Strategic Education Inc (STRA) 2002 Q4 法說會逐字稿

Welcome to Strayer Education, Incorporated's fourth quarter 2002 and full-year earnings conference call. At this time, all lines are in a listen-only mode. Later we will have an opportunity for questions. If you should need assistance during the call, please press "*" zero and an operator will assist you. At this time, I'll turn the conference over to Sonya, vice president for corporate communications for Strayer Education.

Thank you, operator. Good morning. With us today to discussion discuss the results are Robert Silberman, president and chief executive officer and Mark brown. For those that wish to listen to the conference vie at Internet, please go to www.strayereducation.com. 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, February 18th. The number for the replay is 888-203-1112. Pass code 418093. Following Strayer's remarks, we will open the call for questions and answers. I will now read the safe harbor language also in today's press release.

This press release contains statements that are forward-looking and are made pursuant to the safe harbor provisions of the private security 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 important factors that could cause the company's actual results to differ materially. The uncertainties and risks include the pace of growth of 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.

Further information about these and other relevant risks and uncertainties may be found in the company's annual report on form 10-K and its other filings with the Securities and Exchange Securities and Exchange Commission, all of which are incorporated herein by reference and which are available from the commission. We undertake no obligation to update or revise forward-looking statements. Now I'll turn the call over to Rob. Please go ahead.

Thank you, Sonya. Good morning, ladies and gentlemen. I'd like to begin this morning by giving 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 fourth quarter and full year, after which I'd like to comment on our enrollment results for the winter term, provide an update on our growth strategies, and finally end up with a general discussion on the company's performance last year, its outlook for Q1 of 3, and then provide some more general guidance as to the business model for the full year.

Strayer Education, Inc. is a for-profit education service company, our primary asset is Strayer university, a 16,000-student, 22-campus post-secondary ins education institution where we offer associates, bachelor's and master's degrees as well as certificate and diploma programs in business administration, accounting and information technology. Our students are working adults. They are returning to school to further their careers.

Our revenue comes from tuition payments and associated fees and approximately 50% of that revenue comes from federally insured title 4 loans to our students. Our expenses include the cost of our professors, our admissions and administrative staff, marketing expenses, and facilities and supply costs. We currently operate in Maryland, the District of Columbia, Virginia, North Carolina, and as of this term, Tennessee, as well as throughout the world over the Internet through Strayer University Online.

We serve students in all 50 states and 39 foreign countries through Strayer university on line. The university is accredited by the middle states community on higher education, and at this point, Mark, could you run us through the detail financial results for the quarter?

Revenues for the three months ended December 31, 2002 increased 26% to 34.2 million compared to 27.2 million for the same period 2001. Due to increased enrollment and a 5% tuition increase which commenced in January 2002. Operating income rose 37% to 13.7 million from 10 million for the same period in 2001. Operating income margin was 40.2%, compared to 36.9% 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 on line. Net income rose 29 pest to 8.3 million compared to 6.4 million for the same period in 2001.

Excluding one-time secondary offering costs, net income rose 36% to 8.7 million. Earnings per diluted share rose 27%, to 57 cents compared to 45 cents for the same period in 2001. It was up 33% to 60 cents excluding one-time secondary offering costs. Diluted weighted average shares outstanding increased to 14.6 million from 14.3 million for the same period in 2001. Revenues for the year ended December 31, 2002 increased 26% to 116.7 million compared to 92.9 million for the same period in 2001, due to increased enrollment and a 5% tuition increase effective for 2002.

Operating income rose 23% from 33.5 million for the same period in 2001. Operating income margin was 35.3%, compared to 36.1% for the same period in 2001. The decrease in operating income margin was primarily attributable to the impact on the first quarter 2002 operating income of opening three new campuses in the latter half of 2001. Net income rose 13% to 25.8 million, compared to 22.8 million for the same period in 2001. That income was un15% to 26.2 million, excluding one-time secondary offering costs.

Earnings per diluted share rose 15% to $1.78 compared to 1.55 for the same period in 2001. It was up 17% to $1.81 excluding one-time secondary offering costs. Diluted weighted average shares outstanding decreased to 14.5 million from 14.7 million for the same period in 2001. At December 31, 2002, the company had cash, cash equivalents and marketable securities of 67.3 million, and no debt. In the fourth quarter, as part of its cash management activities, the company invested an additional 6 million in a diversified no-load short-term invest investment-grade corporate bond fund. As of December 31, 2002, the company had 18.1 million invested in this fund. The company generated 31.7 million from operating activities in 2002.

Capital expenditures for the year were $17.1 million, of which 12 million was in the first quarter for the purchase of three existing campus facilities. For 2002, our bad debt expense for tuition as a percentage of revenue was 1.5% compared to 1.7% for the same period in 2001. Our day sales outstanding adjusted to exclude tuition receivable related to future quarters was seven days at the end of 2002, unchanged compared to the same period in 2001. Rob?

Thanks, Mark. Just a couple comments on the financials before I get into the enrollment. The revenue growth last quarter at 26% was slightly ahead of our model. As we had announced 18% enrollment growth for the fall and a 5% price increase. We were helped by a slightly higher class load per student, but I wouldn't say material, and a slightly lower drop rate, which pushed our revenue growth again slightly above what the combined enrollment and price increase would be.

I think most significant about the financial performance in the last quarter, though, was that achieving the better than forecasted 330 basis point operating margin improvement versus the prior year. This is important from my standpoint because it goes back to the discussion that is we had a year ago with regard to as we start to open new campuses, how that affects the operating margins in the first year, and then as the campuses start to ramp, how it recovers. The effect of our 2001 campuses, the ones we opened in Baltimore and Norfolk, ramping to profitability at a faster than scheduled rate and then the very strong start of the campuses that we had in North Carolina, as well as the continued growth of Strayer university on line allowed us to achieve that operating margin improvement for the fourth quarter.

Turning to the winter term enrollment results, it's all in the release but to highlight a couple things, total enrollment increased 18% on a year over year basis. This lapse 17% growth on the same quarter of the previous year, so we're starting to compound ourself in pretty high growth rates. Across the campus network, the new student enrollments was up 14% and the continuing student enrollments up 19%, fairly similar over the last several quarters in terms of that mix. In the press release, again, I've highlighted the -- some fairly significant detailed information with regard to the rate of growth of our mature campus, and the strong synergistic effect that we're getting in terms of the popularity of online courses for our mature campus students, which is really allowing a significant growth rate at the mature campuses above our essential break-even target. You see that we've got a 5% growth in the mature campuses.

We are definitely continuing to see, though, that in the later terms of a student's career, they find the online program offering very attractive, and we are obviously continuing to try and support that and make that available to them. The overall online enrollment was up 80% over the previous year. I should emphasize again, we talked about it on several calls, we're not trying to move that mix one way or the other. If a campus-based student wants to take online classes, we're delighted to have that for them, and we're going to continue to roll out the online to make it available for them as well as for our out-of-area students. The same-store growth rate approximately 15%, fairly consistent over the last several quarters, as the three campuses that are new in 2002 added about 3% to our overall enrollment growth rate.

Now with regard to the student course preferences, slight uptick on business administration and accounting. It's up to about 55% of the mix, and computer information science majors at about 45%. Again over the last two years, that shift or that mix has been about 50/50. In 2001 and in early 2002, it bounced back and forth almost every quarter as to which was more than 50%. The last three quarters has been a small but consistent trend where the computer information sciences are slightly less than 50 and business administration and accounting slightly more than 50. Turning to update on the growth strategy which we try and do on each of these calls, many of you remember we've got five objectives. The first is to maintain enrollment in the company's mature markets, second, accelerate the rate of growth of new campuses particularly in the new states, third, invest in and build up our online offerings, fourth, increase our corporate and institutional alliances, and the final objective is to look selectively at potential acquisitions. I would also add that that objective in our own minds has been expanded to really think about what is the best way to redeploy excess free cash flow if acquisitions are not available.

I'd like to comment on these each one at a time. The first objective, as I mentioned, we showed a 5% growth of the mature campuses while many of the students continue to exhibit a preference for taking online courses in their later classes. That's slightly ahead of our model, and we're actually quite pleased with that. We want to continue with a number of physical campus improvements in our mature markets, and continued focus on marketing those areas to keep those steady and as we have over the last couple of quarters, hopefully get a few points of growth out of them.

With regard to the new campus openings, both of our three 2001 campuses or let me say it another way. All of our 2001 campuses, the Baltimore and the Norfolk campuses, as well as the tree North Carolina campuses which were opened in 2002 show very healthy growth for the winter term. You can see it's actually driving significant amounts of our enrollment growth, the performance in those markets. We did receive final approval in December from the state of Tennessee to open two campuses there. That was about a quarter ahead of how we had planned and we took advantage of that to accelerate the opening of those Tennessee campuses, one in Memphis and one in Nashville, to the spring term as opposed to waiting for the summer.

We are currently recruiting students at this time in those markets, and we will be offering classes on March 30th for the spring term. I think most significantly, we received last week approval from the state of Pennsylvania to open two campuses in the city of Philadelphia. This is at least a full year ahead of our plan in terms of what we thought how long that process was going to take, and based on our strengthening ability to grow our management talent and then increase confidence in our ability to manage the outgrowth of this campus network, we he decided to take advantage of that opportunity and accelerate our campus openings there by one full year.

So we will be opening two campuses in the city of Philadelphia in 2003 for the fall term. When you combine the two in Tennessee, the two previously unannounced in Philadelphia with the one previously announced campus, the second campus in Raleigh-Durham, we are increasing our rate of campus openings this year to five campuses on a base of 20 from the originally scheduled three. In the online business, the growth continued quite strong. The asynchronous program is up to 346 classes versus 63 a year ago.

On the corporate alliances and acquisitions, nothing significant to update on this call. We actually had some significant growth from some of our existing partners in the corporate alliance side over this last term, but no new major accounts were signed up. Finally on the business outlook, and bear with me because there's several moving parts. We previously disclosed in our business model, we incur approximately a million dollars or 4 to 5 cents per share of operating losses in the first year in which we open a campus. Increasing our planned campus openings in 2003 from three to five will cause approximately 9 to 10 cents per share of net expense in 2003.

In addition, the acceleration of the opening of our two Tennessee campuses by one quarter from the summer term to the spring term will increase our expenses in Q1 and cause approximately 1 to 2 cents per share of net expense for the year. And then finally, we've increased our provision for tax expense, caused by us projecting an effective tax rate of 39.5% versus 39%, and that will also have a negative of about 1 to 2 cents effect on the year. The increase in the tax expense provision is, frankly, a conservative measure based on the fact that we're going to start a portion over a large number of states, some of whom have higher taxes, we want to make sure we're ahead of that and appropriately conservative.

When you add all that together, it's partially offset by increased revenue from the additional campuses, but as those of you are familiar with our model know, in that first year, it's not really significant revenue because you're starting off with a pretty low student base. So that's how you get to an approximately 12-cent per share reduction in our 2003 forecasted EPS, ignoring what is a significant offset of an 8 to 10-cent gain per share which we expect on the sale of our D.C. campus. Again, those who are familiar with the story know that we bought three of our campuses a year ago. The D.C. campus, I bought for $3 million. We've signed agreements to sell it for approximately 6.5 million.

Our auditors tell us that actually that gain runs through our operating income line as opposed to investment income, but I want to make sure that we've broken that out and that everybody understands what's going on net of that one-time gain. We expect that in the second or third quarter of this year depending on when we actually close. The reason we sold the campus is, for those who have been to our D.C. campus, it's a beautiful building. It's not really that conducive to classrooms, and we're just moving one block down 15th street to what will be a brand new fitted-out facility with a brand new classrooms, brand new classroom equipment, and we'll go back to our traditional model of leasing those facilities. We don't intend over the long term to tie up our capital in real estate. These last three campuses that we bought in early 2002 was a real target of opportunity for us.

I'd just summarize by saying we are very excited about the opportunity to accelerate these investments and to expand our new campus network into new states. We've discussed many times, I have individually with many of the shareholders on these calls the very high unlevered return on our invested capital in opening a new campus. Our objective is to be a nationwide university, and our game plan is to roll out these campuses as quickly as we can in as many states as we can, consistent with maintaining our academic quality, and consistent with the support that we have from our regulators and our accreditors at the pace which we can do that. So with that, I'd be pleased to answer any questions.

Thank you. Today's question and answer session will be conducted electronically. If you do have a question, to signal us, press "*1" on your touch-tone telephone. Once again, that is star 1 to ask a question. If you're on a speakerphone, we do ask that you unmute your phone to allow your signal to reach our equipment. If you find your question has been asked and answered, you may remove yourself by pressing the Pound or hash key. Once again, that is star 1 to ask a question. We'll go first to Fred McCrea () from Thomas Weisel Partners. +++ q-and-a

Maybe you could tack a little bit -- talk a little bit about the Philadelphia openings and what accounted for the rapid approval, and then perhaps the overall opportunity in that state.

Let me take it in reverse order. It has been our biggest target state since I took over because it's the largest population state, closest to where we operate. And so we think there's a very high opportunity. You look, we have 10 campuses in Virginia, Pennsylvania has a much higher population than Virginia, so we're very bullish on the number of campuses that we can put there. We were very pleasantly surprised with the speed at which the state approved our application. It was really under three months, and, you know, I think we can just attribute that to the strong performance that our university management and our -- the reputation that we have with our accreditors in terms of our ability to expand the university and maintain the academic quality, but we were honestly quite surprised and eager to take advantage of it when it came in that early.

As a follow-up, maybe you could talk about the five campuses opening this year and management therein. I know that's been a gating item historically. Are these internal hires, external or a combination?

It's a combination. We were in our Tennessee campuses at the campus manager level, we went outside because we just had some tremendous applicants that came in. We expect that the additional Raleigh campus and Philadelphia campuses will be mostly inside, but we are a hiring machine at this point, and so what we tend to do is when we see quality, we try and get it into the organization as quickly as possible and get it into a position where it ultimately -- the individual can be moved out to be a campus manager. The other thing we've done, Fred, is implement an internal leadership program which we ran the first session of last month. I was very pleased with the outcome from that. It frankly gave me some increased confidence in our ability to grow individuals at a faster rate into positions of responsibility.

Great. Thank you so much.

Thank you, Fred.

We'll go next to Bob Craig () with Legg Mason.

Congratulations, Rob. A couple questions for you. Is there likely to be, then, some makeup quotient in terms of earnings in 04, i.e., you mentioned that you decided to take advantage of the earlier-expected approvals in Pennsylvania. Would you likely continue to open schools at maybe a little more rapid rate in 04 and beyond subject to receiving some of these approvals?

Well, our game plan is to open them as quickly as we can consistent with the quality. I would tell you that I think we've probably maxed out our ability to do that vis-a-vis our regulators, at least in the short term at five. It was not a foregone conclusion that we could condition Vince them of that. So I would say that more than five is extremely unlikely for 04, and it's at least as probable as not that we would do less than five. Our original game plan is based on two to three. I feel very, very confident with the backlog of states that we have opened and our backlog of personnel that we can certainly do three, and I think, you know, the right answer to your question is we're going to watch very carefully our performance in 04 -- I'm sorry -- in 03. If we can open more than three, you know, we will certainly do it. But again, it will be similar to the situation that we had in 01 and 02 in terms of your question about earnings because the biggest impact on short-term earnings is the rate at which you open new campuses. If you hold that rate steady or reduce it, then you're actually going to get an earnings acceleration. In the long run, what I've always said is that the sooner we can get this capital invested, the sooner that we can expand the campus network, the more valuable return we'll have for our shareholders, but it does have a contra-impact () on the short-term earnings.

Ok. Great. Rob, could you bring us up to date on where you now have applications in and any potential timetable for other approvals?

Well, we have already been approved in South Carolina, as we previously disclosed. You know, our future applications will be up and down the East Coast, and then moving west. You know, opening a campus in Memphis, we actually can see the Mississippi river now, so we've gotten farther west than I thought we would earlier, but, you know, the game plan was to move contiguously to try and reach the higher population states that have, you know, the best opportunity for us to expand within the state, and as we get approvals or as we have applications that are final enough in form,, you know, to be relevant, we'll disclose them.

Ok. Lastly, do you have a mix right now between your online students asynchronous versus synchronous?

Yeah, the asynchronous is continuing to grow at a much faster rate, and that's grown to about 60%, 60 to 70% of the classes are asynchronous now.

Ok. Great. Thanks a lot. I'll hop back in.

Thanks, Bob.

We'll go next to Howard Block, Bank of America Securities.

Good morning, gentlemen. Nice job on the quarter.

Thanks, Howard.

Two quick questions and then a longer one. Do you have any update on the mix of master's and bachelor's students?

Yeah. The graduate students have continued about 20%. That's up almost double from the year before but about consistent with where it was last quarter. And bachelor's has stayed the same, around 62, 63, and associate's is about 10. So the real mix is from certificate and diploma up into graduate.

Ok. And then Mark, do you have the bad debt expense for the fourth quarter alone? I saw the full year in the press release.

Yeah. Let me get that. It's 1.9%, Howard, compared to 2% for the fourth quarter 2001.

Ok. And then around the expenses, the operating losses that we sort of have pulled into our 03 numbers, it's a million dollars of operating loss, I appreciate that quick analysis for us, but in terms of the timing of it, it seems as though that those campuses are obviously opening up at the end of the year, but yet the full year in a sense is suffering those operating losses. Is that the way we should think about it, is that -- go ahead.

The losses will occur in Q3 and Q4. We haven't quarterized it or whatever the appropriate term is for that. But, you know, the model was based on opening the campuses in the summer. We're projecting that we'll pretty much have the full impact in Philadelphia, even though we're opening them in the fall because I think it's going to be a slightly more expensive market than the southern markets that we've been in.

Ok. So the million dollars of operating losses over a year, as you say, but it could actually occur over a six-month period?

It will in this case with regard to Philadelphia.

Then lastly, with regards to Philadelphia again, appreciate the opportunity there and your excitement. Is it possible as we think about Strayer in the next few years, there may be other occasions at that at which you may be able to accelerate an opening which at the same time could jeopardize a near-term earnings outlook obviously at if the opportunity to improve returns on capital.

Right. Howard, I have tried to communicate as clearly as I can to our shareholder base that given the opportunity to do that, we will. That we are investing our shareholders' capital -- I mean, think of it this way. The million dollars that we're spending on this is sitting in a bank account earning 2%. Our view is you put that to work at an IRR that we think conservatively will be well above 50%, and we want to do as many of those as we can. Realistically, I would tell you that based on my discussions with our regulators and with our university management, over the next three years, doing more than five will be straining that from the standpoint of our creditors. So I mean, it's not impossible. We have been positively surprised over the last two years in both our ability to get states opened and in the trust that our accrediting body have given us to ramp the size of the university, but I would say the most likely scenario is, is that it's unlikely that we'll be able to press five per year for the next three years.

As we think about guidance, we should always think about it relative to the guidance of campus openings as well.

Exactly right. Exactly right, Howard.

Ok. Great. Thank you very much.

And we'll go next to Greg Capelli () with Credit Suisse First Boston.

Good morning, guys. Bob, just to clear one thing up on Howard's last question -- or on the startup losses, just to clarify, if my memory serves me right, you guys actually start to spend an incur up-front costs on new schools pretty well before they're actually opened. Isn't that correct? So if they were actually opened in the fourth quarter, you'd have to start spending well before that. Is that still a correct assumption?

That is a correct assumption. The expenses will start to run through in earnings () in Q3 and a little bit at the end of Q2.

Ok. Great. I wanted to talk a little bit more about -- you talked about kind of the returns. When I think about some of the numbers that you're talking about in terms of the return on the capital, the IRRs that you're talking about, is that -- at this point, again, just to generalize it, you know, is that -- should we consider that kind of a leap of faith because these are all new schools in new areas or are you looking at that on a historical information from all the schools that the company's opened up historically and now obviously the company has been open ago number of campuses over the last five years, even before you guys came in a couple years ago. I just kind of want to get an idea of the color or the thought process you've put into that IRR.

It's an excellent question, and there's two components, three components, really, in terms of how I think about it. When I was doing the diligence myself on Strayer two and a half years ago, we went through and looked very carefully at the ramp rates of all of the campuses that had opened to date. But I discounted that slightly from the standpoint of showing the Washington, D.C. campuses were in a market where they already had great name recognition and there was already a fair amount of marketing expense, so the incremental margin expense wasn't that high. But the company before I got here had successfully opened campuses in Baltimore and Richmond, which were distinct media markets. There was some bleedover, but, you know, they really are distinct markets, so that gave me an even higher level of confidence in terms of how replicable that model is going outside. Now I think what's been most impact full for us here in the last two years is the rapid rate of growth of our Norfolk campuses and our North Carolina campuses, and how quickly they have come to profitability in entirely different markets for which we had zero name recognition, and the effectiveness of the up-front marketing strategy and just basically the very high demand for quality working adult-based education. So, you know, on each of the historical factors, I discount some to get to what I think is an appropriate modeled IRR going into a brand new area, but I would say that over the last two years, I've gained increased confidence in, you know, the value of our investments and the ability to execute in a way which generates at or above on the returns of invested capital that our shareholders will want.

Ok. And I'm just assuming that given that, that there was no reasoning behind accelerating the openings because you were seeing leads slow or student growth slow and you thought you had to get these open more often -- or excuse me -- sooner. Any comment on that?

Well, we're actually growing our mature markets faster than the original plan. I would say that it's an accurate statement going back two and a half years. I mean, looking at this company in the summer of 2000, my feeling was that you needed to expand the university network outside of the Washington, D.C. area to really create value for shareholders, and that's been part and parcel of our plan from the beginning. You know, the rate at which we do it has always been, you know, for me, the limit limiting factor. We wanted to do it as fast as possible, as I've said, consistent with the academic quality, but actually our mature markets have perform better than our plan relative to the strategy we laid out.

So what you're seeing on the current lead flow pre any of these schools is in line with your expectations, it sounds like.

Oh, absolutely. Absolutely. I mean, look at our enrollment growth for the fourth quarter. I mean, it's -- yeah, it is absolutely.

Just one more quick one. So then I would expect, you know, if you guys actually get all five opened and, you know, it remains at that rate, you know, perhaps the following year, I guess could we then expect all things else being equal, and I'm sure you'll want to stay conservative on this, but it would seem as though, you know, you're opening a couple extra campuses, we'll probably likely see an extra boost to enrollment growth, so you could see an acceleration from the 14% level over time to a higher rate. Would that be a fair assumption? In the new student enrollment growth count?

Yes, that is affair assumption. I mean, that's why we're opening the new campuses. We would expect that all things being equal, that the more campuses you open, the faster your enrollment is going to grow and the faster the earnings of the company are going to grow.

Terrific. Thanks a lot. Appreciate the answers.

Yep.

We'll go next to Mark Marostica with Piper Jaffray.

Mark with Piper. Nice job on the quarter. Wanted to start off with a question regarding some history in terms of the number of new campuses you opened back in fiscal 01 and fiscal 02.

Sure, Mark. Three in each.

Three in each? Ok. Great. And then appreciate the commentary around the economics of a new campus opening in the first year. How does it look beyond year one? Can you give us an idea of how the ramp to profitability looks in year two and three?

Yes. We break even essentially in the second year. It takes about six quarters, and the full second year, if you open in the summer, notionally has been about break-even, and then you ramp very quickly to high operating margins. It's different in each campus, but notionally, it takes about seven years to get the 50%-plus operating margins, and that generally happens around 1,000 to 1,200 students enrolled through the campus.

Great. That's helpful. And then also relative to your exposure to the government, I thought I recalled that you had said previously about 20% of your students in government jobs, and 5% of those in military, and I'm wondering what the reserve Cal-up and the military action that may occur, if you're seeing any effect, impact on your business.

Let me take that in reverse order. I don't know of any general or material impact. You know, I'm certain we have some students particularly in our Norfolk campuses that are assigned to operating units either in the Navy, marines or Air Force down there who will be deployed, and we'll hold their space for them. And wish them God's speed as they head off. But I don't think there's any material number of students, at least that I'm aware of. Certainly it didn't affect our enrollment growth for the fourth quarter. With regard to the mix, I think 5% is probably a little bit high on the military, and I think the 20% on the government is probably good relative to our D.C.-based campuses, but as the overall university expands outside of D.C., I think that number is probably going down.

Ok. Fair enough. Also regarding campuses where you compete directly with the University of Phoenix, I know that particularly in Maryland, for example, that you're in close proximity. I'm wondering what your experience is from a competitive standpoint with when you go head to head with university of University of Phoenix.

That seems to be enough students out there. And we've been able to perform quite well, so I think that the high demand for working adult-based education and the quality of our programs has served us well.

Ok. And the last question, on curriculum side, are you looking at offering any new kind of tranches of curriculum in addition to business accounting and IT?

In the release, we have disclosed that we've applied to middle states for three new masters programs. Masters of education, a masters of health services administration, and a masters of public policy management. And we would hope that we get those fully approved and in operation by the end of the year so that we'd be offering some of those courses in the first term of 2004, the winter term of 2004. All of those are close enough to the core competency of what we do that I feel like it's an acceptable stretch for us, and it's based -- they're based on the demand that we've heard from our students, particularly our bachelor students who are graduating and coming back to us and saying, well, I'd like to get a graduate degree as opposed to just an MBA or an information sciences, you know, these are areas that we're interested in. You know, on the health care side, it's just such a big part of the economy that we think that graduate degrees in business administration focused on health services will be very popular.

So Rob, if you look out three to five years and think today your mix is 55/45 business to computer information systems, what do you think that mix would look like three to five years from now?

I'm not sure on that one, Mark. It has stayed very strong over a two-year period. The information sciences have stayed very strong over a two-year period where I would have thought there would have been more of a shift. When I look at the Department of Labor data in terms of where the largest amount of job growth is, you know, it still seems to be in computer-based kinds of jobs. There's obviously a huge problem with capital misallocation in the technology center, but I'm not sure I would predict that IT is not going to be -- continue to be a very strong part of what we do, but again, the mix is really not that important to us. Most of our students who are coming back to school are really coming for the degree, and, you know, we can offer it in IT, we can offer it in business. We hope, you know, our new masters programs will prove popular in these other areas, but I don't think I would forecast a mix based on what I've seen so far.

Ok. Great. Thank you.

Thank you, Mark.

We'll go next to Gary Bisby, Lehman Brothers.

Hi, guys. Congratulations on a good finish to the year.

Thanks, Gary.

Couple of questions following up on some of the other ones. First of all, you'd said sort of -- made a remark that going into Philly might be more expensive. I wondered if you could quantify that for us. Did you mean in terms of marketing or what would make opening campuses in that market potentially more expensive than North Carolina and some of the others.

It would be all the costs associated with the campus. Salaries are slightly higher there, cost of living is higher, lease rates are higher. I think the most significant impact is the media costs are higher. But one of the reasons media costs are higher is it's a much bigger market, so like Washington, D.C., as you grow your campus base in that market, you actually ultimately end up with a higher return on capital once you get enough campuses in there.

Ok. Can you give us an update on exactly what you're doing with your regional management structure or the people that the campus presidents are reporting to and as you add new states, have you expanded that in the last year?

Yes. We've added one region for precisely this purpose, to handle the expansion into Pennsylvania.

Ok. And I know -- I realize Pennsylvania is a huge market and one you've targeted for a while, but, you know, if you already have approvals in South Carolina, I'm just sort of wondering why you've delayed that, you know, now that you feel you've got the management depth to continue to accelerate the campus openings.

I think South Carolina is going to be a great market for us, and it will certainly be early in 04 that we move into that market. Philadelphia just appeared to be the right opportunity at the right time to move forward on.

Ok. And are you looking right now or do you have application in for Pittsburgh and any of the other places in Pennsylvania?

We're looking all over Pennsylvania. We don't have any specific applications in yet.

Okay. And then just one last one. I think I've asked this about three straight quarters so I apologize, but, you know, in terms of the capacity at your existing campuses as some of the students my great towards online, and I actually realize online students are more profitable, I know you said you don't really care, but has that become an issue where you're not utilizing your capacity as much at some of the older campuses?

It's actually been a benefit because, frankly, the older campuses, for those of you who have visited them, we're fairly chock full, so it's allowed us to generate some growth without additional lease expenses. What we're doing going forward, for instance, you know, we just opened a brand new campus in Arlington, Virginia and closed down the old one. The new campus is designed around a physical campus that's also serving students who want to take classes online. There's more space for our faculty advising, our student counseling activities, the student services that the students use at the campus, and when we move our D.C. campus from the existing building that we own into the space that we're going to lease, we'll do the same thing. It allows us to rationalize space and make it more usable and more supportive of the students and the way they want to take the classes.

Ok. Great. Thanks a lot.

Thank you, Gary.

We'll go next to Richard Close, SunTrust Robinson Humphrey.

Congratulations on a good quarter. First question would be, you mentioned mature campuses around 1200 students. If you could, you know, maybe give a clarification on how many campuses you're running around that level.

Sure. We have 13 campuses that we're reporting as mature, but I would say probably a good half dozen of those have just gotten across the four-year point, and so, you know, they are not -- they still have some growth in them to get up to that plateau. So, I mean, it's basically the initial campuses that were part of the Washington, D.C. area, just eyeballing it, Richard, one, two, three, four, five, six, seven, eight -- eight or so that are at what I would call the plateau level.

Ok. And would that include the online students, the students that were at those schools and then shifted to online?

It includes the students that are at those schools and happen to be taking some courses online.

Ok. So not the ones that maybe were at that school and then completely moved into the online program?

Well, it's not the same -- no students have done that. What we have is students who in any given quarter take 100% of their classes online. But they are always registered as a student at that campus. They're always considered part of that campus.

Ok. And then another question is along some of the earlier questions with respect to the student level to break even. Has that changed at all considering you're getting strong growth in the online unit and new markets, new campuses?

No, because your fixed or quasi fixed costs of opening the campus haven't really changed. I mean, it's changed somewhat from the standpoint because of the usage of online, we're just taking less space to start with, so our lease costs are slightly lower. But, you know, I would say that 300 students is still a pretty good proxy for that.

Ok. And so you are -- is the box actually getting somewhat smaller, and would you anticipate Philadelphia being similar to Tennessee or North Carolina or more like your traditional Virginia campuses?

The box is getting somewhat smaller. I would expect Philadelphia would be exactly as we're doing in Tennessee and have done in North Carolina. That is our model going forward.

Ok. Great. Thank you.

You bet. Thanks, Richard.

We'll go next to Brad Safalow with J.P. Morgan.

Congratulations on the quarter. Just a quick question on the out-of-area online students. Can you give us a sense for maybe on a percentage basis or some idea of how many of those are actually in the Tennessee or Pennsylvania area that may in some sense give you a head start on marketing in those areas?

A lot.

A lot?

And that's a key part of our strategy, is that we market out of area in places where we think we're going to go in-area with a campus. I mean, I don't have the number. We've never really disclosed it. But it is -- you know, it's significant. I think it's fair to say that a good, you know, 5 to 10% are probably in those states.

Ok. Excellent. And in terms of going back to the notional model of the new campus opening, you've talked about, you know, losing money from anywhere from 12 to 18 months and reaching break even on let's call it 300 students. Clearly your experience in North Carolina was not, I guess, in line with the notional model. Is it safe to assume that you have some, I guess, optimism or maybe some confidence that because of your presence on an online basis in Tennessee and Pennsylvania, that you could see a better ramp-up of enrollment growth there?

Let me put it this way. At the notional [inaudible], I would invest the shareholders' capital all day long, assuming I had the approvals and the people in place. You are correct in the fact that North Carolina ramped faster than the notional model. I haven't really changed my expectations for Tennessee or Philadelphia, but we'll be pleasantly surprised if it goes in that direction. I do think Philadelphia is likely to be higher cost. The cost per minute of media is significantly higher than it is in Nashville or Memphis or Charlotte, so I think that's probably going to be closer to our notional model than some of the southern states that we've been in.

Ok. And then the last question has to do with your cash position currently. You know, you've talked about the growth plan you've laid out. Certainly it seems like even this year with five campus openings, you'll still have significant free cash flow generation. What are yow your plans for uses of the cash? You've talked about acquisitions in the past. Maybe you have some pause about -- considering an acquisition given you have 50% IRR opportunities in front of you on a kind of branch campus expansion model. Can you just comment on that?

Sure. I don't think they're mutually exclusive. In other words, I don't think that -- if we hope 20 campuses a year, we wouldn't use up our free cash flow in new campus openings. So to say that we can't reach our new campus opening IRR with an acquisition is not a reason not to do an acquisition. My view is if we can do an acquisition with cash rates of return that are in excess of our cost of capital and that it dovetails into our growth strategy, then it makes some sense. We just haven't been all that impressed with any of the properties we've seen in the last two years relative to the management effort on executing our internal growth strategy. We haven't given in on that and we continue to look at things.

So that is the largest obvious use of additional free cash flow in terms of investing it back into the business, and it's one reason why we keep a significant amount of liquidity relative to our size to make sure we're able to do that. And, you know, if we fully fund our growth strategy organically and there is no acquisitions available, then we'll look at measures of returning that capital to our shareholders, either through some kind of dividend poll policy. We currently have a common dividend but we haven't changed it for two years, but we intend to look at that once we deal with the preferred shares on our balance sheet by the midpoint of next year, assuming the valuation of the company, and then the other choice is share repurchases, which under certain market conditions, you know, can make an awful lot of sense. It is an area where the board and I are going to spend a lot of time this year focusing to make sure that we are prepared to redeploy that capital in a way that enhances shareholder value.

Excellent. Thanks for the color there.

Ok. Thanks, Brad.

Thank you. Once again, it is star 1 if you do have a question today. We'll move next to Mark Fernano with First Capital Analysis.

Good morning.

Good morning. Couple questions. First, in terms of the startup losses that were pulling forward into 03, could you just give us a sense of roughly which line items we'll see more of those, whether it's, you know, gross G&A, selling and promotion, some sense of where those will fall?

When we open a new campus in a new area, we tend to have a big number at leasing () and promotion because there's a heavy amount of marketing. The I and "E" line increases with the cost of the new leases and a few professors. It's not -- you're not that fully staffed when you first start up. And then there's, you know, a fair amount of G&A because the campus management runs through the G&A. We can go back and check how -- probably the best thing to do, mark, is to look at what the increase was, you know, when we started the three campus rollout, probably last year with regard to North Carolina. That's the kind of thing we're doing now, brand new market, new campuses in a new market. But I would say most leasing and promotion and G&A and then some I and E on the basis of the least cost.

Ok. And then could you comment a little bit on the competitive environment for you in Philadelphia, assuming more competitors because it's a larger market?

I think it will be a very competitive market. Like Washington, D.C., there are a lot of university, both public and private, in the Philadelphia area, but we also think it's a very attractive market, and we've always done real well against all the competition, so we're looking forward to it.

Ok. And then lastly, could you talk at all about the corporate tuition reimbursement environment? You know, there's been be anecdotal stories of ramp-downs, not with Strayer with but just more generally in the corporate world. Could you talk about what you're seeing?

Yeah, we really haven't seen much of a ramp-down. As a matter of fact, I'm kind of excited about some opportunities that we have in Tennessee. I spent a week out there two weeks ago meeting with various companies and the concept of investing in their personnel with tuition reimbursement or corporate alliances seem fairly strong. So I don't really have any color for you on that, Mark, you know, that would suggest there's a downturn. I have a relatively limited prism that I look through, but we really haven't seen much.

Ok. Thanks a lot.

Thank you, Mark.

We'll go next to George Dyer.

Good morning, Bob.

Good morning.

You indicated before that the pace of the new campus opening is limited by the number of the qualified people you can find. Now, given that the approval from the Philadelphia is one year ahead of your schedule, and I guess you probably did not start to find -- to look for qualified people ahead of that, so I'm just wondering, what is your game plan to find those people and what is the likelihood that you can find them? Could you elaborate your process a little bit for us, please?

Sure. The likelihood is extremely high. Otherwise I wouldn't be doing it. But the reason that it's high is that, you know, our internal -- two things. One is, the availability of individuals from the outside that we feel, you know, that we can integrate into our organization and will be a real support to what we're trying to [inaudible] is a little bit higher than I had thought maybe a year ago, and our success in staffing out the Tennessee campuses, I think gave me more confidence on that. The other and more significant issue is, is that our internal -- leadership development programs are starting to solidify in a way that we are taking more junior people and giving them the tools to be managers at a more rapid rate. So that strengthening of the position coincided with the early approvals from Philadelphia. Both had to be in place for me to decide to go forward.

Ok. Now out of the five campuses you are going to open this year, what percentage of the campuses will be filled with internal people and what percentage will be from outside? Could you give us some sense there?

Well, I would say it's probably going to be a little over half-inch and a little under a half external.

Ok. Thank you very much.

Mm-hmm.

And we'll go next to Howard Block from Bank of America Securities for a follow-up question.

Hey, guys. Just in terms of the applications for the master's degree, I was wondering if you could give us a little color as to that process. Is there a certain, like, limit to the number of approvals you can request from the accrediting agency, so should we read something into the fact that you have a heavy dose of masters in the approval pipeline versus bachelors programs, and maybe how should we think about the approval pipeline prospectively?

Well, I don't know of any statutory or regulatory limit on how many you can ask for. I mean, I think there's a practical limit that you don't want to be planning a bridge too far. You want to have enough heft behind what you're doing that your creditors know that you're serious about it. The reason we're going with graduate programs is that's what our students have asked for. Our game plan is that they're successful, we would downward integrate into bachelor and essentially associate programs in those areas, but that's where the demand has been so that's where we've done our curriculum development.

The demand in terms of content or the level of the degree?

The demand for the content was at that level of the degree.

Ok. Thanks.

You bet.

And once again, as a reminder, that is star 1 to ask a question and we'll go next to Richard Close for a follow-up.

Just once again on the box size, what was the traditional size versus what Tennessee was on a square footage basis?

The traditional was, you know, 25 to 30,000 square feet, and, you know, we've reduced that significantly. We're down to roughly half that.

Ok. And then in the new campuses, you had mentioned something about moving the Arlington campus and you're going to have more people to, you know, academic advisors, I guess, to service the online. In the new campuses, are you allocating, you know, similar space for online academic advisors in those areas?

Yes.

Ok. Thank you.

You bet.

And gentlemen, there are no further questions at this time.

Ok. Thanks very much. Look forward to talking to you all through the quarter and again on our next quarterly call. Thank you.

This does conclude the conference call. You may disconnect at this time