Strategic Education Inc (STRA) 2003 Q3 法說會逐字稿

Good day, and welcome to the Strayer Education Incorporated's third-quarter 2003 earnings conference call. This call is being recorded. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions, and instructions will begin at that time. (OPERATOR INSTRUCTIONS) At this time, I would like to turn the conference over to Sonya Udler, Vice President of Corporate Communications for Strayer Education. Please go ahead. ma'am.

Thank you, operator. Good morning. With us today to discuss 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.StrayerEducation.com, where the call will be archived for 90 days. If you're unable to listen to the call in real time, a replay will be available beginning today at 3 PM Eastern time through Friday, November 7th. The number for the replay is 888-203-1112, passcode 244673.

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. Those 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 would like to begin this morning as we normally do by giving a brief overview of the company and our business model for any listeners who are new to Strayer. I will then ask Mark to report on the detailed financial results for the third quarter, after which I will comment on enrollment results for the fall term. I would like to also provide an update on our growth strategies and finally end up with a discussion on the company's outlook for Q4 and the full year 2003 as well as highlighting some of our plans for 2004.

Strayer Education Inc. is a for-profit education and service company whose primary asset is Strayer University, a 20,000-student, 25-campus postsecondary institution of higher learning which offers associate's, bachelor's, and master's degrees, as well as certificate and diploma programs in business administration, accounting, and information technology. Our students are working adults who are returning to school to further their careers.

Our revenue comes from tuition payments and associated fees. Approximately 50 percent of that 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 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 in over 40 foreign countries through Strayer University Online.

Strayer University is accredited by the Middle States Association of Colleges and Universities. And Mark, could you run us through the financial results for the quarter?

Sure, Rob. Our financial results for the 3 (ph) nine months ended September 30th, 2003 include a gain on the sale of the Washington, D.C. campus building of 1.8 million before tax, or 7 cents per diluted share. Given that this is a nonrecurring item, we thought it would be most helpful to summarize our financial performance excluding this gain for comparison purposes, which is what I will do.

Revenues for the three months ended September 30th, 2003 increased 30 percent to 30 million, compared to 23 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 rose 41 percent to 5.6 million from 4 million for the same period in 2002. Operating income margin was 18.6 percent, compared to 17.2 percent for the same period in 2002. The increase in operating margin was primarily due to strong revenue growth more than offsetting the increased expense associated with opening five new campuses in 2003 compared to three new campuses in 2002.

Net income rose 40 percent to 3.8 million, compared to 2.7 million for the same period in 2002. Earnings per diluted share rose 32 percent to 25 cents, compared to 19 cents for the same period in 2002. Diluted weighted average shares outstanding increased to 14,969,000 from 14,556,000 for the same period in 2002. For the nine months ended September 30th, 2003, revenues increased 26 percent to 103.7 million compared to 82.5 million for the same period in 2002, due to increased enrollment and a 5 percent tuition increase effective for 2003.

Operating income for the nine months ended September 30th, 2003 rose 23 percent to 33.7 million from 427.5 million for the same period in 2002. Operating income margin was 32.5 percent compared to 33.3 percent for the same period in 2002. The decrease in operating income margin was primarily attributable to the earlier timing of two new campuses opening in 2003 as compared to 2002, as well as the increase of the total of new campus openings to five in 2003 compared to three in 2002.

Net income for the nine months ended September 30th rose 23 percent to 21.5 million compared to 17.5 million for the same period in 2002. Earnings per diluted share rose 20 percent to $1.45 compared to $1.21 for the same period in 2002. Diluted weighted average shares outstanding increased to 14,796,000 from 14,485,000 for the same period in 2002.

Now including the seven cents per share gain on the sale of the D.C. campus building, earnings per diluted share was 32 cents, an increase of 68 percent for the three months ended September 30th, 2003, compared to 19 cents in 2002. For the nine months ended September 30th, 2003, earnings per diluted share was $1.53, an increase of 26 percent compared to $1.21 for the same period last year.

At September 30th, 2003 the company had cash, cash equivalents, and marketable securities of 90 million and no debt. In the third quarter, as part of its cash management activities, the company liquidated its 26.1 million investment in a short-term corporate bond fund and reinvested most of the proceeds in a short-term tax-exempt bond fund. This transaction resulted in a $0.1 million before-tax gain.

The company generated 23.6 million from operating activities in the first nine months of 2003. Capital expenditures were 4.3 million for the same period. In the third quarter of 2003, bad debt expense as a percentage of revenue was 1.7 percent compared to 1.3 percent for the same period in 2002, and 1.9 percent last quarter.

Day sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 7 days at the end of the third quarter of 2003 compared to 7 days for the same period in 2002. Rob?

Thank you, Mark. I've got just a couple more comments on the financials.

First, our revenue growth of 30 percent was basically consistent with our internal model as we announced a 25 percent enrollment growth for the summer term and a 5 percent price increase. The increase in operating income and net income before the yard (ph) sale, of approximately 40 percent over was ahead of our model. We had actually forecasted to have margin compression in the third quarter once we decided to go to the five campuses this year, and basically the growth of the new campuses and the online allowed us to actually expand the operating margin in the third quarter even as we did increase the campus openings from three to five for the year -- but more importantly, from zero to two for the quarter on a year-over-year basis.

The bad debt expense remained under 2 percent. Distributable cash flow growth for the first nine months of the year of 2003 -- which is really a statistic that Mark and I probably pay the most attention to on a year-over-year basis -- was basically consistent with our model. It was roughly equivalent to the net income growth for the nine-month period. And in calculating that, I ignore both the building purchases in 2002 and the building sale in 2003. We continue to expect that distributable cash flow for the full year after funding the expansion of the five new campuses, and actually some increased cap-ex in the fourth quarter associated with retrofitting several campuses, will be roughly equal to our net income for the year, which again is what our model would suggest and what we're trying to manage to.

Let me also emphasize, as Mark said in his comments, that with sale of the D.C. campus building in the quarter, we have approximately 1.8 million of pre-tax income, or about 7 cents a share of earnings, which GAAP accounting requires us to run through our operating income statement, but -- which is most assuredly not ongoing operating income. We bought the D.C. campus building for $3 million and sold it for 5.2 million a year and a half later. In the process, we lowered our ongoing lease obligation and upgraded the facilities.

So it was clearly I think an opportunistic and a beneficial use of our shareholders' capital. But we don't intend to be in the business of buying and selling real estate on an ongoing basis. So I think that's one the reasons why we are making it absolutely clear in the release -- that distinction. If you look in the 10-Q, you will see that those -- that gain runs right through operating income. But that's because that's what GAAP accounting requires.

Turning to the fall term enrollment results -- the numbers are in the release. Total enrollment up 22 percent on a year-over-year basis. New students up 23 percent -- continuing students up 22 percent. A nice balance there from our standpoint.

The online enrollment was up 68 percent over the previous year. That's the out-of-area online. In the press release, we have again provided fairly detailed information which shows the rate of growth of the mature markets, but also highlights these strong synergistic effect that the online programs have and the continued interest that our campus-based population sees in taking online courses -- particularly later on in their careers. I would also cite again, however -- we're not trying to push that mix in one direction or the other. We want the students to take the classes in whatever way they find most convenient.

With regard to student course preferences -- business administration and accounting majors in the quarter continued to shift up slightly. They are up to about 60 percent of our total students for the fall term, while computer information science majors are at about 40 percent of the total student population.

If I can turn to an update on the growth strategy just briefly -- many of you will remember that it's based on five objectives. The first is to maintain enrollment in the mature markets. Second is to accelerate the rate of growth of new campuses, particularly into new states. Third, invest in and build up the online offerings. Fourth, increase our corporate and institutional alliances. And the final objective is to look selectively at potential acquisitions and reallocations of capital. I would like to just briefly comments on these one at a time.

On the first objective, we had a pretty strong quarter with the mature campuses showing 5 percent growth. And again, the mature campus students continue to exhibit some preference to taking online courses in later terms. We are adjusting our physical asset structure and making sure that we have enough online capability to make sure that we match that. It did slow down slightly versus the last couple of quarters, though. The total online growth is slightly lower than our out-of-area online growth, which shows that mix shift is slowing slightly.

With regard to new campus openings, we had a solid start in the fall for the two Philadelphia campuses. The North Carolina and the Tennessee campuses continued a positive ramp, as evidenced by the margin expansion that we talked about. We were also very pleased to announce this morning the approval of the State of Georgia for two campuses in the Atlanta area for Strayer University. And based on our performance this year in managing the opening of five campuses and the deepening bench strength that I believe we are starting to develop, we feel comfortable planning on opening five campuses again in 2004, and that's reflected in our projections for 2004.

In the online business, our growth for the fall term of 68 percent was slightly ahead of our 50 percent target. I would point out, though -- there was a bit of a milestone this term in the fall term in that it's the first term in which our out-of-area online student body, at a roughly 1800 students that we reported in the release, is larger than any one of our single physical campus populations. We thought that that was a interesting statistic, as we have been watching this for the last couple of years.

On the corporate development fund -- front, I want to mention just one thing on it. The joint venture with PBS, which we announced this morning, involves continuing education units. It's not college credit courses. It's really more of a marketing opportunity for us. We will not report any of those students in our total enrollment unless and until they subsequently enroll at Strayer University.

You'll also notice that on the balance sheet for September 30th reflects the reclassification of our student loan portfolio to assets held for sale. We had talked about this on previous calls, and we were pleased to announce today that the actual sale of that units we closed last week to Brazos (ph) Student Finance Corporation.

We will still originate loans for our students. We have a small internal staff which will be funded by Brazos as operating costs which will interact with our students to originate the loans. But under the agreement, we will package them off and -- package them up and sell them off each quarter, so we will no longer be using our balance sheet to fund long-term student loans.

And as I mentioned earlier in the year, it's just a business that we thought other people could do better that us. We could provide better rates and more convenience for our students without actually using our own balance sheet.

Finally, on the business outlook, due to the strong enrollment growth in the fall term, offset partly by increased expenses associated with the five new campuses, we estimate our fourth-quarter EPS will be in the 69 to 71 cent range, not counting an approximate 2 cent gain on the sale of the loans that we were just describing, which will be booked this quarter.

And in addition, based on our performance through the first three quarters of 2003 along with this estimate for Q4, I think we've got pretty good visibility on the full year. And we are therefore increasing our estimate for full year 2003 diluted EPS to $2.14 to $2.16. And that, again, is not counting approximately 9 cents in one-time gains.

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

Thank you the question-and-answer session will begin be conducted electronically. (OPERATOR INSTRUCTIONS) Greg Cappelli, Credit Suisse First Boston.

Nice job. First question is on enrollment here -- I just wondered, Rob, if you could comment a little bit more about the seasonality of the business -- you hit a very high mark last quarter with, I think, 30-percent plus new enrollment growth. I know that's a small quarter, but I also know you've been trying to make some efforts that you've talked about in the past to even out some of the quarters. And maybe you'd just provide some more color on that here?

Well, we basically have the same marketing strategy for each of our quarters now. With working adults, we feel that making starts available to them basically four times during the year is probably the best way to meet their convenience needs. And so our marketing spends and our focus on our enrollment side is fairly consistent through the quarter.

What that has done is -- I mean, if you look back over the last couple of years, our enrollment growth as a percentage increase has always been slightly higher in the summer term, because if you are recruiting roughly the same number of students each quarter but your summer term is off of a lower base, you end up with a higher overall enrollment growth in the summer term.

We actually -- we had a very, very strong third quarter -- or a very strong enrollment cycle for the summer term, which I think in itself was very, very positive. But on an ongoing basis, we actually expect the summer term enrollment to be slightly higher as a percentage increase on those new students because we're basically trying to -- we think the seasonality is coming slightly out of the business. So we will -- there will always be some seasonality because our students have children, and they have summer terms off. And so we get less students enrolled in the summer. But as we start -- as it starts to even out some, I think you see a bit of a spike in enrollment growth in that third quarter -- or for the summer term.

Okay. Got it. You guys got the approvals for Georgia, obviously. Can we assume -- or maybe you can just talk a little bit about timing of campus openings in '04. And I'm assuming Georgia would mean Atlanta to begin with?

Yes, that's correct. The approval was specifically for two campuses in the Greater Atlanta area. Our planning and our thinking right now, Greg, is that we would open campuses at roughly the same rate that we did this year -- i.e., two in the spring, one in the summer, and two in the fall. We haven't decided finally where those campuses would be and in what order.

We certainly would like to get our other campus up into the Philadelphia area next year -- I think that start was strong enough that it suggests that we probably ought to get some more effort on the ground there. And then we really need to put a campus in South Carolina -- we've been approved there for over a year now. And then you've got the two campuses in Atlanta. And I'm sure we've got a number of markets in our existing footprint that are clamoring for an additional campus, so probably one of those. But as to exactly which goes when, we haven't really pinned that down yet.

Okay. Great. And then just one final question. I was just looking at the revenue per pupil -- down a little bit from previous quarters. Is that mix or courseload? Can you just touch on that for us real quickly?

Sure. The courseload mix is -- the way we think about it is seats per student. That was down slightly in the fourth quarter versus a year ago. It's remained about -- it's between 1.9 and 2. And as you go down a few basis points in that, you can have a fairly meaningful revenue per student impact.

We are seeing an increased mix shift toward the graduate student side, and the graduate students due tend to take slightly less courses. But that's really not and to see (ph) that we're managing with any real degree of certitude. We like the graduate students because it's affirmation of the quality of the program. But as long as it stays between sort of 1.9 and 2, I think that's kind of the model that we've got.

Okay thanks a lot.

Mark Marostica, U.S. Bancorp Piper Jaffray.

Nice job on the quarter. First question relates to the 100 percent online student growth rate. Coming in a little bit less than last quarter -- it looks like it's been declining sequentially for a few quarters. I'm just wondering what you attribute that to -- if there's any one thing?

Mark, when you say 100 percent, are you talking about our out-of-area, or are you talking about those students who are taking 100 percent of their courses online?

Those students who are taking 100 percent of their courses online.

Yes. I think that's basically a little bit of a slowdown in the mix shift of our mature campus students. As -- we need to (ph) market the online to our existing campus population and make it available to them.

In the first year or so, we saw a huge surge on a percentage basis as a number of students who had not thought about taking courses online began to see that it was a convenient way to do it. And I've had a question on several calls as to, where do you think that mix is going to end up? And I really don't know. I don't think it's going to be much more than 50-50, because that's what it is on our brand-new campuses where we have the highest incidence of students taking courses online. But where it ultimately ends up, you know, I'm not really sure. The fact that this metric which measures all of our students taking 100 percent of their courses online, which includes our campus-based students -- those students were recruited through a campus -- the reason that growth rate is coming down slightly is that that mix shift is starting to slow down as we reached an equilibrium as to -- for an average campus-based student, how many of their classes they want to take online.

Okay. Thank you. Also, the question comes to mind on the PBS joint venture. Could you describe the business model that you have in place for that joint venture and whether or not your revenue guidance for next year includes any additional revenue from that deal?

Let me take it in reverse order. It includes nominal guidance because we just don't know how big it can be. The model is it's 100 percent online. PBS went out and solicited five schools on a competitive basis to join them in basically managing and offering on a continuing education unit basis courseware which they had developed. And we were one of the five that were selected -- we are the only for-profit entity that they have included. And the revenue per course will be significantly lower than our basic college credit courses.

And what we like about it is that PBS will be marketing the Strayer name on their web site and their media outlets, which we hope will be a generator of leads for our full-fledged college credit university programs, which is the core of what we do.

The management of the continuing education units is not a lot of heavy lifting, frankly. And we're just going to sort of watch that and see how big it is as a business unit versus our core business.

In general, I had been less inclined to be involved in community education because I just think there's a lot lower barriers to entry and a lot more good people doing good efforts in it, so the competition is higher. But as a means of getting a high-profile partner to market our name, I thought it was a real good relationship for us.

Okay, and then last question. Tuition rate increase expected for fiscal '04 -- could you give us some color on that?

5 percent.

5 percent. Great, thanks. I will turn it over.

Bob Craig, Legg Mason.

Just a couple questions for you. Rob, you did mention the favorable start that you had in Philly. Could you talk about student acquisition costs in Philly relative to your expectations going into that market?

They were lower.

Okay. Quick answer. And Mark, on the tax rate side, your greater investment in tax-frees -- tax rates should come down possibly in the fourth quarter and '04 --?

It would be very marginal -- offset by a lower yield that we would get on these investments.

Okay. And you mentioned -- you have consistently mentioned the new schools ramping faster than what the original model that you've put forth several times would suggest. Do you have an estimate for what new school startup or opening losses may be for the year?

Well, they will be less than the roughly $1 million per school that we budgeted. And that's probably the largest generator of the margin differential in this third quarter. I don't have the exact number -- you can probably back-calculate on the basis that we're going to end up with more operating margin than our model would have suggested. And if you -- I don't have in front of me, but if you multiply that basis point differential by the revenue, that's about the difference.

Okay. And lastly, on the program development side -- any new programs that are in the works, scheduled to be introduced over the next couple of months?

Oh, yes -- thanks, Bob. We do have the three new master's programs which are being rolled out right now -- the master's in education, the master's in health care administration, and the master's in public administration. All three of those are being marketed this term and will be offered academically in the winter term of 2004. We are focusing on a couple of test markets to start with to see how they received, and then we'd look to roll them through the whole program -- the whole university system sometime next year.

Okay, super.

Bob, one other thing I just -- the question on the shift of the bond fund. The one thing I wanted to say is, you know, Mark talked about -- we went from one short-term fund to another short-term fund. We actually went from a short-term fund to a shorter-term fund. We were out about three years in turn (ph), and we pulled back about one year. Just on the basis of interest rates being awfully low right now, it seemed that the spread differential made more sense.

Fred Mccrea, Thomas Weisel Partners. Mr. Mccrea, your line is open. Mark Hughes, SunTrust.

Thank you very much. In terms of the new campus openings, what constraints would you need to deal with in order to accelerate from the five openings that you have got planned either next year or the year after?

Well, the overall constraint is ensuring the quality of the product at a faster rate of growth. And in something as undefinable as academic quality, I think that a certain amount of conservatism makes sense.

In more specific metrics, we have to make sure that we have 10 campus leaders, both a campus dean and a campus manager, to staff each new campus. And as you get into new markets, it's all the more important that those people be of very high quality, because you're starting to get geographically spread.

Right now we feel like five is an appropriate number. We would like to open up as many as we can, consistent with quality, and we will continue to keep our eye on that. And as our bench strength gets deeper and opportunities arise in future years, we will certainly look at that number. Right now, we think five is an appropriate number.

Right. And then my final question -- the cost categories -- the specific categories where you're doing better on the new school startups -- is it selling and marketing overhead? Anything you can provide there?

Well, selling and promotion in our nomenclature is coming in lower than we expected -- particularly in Philadelphia. Our marketing and operational team did a great job, I thought, in attracting students in a high-cost market at a relatively reasonable rate -- certainly below what we had budgeted.

But the biggest characteristic which affects how quickly our campuses ramps profitability is not so much cost control -- it's enrollment. If the enrollment grows at a faster rate than we are budgeting -- regardless of if we spend a little bit more or a little bit less -- that's where you really start to have positive impacts on the operating margin impact -- i.e., you lose less money in that first year.

Howard Block, Banc of America Securities.

Congratulations on another solid quarter. The source of outperformance in the margins in the quarter -- you mentioned you were just obviously generating fewer losses at these new campuses.

But you also -- I'm just trying to figure out the order of magnitude here in terms of margin outperformance. Is there any sense that you're achieving greater leveraging even on your older campuses? And -- I'm just thinking of the comment you had said earlier -- you had something about adjusting our physical asset structures. Any adjustments that have been made, and any that may be made prospectively?

We have made some adjustments. But I think, Howard, those are less important in terms of the impact you're talking about. They're actually more defensive. They're more adjusting our cost base to match our revenues so that we don't end up with any margin deterioration in those markets.

I think -- from the way Mark and I and our Board look at this in terms of laying out our plans and what we think the incremental operating margin impact of opening a new campus is going to be, the biggest source of the outperformance would have been the ramp rates of the new campuses. And the one part of our existing business that is probably doing better is the online. And that is growing at a faster rate than our basic five-year plan suggests. And that does help a little bit on the existing business on the margin side.

Okay. And with regards to that, you had noted earlier that the data point that was the fact that out-of-area online is now larger than any physical campus. Is there some significance to that other than just the symbolism of it?

Well, I think it's probably significant in terms of answering your question, which is the incremental margin on an out-of-area online student is very high. And so that is affecting the margin structure of the existing business.

You know, as we've talked before, I don't expect it to stay higher forever, because we're consistently investing on the student service support side, which are pure operating expenses. And I think over time, we'll start to balance that out so that it comes down to about the operating margin of one of our most profitable mature campuses. But right now, we're probably already getting a little bit of juice from that.

Okay. And did you tell us what the mix was of graduate-undergraduate?

I didn't. The graduate is over 20 percent this quarter; the bachelor's is about 60 percent; the associate's are about 10 to 12 percent; and the rest are non-degree, non-program.

Okay. And then lastly, the new programs that you're starting, these master's programs -- you think that new programs provide sort of an incremental boost to the new student inflow? And if so, is there any chance we may see you more aggressively roll out new programs in '04?

I don't know the answer to the first question. And we don't have any other new programs anticipated for '04. What we are pretty interested in is how those new programs are going to work in areas where we think we have fairly high specific demand. In other words, these programs were developed because we had students coming to us and saying, we would like to take a graduate degree, but we don't want an MBA or a master's in technology. Will you offer this program?

And so this is kind of a test case for us as to whether the demand-driven product development really is working, whether it's -- whether our internal nervous system is tight enough to be able to give the students what they want.

Okay. And at what point will you think you'll have some data on that answer? Would that be right away in the winter term for some of these?

Sure. Absolutely. I mean if we don't have any students sign up in the winter, that will be a data point. And then we will watch it pretty closely. And we will report it separately so you guys can see that.

Gary Bisbee, Lehman Brothers.

Congratulations on another real strong quarter. A couple of questions if I could. Looking towards your 2004 initial guidance that you put in the press release -- I was particularly impressed with the margin gain that it looks like you're comfortable with.

But in terms of the student growth and the revenue growth, it would seem like it's a bit of a -- actually fairly significant slowdown versus the trend of the last couple of quarters. And I wondered -- other than the fact that it's still several quarters out and you're being conservative -- if there's anything else you would attribute that to?

Well, I guess the first thing I'd say, Gary, is that our -- when we put this guidance out, it's really in order for our owners and the investment community to see how our model works. Someone asked -- I think Howard asked the question a couple of quarters ago -- whether it was specific to the number of new campuses that we're going to open, and it absolutely is. This is based on opening five new campuses.

I don't know what the enrollment growth is going to be next year. We would like to be as high as we can generate it and sustain academic quality. But within this range -- which is higher than the range that we gave out last year at this time, as befits the fact that we have a couple extra campuses -- if it comes at this range and we open five campuses, we expect the operating margins to stay fairly stable. And that's what we've talked about for a couple of years. But we think in our model, the operating margins are almost entirely affected by the number of new campuses that we open.

If the enrollment growth comes in higher -- and we'll announce specifically what the enrollment growth is each quarter, as we always do, so you'll have at least 90 days visibility on it -- you'll be the track down through this model fairly precisely as to what the earnings output is going to be -- and the same thing if it comes in lower.

So this is less of a prediction of enrollment growth and more of a description of how our operating model works. And you know we're going to continue to try and generate as much enrollment as we can consistent with the quality.

Okay. The press release also said that you've been authorized by the Board for a small share repurchase program. And I guess I wanted to get your thoughts around that. It seems to me with the current share price, the returns or the IRR on that investment, at least at today's price, would not be terrific. And I wondered if you'd comment on potential to increase the dividend as another alternative that might be a higher return alternative for shareholders?

Well, what the board and I will do is clearly use our excess cash in the way which has the highest return on any given set of circumstances for our shareholders. That is the governing principle that we used in looking at this.

With regards to share repurchases, we think about that like we do any other investment -- what is the discounted cash flow value of what we think an appropriate stream of cash that will be generated by the investment is, and what should our discount rate be relative to other uses of our cash.

So it will be -- we wanted the authorization so that we'd have the governance authority to take advantage of situations when they arise. I am never going to comment on what those situations are, just because I just don't think it's appropriate for us to comment on the stock price. But if we do use it, we will announce it each quarter so you'll see where we've been.

Okay. But for now, you're still not thinking -- no plans in the near-term to increase your dividend?

Well, what we've discussed before is that we're going to have a -- we think, an event sometime in next year that will clean up our balance sheet. If our stock price stays where it is, we will be a position to force the conversion of the preferred shares into common shares at the midpoint of next year. And what we've always said is that we'll take a look at our dividend policy at that point relative to the needs of the business for using cash either for internal growth or acquisitions. And then if we have sufficient funding for those growth strategies, then returning cash to our shareholders in the most tax-efficient, value-enhancing manner.

Okay, great. And then just one quick last one. You've talked in the past about -- or I guess you haven't really discussed it -- you move into a big, new market like Philadelphia, if there's been some of those out-of-market online students were in that market previously, and if that -- I'm wondering, as you move to into Atlanta next, for example. Is this something where we're going see you adjust the out-of-market online number on a historical basis such that those students are now in a market that you're in?

I don't think we're going to adjust it historically, just because it would get relatively time-intensive and confusing. What we do do is when we go -- when we open up campuses in a new market, any students who are in that market and are operating through that campus will become campus-based as opposed to out-of-area online students. We're probably going to do this in whatever way it makes the most convenient sense for the students in terms of administratively managing them, and then just reporting accordingly.

Okay. So in Philadelphia, did you -- do those students become a campus-based student -- the out-of-market that you would've had there previously?

If they were in a zip code right next to the market -- right next to the campus, yes.

Richard Close, Jefferies & Co.

Can you talk a little bit about the growth in marketing and what we should expect going forward? And then maybe how much of the year-over-year growth was related I guess to the maybe two Philadelphia campuses?

Well, we don't comment on individual campus outcomes. But I have said in general in the past that we get about one percentage point of growth from a new campus. Now that will go down as our base gets larger. But I think it's fair to say that the Philadelphia campuses were in that range.

In terms of the marketing spend going forward, we would expect to continue to have a healthy marketing spend. As a percentage of expenses, we would expect it to be consistent with where it has been in the past, and maybe even slightly higher, because as the number of large metropolitan areas that we're in gets larger, the total percent of spend that goes to marketing -- particularly as you have newer and younger campuses -- will be at least where it is now, and maybe slightly higher. And then we'll hopefully get some leverage on both the INE line as our students per class grows, and also on the overhead -- on the G&A line.

Okay. And then maybe just a follow-up on Howard's question earlier on new programs -- have you thought about bachelor programs or anything along the lower -- maybe lower-level versus just the graduate ones that you have rolled out or are talking about rolling out next year?

Well, not for next year, but probably the most likely additional bachelor programs would be downward-integrating the three new master's into specific bachelor programs if it turns out that we have high demand for them.

But we'll watch that closely on the basis of student preference and student interest. And if there is a demand for courses that we have shown expertise in being able to teach, we'll certainly -- or demand for programs in academic areas where we have shown some expertise, we will certainly go to our accreditors and try and get those approved.

And then just one final one. Did you mentioned at all the number of new states that you're targeting? (multiple speakers) I don't know if you mentioned that.

For next year? Well, we'll open in at least two new states next year -- probably two new states next year -- Georgia and South Carolina. We've got interests in a number of states up and down the East Coast and moving west, but we don't normally disclose that until we've actually been approved.

Corey Greendale, First Analysis.

I had a couple questions about mix -- the continuing shift toward the business from IT. How much of that would you say is related to moving into new geographies -- are there different sort of demand characteristics in those geographies versus changes in your sort of existing footprint?

I would say a lot is based on geographic mix. We have in our markets in new areas where we have very, very high business and accounting interest and what relatively low IT. And the IT interests in the D.C. area has stayed fairly strong. So I would say the lion's share of it is probably geographic mix.

Okay. And then I also wanted ask you about online, particularly the mix synchronous and versus asynchronous -- if there has been any mix shift there, and what you see as sort of the demand characteristics going forward between those two?

Well, historically, it has been significantly weighted towards the asynchronous over the last two years. We're now up to about three or four times as many asynchronous courses as synchronous.

I don't really know in the future what it will be. But like everything else in our business, we are just trying to pay attention to what the students want to take and make sure we have enough inventory to satisfy them.

Is there any difference in the tuition you charge or the profitability of between sync and async?

No.

Brad Stephalos (ph), J.P. Morgan.

Congratulations on quarter. I was wondering if you could comment on the difference in sources of revenue in either Philadelphia or some other new markets versus your mature business?

Do you mean in terms of the Title IV?

Title IV and corporate.

I think it's pretty consistent. But I don't have statistics in front of me. But I remember looking at them, and it wasn't a big mix difference. It's about half of the classes -- half of the students are Title IV, and a good 20, 25 percent are corporate -- directly sponsored by the corporations to us. And then another -- we think around 15 percent are supported by the corporations through tuition reimbursement. But we don't see that. And then the rest is sort of assorted -- sources of credit.

And in terms of as you extend your geographic reach -- obviously, are going further south, and I guess if -- in '05, you would go further west. Do you expect that to stay the same, just based on the relationships you have, or --?

We would like it to stay the same from the standpoint of -- we would like to continue to have a good solid chunk of our revenue base come from the direct corporate reimbursements. There's just a whole series of reasons why we think that's important, not the least of which is they are easier students to market to if you've already got an arrangement set up with the entity. Then the Title IV, we've always been a relative low percentage of Title IV, like some of the other institutions that are focused on working adults.

And then the alternative sources of credit, whether it's tuition reimbursement to the student or some other kind of funding, we feel fairly comfortable that there's a lot of those out there, and that the source of credit is not going to be an issue for our students if they want to come back to school. But the determining factor for our students is always that they think they have the time. If they think they have the time, they generally are able to find the sources of credit to pay for the tuition.

Okay, great. And then just a follow-up -- really, not to beat this mature campus issue to death, but if I go back and look at -- in the fall of 2000, excluding online students, you had about 11,600 students enrolled at effectively these 14 mature campuses. And today you're saying about 2000 students less. At what point -- I know you've mentioned it in the past -- is there any sort of kind of -- have you guys talked about a certain student level? And I don't know how that trends between the campuses obviously, but at what point do you consider I guess reallocating your real estate costs in a more significant way?

Well, we've already done it. We have adjusted one campus last year. We are going to be adjusting three campuses this year. And we're going to make the campus physical platform fit the demands of the students. It's actually rather convenient for us, because most of these campuses in the D.C. area were either in need of renovation or, now that we've gone to a new internal fitout for the campuses, will benefit from having a renovation. So it's just a question of matching the asset size and your fixed asset cost to your revenue base.

Should we expect on a nominal basis your lease costs to decline perhaps in the next 12 to 24 months?

Well, they are declining already. I don't know if -- yes, I guess that's probably fair, because the D.C. is slightly lower than it was a year ago. I don't think it's going to have a big difference.

I mention, Brad -- we treat a mature market as more of an exercise in matching demand. And I don't see it as a real source of margin outperformance. But it's already I think a really healthy margin. So it's more a question of focusing on quality, serving the students, and making sure that we don't have wasted effort or wasted space.

Okay. I appreciate the color. Thanks.

Fred Mccrea, Thomas Weisel.

I found the mute button switch. Wanted to follow-up quickly on the Philly market and the two locations there. Can you give us a read on how the opening there stacked up, say, to the North Carolina market in terms of enrollments? And did you walk in with a higher or lower set of expectations for the Philly market relative to North Carolina the year before?

We had had -- our expectations for the North Carolina market were based on our model, and we did better than that. With regard to Philadelphia, we opened in a different quarter, so we had a little bit more of an advantage there opening in the fall versus opening in the summer. And we expected there to be higher cost.

We did have higher costs in terms of many of the costs associated with running the campus -- just because it's a higher-cost market. We were pleased with the ability of our marketing team and our operational team to generate leads in a high-cost media area at a lower cost than we expected. And we did a lot of creative marketing and a lot of public relations support that I think got us a fairly strong start. And so I would say we were mildly surprised on the upside with regard to enrollment numbers, and very pleasantly surprised with regard to the costs associated.

(OPERATOR INSTRUCTIONS) Richard Close, Jefferies & Co.

Just really quick, can you give us an update on the military presence you guys have in your student base? And are there any discounts associated with military students?

There are. We have a discount of -- what is it, Mark, about 25 percent? 30 percent? (multiple speakers) 30 percent off of our standard tuition, which basically matches up with the full reimbursement that active duty military get from the government. It's a pretty good demographic for us. It's certainly -- in terms of the socioeconomic stage in life, it is almost exactly the student we're trying to reach -- someone in their mid 30s who may not have gotten a college degree, and in the case of the military, are looking in the next five to ten years probably of retiring from the military and going into the private sector.

On the officer side, getting a graduate degree is a very important part of their progression. And we operate in markets where there are a lot of military -- not the least of which is Washington, D.C.

So it's a fairly significant focus for us. And I would guess -- what did we say, Mark, about 6, 7 percent (multiple speakers) of our population is active-duty military?

Gary Bisbee, Lehman Brothers.

Just two quick ones. Did you comment -- does it look like the Tennessee campuses are likely to break even -- or did they this quarter, or are they likely to next quarter? Is it safe to assume they're, like North Carolina, way ahead of your previous plan?

Well, we have two different markets in Tennessee. And I would say that one of them is training closer towards North Carolina, and one of them is actually closer to our model. Neither of them have gone to profitability yet.

But the real -- even if they're not at profitability, if they're losing a lot less money than we expected, that's where we get a nice margin boost on the overall business.

Yes, thanks. And then the second follow-up -- you mentioned that there will be some higher cap-ex in the fourth quarter -- I think you said retrofit some campuses. Is that what -- basically, what Brad was asking about, in terms of setting them up to handle more online students and not necessarily have as much classroom space?

Yes, exactly. But it's also -- in the case of this quarter, it's also two campuses in the Washington, D.C. area that we just thought badly needed retrofitting. So we're able to basically accomplish both things at once.

It appears there are no further questions at this time. I would like to turn the conference back over to Mr. Robert Silberman for any additional or closing remarks.

Thank you, Stephanie. We appreciate everyone's participation on the call and look forward to talking to you again in February at our year-end call. Thanks very much.

This does conclude today's program. Thank you for your participation.