Strategic Education Inc (STRA) 2003 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, ladies and gentlemen. And thank you for standing by. Welcome to Strayer Education, Incorporated's first-quarter 2003 earnings conference call. At this time, all lines are in a listen-only mode. Later we will announce opportunity for questions and instructions will be given at that time.

If you should need any assistance during this call, please press star zero and someone will help you. At this time, I would like to turn the conference call over to Sonya Udler (ph), Vice- President of Corporate Communications for Strayer Education. Please go ahead.

Thank you, operator. Good morning. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education, and Mark Brown, Senior Vice President and Chief Financial Officer.

For those of you that wish to listen to the conference via the internet, please go to www.voluntaryeducation.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 p.m. Eastern time through Tuesday May 13th. The number for the replay is 888-203-1112, passcode 208036.

Following Strayer's remarks, we will open the call for questions and answers. Please note that today's press release contains statements that are forward-looking and are made pursuant to the safe harbor operations of the Private Securities Litigation Reform Act of 1995.

These statements are based on the company's current expectations, and are subject to a number of uncertainties and risks that the company has identified in the press release and that could cause the company's actual results to differ materially.

Further information about these and other relevant uncertainties may be found in the company's annual report on Form 10-K, and its other filings with the Securities and Exchange Commission.

And now I'd like to turn the call over to Rob. Rob, please go ahead.

Thank you, Sonya. Good morning, ladies and gentlemen. I'd like to begin this morning, as we normally do, 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 comment on the detailed financial results for the quarter. After which, I'd like to comment on our enrollment results for the spring term, provide a brief update on our growth strategies and then finally end up with a brief discussion on the outlook for Q2'

Strayer Education, (inaudible) education service company primary asset is Strayer University. Strayer University is 16,000, 23 campus post-secondary education institution where we over associate's, bachelor's and master's degrees as well as certificate and diploma programs in business add, accounting, and information technology.

Our students are working adults who are returning to school to further their careers. Our revenue comes from tuition at the same payments and associated fees. Approximately 45 to 50% of our revenue comes from federally-insured title IV loans to our students.

Our expenses include the cost of our professors, our admissions and administrative staff, marketing, facilities and supplies costs.

We currently operate in Maryland, the District of Columbia, Virginia, North Carolina, and Tennessee, with campuses, as well as throughout the world over the internet through Strayer University on-line.

We serve students in all 50 states and in over 40 foreign countries through Strayer University on-line. Strayer University is accredited by the Middle States Association of Colleges and Universities. With that, Mark, you want to run us through the financial results?

Sure. Revenues for the three months ended March 31, 2003, increased 24% to 36.7 million, compared to 29.7 million for the same period in 2002, due to increased enrollment and a 5% tuition increase which commenced in January 2003.

Operating income rose 19% to 14.1 million from 11.8 million for the same period in 2002. Operating income margin was 38.4%, compared to 39.8% for the same period in 2002. The decrease in operating margin was primarily dual to the opening of two new campuses for the spring term of this year, compared to the prior year in which all three new campuses were open for the summer term. Earnings rose 19% to 8.9 million compared to 7.4 million for the same period in 2002. Earnings per diluted share rose 17% , to 61 cents, compared to 52 cents for the same period in 2002, as diluted weighted average shares outstanding increased to 14,639,000 from 14,381,000 for the same period in 2002.

At March 31, 2003, we had cash, cash equivalents, and marketable securities of 78.5 million, and no debt. In the first quarter, as part of our cash management activities, the company invested an additional 6 million in a short-term investment-grade corporate bond fund.

As of March 31, 2003, we had 24.2 million invested in this fund. We generated 13.4 million from operating activities in the first quarter of 2003. Capital expenditures were .7 million for the same period.

For the first quarter 2003, bad debt expense as a percentage of revenue was 1.6% compared to 1.5 for the same period in 2002. Days sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 7 days at the end of the first quarter 2003 compared to 6 days for the same period in 2002.

Rob?

Thank you, Mark. Just a couple of comments on the financials. The revenue growth at just under 24% was, I would say, precisely on our model. We'd announced 18% enrollment growth. We had a 5% price increase, so that tracked in just about where we thought it would.

The increase in operating income and net income at 19%, certainly showed the effect of the margin compression from opening the two campuses in Memphis and Nashville in the quarter when we didn't have any campus openings last -- in this quarter last year. But they also showed the effect, both the operating income and the net income, of the fact that our three New Mexico campuses reached profitability in the first quarter and so we were actually ahead of where we thought we'd be on those two indices mainly because, as I said, that ramp to profitability was faster than we expected, even at the beginning of the quarter.

Turning to the spring term enrollment results, the total enrollment increased 17% on a year-over-year basis. New student starts were 16%. Continuing student enrollments increased 18%. We're starting to see a -- certainly the effect of our new campus openings, where our -- the new student starts tend to be obviously higher than the continuing students.

The on-line enrollment was up about 70% over the previous year. In this press release, we again went through in some detail the very synergistic effect that we have between our on-line and our physical campuses, as well as the -- the rate of growth of our mature markets which, again, were higher than our model at about -- at 5% versus a model of essential stability in those markets.

We-- we continued to see high demand for the on-line courses from our campus-based population this quarter, and we are continuing, as we said last quarter, to invest in the on-line program to make sure that they we can keep up with that. I should also add, again, we're not trying to move that mix in any direction one way or the other. We want to make sure that the students are able to take the courses in the format that they find most convenient and most attractive.

On the student course preferences, a slight continuing -- continuing a slight uptick with regard to business administration and accounting. That's up to about 56% of our declared majors versus 44% for computer information science. That's a move of about 1 percentage point in both directions versus the last quarter.

Turning to an update on the growth strategy, many of you will remember it's based on five objectives.

The first is to maintain enrollment in the company's mature markets.

The second is to accelerate the rate of growth of new campuses, particularly into new states. Third, invest in and build on our on-line offerings. Fourth, increase our corporate and institutional alliances at least consistent with revenue growth and the final objective is to look selectively at potential acquisitions and/or capital redeployment to our shareholders.

On the first objective, we again showed 5% growth of the mature campuses. This is, I think, the second or third quarter that we've been at sort of 5 to 7% growth in the mature campuses.

With regard to the new campus openings, both the three 2001 campuses as well as the three 2002 campuses showed very healthy growth, which was very helpful for our total enrollment growth for the quarter.

On March 30th, we successfully opened the two new campuses in the state of Tennessee for classes, one in Memphis and one in Nashville, and we are now offering a full load of classes at both of those campuses. The second -- or our second Raleigh-Durham campus opened for our staff last week.

We're currently recruiting students for the summer term. The first classes will commence on June 30th. And then finally, as we mentioned in the press release, we're on track to open our two Philadelphia campuses for the fall term. In the on-line business, we are basically pleased with the continued growth.

It's certainly well ahead of our 50% target. On the corporate alliances, we continue to source approximately 20% of our revenue directly from corporations or institutions who pay us on behalf of their employees, and we're working that area very hard, particularly in the new markets that we operate in.

And on the capital redeployment front, we have nothing really significant to update at this time.

Finally, on the business outlook, factoring in the strong enrollment growth for the spring term, offset partly by the margin compression associated with the brand-new campuses in Memphis and Nashville and then we'll have a third new campus in Raleigh, so when you offset all of that we estimate that second-quarter EPS will be in the 57 to 59-cent range.

And in addition, based on the -- basically the results of the first quarter, and what we're seeing as the accelerated ramp to profitability in the North Carolina campuses, we feel pretty confident that we'll be at the -- at the upper end of that $2 to $2.04 EPS range that we announced last quarter, and that, of course, is without counting any one-time gains -- potential one-time gain associated with the possible sale of the D.C. campus building.

And with that, Jamie, I'd be pleased to answer any questions.

+++q-and-a.

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, you may do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off, to allow your signal to reach our equipment. If at any at any time you find your question has been answered, you may remove yourself by pressing the pound key. Again, it's star 1 to ask a question, pound to remove yourself.

We'll take our first question from Jerry Herman with Legg Mason Wood Walker

Thanks. Good morning, everybody. Good quarter, guys. A question with regard to the G&A line. That -- that one was -- compared very favorably to our expectation. Is there any more color you guys could share on that line item, being down 200 basis points, almost, year over year?

Well, I think that that's the one area where we expect to get sort of continued leverage. You know, a lot of that line is the cost that we put in place really in 2001, bringing in a new management team and some new systems, and we don't expect that to ramp at the same rate as revenue going forward, except with -- you know, for the exception of we do have some G&A costs in each of our campuses, so as we open new campuses, with we get a little bit of a uptick but that was pretty much in line with how we thought, you know, we would see those -- that expense line track relevant to revenue.

So those -- that trend should continue into subsequent quarters, Rob?

Robert Silberman Yeah. I think that, you know, when you look at our quarters through the rest of the year, that scenario where we potentially see some improvement and then on the other side we would expect S and P to continue to rise as we get into these new markets.

Great. Thanks. And with regard to the new campuses that were profitable earlier than expected, did they also roughly ramp in terms of student count versus your model? In other words, I think you guys are profitable at 375 students. Was the population in those schools that high that quick?

Well, we don't release the individual student populations, and the model's actually about 300 students for profitability, but with there wasn't anything special going on those campuses, so, you know, profitability generally in our business tracks the -- you know, the student count, as long as you're holding your costs under control.

Great. And just one more and then I'll turn it over. With regard to on-line, in your -- you were kind enough in your release to say that the number of course offerings, I believe, was going to be 380-something in the spring term. What will the total company class sections be? Class sections is the terminology you used.

Well, we're up to about 25 to 30 or so percent of our class -- classes are on-line. I don't have that number in front of me, Jerry. But, you know, the on-line class sections are growing relative to the -- to the overall class sections as the on-line population grows.

Okay. But you still have room under the 50%? I mean, I know that's something that you're trying to --

Well, there's a -- two answers. One is, yes, we do have room if it was applicable. It's not applicable to us, till we have an infinite amount of room. The reason it's not applicable is that under the regulation, a course which is offered both on-line and in the campus cancels itself out. So as long as you're offering classes in campuses that you don't offer on-line, you're never close to that -- to that problem.

That's great. Thanks. I'll circle back.

Right.

We'll take our next question from Mark (inaudible) with U.S. Bankcorp Piper Jaffray.

Hey, guys. Nice job on the quarter. First question -- actually a follow-up on Jerry's question regarding the new campuses and ramp to profitability quicker than planned.

I'm wondering, with regards to Memphis and Tennessee, if in your guidance you're assuming the typical 5 to 6 quarters to reach profitability, or if, in fact, your guidance reflects a more accelerated ramp, as with the -- the three North Carolina campuses.

No, Mark, it reflects our existing model. I mean, we've had a nice start there, but, you know, nothing that causes me to look forward and say that we ought to adjust our model at this point.

Okay. Great. And then on the acquisition front, we've seen a lot of activity lately, particularly in the health education rein. Multiples seems to have crept up some. I'm wondering, given the situation on the acquisition front, are you more likely to do acquisitions, less likely, or how should we look at your acquisition strategy going forward?

Well, I think that the multiples are not really the primary driver for us, in terms of the likelihood to do acquisitions. You know, I think an EBITDA multiple is probably not the sole or only way I would look at an acquisition. For us, the likelihood of acquisitions has been the ability to achieve a -- you know, a return on our capital, and a diversion of our management focus relative to the opportunities that we have internally and organically.

Everything that we've seen to date has not been more compelling than the opportunity -- opportunities that we do have, internally, but that's not to say that there aren't things out there that could potentially meet that threshold and that hurdle.

You know, I would say that we have not done anything to date, over the last two years, and the atmosphere or the availability of properties doesn't look any better to me now than it has over the last couple of years, but we are always, you know, reviewing opportunities and if we find one where we can find a very high-quality program that matches our customer base and gives us access to good quality management, you know, we certainly have capital available if that makes sense.

Okay. Great. And I want to follow up on one other point. On the model, the gross margins came in a little bit below our estimate, and compared to year over year it looks like down 250 basis points. Could you comment on what actually drove that?

I think it's 150 basis points. Or 140, right?

Yeah. He's saying versus his model.

Right.

Okay. Over the previous year.

Right.

Yeah. Well, the basic impact on our operating margins is the rate at which we open new campuses. We opened two campuses in Q1 of this year, and last year we didn't open any new campuses, and so that's --

Right.

-- about a hundred percent of the impact.

Yeah. And I was speaking in terms of gross margin.

Oh.

Yeah.

Well, it's the same answer. I mean, the impact on gross margin is the rate at which you open campuses.

Sure. Okay. Just checking. And last question, we've talked about this before, I think, but just to review, for fiscal '04, would you you've talked in the past of, you know, five campuses in terms of new openings would likely be the target. Any change to that strategy?

No. What I had -- again, to be clear on that, our original model was three. We have increased that to five for this year. In general, I'd like to open as many of these as I can, consistent with maintaining the quality and having the available management talent, because there's such a great investment of our shareholders' capital. And so we're going to watch the five that we do this year very closely. If we feel comfortable with our execution on the five, then we would like to do five next year, but we'll make a final decision on that in the fourth quarter of this year, and then make that part of our guidance for '04 at that time.

So would I assume, then, it's unlikely that you'd do more than five?

Yes, it is unlikely that we would do more than five.

Okay. Thanks. I'll turn it over.

We'll take our next question from Fred McCrae with Thomas Weisel Partners.

Good morning, gentlemen.

Good morning, Fred.

Quick question in terms of North Carolina, and then Tennessee. Clearly, North Carolina has shown a nice opening there. Maybe you could talk a little bit about the impact of your corporate alliances in that market, and then follow up with what you've accomplished so far in Tennessee in terms of that line of business.

It certainly helps -- you know, the corporate alliances in a new market, we find, are a good way to immerse ourselves in the community, and they're also a good source of students. I think our corporate alliances in North Carolina, as a percentage of revenue and students, has pretty much tracked what we have, you know, nationwide. It's about 20, 25%. And, you know, we're working that very hard in Tennessee as well. We-- you know, we find that it's a very productive way to attract students, and so we've got a team that looks at that, as well as the campus management and the regional management spend a lot of time on that as well.

Any corporate names you'd care to mention in either of those markets?

There was none in this last quarter that were new. You know, there's been a number that we've -- I think -- announced previously. I don't have it in front of me, Fred, but they we can get you, you know, the previous material.

Great. Thanks so much.

Yeah.

We'll go next to Greg Cappelli with Credit Suisse First Boston.

Hi, guys. It's Greg and Eric.

Good morning, Greg.

Good morning. You know, Rob, I'm wondering if you can comment. I've -- we've always been impressed by the way you've thought about the -- sort of the return characteristics of opening up a school and at the rate at which you go, versus perhaps even acquiring.

Now that you've been through, you know, a couple of states of opening, is there anything in the way you put together -- you know, the way you've put together your thought process and the ultimate IRR, I think you've mentioned in the past, you know, 60, 70, 80% potential, that, you know, now that you've -- you've gone through some of this and it's still early, but is there anything that would alter your thinking there one way or another, in terms of the -- you know, the returns you can generate?

Well, they've certainly been higher over the last couple of years, but in the first year, one of the new campuses was in an existing market. That was in Baltimore. So I -- I kind of discounted that. The other two campuses were in a brand-new market, which was the Norfolk area, and that gave me a lot of confidence in terms of, you know, breaking out into North Carolina.

The success in North Carolina to date certainly, you know, strengthens my view that this is a good use of shareholders' capital, but as I said, I think, last quarter, we've got two campuses planned for this year that I expect will be closer to the mean, or even potentially below the (inaudible), in Philadelphia, in that it's a much higher cost area and in those higher cost areas, you know, we really hope over time to achieve ultimately even higher returns because you have the opportunity to put more campuses into one metropolitan area, but the first couple campuses will probably have a slower ramp, given the cost of media --

Right.

-- and then in the case of Philadelphia, just the general cost of, you know, personnel and leases and things of that nature. But in general, I'd say that compared to two-and-a-half years ago, that I am more confident. I think we've de-risked some of the concerns I had, in terms of opening new campuses, and so, you know, we're eager to do as many of them as we can.

I understand. Could the cost per lead in an area like Philadelphia be as much as twice that in an area like Tennessee?

Well, the media is certainly twice as expensive, so I could -- yeah, early on, easily.

Okay. Then just on the enrollment front, you know, an acceleration actually in new student enrollment growth from 14 to 16% this quarter, is that a trend you would think would continue, with the -- you know, with the new schools continuing to get opened and ramped up, or do you kind of expect it to be in that sort of 15 percentage range, one percentage, you know, either way?

You know, I -- our overall enrollment growth target for the year was in the sort of up -- you know, mid to upper teens, and we have benefited over the last couple of years by increased retention, you know, some important programs we've put in place in terms of quality satisfaction, to get that retention up. But over the long run, I think that the sustainable enrollment growth rate of the -- of the university is going to be based on the new student growth rate.

We're definitely getting some benefit now with regard to the number of new campuses that we have open, and our new campuses as a percentage of our existing campuses will continue to rise over the next couple of years, and so, you know, we would like to see that new student start rate, you know, be in the 15-plus, and we'll continue to work at that.

Okay. Got it. Just a couple more quick ones.

Sure.

You're -- you know, I took a look at the educational loan division in the last, I think it was your K you had some form about that. I'm just curious. I know it's small. What are your plans for that? What do you intend to do with that division, if anything, going forward or do you intend to grow it.

Well, we actually intend, frankly, to look seriously at divesting it. It's not in our core business. We think there are people out there that can do a more efficient job of it than we are. We're being very, very conservative on our accounting for it, so we're not really -- it's not helping our shareholders that much at this point, and so we're actively involved in discussions with entities that we think potentially could buy it and then provide the service at a better rate and, you know, more product offerings for our students.

Okay. Great. And just one final one. If you could, I'd like to get your perspective on just what -- you know, what you're seeing in the competitive sort of environment as it relates to both traditional schools and then, you know, your peer group, the other for-profits, in the states that you guys are in now. And maybe even on-line, you know, in terms of -- in terms of what you're seeing there.

Sure. The -- you know, the traditionals, I think, are -- at least in the areas where we operate, are aggressively, I think, trying to be competitive in the working adult market. They're somewhat hampered, I think, at the same time by the fact that their fiscal situation is being severely constrained because of the fiscal situations of the communities they operate in. So I would say on a net, that's probably a slight benefit for us.

With regard to the other colleagues in the sector, not really much of a change there. I mean, we continue to appreciate their efforts in certain areas, in terms of generating increased interest in the overall level of education, and to date, you know, we feel pretty good about how we've fared in those markets.

Great. Well, keep up the great work, and look forward to talking to you soon.

Thanks, Greg.

We'll go next to Howard Block with Banc of America Securities.

Good morning, everyone. This is Derrick Hawn (ph) on behalf of Howard. Nice job on the quarter. A couple questions. The growth in enrollment, if we exclude the on-line, that's decelerated for six, seven quarters. At the mature campuses, is there the capacity to grow enrollment without leasing new facilities?

It -- it depends on which of the campuses. I think we have 13 campuses that we count as mature.

Uh-huh.

Some -- a couple of them just became mature in the last year or so. There is some space there. In some of our more mature campuses, we've been frankly benefited by the shift to on-line because we were fairly overcrowded and were actually get ourselves back into a -- I think more of a better equilibrium with regard to the academic standards.

But the ability to lease more space and the cost of leasing more space is not in any way a prohibitive factor. I mean, if we have students who want to take classroom-based classes, you know, we can pretty easily expand the classroom asset base to serve that.

Okay. Great. And the -- on the on-line enrollment, that continues to grow at impressive rates, although it looks like it's decelerated about 10 percentage points per quarter over the last couple of quarters. How soon might that kind of come down to the kind of 40% range and where is the infrastructure stand in terms of maintaining such high growth rates? ^.

Well, let me take it in reverse order. Our infrastructure is in good shape, you know, for the next several years to maintain growth rates in excess of what we're doing now. In terms of how soon it would decelerate, I hope never. You know, I don't -- I really don't know how to answer that. I mean, we don't project out beyond to tell people that our model is we think we can grow the out-of-area on-line in excess of 50% a year. The -- when you look at our total on-line enrollment numbers, we were definitely benefited over the last 18 months or so by a mix shift from our classroom-based students to on-line.

That is certainly, you know, starting to level itself out, and what we're seeing at a lot of our campuses is that, particularly some of our newer campuses, that it doesn't get above about 50/50, and so I would say that, you know, the real key indices to look at is our out-of-area on-line growth, and the -- you know, we report the total on-line, so you see the size of the population, but that definitely should stabilize as the -- the mix shift from classroom-based to on-line kind of works itself through.

We've only really made it available to the campus-based students and marketed to them in the last 18 months to two years, and so you're -- you're seeing the effect much that compounding itself.

Okay. And just a couple quick ones. The -- for a new student enrolling at Strayer, are you seeing -- when you compare, say, a new campus in Tennessee versus a campus in Baltimore, are you seeing much of a difference in the -- in the choice between the on-line or the campus? Taking the courses on-line -- purely on-line or at the campus for new students?

Well, in the new campuses, not all the classes are available in the classroom, and so for certain types of classes for which there may not be the -- you know, the demand for a full classroom-based class, those tend to -- to go to, you know, the on-line class.

Uh-huh.

As the campus matures and we get more and more of the full catalog available in the classroom at that site, then it starts to balance itself out. We haven't really seen, I would say, a big geographic mix difference as between how that -- you know, the relative attractiveness of that in Memphis versus Charlotte versus Baltimore, if that was your question.

Okay. Great. And just one last one. Real quick, the -- I made mention in the past of the matriculation (ph) agreements in North Carolina with some community colleges, and curious how that might have contributed to the faster than expected break-even in the -- in Carolina and do you have any -- any such agreements works or any sort of agreements like that in Tennessee?

Again, reverse order. We do in the works in Tennessee. ^ and I think it was helpful. I mean, it's like everything else, it's part of the offerings that we bring to students in that marketplace.

Great. Well, thank you very much.

You bet.

We'll take our next question from Gary Bisbee with Lehman Brothers.

Hi, guys. My congratulations as well, on another strong quarter.

Thanks, Gary.

A couple of questions for you. You mentioned a second ago that retention has improved over the last couple of years due to -- due to some strategies you'd put in place. I guess, you know, I know you don't -- you don't release that rate, but could you give us a sense of order of magnitude?

And I'll tell you the reason I'm asking. When I look at the enrollment numbers that you've put out there, for eight quarters in a row, we've seen that the growth rate in new students has been slower than the growth rate in continuing students and slower than the total overall student growth rate, and, you know, it -- retention, obviously, explains that. But I'm wondering, does that sort of start to run out, or do we run into any issues where graduations, you know, start to increase and your growth rate would slow if you weren't able to continue to ratchet up the new student growth rate?

Well, as I said, I mean the long-term growth rate of the university is not going to be higher than the new student growth rate. You know, we've definitely benefited from the impact of some of the retention programs we put in place. The other point I -- I think I would make is that our new master's programs, we count a student who graduates from the bachelor's program and then re-ups, if you will, or comes back in for a master's program, as a continuing student as opposed to a new student.

Okay.

And so the benefit of those new programs are counted as continuing students.

And can you give me any ballpark sense as to if you're having a large number of students who are actually doing that?

Well, we have a -- you know, I don't have the number in front of me, Gary, but I mean it's -- it is sizable. I mean we've --

Yeah.

-- we've, you know, put in a new MBA program in place, we've got new master's programs, and, you know, I -- I would guess it's at least a percent or two.

Yeah. Okay. And then just one more on that vein. The -- so would -- if someone like took six months or a year off and then re-you said, would they, I assume, be a new start under that situation?

If they're -- if they had not enrolled ^ for an entire year, they are a new student.

Okay. Great. And just in terms of the retention rate, do you think there's more legs to these strategies you've been using, or, you know, are you getting to the point where it's -- it's going to get more challenging to continue to increase that?

No, I think actually the -- it's been fairly stable over the last year or so. We went from about 70% to 80% continuation rates in the first year we were here, and it's been about 80%, high 70s or 80% over the last year. So I mean I think that does -- you know, we have worked that through. It's been a very nice low-hanging fruit, if you will, in terms of the strategy and now we're starting to see the new student rate come up with the effect of executing on the new campus programs.

Yep. Okay. The out-of-market on-line students, as you pointed out earlier, the growth rate's actually accelerated. Is that just you building brand recognition or have you had any major either increases in marketing or changes in the way you're trying to market that over the last couple of quarters?

All of the above.

Okay.

You know, we are investing in it, we're watching it closely, you know, we're very focused on the marketing strategies, and, you know, I think all of that has contributed to the growth rate there.

Can you give us a sense from -- in the mature campuses as to what percent or directionally, at least, of students that started on the campus are moving on-line versus students in the market who just start with you, you know, for the first time and go on-line? I mean, is the migration a bigger piece than just additional interest in these -- in these mature markets?

I think the migration is most of it, actually. You know, I -- the -- most of our students in the mature markets start in a -- and take the first couple of classes in the classroom. I -- you know, I think the number who are recruited in the mature markets and go directly into on-line through the campus is relatively small.

Okay. And then just one last one. You said a second ago that the mix at some campuses probably wouldn't be any higher than 50/50 in terms of on-line versus the campus. Can you just give us a sense of the experience with the campuses you've opened over the last two years? What percent of them are taking, you know, one or part or all of their courses on-line right off the bat when you open those campuses, or is that something, you know, that you're experiencing more in -- in later quarters?

In the -- in the new campuses, there are more students who take a hundred percent of their classes on-line to start with, and that has to do with the clog availability. It gives us an ability to offer the entire catalog through that campus, where we otherwise would not be able to without prohibitive costs.

And would those students still have a -- like an academic adviser at the campus?

Yes.

They would. Okay.

They're recruited but -- there are faculty advisers at the campus. They're recomputed through that campus. You know, all their administrative support functions are doing at that campus.

Okay. Great. Thanks a lot.

Yeah.

Our next question will come from Corey Greendale (ph) with First Analysis.

Good morning, guys, and congratulations on the quarter.

Just a couple ones. Back North Carolina for a second, I know you talked about the matriculation agreements and corporate alliances. Is there anything else you could point to in particular that led to that ramping up so rapidly? And that -- and how much of that might be repeatable, as you move into other new markets elsewhere?

Well, again, our model is slower than that, and that's what we're continuing to forecast for ourselves as we look at new markets. We always thought North Carolina would be a very attractive market, and we also, I think, get a little bit better each time at figuring out ways to, you know, limit the cost exposure early on in the process before you end up -- you know, before you have the revenue that you need. So, you know, I think that a lot of those things made up the -- the positive benefit in North Carolina, and, you know, we'll try and take those lessons everywhere else but our model is based on a slower ramp rate.

Okay. And sort of generally , when you move into new markets, how much of what you do, particularly in terms of marketing and pursuing corporate alliances, how much is transferable from market to market and how much is each new market sort of a different case?

Well, I think each market is a different case because it has different indemnify graphics that we demographics that, you know, we have to speak to. But, you know, the prophecies, I think, are transferable and I think we're getting better at that.

Okay. And then finally, is there any -- could you just give a little more detail, maybe, on some of the programs? You mentioned that you put in place to help increase the retention.

Oh, sure. I mean, we -- none of it was particularly sophisticated. I mean we basically marketed to our existing students from the -- the marketing standpoint, and then we also, in our -- some of our mature campuses, increased some, you know, facilities -- improved some facilities, you know. A lot of things on the academic quality side, and just, you know, tried to focus the organization on the importance of getting students through to graduate.

Okay. Thanks very much.

Yeah.

We'll take our next question from Richard Close with SunTrust Robinson Humphrey.

Excuse me. Congratulations, guys, on a solid quarter.

Rob, one question was with respect to course load. I believe in the 10-K, it ticked down, you know, from 2 to 1.9, not significant, but where do you see that going, or should it pretty much stabilize at 1.9?

I think it's not going to be higher than 2, in the long run, for the simple reason that for a working did you want for spend 9 hours in class in addition to homework time is just I think beyond what most people are doing. We do have some students who are very motivated and take four or five classes a term, even while they hold down a full-time job but I think that's the exception, not the norm.

So if the -- sort of effective upper limit is two, ^, the -- you know, I think 1.9 to 2 is about what -- it's certainly what we use internally, Richard. We don't model revenue increases pursuant beyond the price increase, and then, you know, just sort of watch how it goes.

Okay. Thank you. And then a second question was, you know, we saw you at the grand opening last week here in Nashville, and you mentioned previously on other conference calls healthcare management program. Obviously, you know, developing that for the -- you know, health -- large healthcare market here in Nashville, do you see the opportunity in other areas that you enter, other geographic markets, to develop curriculum or certain programs to, you know, specific industries in those areas?

Well, for the most part, our curriculum development is very customer-based. It's based on what we hear from our students or from employers in the area as to what they would like to see. Our -- we have a number of campuses that are either in the nation's capital or in state capitals, and so on the public policy management side, you know, we have had a lot of requests from governmental agencies for those types of programs, so we're certainly, you know, pushing that one.

Healthcare management -- or healthcare administration, I think, is, you know, likely to be popular -- not, not just in Nashville where you have so many of those companies based but anywhere you have a lot of need for healthcare, you know, hospitals and doctors' offices and things of that nature, and, you know, we look at those kinds of issues in a market, but most of our programs are fairly general and are fairly applicable just about everywhere we go. We actually don't have too much targeted marketing for specific programs in specific areas. If it's not general enough to be, you know, applicable or desirable in most cases, we're probably not doing it.

Okay. And then just one final clarification, if you could. I guess on Gary's question. The decline in the classroom population at the mature campuses, you said that most of that, you know, was a shift to on-line. Is that correct?

Well, I mean it has to be mathematically because, you know, the campus population is growing in those areas, so ...

Okay. All right. Thank you.

Yep.

We'll go next to Jerry Odening (ph) with Jeffries & Company.

Good morning. Wanted to see, as you go into new areas, let's say you go into further contiguous states of Georgia or Florida, that you anticipate a change in the credit load that some of the students would take versus your traditional students that you knew in the Washington and Maryland area.

Well, we don't comment on the -- the states that we're going into until we're essentially approved there, Jerry, but in general, everywhere that we've been, the credit load tends to be relatively constant, and I think it's more along the lines of the demographic of our student, as I said, is trying to get through as quickly as possible but really can't hold much more than two classes per term, and so I would expect that to be similar just about everywhere we go.

In every state you go into.

Yeah.

Okay. Good. Thanks.

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

Hi. Good morning. Just a couple of quick questions. First, as far as this -- not to beat this mature campus issue to death, but for a number of quarters now, you've seen a decline and you've mentioned that, you know, it has been favorable in terms of freeing up capacity at some schools that were full.

At what point do you think you reach stabilization where maybe the campuses that were full maybe have a little more room and we could see something more towards flat growth at the on-site campuses?

You know, we're just not managing it that way, Brad, because what will happen is we're just following the trend. If the trend continues in this direction, we'll get rid of some of the physical capacity. We won't pay for excess capacity. Our -- we're going to make our physical plant match what our students and our customers want to use. And not vice versa.

So we are -- we've benefited in the last couple of years from the fact that we've been able to increase our academic quality in some of and some of the level for our students by reducing some class sizes as this shift took place, but, you know, we just don't look at it that way, and if it's stable here, that's great. If it stabilized at a lower number, we'll just (inaudible) -- you know, the number of square feet that we hold to match that, and if it starts to increase, we'll lease more space ^

Brad Safalow Okay. That's certainly, as far as shrinking physical capacity, that's something I wasn't quite aware as a strategy maybe somewhere down the line.

And then as far as North Carolina goes, you know, you've had great success there out of the gates. I think you have approval from the state for up to 9 campuses. Is that something you feel is the maximum number of campuses there? How have, I guess, your opinions changed on the size of that market, changed over let's say the last year, given your success?

Well, I think nine is probably an upper limit, given the population of that state. We're opening a fourth campus next quarter. I would expect that we would probably open a fifth campus, you know, in the next year or so, and that would cover most of the metropolitan areas, and then, you know, it -- it took 20 years to grow out, you know, the eight or nine campuses in the D.C. area, so, you know, as a market, I think we're well ahead of that in terms of pace in North Carolina.

As to the upper limit, you know, we'll just keep track of that.

Okay. And my last question just has to do with the war in Iraq, as far as its impact on either your intake or having some students drop or stop out. Was it relatively insignificant? Maybe a half a percent or percent of enrollments or can you just comment on the impact, if at all?

Well, I'm sure it was very significant to the people that it happened to.

Sure.

And, you know, in terms of our total population, I mean there was clearly some people that -- some students that we had that either -- and I know of a couple dozen that had to leave, drop out in the last quarter, and I suspect there was, you know, some number that didn't sign up that otherwise might have because of either themselves being mobilized or a family member.

But, you know, we were able to weather through that from the standpoint of the enrollment growth of the university, and as I think I said last time, you know, we held those spaces open and, you know, wished them Godspeed on their way out and welcomed them back when they get back.

Absolutely. Thank you very much.

Thank you, Brad.

And again, ladies and gentlemen, that was star 1 if you would like to ask a question today.

We'll take our next question from Alex Paris with Barrington Research.

Hi, guys.

Hey, Alex.

Just a couple of quick ones. In the fourth-quarter press release, you offered revenue guidance for the full year. I didn't I didn't see anything to that point in this press release. Are you comfortable with the guidance that you had provided most recently?

Yes.

Okay. How about an estimate for capex for the full year?

Alex, we estimate it to be in the five to six percent of revenue range. Probably at the higher end, given the -- that we'd be opening two new campuses relative to the prior year. Two additional new campuses.

Five versus three.

Uh-huh. Very good. And there's been a lot of talk about pricing. You know, in higher education. You raised prices 5% this past January. What's the outlook on your ability to raise prices on a go-forward basis?

We feel very comfortable at the 5% number over the foreseeable future. The -- we don't want to do more than that because we want our students to know, on a multi-year basis, what their tuition is going to be, but we don't see any reason why it would be a problem to stick to that 5%.

Fair enough. And last question. You know, given the -- the tough economy and the level of layoffs within corporate America, any changes to corporate reimbursement programs that you've noticed significantly?

No. And we've -- it's been a really powerful area for us. The one, you know, trend that, you know, we've talked about in the past on the call, and that I think, you know, continues to be there is that the corporations are, you know, being more efficient in their education dollars in terms of asking for terms. Our DSOs did go up one -- one day this -- in this last period, and that's pretty much, you know, entirely related to the fact that we have a number of large employers that are asking for 30 days as opposed to, you know, putting all the money up front.

Great. Thanks. That helps a lot.

Thank you, Alex.

And ladies and gentlemen, as a final reminder, it's star 1 to ask a question. We'll take our next question, a follow-up question, from Gary Bisbee with Lehman Brothers.

Yeah. Hi, guys, just two quick ones. You know, it seems like students are taking more on-line courses right after off the bat with the recent campus openings. That Has that had any meaningful impact on profitability? And, you know, is that something that could lead you at some point in the future to shorten the break-even time, you know, expectation that you have?

I think it's had a benefit to profitability from the standpoint of the overall enrollment growth at those campuses because the on-line has allowed us to offer more classes at the campus. The costs for the on-line student is incrementally lower at this point, but over the very short term, we expect to continue to invest dollars which really show up in the form of expense as opposed to capital in that area, to make sure that we're maintaining the level of student service and academic quality in the on-line, and so I don't see it as a major driver, increasing profitability, beyond the fact that it allows us to ramp the student -- the total student population faster.

Okay. And then just on that point you just made, you know, how do -- are you -- do you still feel real comfortable with where you are in terms of infrastructure, in terms of the level of service that you're providing for on-line, with respect to accommodating, you know, what should be continued strong growth over the next 12 months?

I feel very comfortable with capital. We will add personnel and expense on a go-forward basis to match the operating parameters that we think are necessary.

Great. Thanks a lot.

Yeah.

Our next question is also a follow-up question from Howard Block with Banc of America Securities.

Hi, again. The master's mix, is that still around 20%? I know that it's doubled in the last couple years. Where -- I guess where is it now and where do you think that might go?

That's where -- about where it was for this quarter, and I'm not really sure. You know, it's -- it's grown slightly faster than our undergraduate mix, but we had new programs in that area. We are -- we're particularly grateful for the students that we get that come in at the undergraduate level and then stay for a -- for a master's program because, obviously, that's both a show of confidence in the program and economically is very helpful to us. But over the last couple of quarters, it's been with that same mix, that sort of 65% bachelor's, 20% master's, and about 10 to 15 associate's, and then a smattering of non-degree programs. So at least for our planning model in the short-term horizon, that's how we have it.

Okay. And then Tennessee, I know it's very early, but are you seeing any -- any similarities maybe in Tennessee to North Carolina in terms of lead flow?

Well, lead -- I think they're similar demographic markets.

Sure.

And lead flow in all of our new markets has been, you know, very healthy. But we've only been open there for a month, so I wouldn't extrapolate, you know, much on a go-forward basis until we have a little more under our belt there.

Yeah. Okay. Thank you very much.

Yep.

We'll go next to Jerry Herman, a follow-up question, with Legg Mason.

These should be real easy. Just some housekeeping. Do y'all have a campus roll into a mature campus count this quarter? Is that correct, Mark? Or Rob?

What's -- he's asking when -- white marsh I think.

White marsh was the campus that became mature this quarter compared to the same -- compared to the numbers for the prior year.

He's asking on a -- do we have any others.

Chesterfield.

Okay. That's what we got.

Yeah. South Richmond in the fall, Jerry.

Great. Thanks. Thanks very much. That's all I had.

Yeah.

And ladies and gentlemen, if there are no further questions at this time, I would like to turn the conference back over to your speakers for any additional or closing comments.

Well, thank you, Jamie. We appreciate everybody's participation this morning, and look forward to seeing and hearing from you in the coming weeks. Thanks very much.

Once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation. You may now disconnect at this time.