the spring enrollment period, which we are enrolling now, due to severe weather in the eastern part of the United States where a large portion of our campuses are located as well as our largest global online center. Enrollment at mature campuses grew 10%. This is primarily attributable to the fact that we have some newer campuses that are now being categorized as mature, and we also did, however, have some of our truly oldest mature campuses growing in the mid-single digits. Global online students grew 39%, and we had good contributions coming from our second global operations coming from our second global operations center in Salt Lake City, which we expect will break even later this year. We signed several new national account agreements, including agreements with both Lod [ph] and Carquest [ph], and we also signed 13 new articulation agreements, including one state-wide agreement in Rhode Island. During the quarter we opened three new campuses; two in New Jersey and one in Little Rock, Arkansas, our first in the state of Arkansas. In this quarter, we will open four new campuses; two in Miami; one in New Orleans, which will be our first in the state of Louisiana; and one in Austin, which will be our first in the state of Texas. This comprises seven of our previously announced 13 for 2010. Of the remaining six campuses, two will be Dallas, Texas; two will be in Houston, Texas; and two will be in markets to be named later although we expect them to also be in the Southeast. And then lastly, in terms of student mix, 70% of our undergraduate students are in business and accounting programs; roughly 20% are in information systems programs; and notably 6% are in our new criminal justice program, which is in only its fourth quarter of instruction. Graduate students comprised of one-third of our total student population, which is about the same level it’s been for the past few years. Rob?

[Rob Silberman:]

Just in time for the parties. Thanks, Mark and Karl. Just a few amplifying comments on the financials from my perspective. For the fourth quarter, our revenue growth of 29% was slightly above our forecast, Mark, is that right?

[Mark Brown:]

Yes.

[Rob Silberman:]

We had already sort of jacked up the forecast on the basis of the higher revenue per student. And when you break that down, again, it’s been most of the year we had enrollment growth for the fall term of just under 22%, 5% tuition increase, as Karl just mentioned, a relatively stable mix of graduate and undergraduate students, and then more student dropouts versus the same quarter in the prior year. And that led to a full 700 basis points of revenue per student growth. This continues the pattern that we saw all year with revenue per student growth being higher than tuition increase, essentially caused by lower drops. So we are pleased by that. On expenses, we were also just about right on budget for the quarter that bad debt expense at 4.3% of revenue was up from the prior year’s 3.8% and down from the prior quarter’s 4.5%. And as we described last quarter, I think we had reached a bit of a ceiling at the 4.5%, and we continue to get good collections from existing students. So I think that our reserve policy against those receivables that come from students who dropped out is sufficient now that we expect this to trend in the zone while the economy stays where it is, certainly not getting worse. Notwithstanding the operating losses we incurred in the fourth quarter from the 11 new campuses that we opened in 2009, we did achieve 110 basis points of operating margin expansion in the quarter, and that’s mainly generated by the higher than modeled revenue. Couple of key points on the full year results. On the income statement 23% average enrollment growth led to 29% revenue growth, 170 basis points of margin expansion, and $7.60 per share of earnings that’s up 34% versus the prior year. The important thing, for me, in all the statistics is that the relationship between our enrollment growth, our revenue growth, our operating margin, and earnings per share during the year were all consistent with the financial model that Mark and I have developed and that we’ve laid out for you the year before. And that’s what we’d like to see. We like to see those financial leverages moving in consul with our operational levers, which gives us the level of confidence that we do that we understand this business and it’s working the way we expected to. Second, on cash flow, the owner’s distributable cash flow was up 64% for the year. That’s quite a bit more than the 30% increase in net income. However, that distributable cash flow growth was significantly benefited by the timing of tax benefits associated with stock-based compensation. That’s happened to us before in the past where you end up with cash that is basically front loaded into prior year because you get tax benefit in the year before you actually have the tax effect. Without the effect of those benefits, our distributable cash flow growth for 2009 would have been 38%, which is more in line with our net income, and that should reverse itself and balance itself out next year in terms of lower cash flow growth for 2010 over 2009. But if you trend line it between all three years, you end up with operating cash flow growth and distributable cash flow growth, which is relatively consistent with our net income, which is what we’d like to see. During the year, we generated $142 million in cash from operations and also received approximately $9 million in cash proceeds and tax benefits from stock-based compensation transactions. We used that $151 million of owner’s cash as follows. And I’d like to at the end of the year always reiterate this so that owners see it the same way we do. We’ve got $151 million that we start with. We invested $30 million in CapEx to maintain and grow Strayer University, which is always our highest return on investments, almost always. I mean, it’s certainly all the ones that we’ve looked at. We invested $80 million in the repurchase of our common shares at an average price of $177. And as Mark mentioned, we returned $32 million in dividends to our owners in the year, roughly $2.30 per share. We continued in 2009 to be a very efficient generator of cash. And more importantly, as I said earlier, for me, all the operational and financial indices for the year moved the way Mark and I would expect as we grow the University and, for us, it’s all about keeping that in balance and making sure that all those indices are reflecting a balanced and stable management of the university. Turning to a brief update on our 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, invest our human and financial capital on opening new campuses, particularly in new states and markets; third, continue to build our online offerings; fourth, increase our corporate and institutional alliances; and the fifth and final objective is to effectively redeploy our owner’s capital. On our first four objectives, as Karl reported, we are off to a solid start for the year. I know there is much needs to be added there. On capital redeployment, we announced this morning our regular quarterly dividend of $0.75 per share and also that we’ve repurchased approximately $10 million of our common stock during the fourth quarter of 2009 at an average price of $195 per share. And finally, on our business outlook for the first quarter of 2010, based on the University’s 21% enrollment growth for the winter term combined with the planned expenses and operating losses associated with our increased rate of new campus openings, as well as the continued build-out of the second online operations center. We expect earnings per share of $2.56 to $2.58 in the first quarter and approximately 100 basis points of operating margin compression. And with that, operator, we’d be pleased to answer any questions. Actually I should say before we do that, you might approve we had a little bit of snow in the DC area last week or so. We put in place our disaster recovery continuity of government plan and decamped down to one of our Charlotte, North Carolina campuses where we had our Board meeting yesterday and are doing this earnings call today. We do, however, want to get back to DC, and we are going to try and do that right after that. And so maybe almost immediately on the road, we may not be able to answer questions that come up after the call quite as immediately as we normally do because we’ll be on cell phones. But we will get back to everybody today. And if you do have questions that don’t get answered on the call, get hold of Sonya and we will get back to you. Probably she has gone to Palm Beach. With that, Brandon, we will be pleased to answer any questions.

[Operator:]

Thank you. (Operator instructions) We will take our first question from Kevin Doherty with Bank of America/Merrill Lynch.

[Kevin Doherty:]

Great. Thank you. And good luck. Something [ph] out down there. But I guess just first of all, on the EPS guidance for the first quarter, it came in a little bit late when we are at the street [ph] was, I mean, is this simply a function of looking at the four new campus rollouts? Are there any other incremental investments that you may gain or maybe any other cost increases that you weren’t saying last year? I guess I’m just trying to reconcile with the margin expansion you saw in the first quarter versus the margin compression you’re looking for in the first quarter.

[Rob Silberman:]

Yes. On a year-over-year basis, in the first quarter of last year we got significantly higher revenue growth with some of the lower drops. We assume we are anniversarying that this year. And our model really just looks at -- there are -- the answer to your question is there are no incremental or additional expenses. It’s the timing of new campus openings. We are a little more front heavy this year. Not just the three in the quarter, it’s four for the next quarter, which in combination is I think three more students -- two more campuses than we’ve had in the first quarter of last year. And that’s really about it. I mean, we don’t have any different view as to regard to our full year model. If we have this level of enrollment growth for the year, we would expect to have stable to slightly expanded operating margin for the full year.

[Kevin Doherty:]

Okay. And then maybe just drilling down on the selling and promotional line, and again, you should get year-over-year improvement there in the fourth quarter and we’re certainly expecting some of those cost to ramp up given the new campuses. But do you think you can still get some leverage there? And maybe if you can just talk about any impact you are seeing from underlying media costs?

[Rob Silberman:]

Well, underlying media costs are quite stable, almost down. The -- what happens is -- our model is based at this point in our stage of growth at opening new markets. And we have a fairly set plan with regard to that. We spend about the same amount each quarter on each market. And when you first start off, we really don’t have any students. So that’s really the unrecovered expenditures that create margin compression, if you will. We actually expect to have negative impact on our marketing and emissions line as we open a lot of new campuses. That can be particularly [ph] new markets. That can be offset by higher than expected revenue growth, but we’ve modeled in what we think the revenue growth is going to be. And our view is that we’d like to get into as many new markets as quickly as possible. Our only real limitation there is the supply we have of internal human capital. And we don’t really pay too much attention or worry that much about on a quarter-to-quarter or even year-over-year basis what that does from a marketing emissions line as a percent of revenue. At the end of the day, that’s a derivative. Our view is that we are getting very high returns on owner’s capital and opening up new campuses. And part of those returns, taken into the increased expenditures and building the brand and the brand new market, and over time if you get more students, that tends to balance itself out.

[Kevin Doherty:]

Okay. That’s fair. And then just my last one, maybe if you can just address the Department of Education’s proposal on gainful employment and maybe if there is any analysis you can share about how your programs would fair relative to 8% that’s servicing the income threshold and maybe also how it would fit into the 90% repayment exemption as well. Thank you.

[Rob Silberman:]

Sure. Well, I mean, I think my first comment is, I don’t really have a lot of specific comments on the department’s proposals at this point because -- I mean, they have a lot of different proposals and none of them have been either official or actionable at this point. So my general view is to give the department benefit of the doubt. And I worked in government myself before. I tend to think people as rational and objective and moving towards an outcome, which is consistent with the policy prescriptions or the policy initiatives that they have. So we have not spent a lot of time modeling based on the kind of whipsawing data that’s come out of the various proposals. I do think that pricing is a key part of how you think about the business. And for me, what’s always been attractive about this as a business is that we are able to put in place a tuition pricing, which is a very solid part of a value chain for all of our stakeholders. Our tuition is consistent or even a little bit below what students could obtain to other – would have to pay at other educational institutions and allows us to provide the significant investments necessary to provide the kind of educational outcomes, which we think are important, and still be able to provide a return to capital. And when we look at the general concepts that the department was talking about, I don’t have any concern about our pricing policy. I hesitate to make a specific comment until we see ultimately what the regulations are. But within the range that they have talked about, it at least has been reported to me, I don’t see any impact on our tuition policy, and please buy that. That’s speaking as a CEO. As a citizen, I don’t think that either price controls or commanding control kinds of economic direction makes a whole lot of sense. But again, as I said, I tend to give government officials the benefit of the doubt until things are put in place that cause me to believe otherwise.

[Kevin Doherty:]

Yes. Appreciate the color. Thanks, Rob.

[Rob Silberman:]

Thank you.

[Operator:]

We will take our next question from Andrew Steinerman with J.P. Morgan.

[Andrew Steinerman:]

Hi there, Rob. When I think about what people are asking about here, first quarter guidance it’s about [ph] lighter than we were looking for in EPS and starts decelerated modestly. (inaudible) lot of the year-ago conversation, fourth quarter ’08 starts bounced around, expenses were front-end loaded. And as we know, 2009 turned out to be a very normal strong year for Strayer. Do you see the analogy that I’m talking about?

[Rob Silberman:]

I don’t really remember specifically fourth quarter 2008. But I heard these questions a dozen times in the last ten years. I cannot be more direct than to say we have a long-term business model, for which we think we have established to our own satisfaction is quite powerful and works. And we really don’t pay a whole lot of attention to what happens quarter-to-quarter or indeed what people have modeled with regard to our business. I mean, that’s your guys’ responsibility, and I believe there is a pretty good division of labor. And I just don’t feel like it’s necessary for us to either explain or complain or do anything with regard to how you all are modeling that. I would not have known, frankly, that our forecast is below, Andrew, what you may or may not have had. I think, as I said, the impact in terms of operating margin is -- the single largest impact we have is the timing of our new campus openings. It’s a little more front end loaded this year. As Karl mentioned, the new student growth, that is what it is. I mean, we feel that that is a number which will be variable. It is really a lot less important to us than the continuation rate, which speaks the satisfaction of the students and how well we are educating. That number has bounced around between 10% and almost 30% routinely. And as Karl mentioned, I think the most significant impact we had this quarter was five less recruiting days. So beyond that, we -- it's just not in our nature or even where we spend a lot of time thinking to try and explain this on a quarter-to-quarter basis. I think the operating model is working exactly the way we would expect it to. What I wanted to reconfirm is that for the full year, what we said in October is if we have 20% enrollment growth, we would expect stable to slightly expanding operating margins. And that is exactly what we continue to expect. I see no change to that.

[Andrew Steinerman:]

Right. And just could you fill out the comment about Salt Lake, how much of the drag will be in the first quarter?

[Rob Silberman:]

It’s five times roughly size of regular campus. And we are still -- I mean, we haven’t gotten to break even yet. So we are still incurring several hundred thousand dollars of operating losses, close to probably $1 million in the quarter on that.

[Andrew Steinerman:]

And you like the way it’s performing? This is all within your plan, right?

[Rob Silberman:]

Absolutely. Absolutely.

[Andrew Steinerman:]

Okay. Thanks for the color. Appreciate it, Rob.

[Rob Silberman:]

Thank you.

[Operator:]

Our next question comes from Andrew Fones with UBS.

[Andrew Fones:]

Yes, thank you. Just first on the operating results, I guess given you saw the new student starts in the period down a little bit and you mentioned the snow may impact next quarter, is there anything that you’re seeing currently that would suggest that you wouldn’t reach that kind of 20% enrollment growth for the year as you kind of look out from here?

[Rob Silberman:]

Andrew, we never ever forecast enrollment growth. Students will come when they come. And it’s just not in our nature to try and push that. The new student enrollment was not down for the quarter. It was up 16%. It’s a pretty healthy slug of new students. So again, on a -- comparing it to the previous quarter, it’s just -- that's the nature of what we do. This is a variable business. New student enrollment is variable. We are entirely comfortable with that. And we don’t really even opine on it on a quarter-to-quarter because it’s -- we don’t want to think about our students as a factor of production in our revenue generation. We are happy when they enroll.

[Andrew Fones:]

But I guess put differently, would it be fair to say that you’re not seeing any kind of weakening in demand for students? And do you think the slower growth in the quarter and potentially next quarter would be entirely due to these one-time items?

[Rob Silberman:]

The answer to your first question is, no, we are not seeing any weakening in demand. These are relatively small numbers, bear in mind. New students in a winter term are nowhere near as large as they are in a fall term. And so a few hundred students would have -- or less than 100 students is a percent. So, no, we are not seeing any weakening in demand from our standpoint. And we will see what the spring term listed number is when we see it. And it’s just -- again, we don’t forecast that and we don’t try and measure ourselves against a specific number there. We tell you as soon as we know what it is.

[Andrew Fones:]

Okay, thanks. And then just to kind of follow up on the gainful employment question, could you give us a sense of what the average debt load is for your graduating students? I don’t know if you track that. Thanks.

[Rob Silberman:]

We do track that. And most of our students come in with a lot of their credit earned already. I can tell you what the average lifetime revenue to us from a student is, which is about $25,000, and about 70% of that is Title 4. We don’t know exactly what debt they may have got in from other institutions for those students, but I would guess, Mark, that the average debt incurred in going to Strayer Education University is about $20,000 to $25,000.

[Andrew Fones:]

Thank you.

[Rob Silberman:]

Thank you, Andrew.

[Operator:]

Our next question comes from Ariel Sokol with Wedbush.

[Ariel Sokol:]

Hi, good morning. A question regarding enrollments, how they typically trend throughout a term or a quarter? So applications, are they more back end loaded or people enrollment and applying evenly throughout the quarter?

[Rob Silberman:]

Well, if you’re talking about new students, it -- I mean, we can only process really a said amount per day. The -- for enrolling a new student, there are a number of steps. And we can’t really serve that capacity in any given day. I think it is the processing of those students that can be fairly standard through the quarter on a number of students per day, Karl. In terms of the applications or the actual inquiries, I would imagine those do tend to serve us towards the end, but I’m not really sure.

[Karl McDonnell:]

Yes. You have to remember we only have four starts per year. So each one of these enrollment period is roughly about 12-week long. And it runs pretty evenly. We get a fairly consistent amount of applications and students in the first week of the term, and it sort of holds itself out through that 10 to 12-week enrollment period. And as Rob said, the real determining factor is the amount of people that we have in one of these campuses and that effectively sets a daily limit that you could adequately service. And so we don’t try to push extra students through that, nor do I think we could if we wanted. It’s just the factor of fairly even processing of these admission requests that come in to us throughout the period of the enrollment cycle. And so whenever we have a situation where we have fewer days, that would definitely have an impact.

[Ariel Sokol:]

So as it relates to the weather, so is it fair to say then the lead may not necessarily be impacted as much as the operation of the business and processing leads and the applications?

[Karl McDonnell:]

I think that’s right. I mean, we’re still obviously getting inquiries. There are still students from around the United States that are interested in Strayer on days that we may be shut down due to a weather disruption. What happens is, our ability to follow up with those students has been disrupted. And when the campus is reopened, we will follow up with those students in the first opportunity that they have. But clearly, there is some disruption that happens when the entire campus is shut down.

[Ariel Sokol:]

Okay. Okay. And then just going back to some of the questions on gainful employment, I’m just going to ask --

[Rob Silberman:]

Before you do that, I wouldn’t overstate the weather in terms of the spring term because we do have campuses from Charlotte, South Florida, and in Texas. We’ve got a bunch of campuses that are open. We just had a fair number and some of our bigger ones that have been closed for almost a week now.

[Ariel Sokol:]

Okay. Okay. So just going back to the questions on gainful employment, I’ll ask (inaudible) that others will, would you feel comfortable sharing the default rates for students who graduate from your program?

[Rob Silberman:]

The default rate for students who graduate is extremely low. I mean, our cohort default rate for all students was 6% (inaudible). I would guess most of them are students who have dropped out.

[Ariel Sokol:]

Would you be willing to share a number?

[Rob Silberman:]

You have that number?

[Karl McDonnell:]

I know that for our graduate -- student graduates, it’s below 3%. And it’s in the 3% to 3.5% range for all graduates.

[Ariel Sokol:]

Great, thank you.

[Rob Silberman:]

There is your answer.

[Ariel Sokol:]

Cool.

[Rob Silberman:]

Thanks, Ariel.

[Operator:]

Our next question comes from Gary Bisbee with Barclays Capital.

[Gary Bisbee:]

Hey, guys, good morning.

[Rob Silberman:]

Hey, Gary.

[Gary Bisbee:]

I guess a question on the articulation agreement, I don’t know if that is sort of a stable amount with what you’ve typically signed up in the past. I don’t remember hearing that number. My suspicion is it’s probably an acceleration. And if so, can you give us a sense of the weak economy playing into it or is it more just a geographic expansion gives you more opportunities to try to do deals with other traditional schools?

[Rob Silberman:]

Yes. I’m not sure it’s just of an acceleration. I think we tend to maybe a little bit more. I would guess on a given year we might have 15 to 20. So if we had 10-ish in the quarter, that is bit of an acceleration. I don’t think it has [ph] much to do with the economy. It’s definitely the geographic expansion and then also our increased reputation. Each one of these that you do, that you do a good job with the graduates, the community college, the administrators of that community college talk to their buddies in the community college network and our name just gets better known and easier as you get farther afield.

[Gary Bisbee:]

Okay. And what is the -- what is sort of the typical form that these agreements take? It’s just that they -- you recognize the credits and the kids come into these schools and they help the kids understand that you are an option?

[Rob Silberman:]

Well, they are not kids. I mean --

[Gary Bisbee:]

You called me on that last quarter. I’ll try and remember that.

[Rob Silberman:]

But it’s important because it really goes to the heart of what business and our academic model is.

[Gary Bisbee:]

Yes.

[Rob Silberman:]

Community colleges have a lot of work in adult students. And it is a great feeder for us because the students who graduate from a -- the adult students who graduate from a community college have been through a filter that frankly we doubt those students who are either less serious or less capable of handling the academics. And so they progress through and succeed at Strayer University at a much higher rate. So we are really delighted to get those students. The articulation agreements run in a number of forms. But the basic concept is, if we are comfortable and Middle States, or creditor is comfortable with the academic content of the -- basically the general studies program in the Associate’s level degrees, which are awarded by the community college, those will automatically be included for a full baccalaureate at Strayer. And the student enters at essentially the junior year, the third year, and all their credits transfer. In some of them -- in some of these arrangements, there is more or less aggressive communication or brand awareness that the community college itself does for Strayer University. In other cases, it gets as impactful as they have asked us to cite -- some community colleges have asked us to cite a physical presence on their campuses. And we have that in two locations. So like our corporate alliances, it runs a spectrum of minimal sort of interactions, extreme interaction. But anyway we look at it, we see it as a positive because the nature of those students are so well suited for filling our academic mission that it just works really well for us.

[Gary Bisbee:]

That makes a lot of sense. What’s the motivation for the community college to sign up for these?

[Rob Silberman:]

The biggest motivation is that they can -- in communicating with either the students that are trying to recruit for the Associate’s program or the ones that they have that there is a readymade way in which the students at relatively low cost can go and proceed in their education and move towards the Bachelor’s degree.

[Gary Bisbee:]

Okay. And then I guess just one on the competitive situation, is the obvious funding problems at the state schools having any impact on the one hand, and on the other, we continue to hear Phoenix talking about -- it sounds to me like emulating some of the strategies that you’ve used so successfully over the last decade. I wonder if you’re seeing any sort of change either online or just overall from them as a competitor.

[Rob Silberman:]

Well, they are an able competitor. And they already have a nationwide scope. And I have a lot of respect for their management team. I wouldn’t say that it’s changed any way the overall competitive situation. There have always been a large number of educational institutions that are trying to reach working adult students. The good news from a business standpoint is that there is a lot more working adult students that need education and there are enterprises that are available to provide it, and hence our high interest in expanding Strayer University and investing our owner’s capital and building out a nationwide footprint. So the -- I wouldn’t say that there is any real change in the competitive landscape. And we find it a very comfortable place to operate.

[Gary Bisbee:]

Okay. Thanks a lot.

[Rob Silberman:]

Thank you.

[Operator:]

And we’ll move to Corey Greendale with First Analysis.

[Corey Greendale:]

Hi, good morning.

[Rob Silberman:]

Good morning, Corey.

[Corey Greendale:]

Just a couple of quick ones. I know you don’t want to overplay the weather question, but is there any revenue impact (inaudible) and defer the way that you recognize revenue if classes are canceled?

[Rob Silberman:]

No, because they have to -- I suppose if there was classes that were canceled so badly they couldn’t finish the term, we would have an impact. But we’re going to finish the winter term. And all -- I mean, it’s a more important academic question than revenue, because under our Carnegie system, you got to get the 4.5 credit hours and over a 10-week -- 10-class term. And so -- whereas normally we only need once a week in situations where we have major weather disruptions and classes have had to be postponed, our academic deans and our professors are going to be scrambling to get -- to make up classes scheduled. But, Karl, I assume you’ve already had conversations with the deans on that, correct?

[Karl McDonnell:]

We have in Dr. Stallard’s offices monitoring the fact that all these classes that will be required to be made up will in fact be made up before the end of the term.

[Rob Silberman:]

Okay.

[Corey Greendale:]

Okay. And by the way, as you mentioned, the Carnegie issue, I assume you have had any conversations with Middle States about the letter that (inaudible) or any comment on their standards looking at credit hours?

[Rob Silberman:]

We have a lot of conversations with Middle States about credit hours and about general academic issues. I don’t have -- I haven’t had any specific conversations with them about correspondence they have from the Department of Education, and I -- nor would I be likely comment on it if I had. But -- and it’s suffice to say that Middle States is a mutual association. It’s a group of universities. It includes Columbia and Princeton and Rutgers and State University of New York and University of Maryland. And so as a group of institutions, we, Strayer is a part of, set standards that allow universities to address the key issues of providing discussion [ph] academic content. And I’m quite comfortable the Middle States does a thorough job on that. And our -- we keep a relatively traditional academic calendar. We have, as Karl said, four terms a year, four starts a year that are actually 12-week or 11-week quarters because there is usually two weeks of vacation, and 10 classes that need [ph] within those 11 weeks. So I think that the way that we at Strayer University measure our credit hours and the way the Middle States thinks about it is able to withstand any scrutiny anybody has.

[Corey Greendale:]

Great, thanks. Just one last quick one, have you seen any more of your inquiries or student population coming from a younger population? Just wondering given the economy, if there is more -- maybe traditional, people straight of high school who would be looking to go more on online or closer to your model so they can live at home rather than living away to go to school.

[Rob Silberman:]

We really haven’t seen that. A lot of it is the way that we communicate. I mean, we describe ourselves as a university for working adults. And so I think we tend to have inquiries that itself selected to that. I mean, we do have a handful of younger students, but the vast majority are -- I mean, our average student age is over 35 or above. So we really haven’t seen much of an impact to that.

[Corey Greendale:]

Okay. And you're not planning on augmenting your message to maybe make it more directed to those students?

[Rob Silberman:]

We have frankly as many students as we can pretty much handle at the working adult level. So --

[Corey Greendale:]

Great. Thanks. Good luck getting home.

[Rob Silberman:]

Thank you, Corey.

[Operator:]

Our next question comes from Kelly Flynn with Credit Suisse.

[Kelly Flynn:]

Thanks. Couple questions. First of all, on the student debt per student, Rob, I think you said -- you see about $25,000 and kind of lifetime revenue pursue and then you estimate the average debt at $20,000 to $25,000, then you also said 70% Title 4 or so. Just want to clarify, the $20,000 to $25,000 average debt seems inconsistent with 25% lifetime revenue.

[Rob Silberman:]

No, you’re correct. I mean, it’s probably 70-ish percent of that average. So maybe it’s 18 to 20. Most of our students who are enrolled don’t do a progression of how to pay for their education. And for many of them, the cheapest way is through the corporate reimbursements because they don’t pay those back and it’s free. And then they move from there and our administrations officers and our student business office managers help the students go through this progression, they then look to their qualification for Title 4 awards -- Title 4 loans. And so we may have some students that are doing both, both Title 4 and corporate reimbursements. But with 70-ish percent of our revenue coming from Title 4, I’m just trying to, on the cuff, come up with any answer to that previous question. But I think your analysis is correct. I think that if the lifetime revenue to us from a student is $23,000, $24,000 and probably the average debt load is around 70%, 80% of that.

[Kelly Flynn:]

Okay, great. And then, did you say anything about the draft CDRs for ’08 or could you?

[Rob Silberman:]

I did not, and I’m not intending to. I mean, when the department gives us draft numbers as they have each year, we always consider those drafts and don’t comment on them until they are final.

[Kelly Flynn:]

Okay, got it. And then another default rate question, I know you gave helpful color on the graduate default rate, but I think what I want to try to figure is if you guys would meet that -- 90% of grads in repayment hurdle the department has in its language for gainful employment? And one of the issues with that is that basically treats forbearances and deferrals differently. And they said you haven’t done a lot of analysis on it. I respect that. I mean, can you help us out to try to understand what the impact might be if you adjust it for forbearances and deferrals?

[Rob Silberman:]

I don’t have that exact data, Kelly. My general sense is, we would be okay.

[Kelly Flynn:]

Okay. All right. Got it. And then just one last one, sorry to come back to the weather, I just want to clarify since, as you indicated, I mean, the weather is really bad right now. Do you feel like what you’ve guided to for the quarter is fully reflective of this week’s weather?

[Rob Silberman:]

Again, Kelly, this week’s weather has nothing to do with our earnings for the first quarter, because with this traditional academic calendar, all of the students that we can enroll for the winter term, we already know. The weather now has nothing to do with that. We don’t have rolling starts. Our classes started I think January 10th or whatever it was. So the real issue with regard to the weather is how many students will be enrolled for the spring term. And we never comment on that because we don’t what it’s going to be. I mean, Karl’s point is well taken. We’ve had campuses that have been shut down for a couple of days, but I’m not particularly concerned about that. And I -- we’ll report our total student enrollment in May for the spring term, and I think it will take care of itself then.

[Kelly Flynn:]

Okay. Thank you very much.

[Rob Silberman:]

Thank you, Kelly.

[Operator:]

We’ll go next to Amy Junker with Robert W. Baird & Company.

[Amy Junker:]

Hi, thanks. Good morning. If I can go back to community colleges, and I’m just curious if you have a sense of what percentage of your students come out of the community colleges and if you’ve seen any impact in terms of that pipeline just given the capacity and financial stresses that they have had because of the economy.

[Rob Silberman:]

I have not seen any real impact. It’s been growing rather steadily and continues to do so through the last two years. I think, Karl, it’s about 20%, 25%?

[Karl McDonnell:]

Just over 20%.

[Rob Silberman:]

Just over 20%.

[Amy Junker:]

Okay, great. That’s helpful. And then with respect to your corporate alliances, you announced a couple more this quarter. You continue to ramp those up. Can you just share with us roughly how many of that is up to now? And I think last time we talked about this. You hadn’t dropped any. So it seems like that should be continuing grow.

[Rob Silberman:]

We have dropped any. And my guess is it’s well over 100, isn’t it?

[Karl McDonnell:]

It is. It’s about 120.

[Rob Silberman:]

120? Yes.

[Amy Junker:]

120. And that’s still -- corporate is a percentage of revenue, corporate reimbursement, is that still 20%, 25% of revenue?

[Rob Silberman:]

Is it right, Mark?

[Mark Brown:]

Yes. I mean, we know of 8% to 10% being ones that pass directly and the rest we estimate to be another 10% to 15%. No real change.

[Amy Junker:]

Okay. And then -- sorry, one last question. Just clarification on the weather issue talking about the quarter that -- or the numbers you just announced, if you had five fewer enrollment days and you have 12 weeks of enrollment assuming five days per week, that’s roughly 8% impact. So is that how we should kind of think about the -- I'm just trying to quantify how the starts were potentially impacted by this one less week of enrollment, and does that make sense?

[Rob Silberman:]

Yes, that is, Amy, because the other way to think about it is, as Karl said, there is really a fixed number of students that we can enroll on a day, because -- again, as you said, we are not -- we won’t sort students through registration that haven’t gone through all of the preliminary steps taking the diagnostic test, meeting with the deans, meeting with the academic counselors. And so when you lose that day, you lose it. And I think that’s about right, because if it’s a 12-week -- 13-week cycle and it’s five days per week and you lose five, you lose one-thirteenth. So 7%, 8%. Yes, that’s about right.

[Amy Junker:]

Okay, great. Thank you.

[Rob Silberman:]

You bet.

[Operator:]

We’ll take our next question from Jeff Silber with BMO Capital Markets.

[Jeff Silber:]

Thanks so much. I’m not going to ask about the weather. I’m not going to ask about gainful employment.

[Rob Silberman:]

Okay, Jeff.

[Jeff Silber:]

All right. Just some real quick questions. I may have missed some of it. Did you comment on persistence in the quarter?

[Karl McDonnell:]

We did. Our continuation rate was up slightly in the quarter.

[Rob Silberman:]

You can sort of see that because our continuing student growth was higher than our previous term’s total student growth. So that always means the continuation rate is up.

[Jeff Silber:]

And was there any meaningful difference between your campuses and online in that metric?

[Karl McDonnell:]

No, they were fairly consistent.

[Jeff Silber:]

Okay, great. And what is your capital spending budget for this year?

[Rob Silberman:]

Mark?

[Mark Brown:]

Yes. 2010, we estimate spending somewhere in the 7% to 7.5% of revenue range. We are still a little bit higher than trend lines. We’ve got those major campus renovations, and we’re still filling out the Salt Lake City. So it’s right, yes.

[Jeff Silber:]

Okay, great. Very helpful. Thanks so much.

[Mark Brown:]

You bet.

[Operator:]

We’ll take our next question from Bob Craig with Stifel Nicolaus.

[Bob Craig:]

Good morning, guys. Sorry about the snow. You open up school in Cleveland, we send you our weather. That’s the deal.

[Rob Silberman:]

Yes, (inaudible).

[Bob Craig:]

Anyway, just a couple questions on criminal justice. I take it from your responses to prior questions, I think I know the answer here. But is the retention rate on those students the equivalent of other curricular areas? And are you attracting any different demographic to that program?

[Rob Silberman:]

It’s not a different demographic. It’s the same age and socioeconomic status of people. We have done some studies to suggest that a fair number of these people are incremental and that they would not have enrolled in business or accounting or computer science programs. So we’re pleased with that. And continuation rate was, I think consistent, wasn’t it? I mean, it was –

[Karl McDonnell:]

The continuation rate is consistent, but I wouldn’t read too much into anything with regard to criminal justice, Bob, because it’s brand new. We’ve only got a couple of quarters with that under our belt. And the learning outcomes, the student success, all of that really remains to be seen. So we are pleased with that, but keeping a very close eye on.

[Bob Craig:]

What do they have a needle moving impact on starts at this juncture?

[Rob Silberman:]

It definitely did, and it’s close to 6% of our student population.

[Bob Craig:]

It would seem like it would.

[Rob Silberman:]

Yes, clearly.

[Bob Craig:]

In your shareholder letter last year, you indicated that you thought that startup losses, total startup losses in ’09 were approximately $16 million. Did it attract that expectation? And what is that predicted amount this year?

[Rob Silberman:]

It did. It might have been slightly lower because we delayed some of the expenditures, some of the hiring at Salt Lake City. We really want to be careful with the staff that we were building there. That’s put some of that hiring and some of those losses into this year. And we’ve added two more campuses and pushed a couple of million dollars of the Salt Lake City into this. So if we -- if it was supposed to be $16 million last year, let’s say, it was $14.5 million, $15 million, then we were talking about $18 million or $19 million this year.

[Bob Craig:]

Okay, great. Thanks, guys.

[Rob Silberman:]

Thank you.

[Operator:]

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

[Rob Silberman:]

Hey, Brandon.

[Brandon Dobell:]

Hi, guys. Couple of quick questions. Any better thoughts on pricing strategy or anything or no change there?

[Rob Silberman:]

It was announced that our tuition will increase 5% next year and I don’t have any new thoughts on that at all. I’m quite confident with that pricing strategy and we tend to see that going forward.

[Brandon Dobell:]

Okay. Any sense of how you guys finished out 2009 in terms of the military contribution to either revenue or student population?

[Rob Silberman:]

Relatively low.

[Mark Brown:]

1% to 2%, I think, of our student population, reasonably steady I think.

[Brandon Dobell:]

Okay. And then from a longer term perspective, if you look out over the horizon (inaudible) two to four years, anything that you guys are seeing in the market that you are in right now or that you anticipate being in, from the job market or middle market perspective, there was either -- tell that you need to have a different metric programs or that there is opportunities out there, as you thought about a year or two ago, you didn’t think would be there, but because the economy is a little bit different now that there may be some other programmatic areas where you think maybe you got an opportunity to expand the brand a little bit?

[Rob Silberman:]

Well, we’re not really looking for that, Brandon. I mean, we’re just very comfortable with a business matter with the demand characteristics we see around the programs that we have and the need for what we do. As we have discussed in the past, any new programs tend to be driven on the supply side for us by our academic function who feels like we can keep something well. The actual cost of developing new programs is just not that great a capital expenditure. So if our team comes to us and can convince us that they can really teach something well, and our marketing and strategic planning departments look at it and say, yes, there is no reason to believe that this is not an addressable market, we tend to go ahead and support that. But it’s not a sense of seeking out new markets because we are worried about that as an engine of growth. I mean, our strategy is based on geographically expanding Strayer University over the next years, if not decades, and completely fulfilling our opportunity to be the best working adult focused university with a nationwide footprint. And that’s really -- that's a full plate right there. We’re committed to that.

[Brandon Dobell:]

Great. Final question for you. If you’re out talking to corporations these days, any change in the mentality for setting up new agreements with you from a tuition reimbursement perspective or rethinking older ones to the upside or downside relative to how much the reimbursement is due for [ph] Strayer?

[Rob Silberman:]

Well, I mean, we continue to add them. And we continue to expand the ones that we have. And so I don’t really see a change. Navigating through this most recent downturn is it happened back in the ’02 timeframe, we tend to see corporations whose commitment to tuition reimbursement benefits is fairly solid. So we don’t know any of our corporate alliance partners that have eliminated tuition reimbursement benefits or even reducing. The only one I can remember that was a reduction was the -- was the Wachovia-Wells merger and Wells had a small one, so they went down to Wells level. I think that’s right. It might have been one or the other finance entities. But as a general matter, we see it as a really important part of our -- not just our expansion strategy, but our means to reaching students, I mean, to share offering high quality, regionally accredited Bachelor’s and Master’s programs, they ought to be relevant to large employers. And those tuition reimbursement programs are as much as anything else confirmation to us that we are hitting the right mark with regard to employers.

[Brandon Dobell:]

Okay. Fair enough. Thanks a lot.

[Rob Silberman:]

Thank you, Brandon.

[Operator:]

We will move to our next question from Bob Wetenhall with Royal Bank of Canada.

[Bob Wetenhall:]

Hi, good morning.

[Rob Silberman:]

Hey, Bob.

[Bob Wetenhall:]

Hey. Just to follow up, you’re reiterating your soft guidance to 930 to 950, correct?

[Rob Silberman:]

Well, it’s not guidance. We’re reiterating that the business model we’ve put out is correct that if our enrollment growth in the year is 20%, then we would expect earnings in the 930 to 950 range. And that is definitely the case.

[Bob Wetenhall:]

Sounds good. And just in terms of operating margin performance, you’re expecting flattish or slightly positive over 2009?

[Rob Silberman:]

If we have a 20% enrollment growth, correct.

[Bob Wetenhall:]

You mean 2010?

[Rob Silberman:]

Yes.

[Bob Wetenhall:]

Correct, exactly. Okay. And what’s driving the increase for the continued improvement in continuation rates? And do you expect that to remain in place?

[Rob Silberman:]

We can’t have an infinitely improving continuation rate because you get to 100% obviously. And we’ve thought for a long period of time, well over a year, that we were bumping against practical limits because our continuation rate includes students who graduate, students who academically fail, and then you’re left with those students who chose to disenroll. At over 80% on an annual basis, it’s -- I think you sort of reach the theoretical limit. And we don’t expect to see significant continued increases in continuation rate. But what we do expect and what we’re certainly striving for is that it will at least -- it will be maintained at this high operational level because that will then signify to us that we are doing a good job in the classroom and our students are benefiting from the education.

[Bob Wetenhall:]

Understood. And one final question, what percentage of your students are working adults?

[Rob Silberman:]

About 99%.

[Bob Wetenhall:]

99%. Great, guys. Thanks very much.

[Rob Silberman:]

Thank you.

[Operator:]

Our next question comes from Scott Schneeberger with Oppenheimer.

[Scott Schneeberger:]

Thanks. Good morning. With regard --

[Rob Silberman:]

Hi, Scott.

[Scott Schneeberger:]

Hi. With regard to the improvement quarter-over-quarter in bad debt and commentary in the call saying that you think that may have peaked out last quarter, is this a fact of you have the reserve right now and you feel comfortable going forward, or is there something more underlying like old receivables you’re doing a better job of collecting, if you could just take a full [ph] deeper there?

[Rob Silberman:]

There is three parts of it. One is, yes, we do feel that having increased our algorithm last year, we’re adequately reserved. Second, the recoveries are not getting better at this point of previously written off receivables. But throughout the last half of last year, our collections of current students was going up. That was being offset by taking increased reserves, but we’ve reached that level now. So we think that as long as our collections from existing students stay where they are or even continue to improve, we don’t really need increased recoveries from our written-off students because we’ve got sufficient reserves. And that’s why Mark and I feel like we’re most likely seeing the ceiling on that.

[Scott Schneeberger:]

Great, thanks. And then -- and just with regard to some of your more mature locations, it sounds like especially if you could handle the with snow, your capacity utilization is in good shape. Are you shifting around daytime/nighttime classes or are you not at that point yet, you still have plenty of room?

[Rob Silberman:]

Well, again, the capacity utilization between daytime and nighttime really has not to do with our business model. It has to do with our business desires. It has to do with when the students want to take classes. Working adult students, for the most part, want to take them at night. So the vast majority of our classes are often in evening. If you walk through one of our campuses during the day, you tend to see relatively empty classrooms. Some of our most mature campuses based on the workforce in the area will have a smattering a couple of daytime classes for shift workers or stay-at-home moms or people who are not employed during the work day. But again that’s not really capacity utilization. That’s based on the demographic demand in the area. And we consider the facility is fully utilized if they are full every evening. And that’s really when are designed to use.

[Scott Schneeberger:]

Okay, thanks.

[Rob Silberman:]

Thank you.

[Operator:]

We will take our next question from Mark Marostica with Piper Jaffray.

[Mark Skitovich:]

Thanks. It’s actually Mark Skitovich for Marostica. I just had a quick one -- actually follow-up on (inaudible) student discussion. Could you just talk, Rob, a little bit about the trend line in 2010? Specifically what type of further efficiencies do you expect to see in managing drops? I think you mentioned that we started anniversary a bit on those improvements last year. So I’m just curious how that may impact the trend line in 2010.

[Rob Silberman:]

Well, we really addressed that when we put out our model for 2010, which suggests that -- in a normalized situation, we have a 5% tuition increase. We would expect revenue per student to rise about 5%. We got higher than that last year. Previous years we’ve had lower than that when it was affected a shift towards more graduate students who take fewer classes. But our general view is, it ought to be about that. It ought to be somewhere between 4.5% and 5.5%. And that’s what that business we put out in October suggests.

[Mark Skitovich:]

Okay, great. And then just if I could follow up on bad debt, just given the stable collections obviously that you’re seeing there, is further improvement here -- I mean, is that mostly dependent on the economy or how much further improvement is in your control in terms of managing further improvement in bad debt?

[Rob Silberman:]

Sure. Again, this goes directly to the question that was just asked. There is three components to it. Only the recovery of already written-off receivables is affected by improvement in the economy, and we’re not even assuming that. As long as our collections rate -- collection rate of our existing students either stays stable or improves as it has been over the last several quarters, I would expect to see improvement in our bad debt expense as a percent of revenue regardless of what’s going on in the economy.

[Mark Skitovich:]

Okay. Fair enough. Thanks, Rob. Appreciate it.

[Rob Silberman:]

Thank you.

[Operator:]

We have no further questions in our queue. I’d like to turn the call back over to Mr. Silberman for any additional or closing remarks.

[Rob Silberman:]

Thank you, Brandon. Thanks, everybody, for dialing in. And as I said at the outset, we’ll get back to people as quickly as possible if you have follow-up questions. The best way to get hold of us is to get hold of Sonya. And if we have any luck, we’ll be airborne in about an hour and back to DC. But we’ll definitely get back to everybody this afternoon. Thanks very much.

[Operator:]

That does conclude today’s call. Thank you for your participation.