Strategic Education Inc (STRA) 2002 Q3 法說會逐字稿

Please stand by. We're about to begin. Welcome to the Strayer Education Incorporated's third quarter 2002 earnings conference call. This call is being recorded. At this time, all lines are in a listen-only mode. Later we will announce an opportunity to ask questions, and give instructions on how to ask questions at that time. At this time, I would like to turn the conference over to Sonya Udler, Vice President of Corporate Communications for Strayer Education. Please go ahead, ma'am.

Thank you, operator. Good morning. With us today to discuss Strayer Education's third quarter 2002 earnings results are Robert Silverman, President and Chief Executive Officer, and Mark Brown, Senior Vice President and Chief Financial Officer. For those of you who wish to listen to the conference via the Internet, please go to www.strayereducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in realtime, a replay will be available beginning today at 3:00 p.m. eastern time through Tuesday, November 5th . The number for the replay is (888) 203-1112. Pass code 682011. Following Strayer's remarks, we will open the call for question and answers. I will now read to you the safe harbor language which is also in today's press release.

This press release contains statements that are forward-looking and are made pursuant to the safe harbor provision of the private securities litigation reform act of 1995. The statements are based on the company's current expectations and are subject to a number of uncertainties and risks. In connection with the safe harbor provisions of the reform act, the company has identified factors that can cause the company's actual results to differ materially. The uncertainties and risks include the pace of growth for student enrollment, our continued compliance with title 4 of the higher education act, and the regulations thereunder as well as state and regional regulatory requirements, competitive factors, risks associated with the opening of new campuses, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions, risks relating to the timing of regulatory approval, our ability to implement our growth strategy, and general economic and market conditions. Further information about these and other relevant risks and uncertainties may be found in the company's a annual report on form 10 K and its other filings with the securities and exchange commission, all of which are incorporated herein by reference an which are available from the commission. We undertake no obligation to update or revise forward-looking statements. Now I'd like to turn the call over to Rob. Please go ahead.

Thank you, Sonya. Good morning, ladies and gentlemen. I'd like to give a brief overview of the company and our business model for any of our listeners who are new to Strayer. I'll then ask Mark to report on the detailed financial results for the third quarter, after which I'd like to comment on the enrollment results for the fall term, provide an update on our growth strategies, and finally end up with a general discussion on the company's performance in Q3, our outlook for both Q4 and the full year two of 2002, and then provide some guidance to our business model for 2003. I'll also provide a brief update on our upcoming secondary offering. Strayer Education, Inc. is a for-profit education service company whose primary asset is Strayer University, 16,500 student, 20 campus post secondary education institution, which offers associates, bachelor's and master's degrees as well as certificate diploma programs in business administration, accounting and information technology. Our students are working adults who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. Approximately 50% of that revenue comes from federally ensured title 4 loans to our students. Our expenses include the cost of our professors, our admissions administrative staff, marketing expenses, and facilities and supply costs. We currently operate in Maryland, District of District of Columbia, Virginia and North Carolina as well as throughout the world over the Internet through Strayer online. We're serving students in all 50 states and some 39 foreign countries through Strayer online. Strayer University is accredited by the Middle States Association of olleges and universities. Mark, can you run us through the financial results for the quarter at this time?

Sure, Rob. Revenues for the three months ended September 30th , 2002 increased 26% to 23 million, compared to 18.2 million for the same period in 2001. Due to increased enrollment and a 5% tuition increase which commenced in January 2002. Operating income rose 44% to 4 million, from 2.7 million for the same period in 2001. Operating income margin was 17.2%, compared to 15.1% for the same period in 2001. The increase in operating margin was due to the three new campuses which were opened in 2001, reaching profitability, as well as the continued high rate of growth of Strayer University online. Net income rose 35% to 2.7 million compared to 2 million for the same period in 2001. Earnings per diluted share rose 36% to 19 cents, compared to 14 cents for the same period in 2001, as diluted, weighted average shares outstanding increased to 14,556,000 shares from 14,276,000 shares for the same period in 2001. Revenues for the nine months ended September 30th , 2002 increased 26% to 82.5 million compared to 65.7 million for the same period in 2001, due to increased enrollment and a 5% tuition increase effective for 2002. Operating income rose 17%, to 27.5 million from 23.5 million for the same period in 2001. Operating income margin was 33.3% compared to 35.7% for the same period in 2001. The decrease in operating income margin is primarily attributable to the impact on the first quarter 2002 operating income of opening three new campuses in 2001. Net income rose 7% to 17.5 million compared to 16.4 million for the same period in 2001. Earnings per diluted share rose to $1.21 compared to $1.10 for the same period in 2001, as diluted weighted average shares outstanding decreased to 14,485,000 from 14,847,000 for the same period in 2001. At September 30th , 2002, the company had cash, cash equivalents and marketable securities of 56.8 million and no debt. In the third quarter, as part of its cash management activities, the company invested an additional 6 million in a diversified no-load short-term corporate bond fund. As of September 30th , 2002, the company had 12.1 million invested in this fund. The company generated 19.4 million from operating activities in the first nine months of 2002. Capital expenditures for the nine months were 16.1 million, of which 12 million was in the first quarter for the purchase of three existing campus facilities. In the third quarter 2002, bad debt expense remained at the same level as in the second quarter of 2002, at 1.3%, which is up slightly from .9% for the third quarter in 2001. Day sales outstanding adjusted to exclude tuition receivable related to future quarters was seven days in the third quarter of 2002, unchanged compared to the same period in 2001. Rob?

Thank you, Mark. Just a couple comments on the financials. First, the revenue growth of just over 26% was basically in line with our model as we had previously announced on the last call a 19% enrollment growth for the summer term, and of course the 5% tuition increase. We were also helped by a slightly higher class-load per student and a slightly lower drop rate of students versus the prior year, but not significantly vis-a-vis our model. I would say most significant about the financial performance this quarter is that we achieved the forecasted roughly 200 basis point operating margin improvement which we had talked about with many of you last November when we did our investor day, and that is the result of the 2001 campuses ramping up profitability. We now have embedded in the cost structure the ability to open three new campuses per year without significantly increasing -- or decreasing significantly affecting those operating margins. On the fall term enromment results, total enrollment increased 18% on a year over year bases. This was roughly 15% for the last fall. It is the -- 18% is the highest rate of growth the university has ever experienced in a fall term, which we were very pleased with. Across the campus network, a fairly consistent pattern over the last several quarters where the new students were increasing a little over 15% and continuing students slightly under 20%. Online enrollment was up 90% over the previous year, and this press release, I'd like to call everyone's attention to the fact that we've laid out in more detail the effect of the online enrollment on our existing campuses. It highlights the strong rate of growth in our mature campuses. It also highlights the very important synergistic effect that we feel that the online program has for our campus-based population. We had a number of questions on this in the last quarter, and I just wanted to provide the information the same way that I look at it to the shareholders and the investing community so that everyone is on the same page there. I'd also like to emphasize, however, we are not push student behavior in one direction or the other. We look at this more from the standpoint of looking and trends and making sure we have the right number of class seats available in both campus-based and online based venues so that we can provide the student with the venue in which he or she is most comfortable taking the classes. That's where we want them to take it, wherever it's most convenient for them and where they want to take it. On the same [inaudible] growth rate, we were approximately 15%, the three campuses that were opened last summer added about 3% to our growth rate. I'd also like to point out that we're now up to 13 mature campuses and seven new campuses versus 10 mature and seven new last fall. One of our campuses, the north Baltimore campus white marsh shifted from the new to mature category this term so we shifted their enrollment for the same period last year for comparison purposes. With regard to student course preferences, business administration and accounting majors shifted up slightly to 52% of the total population. Computer information science majors was at 48%. Those of who you have been following the story for over a year or so will remember that these numbers have actually gone back and forth a couple of times, but hovering around 50%. We haven't seen any major shift away from information technology into business administration, in fact, in some of our more mature markets, we've seen basically a higher move in information sciences, and I think that has a lot to do with the fact that we're located in Washington, D.C. where the government hiring and some of the increases in defense and security tends to be in information technology areas as well. Turning to an update on our growth strategy, many of you will remember that we have five points to that strategy. The first is to maintain enrollment in the company's mature markets, second is to build off of that by accelerating the rate of growth of new campuses, particularly into new states, third, to invest in and build on our online offerings, fourth, increase our corporate and institutional alliances which provide us with such a strong revenue mix, and then the final objective is to look selectively at potential acquisitions. I'd like to just briefly comment on each of these one at a time. On the first objectivee, we showed 7% growth in the mature campuses during the term. However, we did show our mature campus students continue to exhibit strong preference to taking online courses in their later terms as I've suggested. With regard to the new campus openings, both our three 2001 campuses and the three North Carolina campuses which we opened in 2002, all six of them showed healthy growth in the fall term. The growth in Raleigh Durham North Carolina was strong enough that we've actually already signed leases and gained state approval for a second campus to be opened in Raleigh Durham in 2003. In addition, on the new state opening front, we received during the third quarter approval to open up to three campuses in the state of South Carolina, which would be our fifth straight, and last Thursday, we received preliminary approval for two campuses in the state of Tennessee subject to receiving final approval from the state of Tennessee, we intend to open two campuses, one in the met metropolitan area of Nashville and one in Memphis in calendar year 2003. In the online business, our growth remained very strong in the term. Our any asynchronous course program has grown to 295 classes versus I believe it was 58 we had in the fall term of last year, so that is a big part of our growth over the last year. On the corporate alliance front, we did enter into two new corporate sponsorship arrangements in the quarter, one with Meridian KSI, which is a training company, and then one with the defense acquisition university, located here in Washington. This brings the university's total number of sponsors to 87. With regard to acquisitions, I've got nothing to update at this time. And then finally, on our business outlook, based on the strong enrollment growth for the fall term, we're estimating 57 to 59 cents earnings per diluted share for the fourth quarter 2002, before approximately 2 cents per share of expense, around $500,000 in actual dollars, associated with our secondary offering. We believe we will be at or above the high end of our full-year estimates of diluted EPS of $1.76 to $1.80 on 14.5 million weighted average diluted shares outstanding, again, before the effect in the fourth quarter of that 2 cents expense associated with the offering. Based on the visibility which our fallen rollment gives us into the next calendar year, we're providing full year guidance for 2003 of $2.12 to $2.16 per diluted share on a weighted average share count of 14.775 million diluted shares. With regard to the secondary offering, we have cleared the SEC review process with no action, and we'll be commencing the offering process next week. If you have any questions on the offering, I'd ask you to contact our lead underwriter on the offering, CSFB if you'd like any details. And with that, Abe, I'm pleased to answer any questions.

Thannk you, sir. Our question and answer session is conducted electronically. If you would like to ask a question, it's star 1 on your touchtone phone. The signal to ask a question is star 1. Also if you're using a speakerphone, please make sure that you're not muted. If you are muted, that will block your star 1 signal. So again, star 1. We'll pause just a moment to give everyone a chance to signal. Gentlemen, our first call will come from Bob Craig at leg mason.

Good morning. Congratulations on the quarter.

thanks, Bob.

Couple of questions for you, in your 14 to 16% enrollment growth estimate for next year, online growth assumption versus mature campuses, what should that look like?

Well, consistent with the model we laid out last November, we believe that we can grow the out-of-area online at roughly 50% compounded year over year rate over the next several years. Our mature markets, we are modeling to hold them flat, including the students who ultimately take online classes from those mature markets. So if you look at the last quarter relative to that long-term plan, we were right about at our objective for online. We were above our objective for the mature markets and we were quite a bit above our roughly 35% growth rate that we see in the new markets.

Okay. While we're on the subject of online, can you give some kind of percentage breakout between those taking classes asynchronously versus synchronously at this juncture?

In this term, similar to last term, we actually had slightly more taking asynchronous than synchronous.

Okay. But don't want to give some idea as to what percentage that is of the total?

I just don't have it in front of me. It's a little over 50% are asynchronous, a little under a synchronous.

Okay. Rob, in looking at the total number of corporate and government sponsorship arrangements now at 87, do you have a figure as to the number of students comprised within those relationships?

I don't have that, Bob. The general color is that some of these are quite large, several hundred students. Some of them are fairly small, less than a dozen. They also tend to ramp with time. You'll sometimes start with just a few, but a little under 20% of our revenue is coming in those and I would guess that it's roughly analogous to that in terms of students.

Great. As far as the student mix is concerned as well, you mentioned the government helping out certainly the CIS component. Do you have any idea where you stand in terms of the number of your students that are employed by the federal government?

Well, we've got about 5% are military, and then I would guess that in our mature markets, you know, 20% maybe are involved in federal government employment. Our student mix tends to match the employment of the markets that we're in, and I think that's a relatively safe number vis-a-vis downtown Washington.

One other and then I'll let some one else take over here. Up to three campuses approval in South Carolina, with that limited number, Rob, would that prompt you to maybe open up some larger schools there?

Well, we only asked for three.

Okay.

Because we really only saw that demand in that state. It's not a high-population state.

Right.

We would anticipate opening our same model. We think that works the best for us in terms of providing campus access and convenience with a short commuting time to the students that we're trying to attract.

Okay. Super. Thanks and congratulations again.

Our next question comes from Fred MacRay from Thomas Wisel Partners.

Maybe you can talk quickly about the North Carolina market. Clearly that that seems to be ramping nicely, and the demographic mix that you're seeing there relative to say your core in north Virginia, D.C., Maryland markets, and also how that would play out vis-a-vis South Carolina.

I would describe North Carolina as probably most similar to the Richmond market. It certainly doesn't have the federal government presence that DC has or the military presence that Hampton Roads, Norfolk has. It's slightly less industrial than the Baltimore market. South Carolina is an attractive state for us. It has a lot that North Carolina has. It has a military presence, it has some manufacturing, and a fair amount of data-intensive back-office processing, call centers, things of that nature that we tend to find attractive. So we think it will be a good state for us.

And then in terms of South Carolina, Tennessee, where are you guys at to date in terms of establishing the corporate alliances in those local markets?

We are just initiating, frankly, that process, and what we try and do is get some of those done as we did in North Carolina ahead of opening campuses. We hope to see that same kind of performance as we have in North Carolina.

Finally, any thoughts of Pennsylvania? Mainly the eastern part of the state or your thoughts to moving as far west as Pittsburgh?

Ultimately we'd like to be throughout the state. Our application to the state of Pennsylvania is only for Philadelphia at this point.

Great. Thanks very much.

We'll now go to Greg Capelli at Credit Suisse First Boston.

Hi, guys. I just wanted to ask a quick question on Strayer online, it obviously continues to show meaningful growth. Wondering if you can walk us through some of the growth initiatives you're putting in place here and maybe some of the areas you've beefed up for advertising and marketing. And then as a follow-up, would you guys expect, you know, obviously a continued decline [inaudible] you mentioned Rob you're up to 295 course offerings so it seems only natural that -- I know you're not trying to plan one type of student or another, but I'd like to get your thoughts there.

Well, let me take them in reverse order. I think the most important lesson that we're learning about are market mix. If we don't have two different type of students. Most of our students find the convenience of online attractive, and we are definitely encouraging them, if that's the case, to take courses online. I can't find a distinction between any large parts of our students in any of our, you know, markets that would say one or more likely to be online or 1 or more likely to be campus-based. And frankly, as they get farther along in the process, they themselves are developing some familiarity with Internet activities and online activities, and so that that's maybe growing some familiarity for students who have entered the program without any inclination to take an online course before they started. In terms of the growth initiatives, probably the biggest one was rolling out the asynchronous courses, which allow us at this intermediate time as well as place, and really feed that convenience need. You'll remember that about a year ago, we made some major investments on the synchronous side to beef up the capacity to offer more synchronous courses, which we have done, and then in general, we just have a very constant focus on the academic quality of the online courses, and so we've got a number of initiatives going on to make sure that the quality assurance, if you will, is at a very high level.

Okay. Are you expecting the demand overall to be higher going forward for the asynchronous courses? Is that what you're planning for?

Over the most recent period of time, the last couple of quarters, it has grown at a faster rate than the synchronous. So I would say over the short term, yeah, that's the way we're planning it, but we obviously are going to watch it, you know, each quarter and make adjustments to our product offering accordingly.

Okay. Just quickly, I wanted to see if you'd given some thought about new program offerings outside of sort of your core two area that is you've talked about. Any thought of rolling out any new or different type of programs or are you going to stick to your knitting right now?

Right now I would say that sticking to our knitting is our strategic focus. On the other hand, I've got a group here who does think about strategic initiatives that would go beyond where we are. Our biggest objective in that area is to make sure that we stay with the focus on the type of customer that we're serving, a working adult, professionally based career-oriented degree completion or master's programs, and there are a number of areas that are close to that where I don't think it would be that much of a stretch for us in the education, criminal justice type of field, but right now we're very pleased with the product offerings that we have, and I think that our shareholders are well-served by our focus, and using the focus on those course offerings as a base on which to build geographic expansion as opposed to portfolio expansion. But we look at it each quarter, and we could certainly see ourselves over the midterm starting to reach out particularly if our students ask for it. And that's the thing that really drives us, Greg. If we see a strong interest level from our students which would evidence itself in conversations with professors or faculty advisors or admissions officers, that would guide us into those areas.

Okay. One final quick one on the competition front. Any change over the past quarter that you've seen from either for-profit or not-for-profits getting into your areas or just on the landscape?

Well, in our geographic areas, you know, there's certainly a number of traditional universities which have been quite, I would say, vocal in this last fall term, quite a bit of advertising, and then there are a number of the other for-profit entities that have opened in our area. We had the highest rate of growth in the history of the university, so I feel pretty good about our local areas, and indeed we are the competition in a lot of the places where we're opening up new, so, you know, again, I feel pretty good about that as well.

Okay. Thanks a lot, guys.

Yeah, thanks, Greg.

We'll now go to Howard Block at Bank of America securities.

Good morning, gentlemen.

Hey, Howard.

Do you have any updated data on the composition by degree, most importantly understanding what the master's percent is?

Yeah, master's went up about 200 basis points. It's up to about 19%? It's up to 20%. Bachelor's went down a little, I think it's 62, associate's stayed about the same and non degree stayed about the same as well.

Okay. And in terms of the corporate alliances, are any of those students receiving their education off site or off your site on corporate location?

Yes. We've got about a dozen of those arrangements.

And if we looked at the percentage of revenue that was -- I think you said 20% was with those alliances, any sense of what percentage of that is off-site versus on-site?

I don't have that, Howard. But we can take a look at it and get back to you. I would guess it's relatively small. We've only -- out of 87, we only have about a dozen to do it.

Okay. I didn't hear you earlier. Did you define "out of area," what that means?

Yeah. It's out of a commuting distance, you know, I don't know, half-hour. We don't have a hard and fast on it. We assign zip codes to campuses based on the commuting distance to the campus and if it's outside of those zip codes, we consider it a direct online.

Okay. And then with regards to your objective of trying to hold mature campus enrollment including, of course, online relatively flat, obviously it outperformed against objective in this quarter, any sense as to whether there was less can canaballization, if I can use that word here, or if there was just more overall growth in online than you thought?

Actually what I would say is it was more growth in new students entering the campuses, and the mix of students taking courses in the online campuses from the mature campuses tends to be in the later terms. So where the outperformance was is with the new students entering the mature campuses.

Okay. And then in terms of the selling and promotion growth, it's decelerated very nicely the last couple of quarters. Are you trying to sort of hold that S & P growth at a rate somewhat commensurate with your revenue growth or you don't necessarily have a hard and fast objective there?

Well, our hard and fast objective is to invest enough in marketing so that we can support the overall student growth, and we're not managing that line 1 way or the other beyond that. I mean, it's certainly a line that I would take up if I felt it was necessary, and it tends to also move with regard to new markets. When you enter a new market, there's a big jump there because there's no name recognition and there's a fair amount of advertising necessary to build the brand. We did that this summer, really this spring and this summer in North Carolina. We'll do it again, you know, next year as we move into new markets. Overall, as I said, I believe the cost of opening two to three new campuses in a couple of new markets per year is now embedded in our cost structure so that we can do that on a consistent basis without the kind of margin effect that we had last year.

Okay. And then of the seven buildings that you own, do you happen to know, I guess it would only be the first four, are they getting close to being fully depreciated or they are?

Well, we bought three last -- just early this year, so those would not be. The other ones, I would guess, are pretty close.

I think we probably have a ways to go. The useful life would be 40 years on the building, so -- I can check and get back to you, Howard, but I would say they're not fully depreciated.

I agree with that.

The last question is maybe back to Greg's question. Obviously one of the reasons why the online is growing, so nicely around the mature campuses is because of traffic patterns and congestion in the area. Do you see any sense that the in-area online students are enrolling more heavily in the asynchronous courses just because of the convenience and that the out of area guys maybe don't have an expressed preference? Just trying to understand, I guess, the market if, in fact, the traffic congestion may be driving more of those students to the asynchronous offering.

I don't see that, Howard. I don't think there's a cause and effect there beyond the fact that I think heavy traffic adds to the convenience issue or adds to the value of online. Our students who take online courses are taking them for a couple of reasons. One is, in some of our newer campuses, it allows them to take courses we're not offering at the physical campuses so it helps the ramp rate of those campuses by making more product offering available at lower cost. Then the most important one, as I constantly return to, strictly in our mature areas, is convenience. The mix between asynchronous and synchronous, clearly the asynchronous is more convenient because you disintermediated time. I think for the most part, the choice between those two has a lot to do with which courses are offered which way. Some of ours courses really lend themselves to the synchronous mode and so I think students like those better, but overall, you know, there's not a tight correlation that I would say geographically between asynchronous and synchronous, except for our overseas students, I'm sure, find asynchronous significantly more convenient because otherwise they'd be up at 3:00 in the morning take ago synchronous class.

Okay. Great. Thank you very much.

Thanks, Howard.

If your question has been asked and answered, you can remove you yourself from the queue my pressing the pound key. We'll now go to Gary Bisby Lehman Brothers.

Hi, guys. Congratulations on a good quarter. You mentioned two openings likely in Tennessee next year and an additional one in Raleigh. Does that mean you're going to wait and open South Carolina in 2004 or are you likely to increase from three the number you're likely to open next year?

Right now our budget is based on two to three campuses. The South Carolina campuses could certainly just be considered backlog in the pipeline that we could do in 2004, or depending on our rate of maturing individuals who can manage campuses for us, it's also something that we could accelerate. Our objective for next year is to open the second campus in Raleigh Durham because we think we have a high demand there as soon as possible, and then depending on the outcome of the ultimate regulatory approval in Tennessee, to enter the markets in Nashville and Memphis.

Okay. In terms of the continued goal to keep the mature markets flat, does this include the online students in market? I mean, you know, you mentioned last quarter --

Yes.

It does?

Yes.

Okay. You've had pretty explosive growth there. Do you think you're reaching at least the markets that you've been in for a while, reaching some sort of level where there's not as much online demand within the markets you're in?

No. Our rate of growth of new students in the mature markets seems to be quite high, and I think if anything, the desirability of online is growing at a very high rate.

As I look at that, I'm beginning to wonder if we look out a few quarters if keeping flatten enrollments is, you know, an overly conservative assumption, as you had one more campus come into the mature campus base this year. I think if my numbers were right, you had one more coming in next year. I guess just wonder if you had any thoughts as to medium term meaning the next one to two to three years, you know, how soon you can move to growth from the mature campus base.

That's a fair question. I mean, when the three campuses that we opened in 2001 moved to mature in 2004, then we'll probably rethink that strategically in terms of how we think about the growth rates because as you move relatively younger campuses into the mature area, that is going to provide some growth.

Okay. And then I guess just lastly, in the operating margin guidance going forward, I know you guys want to remain conservative, but wondering if there's any reason that we would expect to see, you know, that we could expect to see the performance at the low end of that guidance range, which would be down year over year, or, you know, are you just remaining conservative?

No, if we accelerate the timing or the number of new campus openings, it could be lower. The biggest impact on operating margins is the number and the rate -- the -- number of new campuses we open and timing during the year. If we open them earlier in the year, there's more than negative impact on operating margins.

Okay. That makes sense. Just lastly, in terms of your marketing for the Internet and out-of-market specifically, have you changed or accelerated that approach over the last couple of quarters, and do you plan to step that up going forward or are you pretty comfortable with the level you've been spending in out of market advertising you've spent for online?

It has increased really over the last 18 months. I think each term, we put a little more into it. We're experimenting with a lot of different venues, a lot of different advertising mediums to attract those students. The biggest increase was probably a year ago last spring when we first got here on a percentage basis, but we continue to increase it slightly each time. We also use it as a means of establishing some brand name recognition in areas that we hope to open campuses, so it's a bit of a advance landing, if you will, we're moving around the country and up and down the coast as we look at new states, and I think it is an area that we continue to look at each quarter as to whether or not it requires additional staffing and spending because it is growing at a very high rate.

Great. Thanks a lot.

We'll go to Richard Close at Sun Trust Robinson Humphery.

Two quick questions for you, Rob. You talked about the high demand in Raleigh. I was wondering if you could give us a feel of the population levels at the North Carolina schools, whether they're, you know, above your expectations and the road to profitability there in North Carolina?

They've been at or slightly above our expectations across the whole state. In Raleigh, where we have one campus versus the two in Charlotte, they were quite a bit above and deserving of a second campus on a quicker pace, basically.

And what's the level to get to profitability again on the student side?

We model it roughly at about 300 students.

Okay. And then a quick question on class load. I think you mentioned that it's a little bit higher. Can you talk a little bit about the trends on the class load, where it stands now and, you know, maybe where you expect it to go.?

Well, for the fall term, it was just under two classes per student, I think it was 1.97 versus 1.93, I think, the year before. I have consistently believed that that number should -- it's seasonal obviously, a little lower in the summer, a little higher in some of the other terms, but it ought to be around 2. It's not going to get much more than 2 just because our students are working adults and taking more than nine hours of class a week in a traditional university schedule, which is how we operate under a four-quarter system, I just think is probably a more aggressive metric than is appropriate to base an economic model on. I just don't think it's realistic to think that students can take more than nine hours of classes a week plus all of the homework plus their jobs plus their families. So when we look out for modeling purposes, we use 2.

Okay. Thank you very much.

You bet.

We'll now go to Gabor Bagner, he's at Shay Ann Capital.

Hi. I wanted to ask you, does your 2003 guidance assume a further price increase in a similar way that you raised prices this year, and secondly, I'd like to hear a bit about the fall trends on student loans.

The answer to the first question is yes. The answer to the second question is our latest default trend which was announced, what, about three months ago was for the 2000 --

2000.

What is it down to, Mark?

I think it's down to 4.6% is our cohort default rate. 4.6.

And on the pricing, how much of a price increase does your guidance assume?

5%. It's actually been announced as well that we have a 5% tuition increase starting in the winter.

Okay. Thank you.

We'll now go to Mark Ferano, he's with First Analysis.

Good morning. Congratulations on the quarter.

Thanks, mark.

You know, just trying to put two numbers together. It looks like the selling and promotion was up 30% year over year in dollars and then the enrollment data indicated a 15% increase in new student starts. Is it fair to put those numbers together and think that the -- you know, the student acquisition costs had doubled?

Well, they didn't double but they went up.

Okay.

I mean, I can tell you they went up about 25%, so -- oh, I know why. Because you don't have your salary -- we put the admissions officers' salary costs in the student acquisition costs. But we budgeted them to go up because we went into new markets. So they're see on budget -- essentially on budget from that standpoint.

Okay and then secondly, on the out-of-area students, you had mentioned that at least part of the strategy with them is to build name wreck recognition in states that you have intentions to enter, and I'm -- would it be fair to -- is that the primary piece of out of area, or is that a piece of out of area, I guess is what I'm getting at?

It's a piece. I would not say it's the primary, and it certainly isn't the largest percentage of where we have out of area students.

Okay. Thanks a lot.

Thank you, Mark.

We'll now go to Jeff Marsh with Matt Matador capital.

Hi. Wanted to explore a little more the notion that students are enrolling in the bricks and mortar facilities and once they become later in their terms, they're moving to online. I guess implicit in that movement which cements to have accelerated a little bit in the fall term is that maybe students are coming into the bricks and mortar facilities as working adults, not being fully prepared for the demands of taking two classes per term so they're turning to online for the added convenience. I guess my concern there is that, you know, the ultimate convenience would be not to take any classes at all, and it would be helpful to know sort of what the retention rates are of students that have been enrolled in the online courses. I know the date is a little bit muddied up by the fact you're rolling out new asynchronous courses at such a heavy rate, and it's been a little premature to call a retention, but I'd certainly be curious to whatever data you have that could point to students moving as rapidly through the online course completion process as they were within the bricks and mortar course offering.

It's a good question, Jeff. Right now the data, as you correctly stated, is a little immature. I mean, it doesn't have the same history behind our campus-based programs, but such as it is, it's quite strong in that area. Our retention rate or our continuation rate of online students, whether they're in area or out of area, has been slightly above our campus base, and about a year ago, we had our first graduates of solely online programs. That accelerated quite a bit in this last graduation of 2002. So right now from the standpoint of the determination of a student who is taking online courses and the ability of that student to continue in their program, the data that we have is that it's actually a little bit higher than our solely campus-based students.

Right. And with those -- would those students be taking an equivalent number of hours per term in the online courses as they were in bricks and mortar?

Yes. They're set up exactly the same way except that the asynchronous allows a student to start the class process at whatever time he wants to during the week. But they have to keep up during the 12-week term, in other words, they have to do one 4.5 hour class period plus the associated class discussion and homework within that seven-day period.

Just two other questions. I think you mentioned earlier that the CIS program is now 48% of overall enrollment. I think that's down a little bit from the prior term. What's the year-over-year comparison there, and I guess I just want to make sure I understand your statements there. You're not seeing any softening in the IT-based enrollment at this point?

I'm trying to remember what it was last fall. Do you remember? Slightly ahead of 50%? So it sounds like it might be a 300 basis point reduction versus the last fall, but the interesting thing for me is that number has actually gone up and down a couple times in the last 18 months as the, quote, softening of the technology market has taken place. And so because there hasn't been a distinctive trend one way or the other, I frankly hesitate to read too much into it. The rate of growth of new students in the CIS area is actually roughly equivalent to the business area, and again, from our standpoint, it really doesn't matter to us, it's similar to the asynchronous versus synchronous issue. We just want to offer the students what they want to take. We'll adjust our product offering, if will you, our course offerings to match what we think the demand is, and right now it's remaining for slanting purposes at around 50/50.

Right. Just one last question on the tuition financing. I think you guys is sort of stuck to your 5% annual tuition increases per year pretty consistently and haven't elected to take the price increase that the publics as a reason to raise your program prices above and beyond what you have done traditionally. I'd be curious to get sort of a breakdown today how students are funding the annual cost of tuition at this point, maybe based on title 4 tuition reimbursements through their corporate sponsors and third-party loans, which I think occurs through the Strayer Education loan program.

Right. It's about 50% for the title 4 guaranteed loans, maybe slightly higher. I think it was 51 this last quarter. Actually lower I'm getting signals it's slightly lower. It's around 50%, Jeff.

Okay.

Around 20% comes from direct reimbursements from corporations or institutions to us, which leaves another 25% which comes from other sources of the students' own credit, of which, again, we don't have hard data on this but our belief is probably half of that may be coming from reimbursements from employers to employees. We just don't see it because it happens outside of our chain of cash that comes to us. So that's basically how we think about it. 50-20-30 in terms of title 4 guaranteed, direct reimbursements from institutions and 25 to 30% in other sources of credit.

At this point, have you seen any cutbacks at all in tuition reimbursement in your markets?

We have not seen any cutbacks, but as I mentioned on the last call, in our quarterly or annual renegotiation of the alliance agreements, we have seen a higher number of institutions ask for terms. They want to pay on a net 30 or next 60 as opposed to right up front.

Okay. Well, thanks very much.

Thank you.

We'll now go to Brad Saphalo with J.P. Morgan.

Good morning, everyone. Just a quick question. On the 3300 or so students that are enrolled online but are associated with one of the mature campuses, what is the mix just generally speaking between the number of students who enrolled from the get-go in the online program versus those that migrated from an on-site location?

I don't have the exact number, Brad, but it's very few that enrolled originally. Most of our students in a mature campus enroll in a classroom-based class originally and migrate to online at some later point in their career.

Okay. And just to follow-up on the mature campus, in terms of capacity at those campuses as now you've seen a couple of quarters where on an on-site basis, you've had some declines, are you seeing that more prominently in some of the older campuses, in the D.C. area, and do you think that we should see an uptick at some point maybe in a couple more quarters after the anniversary some of these downturns in migration towards online?

In our mature campuses, those tend to be inside the beltway in the Washington, D.C. area. But I hadn't really thought about that because, frankly, it's not what we're focused on. What will happen is, if we see a continued trend on the part of our students who want to take courses on line even though they've been recruited into and started at mature campus, we'll look at our facility utilization in a different way and make that reflect the customer behavior. But, you know, we're providing this information so that the investment community can see it the same way I do, and I'm not looking for any individual growth rate of these segments one over the other. It's the overall rate of growth of the university that's important to me.

Understood. Understood. And just on the corporate sponsorship front, you've had I guess three consecutive quarters where you've have two sign-ups, I think the fourth quarter last year, you did one, and third quarter of last year you did four. Is two kind of the number we should expect? Are you satisfied with that number? Would you rather see three or four? Is this indicative of, let's say, some tightening of the strings among corporations as far as getting involved in these types of programs?

Well, I'd like to see as many as we can get.

Of course.

I don't have a number. I just report them when we get them. So it's not anything that we model. We want to keep about 20% of our revenue at that rate roughly, from that source, because I think it helps our revenue quality and our earnings quality and it's just a great way to find introductions into large congregations of working adults. We've got a small group which is looking at these, and I'd like to get as many as we can get.

Is there any sort of -- I don't want to call it a backlog number but you're having serious discussions with X number of companies at a given time. Is there some sort of the comparable that we can look to that would give us an indication of if there is any changes in the interest level?

Well, we have a backlog obviously, but we don't report things that haven't accomplished yet.

Right.

So we report them when they've happened, and, you know, that's, I think, the right way to do it.

Very good. Thank you.

Thanks, Brad.

Once again if you would like to request ask a question, it's star 1 on your touchtone phone. Please make sure you're not muted if you're using a speakerphone. We do have some follow-up questions beginning with Gabor Bagner.

Hi. In your press release, you said the SEC registration statement for the secondary had not yet become effective, but if I understood your verbal comments, you suggested otherwise. What exactly is the situation there, please?

Well, I'd refer you to lead underwriter CSFB, but just to clarify my point, the preliminary filing was acted on by the SEC with a no-action. They declined to review it. I believe that there is a update to the filing which goes in right before we start the marketing process, but I suggest you contact our lead underwriter on that.

Okay. Thanks.

We'll go back to Jeff Marsh.

Hi, Rob. Just two follow-up questions. On the corporate sponsorships, I'm just trying to get a little more understanding of what these actually are and what they mean. I think at one point, I've tried to touch base with some of the corporate sponsors and it seemed to me that there really wasn't any program in place, per se, where these sponsors were pushing their employees into Strayer to campuses as owe opposed to the many other campuses that they've got similar relationships with. So again I'm trying to understand, when you announce a new corporate sponsorship, implicit in that announcement, should we be expecting that all of a sudden this local employer is going to be pushing students into Strayer facilities more so than some of the competing institutions in the area?

It depends on the arrangement. In some cases, they are either sole or one of a couple favorite suppliers, but for the most part, I think the marketing obligation is ours. It's just -- it's more of a financial ability for the entity, whether it's a government agency or corporation, to pay us directly, and also provide us with an opportunity on a more -- on an easier basis to market to their employees.

Okay. And just the last question. Again, I don't want to discount the enrollment results, very good for the fall term, but it does appear the end result was modestly shy of a few firms' estimates, and what I'm just trying to get a better understanding is if the online performed better than planned as did the mature school group, I'm just trying to understand sort of where maybe the 100 or 200 student shortfall may have come for the term.

I have to tell you to contact those firms that have those estimates. From my standpoint, the way I've modeled it out, I like to get at least a 50% increase in the out-of-area online, hold the mature markets at least for the next year or so where relative to Gary's point, I think we'd have to rethink that, at at least flat, and then grow the new campuses at an average rate over the three-year period of about 35%. Obviously higher in the early years, lower in the later years. So that's how I look at it.

Okay. Thank you very much.

Yeah.

Now we'll go to Howard block and Bank of America securities.

Food good morning again. Any insight as to new students in master's programs as to whether they were previous Strayer students, Strayer alum., any change in the incoming master's student?

I don't have any additional detail on that. As I said, the master's program is growing at a slightly higher rate than the batch the bachelor's program. We do have a number of online master's students who by definition were not Strayer bachelor students, but I don't have any real good data, Howard, to draw a conclusion from that.

Okay. And then it was probably your predecessor, but they had spoken bullishly with matriculation signings they've done with community colleges. Do you have any update on those and whether or not they've become a source of new student inflow or anything?

They have become a source of new student inflow. Frankly I think we can do better there. We have the number of those that like the corporate alliances are great opportunities for us to market which we probably haven't done as much as we can on. It is the focus for us next year to try and use those more to our advantage. It's also -- we've done quite a few ourselves, particularly as we move into new areas. as we went down 18 months ago into the Norfolk area of Virginia, we went out of our way to enter into a couple of arrangements with local community colleges there, and we've done a lot of that in North Carolina as well. The largest community college system in North Carolina, central Piedmont, and we entered into a articulation agreement about two or three months ago, and that is, I think, a good way to, as you get into a new market, establish relationships with other educational institutions and also you almost think of them as a corporate alliance. They are a large potential body of students.

Do you notice if those entering students with prior college credit happen to take a lighter course load than other students?

They don't. They tend to -- they tend to have an even dispersion across the course load credits as everybody else.

And then with regards to the corporate alliances, for those that are provided on site or even those that are provided at campus, is there any break in tuition, price break?

There's no price break in tuition. Some of fees are adjusted based on volume and ability to save us cost, frankly, in collections.

Okay. And then, Mark, is there any capex guidance for 03 yet?

We haven't given any, but we wouldn't expect it to be out of sort of the percentage of revenue capex that we have been setting over the last year or so, excluding the building purchase this year.

Okay. And then last question, you may have said this before, rob, I apologize, but in the out of area definition, he said a half an hour. Was that from home or from work or you're not even firm on that necessarily?

We're not real firm on that because it depends on where the campus is. The D.C. campus, there isn't a whole lot of people that live there. It's a post-work kind of campus. Some of our campuses out in the suburban areas, Manassas, places like that, they're much more based on the distance to a residence, so there's not a hard and fast rule. It's a general guideline we use based on where the population is around 6:00 at night relative to their desire to go to the school.

Okay. Thank you again.

Unknown Speaker*: Thanks, Howard.

We have another question from Greg Capelli at Credit Suisse First Boston.

Hi, guys. One more quick one. On the campus advertising and marketing efforts I guess as it relates to online, are you primarily advertising the online throughout your existing campuses, and secondly, what I wanted to get out before is, are you planning on moving additional advertising and marketing for online into new geographic areas outside your campus locations now?

The answer to the first, Greg, is we've primarily advertised the online outside of our current campus areas. We generally, with regard to current campus areas, just have a tag line or so which suggest that online courses are also available, and we do intend to continue to ramp up our expenditures in out of area online, particularly in support of geographies where we believe in the next three or four years we're likely to open new campuses.

Anything else?

No, thank you very much.

Mr. Silverman, we have no questions remaining, so I'll turn it back to are for closing comments.

Thank you, Abe. Appreciate everyone 's participation on the call and look forward to talking to all of you through the quarter and on our next quarter's call which will be in February. Thanks very much.

Thank you. That does conclude our conference call. We do appreciate your participation. At this time, you may disconnect. Thank you.