Strategic Education, Inc.
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Good morning, everyone, and welcome to the Strayer Education, Inc. Third Quarter 2013 Earnings Results Conference Call. This call is being recorded. For those of you wish to listen to the conference via the Internet, please go to strayereducation.com, where the call will be archived. With us today to discuss the results are Robert Silberman, Executive Chairman for Strayer Education; Karl McDonnell, Chief Executive Officer; Mark Brown, Executive Vice President and Chief Financial Officer; and Daniel Jackson, Senior Vice President and Treasurer. [Operator Instructions] I would like to remind everyone that today's press release contains and certain information on this call may contain 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 assumptions, uncertainties and risks that the company has identified in the paragraph on forward-looking statements at the end of its 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. Copies of these filings and the full press release are available online and upon request from the company's Investor Relations Department. And now, I'd would like to turn the call over to Robert Silberman. Mr. Silberman, please go ahead.

[Robert S. Silberman:]

Thank you, operator, and good morning, ladies and gentlemen. We've got quite bit of material to cover this morning, and our third quarter financial results are included in the press release, so I'll try to keep my opening comments brief. I'll then ask Karl to provide more details on our operating results as well as provide details on several of the initiatives we announced this morning. We'll then throw it open for questions and will stay as long as you all need. From my perspective, just a few points. First, our new student enrollment results for fall 2013 were disappointing. They were not just weak in a normative sense, but they also continued a negative trend, which has worsened throughout the year. Second, as a result of that trend and to continue to address the issue of college affordability, we announced this morning the plan to further reduce our undergraduate tuition. Third, we also announced this morning cost savings initiatives, which will generate approximately $50 million of annual run rate savings. Fourth, as a result of these cost saving initiatives, we anticipate taking a one-time charge to earnings in the fourth quarter of 2013 in the range of $45 million to $55 million. And finally, on capital allocation, our Board of Directors has extended our current share repurchase authorization, which was due to expire December 31 of this year until December 31 of 2014. There's currently $70 million remaining in this authorization. Karl, can you walk us through the operating results and also make a few comments on the initiatives?

[Karl McDonnell:]

Sure. Good morning, everybody. First I'll comment on our enrollment results for the fall term, including trends we're seeing across our various student segments. I'll then walk you through the various announcements we made this morning. Regarding enrollment for the fall academic term, our new student enrollment declined 23% versus the prior year, and our total enrollment declined 17% to 43,192 students. Our continuation rate declined roughly 190 basis points. We were pleased that we continue to see strengths in our institutional alliances as total enrollments from our national accounts grew 1% year-over-year. In addition, we added 13 new national account agreements during the third quarter. Based on the continued strong performance in this category, students from our institutional alliances now represent more than 30% of our total student population. While the government shutdown may have hurt our enrollment results, particularly in our Washington, D.C. market, weakness in our enrollment continues to be primarily with our unaffiliated undergraduate students. Based on the research we've done, we believe one of the primary contributing factors to the lower enrollment levels among these students are issues relating to overall affordability. And we remain committed to addressing affordability through programs like our Graduation Fund, as well as through lower tuition, which we announced this morning. I'll comment on that momentarily, but I first wanted to provide you with a brief update on the Graduation Fund. You recall that summer 2013 was the first term for students to participate in the Graduation Fund. And although it's early, and we only have one term of results, the Graduation Fund did have a favorable continuation rate impact on our summer 2013 cohort of new students. Each quarter, we'll analyze the changing continuation rates to assess our reserve for the Graduation Fund and to make any necessary adjustments to the amount we are reserving. Given our long-standing commitment to providing our students with high-quality academic programs, and in line with our ongoing efforts to increase graduation rates over time, we remain fully committed to the Graduation Fund and believe it will create meaningful value for our students. Now, by design, the Graduation Fund provides benefits in the final year of a student's undergraduate program in order to encourage bachelor degree completion. But because of that design, the fund does not address any financial obstacles a student may face in his or her first few years. And based on that, as well as part of our ongoing efforts to address college affordability, we now feel it is necessary to lower our absolute undergraduate tuition. Therefore, we announced this morning that Strayer University's Board of Trustees has approved an approximate 20% reduction in our undergraduate tuition per course for all new students. This reduced tuition will be effective January 1, 2014. When combined, the reduced undergraduate tuition and the Graduation Fund will reduce the overall cost of a Strayer University bachelor's degree by 40% to $42,600. Now with respect to expense reductions. The weak enrollment results we've experienced this year, combined with an accelerating shift by our students towards taking 100% of their classes online, has made some of our physical locations uneconomic. This is particularly so in the geographic markets in the Upper Midwest, which suffer from very high unemployment rates. These are also areas where Strayer University has little history, alumni network or brand recognition. We therefore announced this morning our intent, subject to final regulatory approval, to close approximately 20 physical locations by the end of 2014. Those locations closings will affect only about 5% of our student population, almost all of whom, as I have previously mentioned, are already taking 100% of their courses online. And again it's only the physical location that is closing. We will continue to serve our existing students, as well as any new students in these markets, via our global online region. And while we cannot predict enrollment next year, given our enrollment results this year, including our more than 20% decrease in new students for the fall 2013 term, it is almost certain that our total enrollments will be down double digits next year. We therefore have had to make corresponding reductions in our academic and operational overhead staff of approximately 20% of headcount beyond the inter-quarter cost savings that we've been able to achieve all year. This workforce reduction, which has already been implemented, combined with the costs associated with the closing of the 20 physical locations, will generate a one-time restructuring charge to earnings in the fourth quarter of 2013 in the range of the $45 million to $55 million. Within this charge, approximately 30 to $40 million relates to the specific locations being closed and to the accounting treatment of their leases. Approximately $15 million relates to the workforce reduction and other operating expenses. And as Rob said, we expect this plan will lead to approximately $50 million of run rate savings in 2014. Lastly, the university remains fully committed to our mission of providing the highest-quality academic programs we can for our students. Our belief is that a high-quality education combined with affordable tuition levels offer students the best opportunity to maximize the return they will receive on their educational investment. And with that, operator, we will be happy to answer any questions.

[Operator:]

[Operator Instructions] Our first question today comes from the line of Suzi Stein of Morgan Stanley.

[Suzanne E. Stein:]

Just wondering, is there any discount being offered to existing students? What are you expecting to happen there?

[Karl McDonnell:]

Well, many of our existing students, Suzi, are there one of our institutional alliance discount, given the large number of students that participated in those programs. But perhaps, more importantly, given the scholarships that we ran throughout 2012, frankly, many of which were more generous than the Graduation Fund and in line with the combined discount impact of the lower undergraduate tuition plus the Graduation Fund, many students are on those scholarships now. But we will continue to watch what happens to our continuing students and we have a longstanding commitment to trying to work with our students on affordability issues. So it's something that we'll watch.

[Suzanne E. Stein:]

Is there an increased discount being given on the -- at the institutional level, now that the overall pricing strategy is changing?

[Karl McDonnell:]

There hasn't really been any increase beyond the trends that we've seen over the last year, with average discounts ranging somewhere between 5% and 10%.

[Suzanne E. Stein:]

And just how long do you think this will take your flow through the whole base? So at what point do you think you get the full impact of the 20% reduction?

[Karl McDonnell:]

Well, it'll be for all new students. And so, obviously, it will depend on the mix of graduate students.

[Robert S. Silberman:]

So -- yes, exactly. So all new undergraduate students.

[Karl McDonnell:]

Yes, all new undergraduate students. So it depends on the mix shift between the graduate students that enroll were not increased -- or not decreasing tuition and just the numbers of new students that we enroll next year. But it'll take a few years.

[Operator:]

Our next question comes from the line of Corey Greendale of First Analysis.

[Corey Greendale:]

Just picking up on that. I was hoping you might help us with a little bit more granularity, think about how to model revenue per student flowing through 2014?

[Robert S. Silberman:]

Well, Corey, revenue per student will be down. We don't really have a forecast on that. And I'm afraid we probably can't be too much help, specifically, modeling. But the major levers are about 1/3 of our students are graduate, 2/3 undergraduate. And as both the effect of the Graduation Fund and the reduced undergraduate tuition roll through over the next couple of years, the full impact of that on a weighted average basis will be manifested.

[Corey Greendale:]

Okay. Then I'll ask a couple more strategic questions. I think it's good that you're addressing the affordability issue. Why did you decide to implement the 20% cut on top of the Graduation Fund, rather than just changing the structure of the Graduation Fund so that effectively it would be a 25% cut starting right at the beginning of the student's career at Strayer?

[Karl McDonnell:]

Well, again, you recall there -- the primary reason we developed the Graduation Fund the way we did is we wanted to align -- making a favorable impact on affordability, but aligning it with degree completion which, frankly, we see is one of the big issues on higher education today. But as we've continued to research the obstacles that many students face, we felt that it was important to try to work to remove obstacles students may face in the very early part of their academic career. And so now, with the reduced undergraduate tuition for our new students, combined with the Graduation Fund, we think we've got an affordability series of answers that on one hand, alliance with degree completions with the Graduation Fund; but also removes any financial obstacles a student may have when they're starting their academic career.

[Corey Greendale:]

And in terms of the decision to shutter some campuses -- again, I think it's good that you're being proactive given the environment. Over the course of the more than 10 years that Rob has been there, there's been kind the same long-term stories for the long-term owners of the company. And now that your downsizing the footprint, that geographic expansion story seems to at least be on pause or moving backwards. So when you talk to your long-term owners, what do you describe as kind of the trajectory and the reason to be investing in Strayer now?

[Robert S. Silberman:]

Well, Corey, there's no question. I mean, I hate to give up territory, so there is a change from that standpoint. It is consistent, though, with an overall objective that we've had, which is to match our physical footprint to the way in which our students want to access the education. And as Karl said, we've had a significant increase over the last couple of years in online participation. And particularly, in the last couple of years, in some of the newer campuses where the mix of students taking 100% of their classes online versus those taking some in the classrooms was significantly higher. And then the other side of that, which shouldn't be -- I mean, it has to be remarked upon, is that the ramp rate of those campuses, our ability to sustain the additional cost of having the physical presence over the last 3 years, has been much less robust than it was in the past. So our physical expansion strategy, our overall strategy will always be aligned to meeting the needs of the students and doing it in a way which is a responsible allocation of our owners' capital. As Karl said, we are serving those markets and will continue to serve those markets. And as we watch the development, basically the recovery -- the hope for a recovery in the economy, an increase in labor participation rates; and then also, as I mentioned 18 months ago, some clarity with regard to the regulatory oversight. We will be looking at that, again, on a year-to-year basis. But it was necessary to do for this year, and therefore we've done it.

[Operator:]

Our next question comes from the line of Bob Craig of Stifel.

[Robert L. Craig:]

I just wanted to follow-up on one of Corey's questions, dig behind the 20% discount. Was there a certain price level that you were targeting? Or, again, any thoughts behind the science behind the 20% and the current pricing around just over $40,000? And do you view this as a permanent reset or is this temporary?

[Robert S. Silberman:]

Karl, let me just say -- I view it as somewhat permanent, based on the fact that the overall affordability issue has become so significant. And I'd like to tell you that there is science behind everything we do Bob. But frankly, we're -- this is obviously I think more of -- a little more of an art than a science and we're taking in data from a lot of different inputs and coalescing around decisions. But, Karl, go-ahead. You've actually done more of the science, Karl, so you should...

[Karl McDonnell:]

Yes. Bob, I was just going to say and remind everybody that's we've actually been testing and experimenting with various tuition levels and various programs, really, for 2 years now. Dating back to the beginning of 2012 when we ran various scholarship offers, we certainly learned a lot. Earlier this year, in a couple of our markets, we began testing various undergraduate tuition levels for new students. And we knew that we were committed to the Graduation Fund, given its alignment to degree completion, so the 20% represents sort of the collective learnings we've had over the last couple of years.

[Robert L. Craig:]

Okay. I take it at this juncture, you're not contemplating any price changes on the graduate programs and masters programs.

[Karl McDonnell:]

No, we're not contemplating any tuition changes at the graduate level.

[Robert L. Craig:]

Okay. Maybe a question for Mark. The P&L impact of the 20 closures, I take it those campuses were losing money?

[Mark C. Brown:]

Most of them were.

[Robert L. Craig:]

Okay, no quantification of that.

[Mark C. Brown:]

You mean, how much they were losing, Bob?

[Robert L. Craig:]

Yes. Yes, exactly.

[Mark C. Brown:]

Well, I mean, our model was always that you'd lose roughly $1 million over the first year, some of these had gotten close to breakeven. But frankly, one of the bigger indicators for us was for the first time we saw campuses that were in their very early years of existence, that were growing and then stopped growing and began to reduce enrollment before they had reached breakeven. So it's not so much a specific operating loss that we were focused to, it's what was the appropriate use of our owners' capital, given our ability to serve the students in those markets through the online portals, and our view that the investment in those markets could be better served with less capital allocation.

[Robert L. Craig:]

Okay. One more from me. Could you -- is it possible to parse out that $50 million between line items, between IES and G&A?

[Mark C. Brown:]

Most of it, Bob, goes against the I&E line. You said the run rate savings, Bob?

[Robert L. Craig:]

Exactly. Yes.

[Mark C. Brown:]

Yes.

[Operator:]

Our next question comes from the line of Sara Gubins of Bank of America.

[Sara Gubins:]

Just to make sure I understand the 20% lower tuition, that will also apply to corporate alliance students, is that right?

[Karl McDonnell:]

It will in most cases apply to our institutional alliance students.

[Sara Gubins:]

Okay. Any concern about the 90/10, breaking 90/10.

[Karl McDonnell:]

Well there will be some pressure on 90/10, which we see really materializing over the next few years. Given our current rate of the 90/10 ratio, at about 74%, we don't see that as a big issue right now.

[Sara Gubins:]

Okay, could you give us any color about enrollment by program area? Is there any variation in the declines across various programs? And also, I'm wondering, does the recent pressure make you think you want to change your program mix at all?

[Karl McDonnell:]

Well, first on program mix, obviously, that's something that we look at each year. And if there was a point in time where we felt like there were program offerings that had strong demand on the part of students and we weren't offering then, then I think we would take a hard look at maybe adding programs. We don't have any that we're announcing now. And then secondarily, in terms of the first part of your question, the declines that we've seen are pretty consistent across programs at the undergraduate level. At the graduate level, the Jack Welch Management Institute continues to perform very well. So really, I can't point out one program or another as contributing more of the decline in our enrollment at the undergraduate level.

[Sara Gubins:]

Okay. On the cost side, do you think we should see your marketing spend come down over time, or conversely, might that have to ramp up?

[Karl McDonnell:]

Well, on marketing, we do think it's important that we continue to invest in building our brand. Certainly there's a lot of choices for prospective students to consider when they're going back to school. So we're not planning any real big -- any reductions, frankly, in our level of marketing as we head into 2014.

[Sara Gubins:]

Okay, and then just last question. Could you talk about your thoughts on share repurchased over time? I saw that it was extended, kind of wondering how you're thinking about that?

[Robert S. Silberman:]

Well, we haven't really changed our thought process on that, Sara. I mean, we look in terms of the use of capital as to what is the highest return for our owners. And we obviously are in the position where, depending on market valuation, we may have opportunities. There are other constraining factors that go into the decision in terms of sort of the complicated mechanism of the financial composite score, the calculation of net equity and things of that nature. But to the degree that we feel that it's the highest return use of the capital to -- for our owners to take excess cash and repurchase shares, we'd certainly be prepared to do it, assuming we meet all the other financial constraints around operating a university.

[Operator:]

Our next question comes from the line of Jeff Volshteyn of JPMorgan.

[Jeffrey Y. Volshteyn:]

First, I wanted to clarify. $42,600, that's before any sort of scholarships apply to it?

[Karl McDonnell:]

The $42,600 relates for a new student who would be paying about $1,420 per course for 30 courses. And the reason we model it as 30, because the student starting from the very beginning would have the opportunity to earn the last 10 courses without any tuition. So it's the combination of both the Graduation Fund and the new published rate of cost of tuition per course.

[Jeffrey Y. Volshteyn:]

That's very helpful. When we think about the campus capacity in your remaining campuses, is there much room to improve either class sizes or efficiencies or -- can you comment on efficiencies in those campuses?

[Karl McDonnell:]

Sure. Well, we're always looking at ways to make our operations more efficient. I would say that our primary focus is to make sure that the actual classroom experience itself is going as well as we can make it. That's our primary focus, to make sure that the learning that's happening is as high as we can get it. If we're confident that we have accomplished that, we do look for ways to become more efficient. And some examples would include, in large metro areas where we have multiple campuses, there's an opportunity to leverage faculty. We've looked at technology, and our ability to broadcast classes to other campuses that may not have as many students, so they can have actually more on-ground classes. So we are looking at ways to accomplish productivity with the other campuses.

[Robert S. Silberman:]

I think, actually, Jeff, that what you were driving at was in terms of the utilization rate of the existing campuses, and I think it's fair to say that there is quite a bit of room to improve that. The overall reduction in enrollment that we've experienced over the last several years means that even in amongst some of our more mature markets, we can add students without adding a significant amount of cost. We've done everything we can in what is essentially a human capital organization, to keep the capacity around so that we can ensure academic quality for the students that we have. But given the nature of how you fill classrooms, we have empty seats that could be filled without additional costs and without any impact on academic quality.

[Operator:]

Our next question comes from the line of Paul Ginocchio of Deutsche Bank.

[Paul Ginocchio:]

Karl, just -- I appreciate your comments earlier about the kind of the art and the science of the price cut. Do you think -- what you think the price elasticity of demand is, and would this 20% price cut get you back to flat new enrollment?

[Karl McDonnell:]

Well, I can't really project what's going to happen moving forward. I would just reiterate what I said earlier that the undergraduate tuition level that we've settled on represents our best learnings across a variety of tests that we've run. And when we ran various tests, we did see improvement from the baseline in performance for whatever segment we were testing. How that will play out across our full university next year, I'm obviously unable to predict that.

[Paul Ginocchio:]

Okay. And then -- I know when you launched the Graduation Fund, you kind of delayed the advertising around that. Will you do that again this time or will you launch a media campaign around the price cut immediately?

[Karl McDonnell:]

Our marketing team is ready to begin running some advertising that will include both the Graduation Fund, as well as our new lower undergraduate tuition for new students. And I believe our media around those subjects will begin -- they'll be in market within the next week.

[Paul Ginocchio:]

Okay. And then just -- what percentage of new enrollment, the most recent winter term, was unaffiliated? What percent of total enrollment currently is unaffiliated?

[Karl McDonnell:]

Well 30% of our students are affiliated with our institutional alliance, 1/3 of graduate students, so -- and some of our graduate students are also institutional alliance students, so it's probably maybe 2/3 of our undergraduate new student cohort in any given quarter.

[Paul Ginocchio:]

Great. And last one, if I may. The charges -- how are the charges going to run through the cash flow statement? When we take -- when we see all that severance in the cash flow statement in the fourth quarter and then when it comes to campus closures, that's more of a longer-term cash burn?

[Robert S. Silberman:]

Yes, Paul. So the severance, of course, is cash based, so you see that in the fourth quarter. The other charges such as the asset write-offs are noncash in nature, so -- but they'll also run in the fourth quarter. The answer, Paul, is that the impact of the write-offs will all be in the fourth quarter. Only about $10 million of it will be an actual reduction of cash. But that will affect our 2013 cash results.

[Paul Ginocchio:]

Right. So the remaining $35 million is the noncash.

[Robert S. Silberman:]

Correct.

[Operator:]

Our next question comes from the line of Michael (sic) [Jeffrey] Silber of BMO Capital Markets.

[Jeffrey M. Silber:]

Wanted to focus on the Graduation Fund. You mentioned the impact on the continuation rate. Anecdotally, did you see any impact on starts where students were enrolling because of this Graduation Fund?

[Karl McDonnell:]

No, I can't say that we saw any of that, Jeff. And quite honestly, we didn't -- we've never had an expectation that the Graduation Fund was going to help in new student enrollment in any way. The entire program was really designed to address long-term retention rates and graduation rates.

[Jeffrey M. Silber:]

That's understandable. And did you take any reserve for that fund in the quarter and where would that be on the income statement?

[Karl McDonnell:]

Yes, Jeff. What we did was we estimated the portion of that cohort's revenue that ultimately would be redeemed in the form of free courses. It amounts to about $700,000, and you'll see that on the balance sheet, actually, as an unearned tuition -- long-term unearned tuition, which will break out in the footnotes.

[Jeffrey M. Silber:]

And was there any impact on the income statement? Is that a contra-revenue account or...

[Karl McDonnell:]

Yes, it's -- we're essentially deferring revenue. So had we not had that program, the revenue would be $700,000 higher in the third quarter.

[Jeffrey M. Silber:]

That's what I thought. And -- I mean, should we take that as a run rate going forward?

[Karl McDonnell:]

It really depends on the effectiveness of the program, Jeff. That's the thing that's difficult about this from a modeling standpoint. Paradoxically, the more effective it is, the higher that reserve is going to be. And frankly, that's what we'd like. But -- and it's obviously a management estimate in terms of -- based on what we've seen in the first quarter's retention, trying to predict what will happen 2 or 3 years from now. So it is something we'd, frankly, like to see go up. And you'll in some measure be able to track our view of its effectiveness based on the size of the reserve.

[Jeffrey M. Silber:]

Okay, got it. I'm going to ask a question I know others have tried to ask. But trying to -- guestimate the impact on revenue per student of the tuition cut. If I take a look at the roughly 43,000 students that enrolled in the fall, what -- roughly what percentage of those students would be considered new undergraduate students that might have enrolled over the past year?

[Karl McDonnell:]

Well, again Jeff, we don't disclose the number of new students. And frankly, there's just too many moving parts for us to give you any good sense on revenue per student. You've got the undergrad, grad mix. You've got our national accounts, which have their own discounts embedded in them, outperforming our overall total enrollment, as well as new student enrollment actually. And now, you've got lower undergraduate tuition. And so, we don’t project forward-looking enrollment. So you take that fact combined with the fact that we've got all these moving pieces, and we just can't provide you with any visibility on revenue per student.

[Jeffrey M. Silber:]

Okay. I understand.

[Karl McDonnell:]

Well, we can provide visibility directionally. Yes, it will go down.

[Operator:]

Our next question comes from the line of Tim Connor of William Blair.

[Timo Connor:]

So, Karl, you said that the $50 million in cost, cuts, that's a run rate. I just want to clarify again, when will you start seeing that $50 million run rate cost cut reduction feed through to the P&L?

[Karl McDonnell:]

Well, as mentioned in my comments, the reduction in expenses related to our workforce reduction, those workforce reductions have already been completed. And so we will start benefiting from that, really, immediately and all throughout 2014. The portion of it which is related to the closing of the physical locations, depends in large measure based on when we get the final regulatory approval, and that's something that we're still working for. But we will, as we enter 2014, first when we announced our fourth quarter earnings, and then into the first part of next year -- once we know a more definitive answer as to when the actual physical location will be closing, we'll disclose that at that point.

[Timo Connor:]

Okay, understood. And then, as recently as a quarter ago you guys have pushed back on closing campuses. And the trends you talked about with declining margins and then some of the campuses, even the ramping campuses not really growing enrollment those seem longer term. So what was -- I guess, what was the catalyst for deciding that this needed to be done?

[Robert S. Silberman:]

Well, we review the facts each quarter. We measure those against both our long-term objectives and our short term requirements. And when we looked at that through the summer, we decided this was the right course of action.

[Timo Connor:]

Okay. And then, with operating margins in the teens this year and double-digit enrollment declines for next year, even when the OpEx you're cutting out of the model, how do you reconcile a 40% price cut for more than half of the population without cutting further costs?

[Karl McDonnell:]

Well, there are 2 separate issues, Tim. The first one is what does it cost to provide a high quality of education? I mean, we're an academic institution and we intend to be around for another 100 years, so you really don't want to be in the position where you're fooling around with that part of the equation. And then, the second part of it is, what is the appropriate tuition in order to create real long-term value for your students, both at the graduate and undergraduate level? So our job as managers is to reconcile those 2 and end up in a situation where we can provide that academic quality, be a relevant academic institution and still provide an adequate return on capital to our owners. So that's how we reconcile it.

[Timo Connor:]

Okay. And then, approximately, based on what you're looking at -- how you're looking at it now, when do you think a potential turn in new enrollment would feed through to a potential turn in total enrollment? What is the typical lag in your model?

[Karl McDonnell:]

Well, just based on historical trends, it's somewhere between 3 and 4 quarters.

[Operator:]

Our next question comes from the line of Peter Appert of Piper Appert Jaffray.

[John D. Crowther:]

Yes, this is John Crowther on for Peter. Quick question. It's sort of relates, I think, to the first question when you talked about the current price for existing students given alliance discounts and scholarships,. What is your outlook on scholarships going forward now with the price discount and the Grad Fund?

[Karl McDonnell:]

Well, the Graduation Fund, when we launched it, replaced any of the scholarships that we were offering, excluding of course any discounts that we're offering our institutional alliances. So that Graduation Fund really replaced any of the other scholarships we're offering. Now, in addition to the Graduation Fund, we're layering in lower absolute undergraduate tuition for our new undergraduate students.

[Robert S. Silberman:]

I think it's fair to say that our view on this as a pricing mechanism is we don’t want to be too cute. I mean, we want to be fairly transparent with our students and prospective students as to what it's going to cost them to have an education. As Karl said, the whole concept of the Graduation Fund is really designed to generate higher retention rates and higher graduation rates. And other than that, we felt that after looking at this for a couple of years, is that the simplest and the best way to deal with students is to set the tuition level at what you think is appropriate and provide a great return on investment for them, and at which you can still manage all of your other financial obligations, the highest of which is to put together a high-quality academic offering.

[John D. Crowther:]

Okay. And then just regarding the reserve, the $700,000 reserve that you booked. I'm wondering if you could share like what percent of new students -- obviously, it's just for undergrads, but what percent of undergrads does that reserve actually apply to? Maybe so we can understand the impact of revenue per student from the Grad Fund?

[Robert S. Silberman:]

No, we can't. But we will disclose the amount of the unearned tuition in our footnotes this quarter and going forward.

[Operator:]

Our next question comes from the line of Trace Urdan of Wells Fargo. [Operator Instructions]

[Karl McDonnell:]

Trace, if you can hear us, give a call afterwards.

[Robert S. Silberman:]

Go ahead, operator, move to the next one.

[Operator:]

And that does conclude our Q&A session. I'd now like to turn the conference back over to Mr. Silberman for any closing remarks.

[Robert S. Silberman:]

Thank you, operator, and thank you very much, ladies and gentlemen. Karl and I and Mark will be around all day. And in the future, please give us a call if you have other questions, and we look forward to speaking with you again in February. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.