American Public Education Inc (APEI) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Third Quarter 2007 American Public Education Investor Call. My name is Carma, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I'd like to turn the presentation over to your host for today, Mr. Chris Symanoskie, Director of Investor Relations. Please proceed.

Thank you, operator. Good afternoon everyone and welcome to America Public Education's Third Quarter 2007 Earnings Release Conference Call and webcast. Before we begin, please note that an electronic copy of the PowerPoint presentation that accompanies this conference call will be available in the webcast section of our Investor Relations website. That's americanpubliceducation.com.

Also please note that statements made in this conference call regarding American Public Education or its subsidiaries that are not historical facts are forward-looking statements, based on current expectations, assumptions, estimates, and projections about American Publication -- Public Education and the industry.

These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words such anticipate, believe, could, estimate, expect, intend, may, should, will, and would.

These forward-looking statements include with limitation statements about the fourth quarter outlook and statements regarding expected growth. Actual results could differ materially from those expected or implied by these forward-looking statements as a result of various factors, including the various risk factors described in the Risk Factor section and elsewhere in the prospectus that forms a part of the Company's registration statement on Form S-1 as amended for the Company's initial public offering. The prospectus was filed with the SEC pursuant to Rule 424 on November 9, 2007. The Company undertakes no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

Today, our speakers are Wally Boston, CEO of American Public Education, and Harry Wilkins, the Executive Vice President and CFO. Now at this time, I'd like to turn control of the call over to Wally Boston. Mr. Boston?

Thanks, Chris. I am pleased to report another quarter of robust growth in net course registrations and solid financial performance. The demand for our products is driven by our reputation for academic quality, great customer service, affordable tuition, and the attractiveness of our unique programs designed for the military and public service professionals. Our reputation has helped us generate high student satisfaction and high referral rates in addition to great growth.

The result of our success is illustrated in the table on Slide Four. Total net course registrations in the third quarter of 2007 increased 71% to 25,290 registrations. This record number of registrations represents the seventh consecutive quarter of year-over-year growth in total net course registrations.

Growth in total net registrations was driven by a 60% increase in the number of net course registrations from new students. Our more recent growth is also partially attributable to our 2006 attainment of regional accreditation and participation in Federal student aid. These events have created additional demand for our programs.

Over the first nine months of this year, we have enjoyed an 88% increase in net course registrations from new students and a 78% increase in total net course registrations. While we have grown total enrolment by 74% to 26,900 students, we believe that we developments that will continue to help us expand and address market needs going forward.

For example this quarter, we secured regulatory approval from MCA, our regional accrediting body, and DETC, our national accrediting agency, to offer seven new degrees in the field of education and information technology. We have just recently launched our two Bachelors and two Associates degrees in information technology, as well as our Master of Education and Teaching with a concentration in instructional leadership.

Next year, we expect to launch two more programs in the field of education, a Masters in Guidance and Counseling, and a Masters in Administration and Supervision. We are also working diligently on developing several doctoral programs. Many of our graduates have told us they would like to return to us for their doctoral studies, and we are responding to that perceived demand.

As illustrated on Slide Five of the PowerPoint presentation, we continue to add new articulation agreements with higher education institutions around the country, most recently with the Community College of the Air Force. This articulation agreement allows for the transfer of up to 60 credit hours towards the Bachelors program at AMU.

Additionally, we signed an articulation agreement with the Florida Community College at Jacksonville, a community college that serves approximately 60,000 students each year, nearly half of which are in the Navy. As we continue to deepen our relationships with key military influencers, we have also signed new agreements for a permanent presence on three military bases.

To support our students and our growth, we need good people and talented leadership. I am proud to announce that a new member has joined our university's Board of Trustees, Lieutenant General Julius Becton, Jr. General Becton retired from the U.S. Army after 40 years of service. He entered active duty in the U.S. Army Air Corp, graduated from Infantry OCS a year later, and is a veteran of three world wars, World War II, Korea, and Vietnam.

General Becton served as Director of the Office of U.S. Foreign Disaster Assistance, AID, before being nominated by the President in 1985 and confirmed by the Senate as the third Director of the Federal Emergency Management Agency, FEMA, a position he held for nearly four years before moving into the private sector.

We are proud of our people and pleased by our accomplishments including our recent IPO. I believe that going public is seen by most of our staff and faculty as a benchmark of success and something to be truly be proud of. There is a lot of excitement and optimism within our organization.

I look forward to working with you, our newest investors, and to reporting on future corporate developments in the quarters and years to come. Now, I will turn the call over to our Chief Financial Officer, Harry Wilkins, for a review of our financial performance. Harry?

Thanks, Wally. I'm referring to Slide Six in the presentation materials. If we talked to you on our road show a few weeks ago, you'll be familiar with some of these slides you're going to see. The third quarter results were very strong, as we thought they would be.

Our net, as Wally said, our net course registrations were up 71% for the three months year-over-year. Our revenue was up 73%, income from continuing operations, up 137%, and net income, up 163%. But, we're very pleased with our third quarter results.

If you look forward to Slide Seven, which is a balance sheet slide, our cash position continues to increase. We have very good cash flow as we -- as you all know. Really, we have no debt, and our balance sheet remains strong, got a little bit stronger after we did our public offering. But as of September, we had $20 million in cash.

Slide Eight is a slide that shows our track record of growth, our historical growth. Since Wally has been with the Company, he's been top-line about 40%, 39% compound annual growth rate from 2002 to 2006. This year, as you all know, we had a exceptional year of growth. It's fueled mostly by our Title IV, which we got access to the Federal Student Loan Program for our students, civilian students, in November of last year and regional accreditation, which we got in the Spring of '06. Those two factors led to this spike in growth for this year.

As you know if you've heard our story, we were really comfortable. In those days, we were growing about 40% top-line, and that's kind of the way we like to run the Company. But, we certainly will take those spikes in growth when we get them, and we had one so far this year.

The next slide, we're going to give you some forward-looking statements and our fourth quarter outlook. We're anticipating net course registrations from new students to be in excess of 6,800 students, which would be an increase four-over-four, those are net registrations from new students, will be an increase of 41% over last year's fourth quarter, which was an exceptional fourth quarter.

Last year, it was when we -- that was the first quarter we got Title IV funds. And these are going to be the quarters for the next few quarters that are going to be a challenge for us to comp against, but we're pretty proud of the fact that we're looking forward to a 41% growth in new students and new student registrations for the fourth quarter.

Total net course registrations, we're expecting to be a little in excess of 27,000. If that comes true, that will be an increase of 58% over the outstanding fourth quarter we had last year. We're looking at revenue, top line, of $19 million to $20.5 million.

Income from continuing operations, and all the income numbers I'm going to give you are excluding -- in our forward-looking statements, we're going to exclude stock compensation expense just because it's just too tough to calculate going forward. So, these numbers do not have stock compensation expense in them. And that would be an adjusted income from continuing operations before interest and before income tax of $3.4 million to $4.2 million, which should give us an adjusted net income excluding stock compensation of 2.3 to $2.7 million.

So if we do that, that would give you a full-year net income expectations of between $8.6 million and $9.0 million, excluding stock comp, and we're not going to give the weighted average EPS right now because our public offering makes it a little difficult to computate -- or compare. So, we'll just let that quarter play out as it -- that calculation play out throughout the fourth quarter.

Going forward beyond, we just wanted to put a page in here, Slide Ten, which shows you the type of metrics we expect to give you quarterly and annually going forward. That slide's pretty self-explanatory. You can see, we've already given you the quarterly information, and there's some more information, which we'll give on an annual basis. And we'll look forward to giving you that on our next call.

So, we're -- our last slide in the deck is just a summary of our investment highlight and we think that makes our Company a good investment opportunity. We have strong top line growth with good visibility. Our tuition is paid in advance, so we have good cash flow. We have very attractive working capital dynamics because of that.

Again, our high referral rates continue to keep our selling and promotional costs low, maybe -- certainly among the lowest in the industry, if not the lowest, and that's continued for the third quarter. We have very limited CapEx expenditures going forward. Since we've put so much money in our system, we have no expense really related to expanding classrooms. We add students because we're online. That helps with cash flow.

We have that variable cost adjunct faculty model where we pay adjunct faculty on a per-student basis, which really allows us to have low enrolment classes and still be profitable, and we continue to gain some margin improvement from our PAD system, which is expandable, and we're more into a maintenance mode now than a development mode.

Now having said that, the fourth quarter if you do the math, it looks like we have a little margin contraction, and that's probably true. We're anticipating some public Company expenses that we've never had before. And we're anticipating maybe spending a little bit of money in marketing, ahead of our launch and to let people know about our new Masters programs and IT programs and to expand more in the civilian marketplace. We think that'll provide great returns in '08. So, I would ask the operator to please open the lines for questions.

(OPERATOR INSTRUCTIONS) And the first question comes from the line of Bob Craig from Stifel Nicolaus. Please proceed.

Good afternoon everybody, congratulations on a great question and a successful IPO. A couple of questions for you, first to talk about selling and promotion, Harry you just mentioned that there'd be some ramp up in marketing. And through the nine months, you're down about 300 bps year-over-year and down about 30 to 40 basis points in the third quarter. Maybe a little bit more color on where and how that should trend and your spending plans, and is some of that contingent on the removal from provisional status by the DOE? I think it's in June of '08. And will there be some additional ramp you would envision in marketing spend, once that does happen?

Bob, excellent question as usual, good to be getting questions from you again over the phone. Yes. What -- to be honest with you, what happened with our spending and marketing this year is the first quarter, our enrolment was up 82%. We had been anticipating, and now this new student enrolment, we were anticipating about a 50%, 60% increase. We had an 82% enrolment in new students the first quarter. So we thought, well, maybe we should keep doing what we're doing.

Then the second quarter, we had 92% year-over-year growth in new students. And at that point, we said, wait a minute, we need to back off a little bit to see what's going on here. We actually stopped spending as much money in marketing in the third quarter because we just wanted to see how this was going to play out. It was obvious that the impact of getting regional accreditation and access to Title IV was much greater than we had anticipated. So, we did cut back in selling and promotional expenditures really for the second, end of the second quarter, end of the third quarter.

We anticipate going back to a more normal level in the fourth quarter and into next year. We always like to spend a little bit more. The first quarter is usually a pretty good enrolment quarter for us, and we like to spend a little bit ahead of that to make sure we're going to have a good enrolment quarter.

We have new programs, which we want to roll out, the three Masters degrees in education and the new IT programs. You are correct. We are -- until we complete a full year's Title IV audit, a compliance audit that you're required to have when you get federal student loans, which we have -- we only had a stub-period audit last year because we got Title IV in the middle of the year.

Once we have our full-year compliance audit, we will submit that to the Department of Education, and we expect them in July, June or July of next year, to lift that provisional status on our Title IV. While we're in provisional status, you are right, we can not have access to Title IV for new programs, new degree programs. So, you're correct in that.

And we probably will continue to spend a little bit more in marketing to promote our graduate program, especially in the civilian population. We really think this message that we want to put forth of affordable quality education offering, a Masters degree for less than $10,000 is the message we want to get out in the civilian population, and I think we'll start doing that next year.

So, that's a long-winded way of saying, I think marketing spend is going to go up a couple of points as a percentage of revenue. However, I do think it will be offset by the revenue per student. Title IV students have to take at least six courses a year to be eligible for Title IV. Our military students historically were taking two or three courses a year.

So, even if our marketing spend goes up a little bit, I think that will be offset somewhat by the revenue per student and maybe even the mix change, because the civilian students are tending more toward our graduate program where we have higher margins because we charge more tuition, and the students pay for their own books. Undergraduate program, you know our -- we pay for the books for our students. So, the combination of the mix toward the higher-end product and the extra revenue per student will eventually offset that marketing spend, I think but maybe not in the first -- next two quarters.

Harry, that's helpful. Could you also comment on the infrastructure build to handle additional T-IV exposure in terms of compliance infrastructure, admissions, reps, etcetera?

Yes, we can comment on that. We need to spend a -- some more money, and I do think you're going to see in the fourth quarter, you probably can calculate it already and into next year that we're going to spend some more money in G&A to ramp up ahead of what we anticipate to be a big influx of Title IV students.

We are currently advertising for a Director of Financial Aid in addition to our current Director. We've -- we'd like to get somebody who has experience with a very large college, financial aid process, and we have several really qualified candidates that we're sorting through right now. And we are going to spend some more to build out our ability to operate our own call center to help with the increasing number of questions we get about financial aid.

So, we're -- and we're going to expand our facilities. We're actually going to move our financial aid group into a different building. They will be given some opportunity to grow. Right now, we're a little landlocked in our space. So yes, those expenditures we'll have to increase -- incur but again, I think it's a case where we'll be spending a little bit ahead of what we anticipate to be quite an increase in revenue for those students.

That's great. Last one and I'll move on, any recent developments with the Navy? You know, they had lifted their freeze, and I think you had put an application in and expected some sort of word in the October/November timeframe?

Bob, this is Wally Boston. We did put our application in, and we've been told that their Board will make a decision in January.

Okay. That's great guys, thanks a lot.

And the next question comes from the line of Mark Marostica from Piper Jaffray. Please proceed.

Thank you, and congratulations on the quarter. First question I had just to get a sense relative to your expectations for this quarter how the military registrations perform and the Title IV registrations perform, did they both exceed your internal expectations?

Yes. That is correct. And we continue to be up about 100% year-over-year in civilian growth, and the military has been growing like 60% to 67%. And that's pretty -- been pretty consistent. So, that's a little bit better than we thought, but that's what we've been experiencing.

Right. And then, could you comment on student retention trends in the quarter and how they behaved relative to past quarters?

Sure Mark, this is Wally. Our student retention continues to improve. And we've been -- we've actually been trending up rather significantly since the announcement of our regional accreditation and the announcement of being a Title IV participant. We -- in the prior -- in the days prior to having Title IV, we would have students that would enroll with us and then find out that because we weren't a participant, their student loans were getting called and have to be repaid. So, they would go on to another Title IV institution.

That problem has ceased on the good new perspective. And so, those types of students are staying with longer as well as the fact that our military students in the past, when the got their approval forms for tuition assistance, would constantly be reminded that if they were thinking about transferring, because we were not regionally accredited, our credits may not transfer.

So, we're pleased with out student retention. It's showing not just quarter-over-quarter improvement but year-over-year improvement. And you may recall that we disclosed in the S-1 in our compensation system that we have a bonus system that's paid on a quarterly basis, the SSQ bonus, and for the sixth quarter in a row, we maxed out on that, and retention is a significant component in that bonus.

Great, thanks for the color on that Wally. And one last question, I know you've been (technical difficulty) in the past in your comments around not raising prices on the undergraduate programs. Review for us your thoughts on a go-forward basis there. And on the graduate programs, what are your thoughts on pricing as you look into '08?

Sure, Mark. On the undergraduate programs, we were pretty adamant in our road show and in our S-1 that we have no intention to raise undergraduate tuition. If the DoD changed their reimbursement, we would of course reconsider that. But, we have set our tuition at the maximum $250 per credit hour that DoD allows under the tuition assistance program.

On the graduate side, we continue to review that from time to time. We had commissioned the folks at Eduventures to compare our -- both our graduate and undergraduate tuition to state institutions, which we really view as our price competition, and we are pleased to say that we're under the 50th percentile in both cases. And I believe we're actually down at the 10th percentile. Or said another way, 90% of state institutions have higher graduate tuition than we do.

So, we'll continue to review that to make sure that we're charging a reasonable tuition. At this particular point in time though, we've not made any decisions about whether we'd increase it or not.

Okay, thank you.

Yes.

And the next question comes from the line of Trace Urdan from Signal Hill. Please proceed.

Hey, good afternoon guys. I was hoping we could go back to the comments that Harry made about sort of ramping down the marketing spend and then anticipating that it'll rise again. Was that -- I guess, there are two aspects to my question. One was, was the rate of growth something that you wanted to slow because of what the implications were from an operations standpoint? Or, was it simply to better understand how the marketing was operating in the marketplace?

And then, the sort of second part of that question is if -- as you sort of look at the marketing in the civilian population, have you changed anything or made any decisions about sort of the mix of media that you're using there, or even maybe the type of message that you're bringing to that market?

I'll answer the first part of your question Trace, and I'll let Wally answer the second part. The first part of your question is, yes, we -- there were operational concerns when we realized our new students for the second quarter were up 92% year-over-year. And we were concerned about maintaining the quality of our educational offerings, because we needed -- we realized we needed to go out and hire a bunch of new faculty that were already -- actually were already on the waiting list, but we needed to train them in our -- get them used to our culture.

And we are also concerned about Federal IV compliance issues. We were new to Title IV. We have been into it less than six months. We had not anticipated the interest that was coming in, and we needed to make sure that we weren't going to make any missteps in terms of compliance. We're still improving our systems, but we -- it's a process and -- that we're working on to continue to make sure that we have total compliance with Title IV regulations.

So yes, we did not want to grow, continue to grow, at 92%. That's a fair statement. So, we think, and if you look at the last -- the nine months through 2006, we spent 13% of revenue in selling and promotion. That 12% to 13% of revenue in selling and promotion is a number, I think, we plan to continue to spend at that rate. We have slowed that down for the nine months ended September 30th this year. It's been about 10% of revenue. So, I think those are the rates of spending that you can make, anticipate going forward. I'm a little -- Wally wants to comment --.

Okay. Then I just -- so then Harry so I understand, so if you do sort of raise the rate of spending again and you have the same kind of reaction, just as a for instance, and the enrolment -- the registration rate grows back to that level, you'll turn it down right? So, it's -- the controlling factor, I guess is the rate of growth, not the amount that you're ready to spend. Is that fair?

Yes. At this point, that's correct.

Okay. And then what about the decisions -- what about decisions you've made or any tweaks you've made to kind of the quality of the spending that you're making in this new market?

You were talking about changes in spending and media, Trace?

Yes. You're just getting to know this Title IV market. I'm wondering sort of what you've learned from the standpoint of how you're acquiring those students and maybe how your thinking has progressed in how you're spending that money?

Sure. I think that we still, as we portrayed on our road show, we believe in referral-based marketing, so we have program managers in our marketing department that we've assigned to our civilian market sector in addition to the military market sector. But on the Internet spend, which is really beyond people, the area where we spend the most money, we have ratcheted up our spend in the keywords that we purchase.

Probably about a year ago, we were at about 2,500 keywords and -- per month and now, we're at -- about 5,000 keywords per month. And fortunately for us, Google allows what I would call A/B testing. I'm not sure what the exact correct name is, but where we can market the keywords and shift between Brand A, which is AMU and Brand B, which is APU, and see which keywords work best on the civilian side for Title IV.

So, as we've increased the number of words, we've increased the type of testing that we've done on these words, and we continue to refine them. Fortunately for us, we continue to bring in our cost per lead through the Internet, somewhere between $28 and $35, which we happen to think is pretty low. And we're pleased with that, and we continue to have pretty decent conversion as well.

And anything of note in terms of the sort of the geographic spread of the students that are coming in, in the Title IV side?

You know quite honestly, I've not been given a report on that. For the most part, our students in the military are in 50 states in 135 countries. The civilian students are pretty much scattered around too. I don't -- we don't seem to have the same trend that Eduventures talks about when they say that many of the online programs are within a two or three-state geographic dispersion from the headquarters. Ours tend to be scattered around the country.

Okay. Thanks guys, I'll let you move on.

Thanks.

And the next question comes from the line of Jeff Silber from BMO Capital Markets. Please proceed.

Thanks so much, can you hear me?

Yes.

Okay, great. Some of the other folks have asked questions about how the business may be different as you focus on the military [stat]. I know you were focusing more on the marketing spend, et cetera. Any other color in terms of how the business may change, either in terms of seasonality, [sure rates], retention? Anything else you can share with us would be appreciated.

Well, we -- this is our 12th month of Title IV, so I'm not sure that -- and we deliberately ratcheted that up pretty slowly so we'd stay in compliance, Jeff. So, I'm not sure that we know what the seasonality of that may be other than we continue to see seasonality in our business that the Fall enrolments in September and October are strong, as typically are the enrolments right after the New Year's in January and February.

So, it'll be interesting to see if we see a different trend. I think what's also pretty good is that while those are the strongest four months of the year, our monthly starts allow us to have pretty good enrolments in what I call the off months. And our -- we do know though, though our civilians are taking more classes per year than the military because of the Title IV 50% requirement of six classes per nine months.

Do you see any difference in the retention rate so far?

I think it's too soon to tell. We measure that on an annual basis, and since our first students came in, in November a year ago, we'll start taking a look at that.

And how about on the marketing side in terms of the show rates?

We don't publish our conversion rates, but it's safe to say that the conversion of Title IV students is less than traditional military students. Most of them are referred, and our conversion rates are very high, inordinately high for the industry. But, I would say our conversion rates on Title IV students are slightly above the industry averages that I'm used to. And I've been in the industry for 16 years. So, our conversion rates are about twice what we used to have at Strayer for the Title IV students but again, we've only been doing it for nine months, so -- ten months.

Okay, that's fair. Just a couple of numbers questions, and this is surrounding your guidance. What kind of tax rate should we be looking for in the fourth quarter?

Yes. And I know, our tax rate's been a -- we get questioned on that a lot, because we've had some unusual instances in the past where we had historical tax credits and things like that. But, I think a safe bet is between 40% and 42% is a good tax expense number for us if you're doing a model. That's what I -- that's the number I would use if I were doing a model. And in any one given quarter, there might be something unusual happens that could affect that, but I think 40% to 42% is about where we should end up.

Okay. And in terms of the share count and the stock based comp, I realize it's somewhat difficult to value right now, do you think as we get closer to the end of the quarter, there might be able to provide a little bit more guidance on?

Yes, I think that's correct. And I think when we file our Q next week -- we probably should say that we plan on filing our first Q next week for the third quarter. And at the very bottom of the first page, we'll give you the total shares of the stock outstanding after the offering, and that'll be the number that should hold up going forward. So, you'll be able to do the math. You're smart.

Okay, I appreciate that. All right, thanks again for everything.

Thanks.

And the next question comes from the line of Ryan Mahoney of ThinkEquity. Please proceed.

Hi. Thanks, good afternoon. I was hoping you could talk about your strategy to market to military spouses. I think you had a couple of pilot programs at some bases in the -- in Q3. How successful were the programs, and if you could talk about plans to roll them out to additional bases?

Well actually, those pilots are still ongoing. And quite frankly, because they're so small, I don't feel comfortable giving you an interpretation as to how successful it might be as we roll it out. I think we've been going rather slow because there have been some proposals in Congress and also in the Department of Defense to possibly offer benefits to military spouses.

For example, one was to allow folks who qualify for the GI -- Montgomery GI Bill to transfer some of those benefits to spouses, although that hasn't been funded yet. So, we're continuing to monitor what the military or Department of Defense or even Congress may offer there as well as what's working for us in these small pilots and then to the extent that we comfortable with the strategy going global on it, we'll do that.

Great, thanks.

And the next question comes from the line of Brandon Dobell from William Blair. Please proceed.

Thanks. A couple of questions for you. Maybe Wally if you could give us a little more color on how the articulation agreements that you've signed, not only the recent ones but I guess in general, how they work for you, can you give us a sense of how many students you think that helps you attract or what kind of students those are helping you to attract?

Well Brandon, I think the -- there's difference types of articulation agreements. The ones that we've signed inside the military to give us an example, Fort Huachuca, which is the Army intel school and Goodfellow Air Force Base, which is the Air Force intel school, because of our unique program in strategic intelligence at the undergraduate and graduate level, have been pretty strong articulation agreements.

We have tried to focus on articulation agreements with community colleges outside of the military because I'll -- so, I'll exclude the one with the Community College of the Air Force, where we focus on our niche degrees. For example, Anne Arundel Community College, in Maryland between Baltimore and Annapolis, has an Associate's degree in Homeland Security. And because of our Bachelors in Homeland Security, we think there's a nice follow up there.

That agreement, we just signed effective, I think September, so it's really too soon to tell. But, there are others we have with other community colleges like in Emergency Management where we have a Bachelor's and they have an Associate. So, I think that -- while we've been very successful with getting a number of those signed over the past year and even in the most recent quarter, I think it's too soon to tell how the civilian ones will pan out. Simply because community colleges are an open enrolment institution and have some of the same issues that we do as an open enrolment institution.

But, would it be fair to assume that you guys are focused on signing agreements where you've got -- already have pretty good course alignment with some of those, I guess I'd call them, more unique courses or more unique programs that you have like Homeland Security versus, let's say, Business or English? Is that a fair characterization?

Oh absolutely, yes. I'm not aware of any articulation agreements we have that focus on our Bachelor's degree in English or History. It's all our specialty degrees like Homeland Security, Emergency Management or Strategic Intelligence.

Okay. Shifting gears a bit over to the teacher work force, you guys are kind of moving towards more of a full-time versus part-time mix. Any sense of where those numbers are falling out these days? A related question, look at compensation, undergrad versus grad. Harry talked about the higher margin for graduate given the higher price point. Do a -- does a -- somebody teaching a graduate course make the same as an undergraduate course? Or if not, how do those compensation margins differ?

Sure. In our research, the average K through 12 teacher in America gets about a 15% pay bump when they get a Master's degree. And so, I can't remember the exact statistic, but somewhere around 50% of all the public school teachers don't have Master's degrees, and they get the incentive to get that Master's in the first 10 years they're teaching.

When you look at the fact that I think last year, the salary figure that I saw was about $32,000 was what the average new K through 12 teacher in America earned and so, a 15% pay bump would be approximately $5,000. We look at the ROI on our $10,000 Master's degree as much -- as a much quicker payback than if they pay $20,000 or $25,000 for the degree.

And Brandon, as far as the full-time faculty group goes, there's a section about that in the MD&A that we'll file next week in the Q, but I will give you the numbers there. For the -- as of September 30th of '90 -- of 2006, we had 37 full-time faculty. As of September 30, 2007, we have 98 full-time faculty.

Okay.

So, we have ramped up and hired full-time faculty. And that's -- I think that's a trend that we'll continue into 2008.

And those full-time faculty, as -- maybe you could talk a little bit about how they're compensated, and you've got a class size at three versus four, and I know you've generally focused on paying (inaudible) per student.

But, is it that much difference for somebody teaches a graduate course for you guys versus an undergraduate course? If we see a big mix shift in enrolment because Title IV students make more graduate courses, could we expect a subsequent increase in teacher compensation costs because you guys pay graduate course teachers more? Or, is the same compensation base for both?

Well, we do pay the graduate -- we do pay more for adjunct faculty teaching graduate programs and full-time faculty --.

Okay.

For teaching graduate programs, but it's more than offset by the extra $75 per student per course.

Okay.

So, I don't think that'll be a big change, plus the fact that they're -- for the graduate program, the really big issue with us is the graduate students pay for their books. Undergraduates, we pay for their books at a cost of about $70 per student per class. So -- which we eat. So obviously, the margins are much higher in our graduate program.

Right.

But, our full-time faculties are paid on a salary with a minimum teaching requirement and a maximum teaching requirement -- or not a requirement, a maximum we don't let them exceed. And they can earn -- their salaries are very competitive with the other companies in our industry. And they can earn extra money if they are Program Managers and -- or Department Heads with us.

Okay.

And we've -- we have a very good relationship with our faculty with -- as demonstrated by the huge waiting list we have.

Okay. And then final one for Harry, on a going forward basis, should we expect or not expect to see balance sheet, cash flow statement when you guys report a quarter, or is that going to be -- should we wait for the Q for that to come out every time?

I think that we're kind of happy with the way we're doing it at this time where we generally will put the income statement in the earnings release and have the balance sheet in the Q, which is released shortly thereafter, and we'll see how that goes.

Okay. Great, thanks guys.

Thanks.

(OPERATOR INSTRUCTIONS). And the next question comes from the line of Corey Greendale from First Analysis. Please proceed.

Hi, good afternoon.

Hi.

Harry, you mentioned earlier that so far, the conversion rates that you're seeing in the Title IV population is twice what you've seen other places, any hypothesis on why that would be and how sustainable it is?

No, because we really haven't been doing it long enough. And some of our Title IV students are people who have opted out of the military and now -- and lost their funding source and need Title IV. So, some of those students are students who may have heard about us in the military.

So, we really need to see some longer-term trends before I can make any definitive statement. So, I can only tell you that the actual conversion rates that we have experienced in the last year with Title IV students are about twice what I was used to in the ancient past when I worked for other education companies.

And then, I wanted to follow up on your -- the slide that talks about recent developments, the deepening -- the agreements for permanent presence on the three military bases. Can you just elaborate on what that means, what the implications are for having a permanent presence and how many of those bases you do have a presence on versus how many bases you think there's still an opportunity to penetrate?

Sure. Well first of all, what the permanent presence means is that we have an arrangement with the base to have someone in an office, in their educational service office, on a full-time basis during whatever days of the week it's open, which is mainly weekdays. It's quite unusual for a distance learning institution to be able to do that. Most of the schools who are land-based and who teach classes live on a resident situation on the base have those arrangements.

But because of our strong enrolments at several bases, we now have a permanent presence. We deliberately did not disclose those bases so that we'd stay a little bit ahead of our competition, but I think as long as we continue to demonstrate strong enrolments on certain military bases that we'll have opportunities that will open up in the future to us, similar to what we achieved in this most recent quarter.

And should we be looking at that as a meaningful driver that each quarter, you'll say there's another few that you've added? Or, is that more -- is that more spotty than that?

Well, I think it's too soon to tell. But, we will certainly disclose it each quarter if we're able to obtain those. And it -- we are quite satisfied with the current arrangement with the three that we signed and strong enrolment growth coming out of them.

Okay. And then, you've answered several questions about the sales and promotion spending. I was wondering if you look at operating margin overall, it sounds like there is a couple of offsetting factors for this next year. Do you have any targets over the next three to five years of where you'd like the overall operating margin to be?

We do, but we're not telling. That's our story, and we're sticking with it. No, we're -- we really feel that we can continue to grow the business and improve -- and become more efficient at it and then have some operating margin improvement as we get beyond the next couple of quarters where we really think we're still trying to catch up a little bit and get ahead of our growth.

So, I think that that historic trend that we had before was how we liked to run the Company. When Wally was here from 2002 to 2006, we had about 40% top line growth with some margin improvement, and that's kind of our comfort zone, the way we have run it historically. And we're just not going to give forward-looking statements when it comes to margins.

But -- obviously, there's things. There's only one Wally. We're not going to give him the big raise this year. So, the -- then, we'll get some margin improvement from G&A. We should get some -- that line item that has instruction, cost, and services, a portion of that is fixed. Maybe 25% of that is fairly fixed over a certain range because it relates to people who evaluate transcripts in Registrar's Office and those positions don't tend to ramp up as much with revenue growth. So, we should get a little scalability there. We should get some scalability from G&A, and we'll see what happens.

Great. That answers the question, thank you.

Operator, I think we have time for one more question if there is any --.

And you have a follow-up question from Trace Urdan from Signal Hill. Please proceed.

Thanks. I -- Harry, I apologize if this was in your prepared remarks. I don't think it was. But, I wondered if -- is -- does it make sense for us to look at revenue as a function of course -- total course registrations? Because, it -- it's a number that is a little erratic. It seemed to be a little bit off from what it had been in the prior quarter and the prior year, and I'm wondering if there's some explanation for that or sort of how you think about that metric?

Well yes, there is -- it should. Revenues should be very closely correlated in the long run with course -- net course registrations. Now, there'll be a few factors, which influence that. If the mix change -- if the mix changes between graduate and undergraduate students, that can affect that because obviously, we're charging more for the graduate programs.

But, it's a very good indicator, since we not only price increase, volume increase is a very good indicator of where revenue should be coming from. The problem is that when you're reporting quarterly information, there's a tail. We recognize revenue over the length of the class.

So, if we give you an enrolment information for instance for the month of November, we're going to collect a large portion of that revenue in December and January. Because the classes are eight and 16 weeks in length, they go beyond the [quarter]. So, that's the only difference really. The change in the mix between graduate and undergraduate can affect that and just the tail of recognizing revenue in future periods that we report the registrations for in the current period.

So, a moving average would be sort of a better, more even metric you'd think?

It should.

Based on that? Yes.

Really, it should.

Okay. So, the fact that it was down year-over-year isn't really significant from your perspective? There's nothing that went on in terms of the mix that you can point to that would --?

Again, I'm not quite sure what was down year-over-year.

Well, just if -- plain old revenues divided by total course registration.

Yes. I would think that that's because our registration growth is ramping up, so as long as it keeps getting higher -- for instance, September enrolment's higher than August --.

Got it.

But, you're not getting that revenue until October and November.

Right, okay.

So, you should see a corresponding increase in deferred revenue on the balance sheet, I would think, that could maybe mitigate that too. So you maybe have to do some combination if you're trying to do that.

Yes. That's a good -- that's a good idea. All right, thank you. Sorry for that.

Okay, this is all the time we have for now. I thank everybody for your great questions and look forward to speaking with you again when we announce our fourth quarter results. Have a great weekend. Thanks.

This concludes your presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful weekend.