Strategic Education Inc (STRA) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Strayer Education Incorporated second quarter 2003 earnings conference call. This call is being recorded. (CALLER INSTRUCTIONS). At this time I would like to turn the conference over to Sonya G. Udler, Vice President of Corporate Communications for Strayer Education. Please go ahead, ma'am.

Thank you, operator. Good morning. With us today to discuss the results are Robert S. Silberman, Chairman and Chief Executive Officer for Strayer Education, and Mark C. 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.StrayerEducation.com where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 3 pm Eastern time through Tuesday, August 6. The number for the replay is 888-203-1112. Pass code 648024. 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 provisions of the Private Securities Litigation Reform Act. 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 would like to turn the call over to Rob. Rob, please go ahead.

Thank you, Sonya. Good morning ladies and gentlemen. I would 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 will then ask Mark to report on the detailed financial results for the second quarter, after which I will comment on the enrollment results for the summer term, provided an update on our growth strategies, and finally end up with a general discussion on the Company's outlook for Q3 and the balance of the year.

Strayer Education Inc. is a for profit education service company, whose primary asset is Strayer University, a 16,000 students, 25 campus post-secondary education institution, which offers Associate's, Bachelor's and Master's degrees, as well as certificate and diploma programs, in Business Administration, Accounting, and Information Technology. Strayer's students are working adults who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. Approximately 50 percent of our revenue comes from federally guaranteed Title IV loans to our students. Our expenses include the costs of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs.

We currently operate in the states of Pennsylvania, Maryland, the District of Columbia, Virginia, North Carolina and 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 Online. Strayer University is accredited by the Middle States Association of Colleges and Universities.

And with that, Mark, can you run us through the financials?

Sure, Rob. Revenues for the three months ended June 30th, 2003, increased 24 percent to 37 million compared to 29.8 million for the same period in 2002 due to increased enrollment and a 5 percent tuition increase, which commenced in January of 2003. Operating income was up 20 percent to 14 million from 11.7 million for the same period in 2002. Operating income margin was 38 percent compared to 39.3 percent for the same period in 2002. The decrease in operating margin was primarily due 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 opened for the summer term.

Net income rose 20 percent to 8.8 million compared to 7.4 million for the same period in 2002. Earnings per diluted share rose 18 percent to 60 cents compared to 51 cents for the same period in 2002, as diluted weighted average shares outstanding increased to 14,779,000 from 14,515,000 for the same period in 2002. Revenues for the six months ended June 30, 2003 increased 24 percent to 73.7 million compared to 59.5 million for the same period in 2002 due to increased enrollment and a 5 percent tuition increase effective for 2003.

Operating income rose 20 percent to 28.1 million from 23.5 million for the same period in 2002. Operating income margin was 38.2 percent compared to 39.5 percent for the same period in 2002. The decrease in operating income margin was primarily attributable to the earlier timing of two new campus openings compared to 2002. Net income rose 20 percent to 17.7 million compared to 14.8 million for the same period in 2002. Earnings per diluted share rose 17 percent to $1.20 compared to $1.03 for the same period in 2002, as diluted weighted average shares outstanding increased to 14,709,000 from 14,448,000 for the same period in 2002.

At June 30th, 2003, the Company had cash, cash equivalents and marketable securities of 83.8 million and no debt. In the second quarter, as part of its cash management activities, the Company invested an additional $2 million in a diversified no-load short-term investment-grade corporate bond fund. As of June 30th, 2003, the Company had 26.4 million invested in this fund.

The Company generated 19.6 million in cash from operating activities in the first six months of 2003. Capital expenditures were 2.4 million for the same period. In the second quarter of 2003 bad debt expense as a percentage of revenue was 1.9 percent compared to 1.3 percent for the same period in 2002. Day sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 7 days at the end of the second quarter of 2003 compared to 7 days for the same period in 2002. Rob?

Thanks, Mark. Just a couple of comments on the financials. The revenue growth at just under 24 percent was really precisely on our model. We had announced 18 percent enrollment growth last call, and the 5 percent price increase pretty much generates that revenue increase. The increase in operating income and net income showed the effect of accelerating the opening of the Memphis and national campuses by a quarter. It was actually little bit ahead of our model. We were expecting more margin compression and it was actually only about 130 basis.

The bad debt expense remained under 2 percent. That is consistent with our model. The distributable free cash flow for the first six months on a year-over-year basis is actually higher than our model. The increase in the distributable free cash flow was at a higher increase in net income. The reason for that mostly is timing of tax payments. We deferred some federal income tax payments to Q4 in 2003 that we made in Q2 of 2002. We actually expect that our distributable free cash flow growth will pretty much match our net income growth at the end of year, and will be roughly equal to our net income.

I emphasize that point because, frankly, that is the metric that Mark and I probably spend the most time managing or paying attention to. And just so anybody is clear, when I say distributable free cash flow, you can derive that from our press release. If you look on the cash flow statement, it is the after-tax cash from operations, minus the CapEx required to fund our growth plan, which means both the maintenance CapEx and the CapEx associated with opening the new campuses. If you subtract the CapEx from the cash flow from operations, that is the distributable free cash flow.

In Q2 of last year, it was actually Q1 of last year, that number is slightly higher because, remember, we bought three buildings for $12 million, which I do really consider CapEx. That is an investment decision that we made based on the specific instances of the leases that we had in those buildings.

With regard to the summer term enrollment, we had a pretty strong quarter. The total enrollment increased 25 percent. New student enrollment increased 31 percent, and continuing increased 24 percent. We have in the past had slightly higher growth of continuing students than new students, and that is, I think, a result of the fact that we were concentrating both our student satisfaction and making sure that we were marketing to those continuing students. We're now starting to see the effect of some of the new campuses kick in with the higher new student growth.

Online, up 68 percent, again, is ahead of our model. We are looking to grow that at 50 percent on a year-over-year basis. We again in the press release highlighted detailed information which shows the synergistic effect of the online classes for our mature campus, or actually all of our physical campus population. We continue to see high demand at our campuses for online courses. I should emphasize again we're not trying to market or push that in one direction or the other. We want our students to take classes in whatever format they find the most convenient. And we want to make sure we have enough inventories to support that.

With regard to student course preferences, in the summer term our Business Administration and Accounting majors grew to 58 percent of the total. And Computer Information Science majors was at 42 percent. So that continued that slight shift that we have seen over the last three or four quarters of a greater proportion of our students focusing on Business Admin and Accounting versus Computer Information Sciences.

Just a brief update on the growth strategy. I think many of you who follow the Company will remember that we have got basically five objectives as part of the strategy. The first is to maintain enrollment in the Company's mature markets. The second is to accelerate greater growth of new campuses, particularly in the new states. Third is to invest in and build up our online offerings. Fourth, to continue to grow the corporate institutional alliances. And our final objective is to look selectively at potential acquisitions and potential reallocation of capital, which builds up because of the strong distributable free cash flow.

I would like to comment on each of these one at a time. On the first objective, we had a pretty strong quarter at the mature campuses. It showed 9 percent growth there. That is significantly ahead of our model of keeping that flat. Part of that comes from the fact that we had two relatively junior or younger campuses in this year that have been switched over to the mature category. I think Gary asked the question on the last call of whether or not that would start to affect that mature campus growth. I think it certainly did. It is probably a percentage or 2 growth associated with the one of our Baltimore and one of our Richmond campuses that just shifted over.

With regard to the new campus openings, three 2001 campuses. The three North Carolina campuses in 2002 and the two Tennessee campuses in 2003 in the spring, all of those had very strong, very healthy growth for the summer term. We did also open a third campus in 2003 in the summer term in North Raleigh, North Carolina. They are currently offering classes at that location. And then finally as we mentioned in the press release, we're on track to open the two Philadelphia campuses for the fall term.

As I said in the online business, we were pleased that growth. That is ahead of our target. On the corporate alliances and the acquisitions, nothing significant -- or capital relocation, nothing significant to update at this time. We did issue a press release in between the earnings releases in the middle of last quarter on one corporate alliance with AT&T. That was really basically because they had asked us to do that as a means of marketing the program efficiently to their employees.

Finally, on the business outlook, due to the strong enrollment growth for the summer term, which will be partially offset by increased expenses associated with particularly the Philadelphia campus openings, but also the acceleration of national and Memphis into the spring, we estimate that the third quarter EPS will be in the 22 to 24 cent range. And then again, anticipating that strong performance and adding it to the performance in Q1 and Q2, we are increasing our estimate for the full year 2003 diluted EPS to a range of $2.04 to $2.08, before any potential onetime gains that we talked about in the past.

And with that, Abe, I would be pleased answer any questions.

(CALLER INSTRUCTIONS). Jerry R. Herman with Legg Mason.

Rob, could you comment on the participation of online students in Philadelphia, or in that Philadelphia market, as a potential feeder for the campus-based?

Sure, that is something that we have actually done in all of our new markets. We tend a year or so before the market focus on some significant online marketing in there. And we do have a number of online students from the Philadelphia area. And we have actually specifically reached out to them as means of generating referrals and some word-of-mouth about the campuses. So we hope that will be a real help to the campus openings.

And how about from an infrastructure perspective on online, are you comfortable where you are at? Will you need to invest in the online as it grows so rapidly?

Well, on the physical infrastructure side, I am comfortable. And, no, I don't anticipate we will have to invest. Remember, we made a pretty large investment two years ago in the summer of 2001 on the synchronous side on the broadcast infrastructure, and that is enough to suffice at least for the next year or so. On the asynchronous side, we have outsourced that, and so there is no physical infrastructure necessary to ramp that growth. What we will continue to do is invest in people, in personal in that unit. That, frankly, is all expense. But we're what we're finding is you can grow the online reasonably rapidly in a way which is almost immediately profitable. So that investment in personality expense associated with that tends to be almost immediately helpful to the bottom line as opposed opening the physical campuses where you do have that lag of a year or two before you're actually generating positive net income.

Last question, I know you're relatively indifferent in terms of where they go, on ground or online, but could you speak to things like retention rates and graduation rates on the online side? And also, just a clarification in terms of the pricing on online verses on ground?

Let me take it in reverse order. The pricing is exactly the same. And then in terms of sort of the major indices of performance that persistence rate, continuation rate, the graduation rate, it is important to understand that where we report students who were in campuses who happen to be taking online classes, they are campus-based students. They have campus-based faculty advisors, and all of their financial interaction with the University is through the campus. So we would not expect, nor do we see, any distinction whatsoever among those students.

Where the more important comparison is to what we call our out of area online, where it really is a different relationship between the University and the student in that there is no physical entity for them to interact with. And in those cases, they have actually been about the same, but it is something that we watch much more carefully, because if that was going to be difference, I would expect to see it because they don't have the physical interaction.

Eric Sledgister with Credit Suisse First Boston.

Bad debt remains low with just under 2 percent. It was up about 60 beeps year-over-year. I was wondering if you comment on that?

Sure, a couple of things. One is that we get some real advantage last year in just low hanging fruit. You know when we started we made a real focus and effort on collections and I think picked up some that was probably ones that were out there for the taking, so to speak. And that drove a very low number for last year. For this year our days sales outstanding has been essentially the same from last year, so the way in which we are building up the allowance for doubtful accounts based on the performance of receivables in the current quarter and the quarter before has been about the same. We did have a slight deterioration in the accounts that are over 180 days old, which are turned over to a collection agency. The bad debt expect expense that we take to top off that allowance for doubtful accounts is offset by collections we get from receivables that we have already written off.

In this last quarter they were slightly lower than they had been in previous quarters, which I think, frankly, is something that I have been expecting and watching for a little bit of the impact of a softer economy. But in general, our model has managed this to around 2 percent. And you know, so we were -- we're quite comfortable with where that is.

Just a quick question on the programs. I was wondering if you can comment on the shift in the program mix toward the business? And just give us an update on new programs participated in '03 and '04?

Sure. You know over the last year, really the last four quarters, we have seen a slight but steady trend of more of our students wanting to take Business Admin and Accounting than CIS. The first couple of years I was here that kind of bounced around back and forth. We're not really that focused on it from the standpoint of trying to drive it one way or the other. We want to make sure we have enough classes of both.

I think is partially the results of the fact that as we move farther and farther outside of the Washington D.C. area, you know we're getting into markets that aren't quite as strong in IT as Washington is. Washington is a very strong IT hiring market with the government. But it is hard for me to say as you get nationwide what that balances is going to be. But again, we're just watching it and trying to make sure we have enough inventory of both categories in order to support it.

In terms of new programs, we've got three new Masters which we announced earlier in the year, which are on track to be offered for the winter term of next year. That is the Master's of Education, the Master's of Public Policy Administration, and then the Master's of Healthcare Administration, which is really a business management graduate degree that happens to have a focus on the healthcare vertical.

Fred McCrea with Thomas Weisel Partners.

Maybe we could talk a little bit about the course load for students during the quarter?

It stayed about right on our model at just a little under two courses per students, which again I think just given the behavior and the circumstances of a working adult is about where I would expect to be. That is nine hours of class time and at least that much homework time in a week, which is an awful lot to have contributed by someone who's got a job and a spouse and kids and things of that nature. That much movement one way or the other on that.

Okay, and is there any variation between the out of area online and the traditional students in terms of the course load?

No, it is relatively constant actually.

And then switching gears for one second. Moving forward, have you guys -- I know we talked about this a couple of quarters ago -- the overall campus footprint, has there been -- is that still to be market by market what it demands, or has there been a C change in terms of your thoughts, in terms of the overall footprint of the new campus relative to the traditional ones?

Are you talking about the physical side?

Exactly, square feet.

Yes. Well, I don't know if I would call it a C change, but it certainly -- the campuses that we've opened in the last couple of years have been less square footage, because we have taken into account, particularly in a new market, the propensity of students to take some of their courses online. Mainly because we don't offer the full catalog in our brand-new campus physically at the classroom, and we do offer it online. So we're able to adjust our footprint to match that demand.

Within the footprint we have even adjusted it further to make sure that we've got more students support, library, counseling, and students support spaces in the classroom so as to make sure that we're meeting the needs of the students who is using the campus as a place to be recruited, and to talk to his professor, and take one or two classes, and then taking one or two others online.

Howard M. Block with Bank of America Securities.

The first question is, in terms of the out of area online growth it is actually is remaining very robust, not seeing any falloff at all, even while you're out of area is actually declining in terms of geography as you move into new markets. So I guess in terms of the level of performance, are you surprised by that? And again, even playing off of Jerry's question, if those Philadelphia students that were in effect out of area all of a sudden become in area, if that migration is significant? One would think that that level of growth would slow over time, but it is not. And to what do you attribute that?

Well, mainly just by the fact of geography there is so much more of the country that we're not in than where we are. And so whereas a market like Philadelphia will shift in the fall to being in area, you know there is so many other places that we're in our targeting for the out of area that we can kind of keep ahead of that bough way .

I think that the attractiveness of online education is proving itself to be rather strong. If you've got good program offerings and particularly if you are focused on serving students in a way that make life easier for them outside of the classroom. And we think it is a key part of our growth strategy, so we are actually quite pleased with that.

And with regards to the fact that the full program offering is not available on campus in the new markets, but is online, how significant is that migration from let's say a new campus online learner to a new campus on campus learner? How significant is that migration? And after how many quarters I guess does that migration began to slow, if not stop?

Well, I really don't know the answer to that because we've only got three years of history of really managing it this way. As a matter fact, if you look in the stats in the press release, the shift or the split between campus-based students who are taking their classes in a physical classroom and campus-based students who are taking them online has remained pretty steady at about 50-50. So I'm not sure if that is an equilibrium that we will live with forever, but it is certainly has been the case over the last couple of years. And we will obviously monitored that closely and adjust our campus sizing and our support staff in the campuses to reflect that.

In the mature markets, it hasn't gotten much about 25 or 30 percent. And so you know one could potentially extrapolate and say that over time as the new markets become mature markets they would move in that direction. Just I just don't know if that is going to happen that way or not.

Okay. And then lastly with regards to that migration, is there migration occurring on the mature campuses so that some of your students that are about to finish maybe are finishing online? And if we were able to sort of quantify that, I am sure you can because you are privy to the student numbers and details, if we were able to control for that migration, would we see less of a decline in the on-campus mature population? And, I guess, just to build on to that, is there any chance that you may actually cut back on some of the lease obligations and facility obligations that you have in your mature locations?

Again, let me take that in reverse order. We won't hold leases beyond our requirement to have a physical space. I mean we will manage that like any other asset, make it match the demand to our students as opposed to vice versa. And that is one of the reasons why relatively short-term leases are a value to us. We want to have a very flexible footprint to support that.

I think we already provide in our press release the answer to first question, which is the total campus population basically reflects the totality of the students who are enrolled to that campus, whether or not they are taking classes in a physical classroom or taking them online. So that number is -- that 9 percent growth is, I think, the number that you're asking about.

Yes, not totally because I wouldn't know if those are new, or in terms of the new and continuing numbers that you give us, that is not broken by mature and new. So...

I see what you're saying. Okay. Yes. There is a -- it is rare for students who are enrolling in a mature campus where we have basically a full course catalog available to immediately go into a situation where they take all their courses online. That is not the norm. So more of that is a migration in later terms.

(CALLER INSTRUCTIONS) Mark A. Marostica with U.S. Bancorp Piper Jaffrey.

The first question relates to the guidance for the year. And I am actually trying to back into the Q4 guidance here. It looks like if we take the low-end of your Q3 guidance that the Q4 bottom line growth is quite nominal, somewhere between 8 and 9 percent to reach the top and of your full year guidance. What I'm getting at here, is there anything in Q4 that is driving the slower growth or is that in fact what you're suggesting?

In terms of earnings, it is the fact that we will have opened five campuses this year, and two of them in the fourth quarter in a very expensive market. You know in terms of revenue we haven't adjusted our internal model for Q4. We won't do that until we have the enrollment numbers for Q4.

Great. Okay, that's very helpful. On the topic of and conversion rate, can you comment on how does have been trending for you?

They have been healthy. They have supported what has been the highest rate of growth for this summer term that certainly since I have been at the Company.

Great. Looking forward to fiscal '04 here. You just commented in the past that you would likely not look to open above five campuses. Is that still the case or have you revaluated that?

No, I think that is certainly the case. I really want to prove that we can open five successfully, both in terms of our internal management structure and human resource development, and then in terms of maintaining a confidence level with our creditors. So it would be extremely unlikely for us to open more than five next year. And frankly, if we did it, it would be because the performance had been so spectacular in terms of our ability to maintain quality that it would almost sort of reveal itself, frankly. But I would say that somewhere between three and five is a good planning number for next year.

And on that topic, could you give us an update on what states you currently have approval in at this point? And perhaps what candidate locations you would be looking at for fiscal '04, new campus openings?

In addition to the states that we operate in now, which is Pennsylvania, Maryland, D.C., Virginia, North Carolina and Tennessee, we have been approved in South Carolina. And our openings for '04, we haven't disclosed that. We actually haven't made any decision on. We do feel like we probably most likely will have at least one campus in South Carolina just because that has been approved for us for over a year now. And the rest of the campuses will be based on any other states that we get opened versus a demand requirement which our regions kind of compete for the resources of opening campuses in their areas as well.

Just to clarify, other than South Carolina, there are no new additional states that have been approved?

That is correct.

Does it take about four months for state approval?

Well, when I was laying out the strategy for ourselves and our Board, looking at the experience of other companies, I expected that it would take somewhere between 6 and 24 months at a normal state, and potentially more than that in a difficult state. Each of the states that we've done have been less than that number, but their are other people who have been doing this in a lot more states, and I think that history is probably more reflective over the long run. So I would say four months is extremely fast. Even though it's consistent with our previous history, I think historically I think that is an extremely aggressive assumption in terms of the timing.

Gary E. Bisbee with Lehman Brothers.

I want to follow up on one of Howard's questions. And specifically the comment that as you open up in Philadelphia some of those students who had been in the outer market online will fall into the new market online. But can you -- assuming that that has happened a little bit the last couple of quarters, can you still talk about the growth there. I know it has been more than 50 percent, so ahead of your guidance. But it seems to still be fairly modest compared to growth we are seeing from some of your competitors in the online space. And that may be by design, but I guess I wanted to get a sense as to what your thoughts were going forward in terms of ramping that out of market maybe more quickly, for instance, sequentially this last quarter where it was actually down a little bit? And in terms of marketing -- or what strategies you have? I guess to wrap it up, what is sort of like the two to four-year growth outlook? Is it going to continue to be 50 percent off of the base we have now, or are you going to get more aggressive with that?

Well, a couple of things. One is on the sequential summer term in our programs tends to be lower. Even though they are working adults, most of them have kids who have their own summer vacations, and they want to take some time off. So we have always had lower enrollment in summer term relative to the other terms. We have taken a little bit of the seasonality out, but I don't think it will ever be eliminated.

In terms of our view of the online, we think it is a really important and powerful way in which we can reach students, particularly in those markets where we don't have campuses obviously. We're going to grow that at the rate at which we are confident we can ensure the quality. We don't pay really that much attention to rate of growth of other institutions. They've got their own plans and goals and it doesn't really affect us. And we would like to grow it as quickly as we can consistent with that commitment to the quality.

Right now we think over the next several years 50 percent on a year-over-year basis is a good target. We have been higher than that in the last couple of years, but it is off a relatively low base. And so our own planning basically takes out that 50 percent number, make sure that we have enough internal resources to support that, and then take a very judicious and thorough review of the quality on an ongoing basis, and make sure it is up to the academic standards of the university.

What are the major investments to hit that quality commitment that you talked about. I know since you outsource a fair amount of infrastructure, is it mostly just your ability to continue to hire people to handle the customer service and recruiting end of things?

Yes. Well, that is a big part of it. The other part of it is obviously as you get bigger and bigger in terms of a faculty structure, making sure that your hiring a faculty is consistent with quality standards and you have sufficient oversight in faculty training.

Okay. Just one follow-up on that. You talked about the advisers and are on the campus for in market online student. Would not be the same for the enrollment adviser that is, in effect, recruiting these people? When someone, or when someone goes to the Web or calls the 800-number, do you have -- is the centralized group that is handling the out of market students going to also be handling the in market, or are those people routed to the campus?

Those are routed to the campus by ZIP code. If you are within a close drive of the campus, you are routed to the campus. And if you are not, you are automatically routed to the out-of-area online.

Okay. Just one last one. Obviously, you blew out the numbers for the summer enrollment. And it seems like you are starting to get the benefit from the campuses you have been opening. Is there any reason to expect that rate of growth to slow down? I realize some slowdown is probably real realistic given that you might not able to have such strong performance every quarter. But do you see this number dropping back down into the teens at any point, or are you pretty comfortable that your on track for a sort of 20 percent plus enrollment growth overall over the next few quarters and over the next twelve months?

Well, Gary, we don't really give specific guidance beyond the quarter that we know. I mean our general model for the year was based on mid to high teens. We were very pleased with the third quarter and it definitely gives you a little bit of leg up going into the fourth quarter, because you have a higher base of students from which to develop your continuing student number. But we're really not talking about Q4 here today, we will do that in November.

Richard Close with SunTrust Robinson Humphrey.

Just a couple of questions here quickly, and then I will turn it over. You know, could you give us a little bit of a feel on the Philadelphia schools? Just generally speaking, how much in startup expenses have already been realized to get these opened?

Well in terms of the numbers that had been reported for Q2, not very much. In terms of actual expenses, which we haven't reported yet, i.e. the Q3 expenses, a fair amount. You know most of the expenses, Ron, from about three months before the campus opens up through the campus opening, and then obviously in that first quarter of operations. The second half of the year is where we expect to see most of the expense associated with the two Philadelphia campuses.

Okay, so if we look at like the G&A and marketing and advertising expenses that you reported here in the second quarter, should we you know a noticeable ratchet up then in the upcoming quarters?

Yes. Certainly in SMP. There's a lot of marketing expense for Philadelphia. A little bit in both construction and education where we have the additional lease costs and some professors. And a little bit in G&A because we run the campus management through the G&A. But most of the margin compression comes from the S&P line in the first couple of quarters.

Okay. Thanks. I appreciate that. And then just a quick second question here. On the advertising side or marketing side, could you give us a little bit of a feel of where you're getting the best bang for your buck in terms of where you have been most productive in generating leads and new students, I guess?

Well, there has been a couple broad trends over maybe the last eighteen months to two years, which is the Internet has grown in importance in terms of our ability to reach students. With regard to just the last quarter, we were, frankly, pretty strong relative to our model and our history in almost all the areas. You know the indirect TV and radio, the direct-mail, some of the newspaper, all of those things were actually pretty healthy. But in a broader trend Internet continues to grow relative to other media. And you know we will try and take advantage of that.

Have you done anything special to improve conversion rights or anything along the Internet side?

Well, two different issues there. One is Internet has been big for us even for campus-based population. And our conversion rates for those campus-based students continue to be very strong. Where we have seen some opportunity for improvement is in the conversion rate of our out-of-area online. Regardless of the media with which we attract those students, we just found it a slightly more -- more than slightly -- a more difficult conversion for those students when they are not sitting across the desk from a human admissions -- well, they are human anyway, but they are over the phone as opposed to across the desk of the admissions counselor. But we actually did see a little uptick in that, which is one of the reasons why the online growth was higher than we expected, because those conversion rates were a little bit higher than we have seen historically. And we're continuing to refine our abilities on that and try and look both at other indices in the sector, as well as businesses that operate outside of our sector in terms of how do you market and convert leads for out of area or physically disaggregated customers.

Okay. And then just really quick on the bad debt expense, do you see that you have to do anything different in the upcoming quarter to keep that down or was this most recent quarter just sort of a one time thing?

Well, I hope it is not a one time thing because I actually want to be below 2 percent permanently. The increase from the previous year, I think was a result of the previous year been a bit of a one time thing. But also, the fact that as I said, I think we get a little bit of the effect of the slowing of the economy in terms of the lower conversion rate of debt that have already been written off, or receivables that had already been written off. We're actually not planning to do anything on that.

I think regardless of whether or not we're selling receivable to somebody else, it is our name on it. And as an educational institution I think there's certain constraints in terms of how you deal with your students, at least we do. And our credit control up front is what we really are focused on. And I think that has been quite strong. And we will continue to monitor that, but I don't see any major changes for that.

Gerald Odening with Jefferies & Co.

A couple of questions. One, do you find that some of your campus-based students actually require more counseling on financial aid and actually need more financial aid than your out of area online students enrollment?

That is a very interesting question, Jerry. I think the answer is potentially, yes, just because we have a slightly more affluent student on out of area online. We have a number of students in our campuses that don't have Internet access and have a -- come from a lower socioeconomic background. So I would say that, yes, that is probably the case, although I don't off the top of my head have a way to quantify that and give you an exact number. But directionally that sounds logical to me.

It also true for your Business Admin students than, say, your Computer Science?

Unfortunately not. I would not say that our Business and Admin students are more financially mature or sophisticated than our IT students.

And the other question I have is related to your winter program rollout for Education and Public Policy. Would you anticipate you're going to offer maybe some shorter term programs, as well as the longer term programs, say, education and teaching certificates as a policy for you in the future?

At this point, we're not focused on that. We want to see how they work in terms of the full-fledged accredited degrees. I also wanted to just amplify my answer on the last question, Jerry, which is that after they finish the business program, at Strayer, then they are indeed more sophisticated.

Of course. But let's say, at least with the education degrees and public policy degrees that you have upcoming, you are anticipating that, or are you anticipating that there will be more campus-based, or the same sort of mix online and campus-based?

No, they will actually be 100 percent online when we start them. The first quarter or two we want to see how that plays. And then we will start to roll them. We have some classroom constraints in some of our mature campuses. We want to see that there is sufficient demand, and then we will -- it goes back again, frankly, to the physical lease issue as to how much space do you need and how much do you have.

You are thinking and anticipating first to see how well it rips for students on online, and then potentially doing a campus-based version of Education of Public Policy?

Correct.

Corey Greendale with First Analysis.

I just have a couple of questions. First of all, the enrollment at the new campuses I thought was particularly strong. Can you talk a bit about -- I know you don't break this up by campus, but just sort of qualitatively how enrollment was at Raleigh and anything else? If it is just that the number of new campuses is changing, or is anything particularly helping sort of the number of students at each new campus compared to what you would have gotten in the past?

I think the number of campuses that are considered new is relatively the same, because we added a few and we graduated a few. It has been around 9. And we had a healthy start in North Raleigh. It was a good opening for us.

Just the expectation there, are you expecting something different in terms of the number of students in each new campus compared to what you have seen in the past?

I'm not sure I understand the question, Cory?

You are saying that the number of new students, the number of campuses, the number of new campuses is relatively stable, but the overall growth is sort of up. So I guess the question is just the number of students at each new campus, has there been some change in the expectation there?

Well, there hasn't been any change in our expectation. You know, as we announced last quarter, the ramp rate of our campuses in North Carolina was faster than our model had predicted. And so we have a healthier growth of new students driven by that, and you know a strong start in Tennessee as well. So yes, there are -- we have more new students than we expected to have at the beginning of year -- or more students from new campuses than we expected to have at the beginning of the year.

Okay, and also on the topic of your expectations. You gave a sort of 50 percent plus sort of internal goal for online. How should we think of that in terms of the timeframe? Is that something that is sort of indefinite for the next couple of quarters, for the next year or two, or how do you think of that?

Well, I thought of it in 2001 on as a five-year plan. So that leaves another three years in it.

Okay. And then just one more quick one. Some of the other public companies are building up their curriculum platforms. I was wondering your current thoughts on building up the curriculum platforms of areas that you offer?

It is really not an area of focus for us. I think we've got a pretty big challenge just managing the geographic expansion and growing the online. And also, I feel like the curricula that we currently offer is the curricula that for the most part is what our students, our targeted students, want to take. We are dabbling a little bit in terms of three new Masters programs, and we will certainly keep our eye on that. We are very demand driven in those cases. Those are programs that our students came to us and said they really wanted to take. And if we hear that in other areas, we will certainly take a hard look at it.

Mark Yuckleson with Axle Capital Management.

Just one question for you. Just based on n your recent experiences in Tennessee, in Philadelphia and North Carolina, I guess how has that impacted your long-term view on having a national presence in the long-term?

It has strengthened my belief that it is the right strategy.

I mean is there -- I guess, you are saying you're confident in your ability. Is there anything that would suggest that you won't be able to open -- that you can't open in every major metropolitan area in the future?

Well, we don't really predicted specifically with regard to any individual metropolitan area. It has made me more confident that the ability to roll out a national platform of Strayer University is more likely to succeed given that the places where we have gone to date has been successful for us.

Gary Merwitz with Morgan Stanley.

Just wondering if you can give us an early read on Philadelphia and whether kind of the competitive landscape there has had any impact on your early success?

Well, we don't comment on the individual campus. And we won't have any comments with regard to enrollment for the fall until November. But it is certainly fair to say that Philadelphia is a competitive market. You know, all of our markets are competitive. But Philadelphia is one in which there are a lot of players. And that is something that we take into account in terms of how we try and approach that market.

Anyway you can give us any sense for how about just in general when you think about the successes of various new campuses, and have you seen an impact, or less a success, in certain market, again, because of competition? Have you notice that as a big factor?

No, we really haven't. As a matter of fact, one of the interesting things about this business for me is that the nature of the competitive impact has been relatively positive for us. And our biggest competition appears to be for time -- the essential time commitment of our students. In other words, for a working adult student the most difficult part of the sales process is, can we convince a 35-year-old that -- they know already that it makes sense to go back to school, but can they physically do it? Can they work it into their time schedule? When we get over that hump, we seemed to do fairly well.

And I think the major reason is there is there is just not a whole lot of offerings available for working adults to go back to school. And so the presence of either traditional universities or other entities that focus on the working adults, hasn't had that much of a comparative impact on where we have been successful and where we have been less successful, I guess is the way I would describe it. It is been much more internally generated that externally.

I mean, for instance, you look at Washington D.C. has got as high a penetration per population of universities as anywhere. Raleigh certainly does. Philadelphia is a metropolitan area like that as well. But we have been successful in both Washington and Raleigh. So we hope we will be so in Philadelphia as well.

One last quick question. Just any thoughts on potentially getting out of the lending business altogether?

We're certainly addressing that. Thinking about it. I don't see it as a long-term core competency for Strayer. If we can find people who will do it better, with more service to our students, we certainly wouldn't hesitate to divest that.

(CALLER INSTRUCTIONS) Amul Bondrekar with J.P. Morgan.

I just wanted to ask a quick question on, if you could talk about it, the potential pipeline that we have for campus presidents or campus managers right now? And I guess you typically have about 8 to 10 in the pipeline each year or so. If you could just talk about how many you have trained right now and how many are yet to be trained this year?

That is a great question actually. We have just in the last twelve months set up an internal management development program to try and pre-identify people for these. We call it our Vision Leadership Program. We just ran a five day session actually last week. And we take our most promising full-time professors and campus administrative personnel and put them through that program. It is part of being identified as being on a fast-track for these kinds of opportunities. And we're starring to build that pipeline up. I mean, it is what made me confident in our ability to open five this year. And if we continue to perform the way we are so far, I think we will be in pretty good shape, or certainly above three next year.

So you would say that number is still 8 to 10 a year in terms of the campus presidents and the campus managers combined?

Well, our campus deans and our campus managers -- I mean, we obviously need one per new campus opened. So if we did five campuses next year, we would want to have a good solid 10 are so in the pipeline and I would say, yes, right now we're feeling pretty good about that.

And then one quick question, I guess you talked about a new program offering in the past. I guess it is a Master's in Education, and just wanted to get an idea from you if you have decided on the timeline for that?

Yes, we are currently anticipating that will be offered in the winter term of 2004. So we will start recruiting this fall for the winter term 2004.

We do have two follow-up questions. Going first to Jerry R. Herman at Legg Mason.

Rob, a couple more questions on online, if I can. You mentioned that the online enrollments were above budget, which I'm assuming implies that your student acquisition costs were less than expected. Is that true, or did you guys actually spend more marketing dollars there?

We did spend more marketing dollars, but they were slightly less than our -- but the per acquisition -- per student acquisition cost was slightly less than our model.

Okay. And then could you talk about your media mix for the out of area online. I'm assuming that the bulk of that is Internet related but can you talk about the other mix that you use there, and then I've got a follow-up to that?

You are correct that the bulk of it is Internet based, and it certainly has been -- you know, continues to be a big success for us, so we are going to put more dollars and effort behind that. We do also, in certain markets, have a broader mix of traditional media. We tend to decide it on a market by market basis, depending on the test market that we want to go for in each quarter.

And do you guys use -- do you use an SMA or a zip code analysis on the non-Internet media? And what I'm really getting at is can you speak to the relative increase in the number of markets that you guys will use non-Internet media, say in '04?

It will depend on what we think the new markets that we can open for physical campuses are. Because that is where we tend to concentrate that non Internet media.

Howard M. Block with Bank of America Securities.

Rob, with regards to the on-campus mature population or on-campus population mature campuses, is the decline pretty evenly spread across the 12 of the older 14, or is it disproportionate to a few campuses?

Do you mean is the shift of campus-based students who want to take all the online courses pronounced in certain campuses versus others?

Well, I actually meant in terms of the year-over-year decline in the on-campus at mature. Is that...?

I was trying to correct your question, Howard.

Okay. Fine. (multiple speakers)

The shift is not even. It tends to be most pronounced in some of our campuses that are most affected by traffic and logistics issues and where -- and also in demographics of our mature markets where you have the highest penetration of Internet access and people who are familiar with and comfortable with using the Internet as a means of getting an education.

Okay. And then with regards to the 58-42 split, highly even is that split across both new and mature? Or is there perhaps a different split that you could offer a little color on, if not detail, if we compared new populations versus mature populations?

It is actually more geographic. What we're finding is that particularly in the Washington D.C. area, the IT interest remains quite strong. In some of our newer markets, the growth of students -- there's a higher percentage of newer students who are coming in wanting to take Business and Accounting versus IT.

And then the last question is then with regards to that. If you looked at the declared majors of, let's say your new students, whether they be new at mature locations or new at new locations, how sensitive do you think your new student population is to the IT spending cycle? In other words, when students come to Strayer do you think they're coming there for career enhancement and continuing education, or are they coming there very much for specific programs, in which case there may be some IT sensitivity in your population?

Well I think the answer is yes to both. I think that most of our students are coming not for specific career information but for the degree. They understand that getting the Bachelor's degree and getting a Master's degree is in the long run very helpful for them economically. But I don't discount the fact that there has got to be some effect of a perceived IT slowdown on IT enrollments. It was not pronounced at all in our DC area. I think, frankly, because there has not been that much of a slowdown in D.C. The government remains a very high employer of IT personnel. I read the want out every Sunday in the Washington Post. They don't seem to have gone down at all with regards to IT employment. Plus the fact with September 11 and the rise of Homeland Security and some of the other -- the war -- that just tends to build up government employment, and that is big in the IT area.

But you know over the long run, I don't think it would be plausible to say that there is no effect of a perceived health of a sector of the economy on what students want to study, which is why we want to be very flexible.

Mr. Silberman, we have no other questions at this time. So I would like to turn back the call to you for closing comments, sir.

Thank you very much, Abe. I just want to thank everybody who participated on the call. I look forward to talking to you in the quarter ahead and talking on the next call, which will be in early November. Thanks very much.

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

(CONFERENCE CALL CONCLUDED)