Strategic Education Inc (STRA) 2003 Q4 法說會逐字稿

Welcome to Strayer Education Incorporated's fourth quarter and 2003 full year earnings conference call.

At this time, I'd like to turn the conference over to Sonya Udler, vice president of corporate communications for Strayer Education. Please go ahead.

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

For those of you that wish to listen to the conference via the Internet, please go to www.strayereducation.com, where the call will be archived for 90 days. The replay is 888-203-1112, pass code 713391.

Following Strayer's remarks we will open the call for questions and answers. Please note that today's press release contain statements that are forward-looking and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act. The 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 could cause the company's actual results to differ materially.

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

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

Thank you Sonya. Good morning ladies and gentlemen. I'd like to begin this morning by giving a brief overview of the company and our business model for any of the listeners who are new to Strayer. I'll then ask Mark to comment on the detailed financial results for both the quarter and the year, after which I'll talk a little bit about our enrollment results for the winter term, give a brief update on our growth strategies and then finally talk a little bit about our outlook for Q1.

Strayer Education Inc. is a for profit education service company whose primary asset is Strayer University, a now 20,000 student, 25 campus postsecondary education institution which offers associate's bachelor's and master's degrees in business administration accounting information technology public administration and education.

Strayer students are working difficult. They're returning to school to further their careers, and our revenue comes from their tuition payments and associated fees. Approximately 50% of that revenue is in the form of federally insured Title IV loans to our students.

Our expenses include the cost of our professors, our administrative cost marketing and facilities and supplies cost. We currently operate campuses in six states and the Mid Atlantic region and online. We serve students in 50 states and 39 country through Strayer online.

Mark, with that, could you run us through the financial results for the quarter please?

Sure. Our financial results for 2003 include the positive impact of the gain on the sale of our student loan portfolio, which took place in the fourth quarter this year, and the gain on the sale of our Washington, D.C. campus building which took place in the third quarter of this year.

In accordance with GAAP, both of these items are included in the income from operations in the financial statements which we have released this morning. Given that these gains are not necessarily recurring, nor indicative of our underlying performance, I will focus on our financial results excluding these two items. I'm also excluding the secondary offering expenses incurred in the fourth quarter of 2002 for the same reasons.

Included in our press release is a table which reconciles our financial statements in accordance with GAAP to the following financial highlights.

Revenues for the three months ended December 31st, 2003, increased 25% to 42.8 million, compared to 34.2 million for the same period in 2002 due to increased enrollment and a 5% tuition increase which commenced in January of 2003. Operating income rose 23% to 16.8 million, from 13.7 million, for the same period in 2002. Operating income margin was 39.4%, compared to 40.2% for the same period in 2002. The decrease in operating income margin was primarily due to the increased expense associated with opening two new campuses in the fourth quarter of 2003, compared to no new campuses for the same period in 2002.

Net income rose 24% to 10.8 million compared to 8.7 million for the same period in 2002. Earnings per diluted share rose 20% to 72 cents, compared to 60 cents for the same period in 2002. Diluted weighted average shares outstanding increased to 15,036,000 shares from 14,609,000 shares for the same period in 2002.

Revenues for the year ended December 31st, 2003, increased 25% to 146.4 million, compared to 116.7 million for the same period in 2002. Due to increased enrollment and a 5% tuition increase effective for 2003.

Operating income rose 23% to 50.5 million from 41.2 million for the same period in 2002. Operating income margin was 34.5%, compared to 35.3% for the same period in 2002. The decrease in operating income margin is primarily attributable to the earlier timing of two new campus openings in 2003, as compared to 2002, as well as the increase of the total new campus openings to five in 2003, compared to three in 2002.

Net income rose 23% to 32.3 million, compared to 26.2 million for the same period in 2002. Earnings per diluted share rose 20% to $2.17, compared to $1.81 for the same period in 2002. Diluted weighted average shares outstanding increased to 14,857,000 shares, from 14,516,000 shares for the same period in 2002.

At December 31, 2003, the company had cash, cash equivalents and marketable securities of 108 million and no debt. The company generated 49.3 million from operating activities in 2003, of which 10.5 million is attributable to the sale of the company's student loan portfolio. Capital expenditures were 6.8 million for the same period.

In the fourth quarter, as part of a previously announced common stock repurchase authorization, the company repurchased 32,350 shares of common stock at an average price per share of $99.54. The amount available for repurchases after December 31, 2003, under this program is 11.8 million.

In the fourth quarter 2003, bad debt expense as a percentage of revenue was 2% compared to 1.9% for the same period in 2002. Days sales outstanding adjusted to exclude tuition receivable related to future quarters was eight days at the end of the fourth quarter 2003 compared to seven days for the same period in 2002.

Rob?

Thanks Mark. Just a couple of comments on the financials before I get on to the enrollment growth. The first one is, our revenue growth, you know, again emphasizing before the gain on the loan sale, about 25.5%, was about a point below what our internal model would have predicted as we announced a little over 21% enrollment growth in the fall and a 5% increase.

We think there were really two causes for that 100 basis point differential in revenue growth. The first which we believe is a pretty-certainly a temporary phenomenon is that we had a slightly higher drop rate in our fall term which we believe was associated with the hurricane that blew through our markets right in the first week of classes.

We just had a higher number of students that had previously registered not show up. We were told that the power out and for a couple of weeks in the Washington, D.C. area they weren't going to show up. We actually extended the start classes for a week to try to ameliorate that. We still had a slightly higher drop rate. I don't see that recurring.

The second phenomenon which we think is more of an ongoing trend is that our mixed shift of graduate and undergraduate students over the last several quarters is continuing to shift towards graduate. We got a higher rate of growth in the graduate students than the undergraduate. We're now well above 20%, 21, 22% of our students are in the graduate programs.

Now, we're actually pleased with that for a number of reasons. But one corollary to that outcome is that graduate students tend to take less classes than undergraduate students, and so our seat count per student in the quarter was down slightly from about 1.97 to about 1.945 I think something like that. And that obviously affects your revenue per student number.

Actually, Mark and I think that that may be an ongoing trend. We'll sort of keep our eye on that. But if that does continue we would expect that our actual revenue growth through the year would be about 50 basis points less than what would otherwise be derived by just adding our enrollment growth and the 5% price increase. But we'll certainly keep our eye on that.

In terms of the increase in operating income and net income, of 23%, again Before that gain on the loan sale, that was actually better than our model would have predicted. As the increase in campus openings during the quarter going from zero to two, as Mark described, we would have seen as causing, you know, over a 200 basis point decrease in operating margin for the quarter, was actually only about 80 basis points.

We believe that's because the increased cost of the new markets were largely offset by the strong enrollment growth for the fall term. We were sort of over a tipping point in terms of enrollment growth where that starts to add back in to margin, as well as the accelerated ramp to profitability of the new campuses as well as many people have remarked the continuing growth of online, which runs at a very high operating margin. So all that, together, caused a hire operating margin than we would have expected.

The bad debt expense remained at just under 2%. That was pretty much consistent with the model. The other key metric that I try and look at each quarter, and particularly at the end of the year, is our distributable cash flow growth for the full year, as Mark said, it's roughly 49 million, you take about 10 million out for the loan sale, it's about 39 million and then about $6 million of capex is down around 33 million.

That's the true distributable cash flow growth from my perspective. That's roughly equivalent to our net income and that part of the model again through the year tended to stay quite tight, that we are generating basically our net income as true distributable cash flow which can be, you know, given back to our shareholders or used in some other value-enhancing way. But that's above and beyond what we need to fund the organic growth strategy.

Let me also just reemphasize as Mark said in his comments, that for the quarter, there's the gain on the sale of the student loan portfolio, which GAAP income requirements require us to run it through the income statement, approximately $580,000 of additional revenue and operating income, another 2 cents per share of earnings on our GAAP income statement in the release.

We do have the table at the back of the release, it's also posted on our Website. I think a little clearer, because the columns on the release at least on the one I saw on PR Newswire didn't quite line up. The GAAP statement that Mark's been talking about you'll find on our Website if it is not clear on the news wire release.

Asset sales, we generated a 23% increase in net income and in distributable cash flow growth, at the same time that we almost doubled the rate of growth of our new campus investment. Put it another way, that increase in opening new campuses didn't really cost us as much operating margin as we would have expected.

That gives us a lot of confidence that we can open the five new campuses in '04, and two new markets, and keep our operating margins relatively stable through '04.

Turning to the winter term enrollment results, our total enrollment increased a little over 21% on a year-over-year basis. Across the campus network the new student enrollments increased 25% and continuing student enrollments 21%. The out of area enrollments was up 74%. In this quarter we again continued to see demand from our campus based students particularly in some of our mature markets to try to move towards taking online classes.

Again, I'd like to emphasize we're not trying to push that in one direction or the other. Once the student is recruited through a campus, we encourage them to take classes in whatever format they find the most convenient. And I think it's been a major help to us, particularly in some of our continuing student numbers, to provide that convenience.

With regard to the student course preferences, the business administration, accounting now education, public administration, all the non-IT majors, continue to shift up. They're slightly over 60% of our total mix right now and the computer science major are in the mid to high 30% range.

That continues a trend we've seen in the last 18 months and some regionally based but actually fairly consistent across the country where our business and accounting programs are really proving to be very, very popular. The information technology courses are growing, just not quite as fast a rate.

Turning to an update on the growth strategy. I think many of you will remember that's based on five objectives, the first is to maintain enrollment in the company's mature markets, second is to accelerate the rate of growth of new campuses particularly in the new states, third is to invest in and build up our online offerings, fourth increase our corporate institutional alliances and the final objective is to look selectively at potential acquisitions and reallocation of capital to enhance shareholder value.

On our first objective for the winter term, pretty solid quarter, mature campuses grew at 3%. Again, with that continuing preference for campus-based students taking online courses particularly in their later terms. With regard to the new campus openings, the two Philadelphia campuses continued solid growth in the quarter.

Our Tennessee campuses should actually reach break-even this quarter the Q1 of '04, that would be their fourth quarter of operations which is faster than our model, not quite as fast as our North Carolina campuses that actually did it in three quarters but we're quite pleased with the activity in Tennessee.

We're going to open a second campus in Memphis this month, actually is open right now, and we also opened the campus in Greenville South Carolina. Both of these campuses are currently enrolling students for the spring term which will start at the end of March and that will be the first two of our planned five campuses this year.

We're on track for two new campuses in the market in the latter half of this year, and one other campus to be determined, most probably in one of our existing markets, where we've got fairly high demand. I

In the online business the growth for the fall term at 74% was significantly above our 50% target. On our announced secondary offering, we're currently awaiting clearance by the S.E.C., I'd refer any questions to our lead underwriting, Credit Suisse First Boston.

On the business outlook, due to the strong enrollment growth for the winter term, offset partly by the increased expenses associated with the new campus openings, we estimate our first quarter fully diluted EPS will be in the 73 to 75 cent range.

Again, that is on a fully diluted basis. There is nothing associated with the secondary offering that will affect that.

Then one final note we're tentatively planning an investor day to be held on May 3rd in conjunction with our annual meeting here in the Washington, D.C. area. Sonya will put out a save the day press release with some details in the near future, but I did want to highlight that for our investors and analysts. It will be an opportunity to spend a lot more time with the rest of the management team and the operating team. I will probably try and say as little as possible, give you guys a chance to talk to the people that are really getting the work done here.

With that, Bill, I'd be pleased to answer any questions.

Thank you Mr. Silberman. We'll take our first question from Howard Block, Banc of America Securities.

Good morning Rob and Mark, congratulations another solid quarter. First question is, on the basis point erosion in the margin, you said it would be 200, end up only being 80. Would you have expected that incremental of 180 BPs to be in the educational and instructional line?

I think it would be more in the selling and promotion, Howard.

Okay. Any sense of what it may have been in the IE and S line just to give us a sense of how much incremental profit the online would have added if we could sort of normalize for the new openings?

I think all the costs that we were going to incur in lease cost for the facilities, and the hiring of professors and things of that nature were occurred. I'm not sure there was any real savings in the I & E line to what we were expecting.

Okay. And then in terms of this trend that you noted about the master students becoming a greater portion, how much of that is being driven by new program introductions, let's say new master's programs relative to new undergrad versus some other secular trend and if it is something about a secular trend maybe you could offer a little bit of color of what you think it is.

We've only had the new programs in place this last quarter and we had a pretty solid start on those, but I wouldn't say it was overly material. It was about the effect of each of them was probably the effect of sort of opening a brand-new campus. I think it is more of a secular trend, probably geographic.

We see in some of our markets outside of the D. C. area some of our new markets that particularly the MBA program, has a faster jump start, and it's some of those new campuses, you know, we're upwards of 50-50 between graduate and undergraduate students. I don't really know where that goes.

Although as I said, we're delighted to have the mixed shift for a couple of reasons. One is, is that it's a testament to the academic quality, you know, the restrictions and the oversight in the graduate programs tends to be a little bit higher. And it's also in many ways you know more competitive.

We feel that by doing well there we're sort of establishing ourselves in those new markets. But we'll keep our eye on it. It's really the first, you know, sustained period that we've seen it which is why we're talking about it now, and if it continues, I think we'll be able to draw more conclusions over the rest of the year.

Okay. And then this is the last question. I don't know if you offered a lot of color in your opening comments or not, but can you walk us through the schedule for openings in '04, in terms of locations by quarter?

Well, we have the second Memphis campus and Greenville, South Carolina which are open right now, and will start offering classes in the spring term. We expect to have two campuses in the Atlanta market opened in the latter half of the year. We're not pinned down yet as to whether we'll be opening, you know, for the summer or for the fall.

Then we have one other campus that we are actually waiting to decide where we want to allocate it to. We've got a number of existing markets that are sort of clamoring for a second campus and we're just going through our Al allocation process over the next month or so to decide where we're going to put that.

Thank you and again congratulations.

Next question comes from Mark Marostica with Piper Jaffray.

I just wanted to ask about the comment you made, Rob, regarding Tennessee's ramp to break-even in four quarters. And I'm wondering, I know historically you've talked about a six quarter ramp to profitability.

As you look to fiscal '04 and the new campus openings, do you think this is something we should continue to occur a rapid ramp to profitability or is the more rapid ramp unique to the markets you've entered in '03?

I just don't know, Mark. The data points to date are very positive. Because we've got the two markets in Carolina that were both, you know, even faster. And then we now have two separate markets in Tennessee which, although not quite as fast as North Carolina they're certainly ahead of the model that Mark and I played out three years ago when we were looking for it.

It's still three markets. We're not yet profitable in Philadelphia, moving rapidly in that direction and opening up several other new markets this year.

So I think from the standpoint of our investment decisions, we're maintaining our original model mainly because it's not really that significant to us. Whether a campus gets to profitability in three or four or six quarters is not going to affect the rate at which we open them. Because at any of those ramp rates, they are amazingly profitable investments and we'll do as many as we can consistent with quality.

More than anything else we're keeping track of it and letting you all know as we see developments that we know are sustainable or real. But I wouldn't draw any other conclusions beyond that at this point.

Okay. And I want to follow up on your comment on the undergraduate to graduate shifting. Is there any difference in student retention between the two groups that you notice?

No. They've been fairly consistent on that basis.

Okay, great. Thanks. I'll turn it over.

Next to Greg Cappelli, Credit Suisse First Boston.

I wanted to follow up on Howard's question of average student rate per course load. New programs, how do you relate that to new schools going into new areas, new geographies, is that something you can get your arms around or see how it falls out over the next year or two?

Well, we certainly have as I said a higher percentage of graduate students in some of our new markets. It may be geographically derived or pushed. We really don't know that. We will keep watching it closely through the remainder of this year.

As I said, from our standpoint, we're actually pleased with the student and educational community acceptance of the graduate programs. We feel that you know, over the long run, getting established in those markets with that reputation is going to help the undergraduate as well.

The other thing I'd say is the undergraduate's growing also. It's just not quite as fast in some of those markets as the graduate which is causing some of that mixed shift.

Sure. I'm guessing online actually did not contribute to that decline, is that correct?

The decline in seats per student?

Yes.

No, it did not. As a matter of fact, online at both the graduate and undergraduate level is at or above the university average.

Okay, so I'm guessing that would help just offset some of that since your fastest growing piece going forward?

Yes, I guess that's right. I hadn't really thought about that.

Okay and then just a couple more. In terms of the schools that you've opened over the past year and a half, can you just give us a little bit more color on how some of these are doing, maybe Philly, maybe some of the schools in Tennessee, it sounds like in each case they ramped up faster than expected. Is there anything that stood out to you now that you've had a little time with these open and could Philly actually bear more than two schools for you guys?

Let me take those in reverse area. Philly is I think the fourth or fifth largest metropolitan market in the country. And you know, we've got really ten campuses in the D. C. area although I said before we may be slightly over invested here. Well in excess of two, I don't know what the up upper limit is in Philadelphia, but certainly be four or five and maybe even more there depending how that market plays out.

All the markets have their own individual characteristics. I would say that from a management standpoint, the point that's driven home to us again and again is that the kind of recurring theme or the regression analysis outcome of when a campus does well or not is based on the caliber of the people that we put in as the campus manager and the campus dean.

All the markets seem to have their own inherent vitality, and strength in terms of demand, and that's really a question of how we're managing that, that affects the rate at which a campus grows. Which is why we continually both internally and externally focus on the fact that the development of our campus management personnel is the real limitation on our growth, and becomes sort of the barometer for what kind of quality we'll have there.

Okay. Great. Final question, I guess this is on the mature school sort of D. C. area question that I know it's come up over the past couple of years. You guys, I think, have a beautiful new facility in the D. C. area that I think just recently got opened. I know it technically shouldn't be the driver of enrollments there, but could the mature schools have had some issues there in terms of growth.

Is that something that you think in the next quarter or two could actually help that? I know that you had some issues there with the school.

Yes. I mean, I think that we believe that the physical surroundings of the campus are an important determiner of academic quality. I mean, people like being in nicer, newer facilities. We're also able in the newer facilities to have a lot more technology, have the campus, the classrooms be wired in a better way.

We've shifted some of our resources on our campuses to deal with the phenomenon of students wanting to take courses online by providing larger computer labs at the campus. -

This is kind of an important point, that really helps to frame this issue of campus versus online students. A number of our campus-based students who we report as taking 100% of their classes online do not have computer capabilities at home, are taking the online course at the computer lab at the campus. I

Increasing the capability of those labs, making the student areas at the campus the library facilities the counseling facilities more attractive, and supportive, I think actually is going to be a positive benefit for us.

I wouldn't begin to predict what it means in terms of enrollment. But it certainly improves quality and over the long run I think that's the best we can do.

Great, thanks a lot.

Next question comes from Fred McCrea Thomas Weisel Partners.

Just to follow up on a couple of your comments, Rob, earlier in the call. In terms of seat per student, 1.97 and 1.945, is that the average across the system or is that for the grad versus the undergrad?

That is the average across the system which is the effect of the mixed shift.

Could you break that down for us grad to undergrad?

I could do it directionally. A lot more of the grad students take one course, a lot more of the undergraduate students take two courses. I done have the specific breakdown by group. But that shift from 1.97 to 1.945, we think, is the results mostly of that mixed shift.

And the 1.945 represents Q4?

Correct.

And the 1.97 is the previous three quarters during the year?

No, no, Q4 the year before. Sorry, year-over-year care son.

Perfect, okay, very good. And then in terms of the South Carolina campus, you're approved for more than one in that market, correct?

Correct.

Okay. And what are your thoughts there? Would that be probably in '05 or '06 before you'd go to a second or third?

It's really a question on the competing claims for the resources. We're approved for three in that state. We're approved to open the Atlanta market. We definitely have areas in Pennsylvania we want to fill out. We've got other states in which we have applications.

It really is just a question of the number of people that we have in place that can man the opening of new campuses that we have confidence in, and then you know, which metropolitan area or market has the highest demand at the time.

In regards to the market density of certain markets, clearly looking back historically at Strayer, with some of the best margins in the space, clearly picked up probably some benefit from its regional isolation and the concentration of marketing dollars that could be applied to one regional metro market.

What are your thoughts, obviously in light of what you said about Philadelphia and the concentration that could unfold there, are you going to have a preference for denser markets where you can get more marketing leverage?

Well, we ultimately want to be nationwide. So we'll be in dense and less dense markets. We have a model which works pretty well in, you know, lower population areas with only single campuses. Denser markets have a better opportunity to quickly build out the brand. -

I would guess there's a slight preference for that. But it's not overwhelming, and it would really depend on, you know, where our opportunities come up and where we see the highest unmet demand that we can fulfill at the least risk with the most chance of ensuring our academic quality.

Understood. All right, I'll pass it on.

We'll go next to Gary Bisbee of Lehman Brothers.

Mike Glass on behalf of Gary. He apologizes not being able to join us this morning. Could you talk about the percentage of your bachelor graduates who go on to take immediately or eventually a graduate program, and has that percentage changed in any direction recently?

I don't have the exact numbers, Michael, but it is increasing. We count those students as continuing students. We don't count them as new students. And it's one of the reasons that our continuing student number, you know, began to increase a couple of years of ago and has stayed fairly high.

As we roll out the new programs, I would expect that will increase that as well. I would say a little less than half of the students that we've enrolled in the new programs are continuing students, are, you know, bachelor graduates.

So we think that is a great phenomenon for us. We like when our students have enough confidence in the university and have enjoyed their experience, such that they want to enroll for the graduate degree.

Okay. Of the folks who dropped after the hurricane, have most of them or all of them returned to class?

We got a fair amount of them for the winter term, yeah.

Okay. Could you talk a little bit about the depth of your campus level management team, and the feeling of comfort that have you the capacity to continue to staff the new campuses, based on that current depth?

Yeah, we're very comfortable with our ability to staff five new campuses this year. We've done a number of things in the last couple of years to try and beef up that internal management development process. We run a program, we call the vision leadership seminar, twice a year. Where we bring in a small, but select number of individuals throughout the university for about a week-long fairly intensive training session with our senior team here at the faculty, as well as some people from the outside.

That has given us, I think, that's deepened our bench strength quite a bit. We've also been I think quite fortunate in a couple of markets to be able to attract people from outside the organization who we think have the ability to be very helpful to us.

So we wouldn't have announced five campuses for '04 if we weren't quite confident that we have the strength to do that. And our rate of campus openings in the future will be dependent on how well that strength continues to develop.

Sounds great. Thanks and nice job on the quarter.

Our next question comes from John Flanagan, First Analysis.

Sitting in for Corey Greendale. Could you talk about the marketing resources and the company has focused on sustaining growth in out of area online?

Well, the market has not really been the issue there. There is a pretty high demand for out of area online education. 2003 has a separate organization which runs academically and administratively, the out of area online students. A certain part of our marketing budget each year and each quarter is set aside to develop leads for that organization.

I would say that the limitation on the rate of growth for the out of area online is almost more than anything else the rate at which we are hiring quality professors, that we have quality management in that part of organization.

We're comfortable over the next several years that the 50% target that we have out there is sustainable, with the infrastructure that we have, the human infrastructure that we have. We're a little bit ahead of that now, but over time, I suspect that will probably trend back unless we get more and more comfortable with our ability to expand the academic infrastructure to a rate which can go higher.

Thanks. Any update on the PBS relationship?

It is still in the formative stage. We're still basically drawing out the way the program's going to roll out. We've had a little bit of marketing help from them to date but not a significant amount. As I said, it's still formative.

Thanks. Warming up here, any news on corporate alliance front? I think you were active in Philadelphia, perhaps elsewhere.

Yeah, we actually had a number of organizations in the Philadelphia area that we signed up. Many of them are national companies for which we already have a relationship like Verizon and Northrop Grumman and things like that. That continues to be a very solid part of our student mix.

We're at or slightly above the 20% target that we have for that and revenue at the same time that we're growing the student population base by in excess of 20%.

Any changes in the corporate reimbursement trend that you're seeing?

I would say it's loosening up. It was, I thought, tightening over sort of a 12-month period in mid 2002 to mid 2003. I would say now we're starting to see a little bit of that affect of a quickening economy that I think makes it easier for those programs to get going.

Thanks. Last one, any detail on licensing processes in new states?

We don't comment on that until they're done. But we have a number that are in active development at this point. We'll continue to look to expand up and down the East Coast, generally contiguously to the place we operate and then moving West.

Thanks guys.

We'll take our next question from Richard Close, Jefferies and Company.

Congratulations Rob and Mark. I had a question, not to beat the trend on the graduate student, but if they're just taking over one class, how long does that take them to get through the program?

If they take one, it would take them about two years.

Okay, okay. And then in one of your answers, or response to a question, you talked about the rollout of graduate programs. Are there any undergraduate programs that you're rolling out as well, maybe, to sort of counterbalance the trend on the graduate side?

I really don't think that the development of the new master's programs has a significant impact on that number now because they're not really very big at this.

But the answer to your question is ultimately if the master's programs in education, public administration and health care administration are successful, we would look to downward integrate those into the bachelor's level.

I didn't hear anything with respect to part time and full time. Is there anything happening there, either on the graduate or undergraduate side, that is also impacting the class load?

Well, within the two categories, the mix between part and full-time is staying relatively constant. The graduate category has a higher mix of part-time students.

Okay. And what was the overall mix?

I don't have that in front of me, Richard. Let's get that back to you.

Okay, great. I appreciate it. And congratulations again, guys.

Our next question comes from Brad Stephalos, J. P. Morgan.

Just wanted to follow up with a question, I guess Greg changed about one of the campuses that changed in the D. C. area. What are your plans in 2004, any change to your physical plant in your mature markets?

We've actually got a pretty big program in place Brad. We think as part of our capital plan, that over the next two years, we'll probably replace all of the D. C. campuses or essentially retrofit those D. C. campuses that haven't been built in the last four to five years. That will be ongoing.

We have accomplished two at the end of '03, and we've got a schedule of four this year, and probably another couple in '05.

I mean obviously it's a little hard to tell at this stage what the impact in enrollment trends will be, we can kind of guess what that will mean but as far as the overall profitability and efficiency of the space, is it possible for you to operate at a higher margin in these mature markets, obviously depreciation and expense you'll incur from the capital expenditures?

That's not really our focus, Brad, it's more improving the quality of the experience. These campuses already operate at pretty high margins. So this is not a margin enhancement program. But over the long run, I think it's a margin sustainment program because if you don't have decent facilities, you're not going to have students, period.

And the overall capacity of the school will be relatively similar?

Yes, yes, although slightly shifted to take into account as I said this preference on the part of students to take online classes. In other words, slightly less overall square footage, but within the campus more of the square footage based on student support activities and slightly less classrooms.

Sure, that makes sense. And then just to switch gears, on the corporate tuition reimbursement side, what is the percentage of revenues in newer markets, is it commensurate with the 20% level that you've seen company wide or is it a little bit lower and you see areas for improvement there?

It bounces around, and a new market by definition is so small that you could have misleading kinds of statistics. Some of the markets you know maybe all the students when we first start off are coming from a couple of early relationships that we have. Then it kind of grows out.

The long term trend in the new market -- I haven't seen anything in our geographic markets that suggests it's significantly different from what our experience has been in the D. C. area.

Thanks a lot; I'll turn it over.

We'll go next to Jerry Herman, Legg Mason.

I was wondering if you could summarize the number of campuses you have approvals for especially in the new states, I think North Carolina is 9, South Carolina you mentioned 3. In PA, I thought it was just Philadelphia, geographic numbers or numbers moved up?

The way Pennsylvania works is you request a specific approval when you open each campus. There's not a larger approval for a larger number of campuses. I believe your numbers were correct. North Carolina it was up to nine and South Carolina it was three.

Tennessee and Atlanta, are there any upper constraints on those areas?

) Those are also like Pennsylvania which is a per campus approval.

Great, thanks. And the three new programs, have you specified which number of schools or how many schools those programs are deployed at?

Well, they were rolled out or available at all of our Maryland, D. C. and Virginia campuses because that's where the -- actually I take that back. Two of our Maryland campuses, the education program was not available at. Because of a state regulatory constraint. And of course they were all available online.

We ended up with classes in two or three of the physical campuses and then a number of classes online in the first rollout this term. And we ended up consolidating classes at nearby campuses to try and get a little more efficient class size.

I would expect over the next year or so as we continue to market them and they become more well-known, that certainly all of our campuses would have some participation in those programs, and then ultimately as we go back to the states that we had just been licensed in, North Carolina, Tennessee, Pennsylvania, and request approval, and then for all our new licenses and new states we're including that right now.

Okay, great. I guess the question of the day is, grad versus undergrad. Could you address the duration and pricing differential between those two types of students?

Yes, very similar duration. Because most of our under graduate students come in with about half of their undergraduate credits already earned. And so that you know, it's about two years in both cases. And then on pricing differential, we charge about 30% more for our graduate programs, however, on a, you know, net contribution basis, they're relatively similar because our graduate classes tend to be a lot smaller. They're more seminar type classes.

Okay. Great. And then finally, last thing I'll ask. You guys did not speak to guidance or full-year guidance in the release. Should we interpret that as the old guidance or previous guidance applies or would you like to address that issue?

Well, I think the way I'd like to address it, same way I talk about it last time, is just to reemphasize that what we gave in the fourth quarter of last year isn't really guidance in the traditional sense. I don't really believe in that. Clarity as to how our model operates. If, given the investment schedule that we have, and if we have 15 to 18% enrollment growth, through the year, then economically or mathematically, that is the margin expectation that we have and the earnings per share.

For the first quarter of '04, we have higher enrollment numbers. If those numbers stayed high through the rest of the year, and we didn't accelerate our rate of campus openings, then you can see from that model that our earnings will be higher.

I'm really not in the business of predicting what our enrollment's going to be before I know what it is. We tell everybody that each quarter, so that you've got the exact same view we do, 90 days out. -

So the only real guidance we ever give is the next quarter ahead guidance which we can be very specific on because we're really more preannouncing results than giving guidance, we know what our enrollment will be.

15 to 18% enrollment relative to the first quarter, but I'll let you move on. I appreciate it.

Next to David Babinski; Hart Capital.

You guys build a great brand and you deserve a great deal of credit. Congratulations. First, let's talk about online. Is there any way you might be able to give us a little color on perhaps how that model for online is rolling out internationally and attracting perhaps international students which may be a big upside for you guys?

Well, we have a number of online students in our online, in fact that was one of the initial sources of its growth because we had a number of international students that came here to the Washington, D.C. area, and attend campuses and then went back into their home communities and talked about it.

I would say that percentage, as a mix, increased slightly after September 11th, because of the fact that it was more difficult to get visas to come here. It continues to be a fairly meaningful portion of our out of area student population.

Our marketing efforts for that, I would describe as more passive. I mean, we're available on Websites for people to find us, and we have a pretty strong word of mouth in some of the areas where we've had strong F-1 student visa participation here in Washington. It's maintaining about ten percent of our out of area online is coming from overseas activities.

Is that full time online international or part time or too fine a delineation to make?

I actually just don't know the answer. I don't think it differs much from the mix between we have part time and full time with our domestic activities.

So actually, a 10% composition of your online students being let's call it classified as international students, wherever that may come from, that may represent potentially depending upon how your marketing effort rolls out, other than word of mouth, of becoming more formally, a real upside potential for you?

Well, as I said earlier, I don't really see the market demand as the limiting factor for our online programs. And that certainly is the case domestically as well as internationally. The international student actually poses even more of a quality issue with regard to serving that student, because you may have major time zone differentials, less of a support structure, and a little more difficulty in terms of reaching that student outside of the online activity which is one of the reasons we're continuing to beef up our student support service functions at the online, not just for the international, but for all of our out-of-area online students.

So we're pleased to serve those students. We think that we have a product in terms of a U.S. educational degree, which is you know, well respected and sought after. And we don't see, for the online, as the, you know, the border being a limitation on our ability to attract students.

Yeah, and the time line, excuse me the time zone differential you spoke about, this is really asynchronous learning I'm assuming.

Right.

Therefore, that wouldn't be a barrier, would it?

Well, you're correct with regard to the access of the classroom material. But for some of the other students' support activities, you know, if the student has a problem if they need to speak to a professor, if they need to speak to a student finance counselor, something like that, the time zone difference does have an effect.

My second question is is there any way someone earlier spoke and asked you to speak a little bit more about some of the corporate alliances. You mentioned in the Philly area, Verizon and I think you mentioned Northrop Grumman.

Is there any way to connect the dots between building these corporate alliances out more between your new campus openings and something you mentioned earlier you thought there was a trend perhaps toward loosening the corporate tuition reimbursements because your stated goal is nationwide, you build out the East coast and build out the West. Is there some sort of cogent strategy there?

Our idea is that you build out a nationwide network of campuses, and you continue to support the online activities as an important supplement to that. And that one of the ways in which you reach working adult students is go to where they work. So the corporate alliances or institutional alliances is a big thing of what we try to accomplish.

We start with any organization we already have an agreement with, and entities in some cases we may have a number of online students from that market. And then we move towards trying to set up specific and separate agreements with employers in the area, and then sort of take it from there.

Okay. Last question. Again, this was part of your five-point strategy and talked about the enrollment metrics, new campuses, building online enrollment and the corporate alliances. Last one was selective enrollment, is there any specific program of study that really needs to be added to the existing program base or some sort of geographic expansion European or otherwise that really makes a lot of sense for your company?

No, in the acquisition area, we've never really looked specifically as a means of expanding into other program areas. We're quite comfortable and happy with the academic offerings that we have right now. They're the ones that we know the best, that we're good at, we have a track record on and they seem to be in high demand.

So for us, and I guess the evidence is pretty overwhelming, we haven't done any acquisitions in three years. Nothing we've seen has been more compelling than our internal growth strategy. What would be attractive for us are entities that share a similar focus and goal on academic quality, and ones who could supplement and help the development of our staff in a way which would allow us to, you know, accelerate our growth at the university.

So really it's just shared goals?

Yes.

Okay, thank you very much. I'll turn it over.

We'll take a follow-up question from Greg Cappelli from Credit Suisse First Boston.

Thanks Rob, just a quick one here. Just in running through the model here, we take into consideration the sort of the revenue growth trend, the margins that you talked about, and then all the investment into the new schools. Is it possible to be 40 million or slightly in excess of that for a free cash flow number in fiscal '04, just wanted to get your thoughts on that.

I would expect that our distributable cash flow in '04 would be roughly equivalent to our net income. I believe at the 15 to 18% enrollment number that we have in our model, that yeah, that's pretty close to that.

Okay, great, thanks a lot.

And Mr. Silberman we have no further questions at this time. I'd like to turn the conference back over to you for any additional or closing remarks.

Thanks very much. I appreciate everyone's participation. I want to reiterate we have an investor day in May and we'll have more information out on that. We will be discussing the secondary offering as we have information available on that as well. Thanks very much.

Thank you. That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.