American Public Education Inc (APEI) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q3 2008 American Public Education, Inc. Earnings Conference Call. My name is Kim and I will 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 today's conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's conference, Mr. Chris Symanoskie. Please proceed sir.

Thank you operator. Good evening everyone and welcome to American Public Education's third quarter 2008 earnings release conference call and webcast. Before we begin, please note that an electronic copy of the PowerPoint presentation that accompanies this conference call is available in the webcast section of our Investor Relations website and is included as an exhibit to our current report on Form 8-K filed earlier today.

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 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 as anticipate, believe, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitation, statements about the fourth quarter and the full-year 2008 outlook and statements regarding expected growth.

Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors including the risk factors described in the risk factor section and elsewhere in the Company's annual report on Form 10-K filed with the SEC. 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, the CEO of American Public Education, and Harry Wilkins, Chief -- Executive Vice President and CFO. Now at this time I would like to turn the call over to Wally Boston. Mr. Boston?

Thanks, Chris. I am pleased to report that during the third quarter of 2008 our revenues increased 56% to $27.4 million. This growth was driven primarily by strong growth in registrations from new and returning students. Net registrations from new students increased 55% to 10,400 and net registrations increased by 54% to 38,900. Overall, our student enrollment increased to 41,100 students at the end of the third quarter.

Our operating margins increased to 22.6% in the third quarter compared to 20.3% in the same quarter of last year. We were able to improve our efficiency while making investments in new programs and while expanding our marketing and branding efforts especially in the field of education. This quarter our net income increased to $3.8 million, a year-over-year increase of approximately 72%.

We reported earnings of $0.20 per diluted share, which is $0.02 above the high end of our previously issued earnings guidance. This positive earnings surprise is primarily attributable to outperformance in the military market. Our solid results give us confidence to raise our full-year guidance. Today we announced that we are again increasing our full year 2008 earnings outlook to be between $0.81 and $0.82 per diluted share. Needless to say our organization feels fortunate to be in a position to increase our full year guidance in light of the obvious challenges faced by the broader US and global economy.

Going to slide 5, our unique value proposition offers sustainable advantages. Our high military concentration serves to reduce our sensitivity to economic cycles. Overall we believe that the characteristics of our business, our programs, and our students position us well for growth during times of economic expansion and contraction. Increasingly affordability and flexibility matter. At the undergraduate level, our tuition is priced well below the tuition of private universities and is comparable to that of the average tuition at state universities. Additionally, we offer undergraduate students a book grant program relieving the financial burden of high student textbook costs. Our tuition at the Masters level is significantly below the averages for both public and state universities.

We believe that there is a large population of potential students who want a higher education, but do not pursue it because of their belief that tuition is unattainably high. There is a very good opportunity for us to get the word out about our affordability in order to attract new students from this market segment. A major aspect of our mission is to be affordable. We currently have no plans to increase tuition.

Our growth is the result of increasing student enrollment driven in part by our compelling value and flexibility. The American Public University system offers a great solution to our country's problem of rising tuition costs. As a fully online institution, we offer courses that are 8 and 16 weeks in duration with monthly starts. We are able to offer academic credit for certain types of military training and we can accept up to 75% of total degree program credits as transfer credit from other regionally accredited institutions.

Our students can complete their degree at their own pace. They can apply academic credits earned at other institutions towards their degree. Our policies and programs allow a student great flexibility to complete their degree in a manner that is right for them. Our program offering is diversified. While we specialize in unique degree fields such as public safety and national and homeland security, we are not over-concentrated in any one discipline. We offer liberal arts, history, psychology, sports management and education programs, 73 degrees in all.

Our programs are respected with proven results. Our outcome assessments show that our graduates perform above national norms. Our referral rates are at the high end of the education industry at over 50%. The graduation rate of our undergraduate students who continue after completing the first three courses is over 80% and 25% of all of our graduates return for a second degree.

We focus on serving the higher education needs of the military and select segments of the civilian market. The military uses higher education benefits as its primary recruitment tool and it has identified online education as an attractive option for its highly mobile active duty members. Successful military operations require highly educated and trained soldier to operate new technology and asymmetrical warfare requires greater expertise and critical thinking skills.

Active duty military professional's selection of a higher education institution relies heavily on the opinions of key influencers and leaders within the military. In the civilian market, we address the needs of certain segments such as police, fire and teaching professionals. Many of these segments are in industries that have positive dynamics even in difficult times. Often professionals in these fields seek credentials and knowledge for advancement and higher earnings. They are looking for unique degrees that are affordable. Their selection of a higher education institution relies heavily on the opinions of key influencers in their field.

We also enjoy a significant number of operational advantages. Our relationship marketing strategy allows us to attract students using a more targeted and low-cost approach to advertising. We have a low reliance on lead aggregators which are an expensive way to generate low quality leads. Instead we focus on precisely targeting professionals in each segment, expanding and deepening our relationships with key influencers in target markets and on generating referrals from alumni as well as industry leaders.

Our proprietary partnership at a distance or PAD system, which is a type of ERP, allows us to efficiently communicate with students, provide customer service functions, and manage a wide variety of business processes. This creates operational efficiencies that generate cost savings that ultimately improve margins and keep tuition affordable.

Our margin expansion has primarily been the result of G&A leverage. We have a low overhead and a focused strategy. In preparation for our future growth, we have made major investments in management and infrastructure that can be leveraged. At the same time we will continue to plan for the future by investing in new products and entering new market segments.

Our current financial position is strong. Our military students fund their tuition through the Department of Defense Tuition Assistance Program, a very stable source of tuition funding. Due to our low tuition and book grant program, active duty military can earn a degree from American Public University system with minimal out-of-pocket expense.

Our veterans often fund their tuition through the GI Bill. During the Presidential Election, President-Elect Obama confirmed his support to fund veterans' benefits. The new GI Bill, which will soon increase the tuition benefit for veterans, illustrates the strong political support of higher education benefits for vets.

Our balance sheet is strong with no debt, $41.4 million in cash and cash equivalents and our bad debt expense is less than 1% of revenue.

In summary, we have a lot of characteristics that make us a strong organization. We are a leader and innovator in online higher education with proven transparent results and we have a straightforward strategy and a business model that puts us in a great position for growth. Now I will turn the call over to our CFO, Harry Wilkins, to provide you with more detail on the quarter's results and to discuss our expectations for the remainder of the year. Harry?

Thanks, Wally. As we previously stated, our strong results are due to a 55% increase in net course registrations. We have a slide, slide 7 in the presentation that points these things out. We have a 54% increase in net course registrations. Strong -- strong increases in net course registrations drove revenue growth of 56% to $27.4 million compared to $17.6 million in the third quarter of 2007. Income from operations before interest income and income tax increased approximately 73% to $6.2 million in the third quarter of 2008.

The bottom line is that net income increased 72% to $3.8 million compared to the same quarter last year. In the third quarter, we earned $0.20 per diluted share. This was 2% above the higher end of our guidance and is the result of higher than expected registration from military students. Our civilian population -- student population -- growth is tracking as we expected. Thus the concentration of -- in percentage of revenues derived from active duty military decreased slightly to 64% in the quarter compared to 65% last year, as we have grown our civilian market.

We have not yet detected any measurable changes in civilian student behaviors as a result of the challenging economy. Of course, we expect our success at reaching out to and attracting civilian students to continue. Registrations from Title IV students increased 89% in the third quarter and have increased 106% for the most recent nine-month period. Net course registrations from Title IV students represent 14.2% of our total net registrations in the third quarter and this compares to 11.6% for the same quarter in 2007.

If you look at slide 8, we talk about margin expansion. Instructional costs were slightly lower than expected in the third quarter under our variable faculty pay model adjuncts faculty are paid per registration. During the third quarter certain full-time faculty members who were paid a salary shifted more of their required workload from administrative functions, where they were developing and improving our classroom product to more classroom instruction. So, the effect of this shift caused a slight reduction in the amount of adjunct faculty we needed for the third quarter as the full-time faculty totaled a higher percentage of total registrations. This is kind of a one-time thing. We don't expect that trend to continue in the fourth quarter.

G&A costs were slightly higher than expected due to the timing of Sarbanes Oxley costs. We incurred much of this testing for the Sarbanes Oxley, which is expensive because we are having third parties do it, and much of that testing is done in the third quarter, and the second half of the year actually is when we do the vast majority of the testing.

As anticipated, we increased our selling and promotion expense to 13.1% of revenue. During the third quarter we continued to advertise our new Masters of Education programs and make additional investments in the APU brand. But despite increases in our marketing spend, our operating margins increased by 230 basis points to 22.6% in the third quarter of 2008.

If you look at slide 9, we give some fourth quarter outlook. In the fourth quarter, we expect net course registrations from new students to increase between 38% and 42% to between 9,500 and 9,800. We anticipate the net course registrations will increase between 45% and 47% to between 40,400 and 40,900 net registrations for the fourth quarter. We expect this to drive revenue growth of between 39% and 46%.

It is possible that we experience a slight decrease in operating margins as a result of our increased marketing spend in the fourth quarter of 2008 compared with our unusually low marketing spend we had in the fourth quarter of last year. As we stated during our last quarter earnings call, we expect advertising spend related to our new education degrees and our new drive to brand APU to cause selling and promotional expenses to be approximately 14% of revenue in the fourth quarter.

Net income is expected to increase between 37% and 45% year-over-year to between $4 million and $4.3 million. We are also introducing our fourth quarter earnings per share outlook of between $0.22 and $0.23 per diluted share.

So, slide 10, we give our full year outlook for 2008, and we are increasing our full 2008 outlook. We expect net course registrations to increase approximately 54% for the full year and net course registrations from new students to increase 47% or more in the full year 2008. We expect revenues of between $105.2 million and $106.6 million, which is an increase of between 52% and 54% for the year, with a slight improvement in margins and an expected tax rate of 41%. We also believe selling and promotion expense as a percentage of revenue will be approximately 12% for the full year.

We anticipate net income of between $15.2 million and $15.4 million, which will be an increase of between 73% and 76% year-over-year. EPS is expected to be between $0.81 and $0.82 per diluted share. Depreciation and amortization expense is expected to be $4.1 million to $4.3 million and CapEx is expected to be $7.9 million to $8.9 million. This is a bit higher due to the recent purchase of some facilities in Charlestown and our continued build out of leasehold improvements to help provide facilities for our growth.

So, looking ahead and in conclusion, we plan to remain focused on our current strategy to expand in civilian markets, to continue to penetrate the military market, launch new programs and enter new market segments. And now, Wally and I would be happy to answer questions from the audience. Operator, can you please open the line for questions?

(Operator Instructions) Your first question comes from the line of Mark Marostica of Piper Jaffray. Please proceed sir.

Hey guys nice job on the quarter.

Thanks.

My first question relates to the military course registration growth, which again much like last quarter exceeded expectations and continues to outperform. And I just wanted to go for a little more detail on that point. Why do you think you are seeing that growth at such a high rate?

One reason, Mark, this is Wally. One reason is the Navy is coming along nicely. We have - -we have said all along that being admitted into their distance learning program would be an attractive proposition for us and so they are growing at an -- at an above average rate for each of the branches. And we continue to see strong penetration in the other branches where as we have said in a number of our calls that the military thinks that the tuition assistance program students will eventually, about 75% of them will be in online probably by the end of 2010, 2011. So, we are positioned with attractive programs. We have aligned ourselves with the military and we think that we are favorably received in all the branches.

And then, a question in regards to your Masters of Education programs that you are now promoting those out there and I am just curious, are you seeing the uptick in leads and starts as you expect? Are those performing as expected or -- better or worse? Could you give us a sense?

I think they are performing about as expected. We were late with the launch. And so, if you look at where we are this year versus where we thought we would be when we started the year, we are a little behind. But the one thing that's notably different for those programs is all of our programs, whether they are undergraduate programs or current Masters programs with the exception of the education programs, are open enrollment programs where the students simply have to generate proof of graduating either from a high school or a high school equivalency at the undergrad level or an accredited college at the graduate level.

The Masters of Education degrees for licensure reasons are much more complicated depending on the state that the student is in. Some states for example require fingerprinting, some states require background checks. So, we have a number of students that are still in the admissions pipeline depending on the state that they are from and as we get through the nuances of this and get much more efficient at processing them, we still have high regards and anticipate that the education degrees will fuel our future growth.

And then one last item and I will turn it over. With the selling and marketing expense at 14% in Q4, it kind of begs the question as you look out to '09 and I know you are not giving guidance for '09, but generally speaking should we expect selling and promotion expense to be hovering around this level now or are you sensing that you are at this point more or less pushing for the next few quarters and then you may back off? So, I would love to get some color on that. Thank you.

Mark, we said when we went public last year that we thought we could keep even in the civilian marketplace, as we expand and we thought we could keep selling and promotion about 12% of revenue. I think our guidance right now is saying it's going to be about 12% of revenue in 2008. We are sticking with that right now, but we are not giving any guidance yet in 2009 but we don't see any reason to change our game plan.

What's happening is different in the fourth quarter and the third quarter is that we are -- we are really marketing APU as a separate brand for the first time and we are really going into a market that's a brand new market for us, the education market with a brand new product and that's -- that's going to require a little bit more spend and it's not going to have the revenue coming in yet that offsets that spend. But that's -- we think that's a one or two quarter anomaly. We don't think that's going to change our long-term guidance.

Great. Thanks for the color.

Your next question comes from the line of Bob Craig of Stifel Nicolaus. Please proceed.

Good afternoon guys.

Bob.

Just -- just following up on that last question from Mark, how you are attacking the -- the marketing of the -- the Masters programs either, if you want to term it in terms of media mix you are using or some of the avenues you are exploring to penetrate that market?

Well, Bob, the old answer, we told you we'd have to shoot you. No, we've said all along that our culture is relationship marketing and so in our marketing department when we set up new programs, we hire program managers who are people with a background in the particular industry sector that we are entering. Those people begin networking with key influencers, which can be anywhere, in the military, a key influencer might -- might be an officer in charge of a particular division or in the civilian sector, a key influencer might be someone who heads up a trade organization or who has a group of those type of people reporting to them in one way or the other.

So, we hire two program managers in our education program. They have been networking quite nicely since the summer once we knew when we would have the programs up and running. And we continue to sort of do the door-to-door sales thing. But we are -- we are pleased with the progress, we are pleased with the doors that we are opening. As we have said before, these -- these degrees are about half the price of what anyone else is offering them online for, and so we are getting quite a good reception. It just -- it does take a while when you are a new entrant to a field and our School of Education is new compared to all the other ones that have been out there for 40, 50, 60 years. So, -- but, at the same time when -- when you have something that's regionally accredited and approved for licensure and you have got a nice price point, we are -- we are being favorably received and we expect good things out of these degrees.

That's helpful. By the way, shooting me might be preferable, watching the market go down 400 points a day. But anyway any -- any read, I don't expect specific numbers here, but any read or trend in terms of cost per start on the -- in the civilian side, at least how that's trending relative to your expectations?

Well, we don't really give specific information on that but -- but what happens with the civilian students is we don't get the referral rates we get with the military. So, there is a little more cost for new student start. But the civilians for the most part are Title IV students and they have to take more courses. But our military students take two or three courses a year on average and the civilians to be eligible for Title IV have to take at least six courses every nine months.

So, while it might cost a little more to market to those students, they produce a lot more revenue in any given period so that more than offsets the marketing costs plus the mix is different for our graduate programs. The civilians are opting much more between 35% and 50% of our civilian students enroll in graduate programs, and that we have a much higher margin in those programs. So, those factors of increased revenue per student and the higher shift to a higher margin business really offset the marketing costs for those civilians.

Okay. Was there -- were there anything unusual this quarter between the new versus returning students that you saw?

Anything unusual with this quarter new versus returning?

Yes, you mentioned strength in both and I know one quarter in particular maybe a couple quarters ago had an unusually heavy tranche of returning students. I just wonder if there's anything unusual there.

You have a good recollection. The first quarter we had more returning students. In fact my recollection without being accurate was we were about $1 million over in revenues and almost all of it was due to higher returning students than expected. The numbers are remarkably similar for the quarter, they are not much more than two percentage points difference between returning and new and they are both awesome growth rates.

So, we tend to continue to promote retention efforts on the academic side and those -- those results are panning out well for us. We -- we talked about our graduation rates as well as our students coming back for a second degree. On the marketing side, we are pretty pleased. We continue to expand our market share in the military and we are a very good choice in the branches there. And on the civilian sector, the sectors that we have been in we continue to expand our market share. And I would say that any percentage that we are growing at in education is a ridiculous percentage to look at positively, but very small numbers. So, we continue to grow there. There is really -- I would say there is -- there is nothing notable to report in the third quarter as far as the difference between returning student growth and new student growth.

Okay, last one and I will turn it over. Any conversation rolling around Washington, Wally, at all regarding any possible increases in tuition assistance for the military with the Obama regime?

I haven't heard anything since the election, Bob. We did hear some grumblings right around the time that the GI Bill was passed that there were some considerations to -- to make changes particularly with the budgetary pressures on the -- on the public universities. But since -- that was around the end of July, August 1, and we have not heard anything since.

Okay, great. Thanks guys.

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

Hey, good evening guys. I just want to make sure that I understand it. It sounds to me like the -- the marketing effort around APU got started a little bit later in the quarter than you had anticipated. Is that a reasonable statement?

Later in the quarter or later in the year?

My understanding was that that effort was sort of kicking into gear in the third quarter in terms of -- particularly in terms of your spending activity and I wondered did I get that right?

You did get that right, yes.

In the level, that you are -- I give veterans -- what I am -- where I am getting to is I want to know if the level that you are anticipating for Q4 is something like a run rate for your APU marketing effort?

No, I think Harry articulated that we -- we thought that we would need a two-quarter spend increase, so our third quarter of 13.1% and our fourth quarter of 14%. We still like for the year of 2008 the 12% number and obviously we can't give our 2009 guidance at this point in time, but we are not backing off on that. We just -- we needed to put some money behind APU because when you enter a new segment -- pretty much the teacher segment is all civilians and that APU brand had not been promoted to our other sectors of law enforcement and fire and emergency management.

Okay. And I think I heard you say this, but I just want to ask it more explicitly, do you feel like the qualitative data that you are getting back from the marketing in terms of marketing the education program is validating your perception that a lower price point is a compelling differentiator in that marketplace?

I am glad you said qualitative versus quantitative because quantitative numbers are -- are -- it's too early to tell on the quantitative side. I would say that anecdotally that the signs are good that we have an attractive price point but it's such a small base of numbers at this point in time that I wouldn't want to do a statistical model on it.

Okay. So, you are still -- you are still in the learning phase, is that fair to say in terms of --?

Yes, I think that's fair to say.

Okay. And then, Wally, you periodically talked about the pace of student growth and registration growth and the potential -- one of the potential issues in growing too fast might be attracting sort of concern or undue attention maybe from your accreditors. But you still seem to be kind of running at a -- at a fairly even and hot pace relative to that. I am just wondering is there a check in there and ask if the 50% plus growth in new course registrations is something you are sort of comfortable with respect to the different issues that you had cited previously about going too fast.

Sure. We were -- let me just tell you that we have always been focused on maintaining our quality and when we gave guidance originally for the year, we put our guidance I think in the 38% to 42% range and felt that I think it was a 38% number or something we were comfortable with. And we have had some successes that are beyond our -- our guidance but I have stated in previous road shows that managing a high octane, a high growth entity like this in higher ed is a little different than running an Internet company for example in the sense that you do have to watch out for professional development and make sure that you are able to hire and maintain quality faculty and that students are getting a quality experience.

I might note for those who are unfamiliar with the terms of the Higher Education Opportunity Act that just passed this summer that there is a provision in that act that requires accreditors to look into institutions that grow over 50%. Now, that's not been defined and there is rule making committees that will have hearings and look into more specifically. But for the first time ever Congress has put some pressure on accreditors and I would you say you would be at a heck of a disadvantage if you had very low enrollment with that particular point of the law. But I think it sort of supports our contention that we were pretty comfortable at a 40% clip. And if you accidentally get a little higher than that and you can justify that you maintained the quality and we certainly have done that with a number of our initiatives and a number of the test scores that we have published with our seniors. So, I feel pretty good about it.

Our guidance we just gave on this call was 38% to 42% new student growth in the fourth quarter. 40% growth is something we were very happy with and the surprise is we have had about $0.02 each quarter so far of surprise and growth higher than we thought from the military. We don't know if that's going to continue and we don't really give guidance if that's going to continue. That's been a pleasant surprise but it's not something we model or expect.

I understand. Thank you very much.

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

Hi guys, thanks. A couple of quick kind of follow-ons from the previous comments. Any trends within your students, either military or Title IV in terms of skewing towards 8 week or 16 week courses? I know there was a general trend toward shorter courses. This will continue or do you see any difference in behavior between the different types of students you are enrolling?

Yes. This is Harry and I will tell you, Brandon, the trend is for 8 week courses. We have some courses that we think are better off for going 16 weeks, but whenever we have offered both 8 and 16 week options to our students, they have almost always overwhelmingly gone for the 8-week courses. The faculty also likes to teach the 8-week courses, that seems more than the 16 week courses.

So, that definitely is the trend and I think that we will continue that trend. We haven't seen any difference in the quality or the student outcomes. It seems like the students learn just as effectively in the 8 weeks, the more accelerating courses. It's the same amount of material being taught, the students have to work a little harder. But we expect that trend to continue. People want their education, they want it to be affordable and they want to get a quality education as quickly as they can. And I think that's probably a trend that's going to stay.

Okay. As you look across the different types of students that are enrolling these days particularly in the Title IV part of your -- of your business, any particular programs that are sticking out for you? You mentioned good progress within education but are you seeing particular interest in certain types of, let's call it military programs for the traditional student or is it pretty broad based?

I think it's pretty broad based. I think we had said on an earlier call that about 40% of our 40% to 45% of our Title IV students were civilians and doing graduate programs versus I think about 26% of our overall students are graduates -- graduates students. So, we are seeing a higher concentration in the graduate programs and a higher percentage of civilians.

It looks like the civilians like our liberal arts programs. There's not that many universities offering liberal arts programs. We have 73 programs and we have a large liberal arts population of students and they seem to like that. I would say that's the biggest difference is that the civilians are opting more toward our new IT courses and our liberal arts programs.

Okay. And then, final question for you, as you look at the number of student you have been adding and the rates of growth, are you guys still comfortable with where you stand from kind of a process and personnel perspective? I guess in one respect from the financial aid process or in terms of your ability to make the PAD a part of your business. Will it still kind of work as effectively and efficiently as it has historically as the student mix changes and those kinds of things, put different pressures on those systems?

Sure. We are -- we are really a CQI type organization and we have our student satisfaction quotient, which is our quarterly incentive plan for employees that we have approximately 20 measures that we look at in any quarter and the idea is that we pay out an incentive plan to all full time employees assuming that we have improved over the previous quarter or the previous year depending on the measurement that we are looking at. And as we do that we have suggestions, for example over the past year we have digitized all of our student records to make the processing of student records and transcripts for the 98% of our students who transfer in credits from other institutions or from military service. So, we continue to look at ways to get efficient and provide better service in operations, not just to benefit the Company but also to benefit our students.

And what we are finding, Brandon, is that we can always improve and that we do have to spend more and more money every year to upgrade our system and we do spend that money. That's why our CapEx continues to creep up a bit but we think we have a great system and we have the ability to improve it and we are continuing to do that. This year with Sarbanes Oxley compliance we had to make some system changes that we didn't anticipate really that were pretty expensive. Next year if we do get more into Ph.D. programs, you have to make system changes to accommodate that. Or if we want to develop some type of variable pricing model for our Masters programs if we decide to increase tuition at some point, we will make some system changes. But we can make the changes when we have to. We just have to spend some money to do it.

Great, great. Thanks guys.

Your next question comes from the line of [Paul Condrat] of BMO Capital Markets. Please proceed.

Hey guys. Thanks for taking my call. I just had a couple questions since most of my questions were answered. But I wondered if you could go over the -- you mentioned something about a shortage of adjunct faculty. What?

Yes, we are here. Yes, what we said was we had margin improvement that we hadn't anticipated really in the -- in the third quarter from our faculty, our instructional costs and services line item. And that was because we actually were able to better utilize our full time faculty to teach courses over the summer. We didn't have to hire as many adjuncts as we thought. Our full-time faculty --

Okay.

And that -- because of that -- our full-time faculty are salaried and by using them more we didn't have to pay extra to hire additional adjunct faculty this summer. We hadn't factored that in and that was a one-time thing. It caused margins to be a little higher in the third quarter that we don't anticipate happening in the fourth quarter.

Okay. And then the other question is what would have to happen for you to decide to increase your tuition rates? Maybe you don't want to talk about that, but I am just curious.

What would have to happen for us to decide to increase our tuition rates?

Right.

I don't -- at the undergraduate level, we have pretty much stated that we are passionate about providing an affordable product for the enlisted military person who is seeking an undergraduate degree. So, as long as the military sets its tuition assistance reimbursement rate at $250 a credit hour, that's where we intend to stay as long as we can afford to do that. And we have no intention at increasing that. At the same time should the military decide that it's been a while since they have done that and they want to increase the reimbursement rate, we will take a look at that if and when it happens.

At the graduate side though, we have said for a while now that we continue to monitor that our graduate degrees are so significantly priced lower than even state university's graduate degrees that we intend to ask our marketing department in the first and second quarters of 2009 just to evaluate those on specific programs. We have over 20 graduate degrees. So, doing it for every program is a bit of a stretch, but we will look at some of the programs where we think we might actually have some issues by being set too low and we will make a decision once we get the market data in as to whether or not we may consider something at the Masters level.

Okay, great. Thanks a lot. That's everything.

Sure.

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

Thanks so much. Unfortunately I missed most of the prepared remarks and forgive me if you have covered this, but did you talk at all about persistence rates in the quarter specifically in the civilian market?

Jeff, we didn't. We talked about what our returning student numbers were but we didn't break them out between civilians and military. We had a healthy increase in returning students for the quarter and it was pretty close to the rate of increase for our new students.

And was there any difference between the civilians and the military or you are just not willing to talk about that?

I actually don't have the information in front of me. So, if I had in front of me I might consider doing that but I don't have it in front of me.

Okay, I appreciate that. I am sorry, also on the GI Bill, I know it doesn't really kick in until the summer, but is the Company doing anything differently to position yourself to maybe get access to that funding over that time period? Are you marketing any differently, et cetera?

Well, I would -- I would tell you that we are positioning ourselves but to give out much more information than that given that there are a number of people who try to copy what we do, I would prefer not to do that at this time.

Okay, that's fair enough. I saw that there was an S-1 that was filed around the same time that you released earnings. Again, if you commented on it, that's fine. But if you haven't, I was wondering if we could any more color on that?

We think the S-1 and the Company press release speaks for itself. We did not comment. You are the first question and that's our position.

Okay, fair enough. Thanks again.

(Operator Instructions) Your next question comes from the line of [Jennifer Gillis] of Credit Suisse. Please proceed.

Thanks. I am wondering how the provisional certification that now goes through September 30 of 2010 might affect your program roll out, specifically your doctoral degrees.

I don't think it's a big deal. It's a requirement when you have a change in ownership and we had a technical change in ownership with ABS Capital going down to below 25%. It is a different type of provisional certification than when you initially become a participant in Title IV. When you are an initial participant, you can't add any new degrees at all. When you get this type of provisional status, you just have to go to the Department of Education and get their permission to add degrees. So, we will see, I mean depending on -- we sort of said that the doctoral degrees weren't going to launch pending their approval until late '09 or early '10. It may be just a non-event.

Okay, thank you.

Your next question comes from the line of [Scott Haugen] of [Tide Capital]. Please proceed.

Can you hear me?

Yes.

Hey, just the announcement of this secondary in addition to the earnings today, can I just confirm what ABS' holding will be assuming you get that secondary finished?

Yes, sure. Based on my math it would be zero if they finish the entire thing, if and when they do it.

Will the second VC down on the list still have some ownership or will they be all the way out?

We don't know. They have had a 10b5-1 that from time to time has kicked in based on share values or whatever. And the last reported filing I saw they still had a few hundred thousand shares. So, I do not know.

[Haugen], it's really an insignificant percentage of our ownership at this point.

Okay, thanks.

Sure.

I would now like to turn the call back over to Mr. Symanoskie for closing remarks. Please proceed sir.

I want to thank everybody for their time and their interest and that will conclude our call for today. Have a great evening.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.