Strategic Education Inc (STRA) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Strayer Education Incorporated's First Quarter 2004 Earnings Conference Call. At this time all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. If you need assistance during the call please press the star or asterisk key followed by the digit zero and someone will help you.

At this time I'd like to turn the conference over to Ms. Sonya Udler, Vice President of Corporate Communications for Strayer Education.

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 who wish to listen to the conference via the Internet, please go to www.strayereducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in real time a replay will be available today at 3:00 p.m. eastern time through Tuesday May 11th. The number for the replay is 888-203-1112, passcode 565712. Following Strayer's remarks, we will open the call to Q&A.

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. The statements are based on the company's current expectations and are based on 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 by thanking all of our shareholders and the members of the investment community, who attended our Investor Day and Annual Meeting earlier in the week. It was a great opportunity to get a deeper view of both our management team and our execution strategies, and we very much appreciated your attendance -- those of you who were there. For those of you who were unable to attend, the slides are available on our website to review at your convenience. And I would urge for those followers of the company to go ahead and do that because there's a lot of good information there.

As is our custom, I'd like to start with just a brief overview of the company and our business model this morning, for any listeners who are new to Strayer. I'll then ask Mark to report on the detailed financial results for the first quarter, after which I'll talk a little bit about our enrollment results for the spring term, give a brief update on the growth strategies, and end up with a comment or two on our outlook for Q2.

Strayer Education Inc is for-profit education service company, whose primary asset is Strayer University, which is now an over 20,000 student, 29 campus post-secondary educational institution, at which we offer associates, bachelors, and masters degrees, Business Administration, Accounting, Information Technology, Public Administration and Education. Strayer students are working adults who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. And approximately 55% of that revenue is from federally insured Title IV loans to our students.

Our expenses include the cost for professors, our admissions, and administrative staff, marketing expenses, and facilities and supplies costs. We currently operate campuses in seven states in the Mid Atlantic region, 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. Mark?

Revenues for the 3 months ended March 31,2004, increased 26 % to 46.1 million compared to 36.7 million for the same period in 2003 due to increased enrollments and a 5 % tuition increase, which commenced in January 2004.

Our operating income rose 31 % to 18.5 million from 14.1 million for the same period in 2003. Operating income margin was 40.2% compared to 38.4% for the same period in 2003.

Net income rose 29% to 11.5 million compared to 8.9 million for the same period in 2003. Earnings per diluted share rose 25% to 76 cents compared to 61 cents for the same period in 2003. Our diluted weighted average shares outstanding increased to 15,091,000 shares from 14,639,000 shares for the same period in 2003.

At March 31, 2004 the company had cash, cash equivalents and marketable securities of 123.9 million and no debt. We generated 15.9 million from operating activities in the first quarter of 2004. Capital expenditures were 2.3 million for the same period.

For the first quarter 2004, bad debt expense as a percentage of revenue was 1.5% compared to 1.6% for the same period in 2003. Day's sales outstanding adjusted to exclude tuition receivable related to future quarters was 9 days at the end of the first quarter 2004 compared to 7 days for the same period in 2003. Rob?

Thanks Mark. Just a couple of comments on the financials. The revenue growth at just under 26% was consistent with our model we had announced a 21% enrollment growth through the winter term and a 5% price increase. As Mark mentioned on Monday at the Investor Day we no longer had interest income on Strayer-owned student loans running through our revenue line but that was made up, you know, more then made up by some increased fee income on application fees and some other fees. The basic kind of, the metric that I think is important here is that our seats per student ratio came in about what we predicted when we talked about it last quarter, which is a effect of the increased growth of the graduate students versus the undergraduate students.

We also, as Mark discussed on Monday, that's partly offset by the fact you get a higher tuition per seat because we charge more for the graduate seats. But basically somewhere between 400, 500 basis points above our enrollment growth is where we expect our revenue growth to come in, in any given quarter. We did have a very large 180 basis point increase in operating margin. However, only about half of that is increased real operating leverage in the business. As Mark mentioned, the other half is a result of the accounting reclass, which he went through on Monday. So you know, positive move in that area but not all of it actual real increase in operating leverage. But about half of it was mainly, would result to the ramp to profitability in some of the new campuses.

Turning to the spring term enrollment results; total enrollment little over 23% on a year-over-year basis. Across the campus network, new students increased 29%, continuing students increased 22%. The out of area online enrollment was up 74% over the previous year. Again, it continued to see high demand from our campus-based students desiring to take online classes. As we've discussed many times we don't push that in one direction and other. It does seem to be reaching a bit of an equilibrium and that, I think this is the third quarter in a row marked with a growth of total students taking 100% online was below the growth of the out of area, and so as we've said we assume that over a period of time that will reach an equilibrium and than the use of or the growth in total students taking 100% online will be somewhere between our total student growth and our out of area online growth because those are two metrics which will drive that when the mix shift reaches an equilibrium.

With regards to student course preferences Business Administration and Accounting degree seekers account for slightly over 60% of our students -- for the spring-term. Computer Information and Science degree candidates are about 35%. That is relatively steady over the last couple of quarters. But a rather significant shift over 2 or 3 years ago where it was about 50-50.

Turning to an update on the growth strategy. Many of you who remember and those of you that were at the Investor Day were re-introduced to the fact that we have five basic objectives. The first is to maintain enrolment in the company's mature markets. The second is to accelerate the growth of new campuses, particularly into new states. Third, to invest in and buildup our online offerings. And fourth, to increase our corporate and institutional alliances as sources of students. And the final objective is to look selectively at potential acquisitions and potential reallocation of capital.

On the first objective, for the winter term, very strong performance there with 5% growth at our mature campuses. On the new campus activity we opened two new campuses for the spring term; Greenville, South Carolina, and a second Memphis campus. The two original Tennessee campuses, the first Memphis campus, and the Nashville campus did reach profitability in this last quarter, as we predicted they would, and that did contribute to our margin expansion in the quarter, little bit more frankly then Mark and I expected at the beginning of the quarter.

As Jim McCoy announced on Monday we are opening two campuses in the Atlanta market for the summer term and a third campus for the Philadelphia market in the fall term. On the online, the growth of 74%, ahead of our 50% target. We are rapidly ramping our professors and some of our student service support to deal with this increased growth. And I think you heard from Pam on Monday, I feel very good about our ability to maintain high levels of academic quality in those programs.

We are particularly pleased to announce today an agreement with the University of Virginia, and we are going to offer a joint MBA in several of our Northern Virginia campuses. Students will take six courses at the University of Virginia's facility in Falls Church, Virginia and six courses at any of our Strayer campuses. The recipients would get an MBA from Strayer, as well as, a graduate certificate from the University of Virginia. It is designed to deal with the fact that the Darden School or the Charlottesville campus is not allowed to offer MBAs anywhere but Charlottesville. So, for those working professionals who are unable to move to -- go to Charlottesville but were currently enrolled in UVA's Northern Virginia campuses, this gives them an opportunity to complete their program and get an MBA. The program will be available starting in the summer term.

Finally on the business outlook due to the strong enrollment growth for the spring term offset by increased expenses, particularly associated with opening the two new Atlantic campuses this summer, we estimate our second quarter EPS will be in the 71-73 cent range. And with that Bill we will be pleased to answer any questions.

Thank you, Mr. Silberman. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the "*" key followed by the digit "1" on your touchstone telephone. If you are using a speakerphone, we ask you to please make sure your mute function is turned off to allow your signal to reach our equipment. Once again that is "*", "1" for questions. We will pause just a moment to assemble our roster.

And we will take our first question from Howard Block, Bank of America Securities.

Good morning everybody. Congratulations on another solid quarter. I have two questions actually, the first one was, this first quarter selling and promotion margin looks like it's the first year-over-year improvement, I think in about in 5 years, and I don't know if that's just sort of a bleep or if -- is there something we can pertain from that?

Well it's, I think that's going to be effected on an ongoing basis by the rate of new campus openings and particularly the rate of new market openings. Now we did have one new market in the quarter, which was Greenville, not particularly expensive market. We definitely got good results with our marketing strategies in some of our existing markets, and some of the ones that we've just opened in the last couple of quarters. So, I would expect overtime that we will gain leverage in this area, as we buildup our campus populations, and our referral bases, and some of our corporate alliance programs in some of the new markets. But I would not, you know, it was only down a little bit and I don't think I would take that to the bank for the rest of the year from that standpoint.

Okay. And the other question is with regards to the University of Virginia. Is this the and obviously that's a fantastic university, would you say that this is the strongest at least by reputation University with whom you have this type of agreement and if so again what does that pertain for ongoing brand equity for Strayer?

I think it's actually the first university of any kind where we have a specific -- at graduate level joint degree. And we have a number of articulation agreements with universities particularly at the undergraduate level and particularly with community colleges, where we do the two plus two program. So it is, you know, we are very pleased with it. I think it is a way in which in markets that were traditionals want to work with us, we can certainly gain access to more students. And given that it's in an area that's relatively mature for us, I think that also is helpful in terms of maintaining that penetration here in this market. And we are always happy to reach out institutions that we think can support our academic standards and allow us to serve more students. So we were pleased with it.

Can you just tell us who the parties were on both sides that reached the agreement?

Well, with Strayer University on our side Dr. Toe the President of the University and then at UVA, the head of their school of professional, what you call it -- Continuing and Professional Studies, and I don't have that individuals name but he is down in Charlottesville.

Okay. Thank you.

Go ahead Bill.

We'll take our next question from Bob Craig, Legg Mason.

Good morning everybody. Sorry, I missed you the other day.

Well, you are in serious trouble Bob.

I know, I know. First question. Was there any offering expenses included in the quarter at all?

No, we had reached an agreement with the selling shareholders that they would fund the, any cost associated with the offering so that they were not.

Okay, good for you. Have you reached profitability in Philadelphia yet?

We have not. We did intend to see this last quarter and we haven't commented as to when we expect to in Philadelphia but it's fair to say we did not in this quarter.

But you are still moving rapidly in that direction.

Yeah.

Okay. Last question on, you got two quarters under your belt now of certainly well north of 15-18% growth in enrollment target you have. I just have a question I know that you folks like to remain conservative but why not edge up guidance, there is some assumed acceleration and spending plan there right now. [I take up] with online over 50% of your total enrollment and growing north of 50% and that the 15-18 % in the remaining two quarters is probably not likely?

This is there is several points in that question. Bob let me kind of work in backwards. The first one, I just want to clarify with regard to online, what is close to 50% of our overall enrollment is students who are taking at least one course online or indeed students taking 100% of their courses online, but a lot of that enrollment is embedded in our overall student enrollment growth number because only about 10% of our students are the out of area that are growing at a very, very high rate. So, you can't take that 50% statistic and then extrapolate with an overall student university enrollment growth is going to be. The 10% of our students who are growing at 74%, the out of area online is definitely helping our enrollment growth, there's no question about that.

With regard to guidance the question on increased expenses in the second half of the year, that clearly is the case. I mean we are opening a number of new campuses and two in relatively expensive markets. So, there is something there. We are also going to have additional costs associated with -- we had a number of stock option exercises, which affects our benefits line, payroll line, because you end up with having to payup a big chunk of Medicare tax, and things of that nature. And there's a couple of other personnel expenses associated with, you know, will hit that. But the main reason, just taking this completely in the reverse order Bob, is just that I tried to mention last fall, we're not going to be in the business of giving guidance beyond one quarter out, when we know what our enrollment is. What we try and to do is to make clear, what the analytics and the algorithm of our model is, so that everyone can draw their own conclusions, and then report the enrollment as it happens.

Now, we've been very open about saying that, and I think it's fair to say, that if we achieve 15-18% enrollment growth in the second half of the year, having outperform on enrollment growth from the first half of the year, then we will exceed the 260-265 range that we put in our model back in November.

Ok that's great; I appreciate you reviewing that with us. Thanks.

Yeah.

We will go next to Fred McCrea, Thomas Weisel Partners.

Mark, Robert good morning.

Another no show.

That was my next comment.

Go ahead Fred.

But apologies as well.

No problem.

Rob, one quick question on the seats per student ratio you'd mentioned. Can you fill us on the few numbers there, in terms of how that worked out and then compare it to last year?

I think it was by 1.95 Mark, and it was about 1.97 last year as I remember.

Okay. And expectations, just looking forward do you expect stabilizing at 1.95 or do you expect that number to take a shift in one direction or another?

We just don't know Fred. I mean it really depends on the rate of mix shift or the rate of -- relative rate of growth between graduate and undergraduate students. It's, -- we just don't know. We don't think it's that important to us, I mean, as I said we are quite pleased to get increased graduate students and it's just means that the algorithm of enrolment growth to our overall revenue growth needs to take into account the possibility of those shifts.

Understood. Then following on Howard's comment, are you actively pursuing similar type agreements, say in North Carolina or in the Tennessee area, Philadelphia markets?

Yeah, I have to tell you, no. I mean we weren't really actively pursuing this one, it came to us and we were pleased to do it. We do actively pursue the community college two plus two agreements, because I that I think is very key to our strategy of integrating ourselves into the academic community in a particular area. But we certainly wouldn't turn it down if other universities come to us, have an opportunity where we can benefit, they can benefit as well.

And then following up on that, do you envision or does the University of Virginia envision at some point that it would be perhaps a joint degree where they would actually put their-- provide their names on the degree as well?

Actually, I don't think Middle States will let us do that.

Okay.

It's not on their side it's our accreditor.

I assume that UVA is also Middle States.

No, they are SACS.

Oh, they are SACS. Okay. Great. Thanks so much.

You bet.

And we'll go next to Mark Marostica, Piper Jaffray.

Yeah. Thanks. Just want to follow-up on Bob's question about the ramp to profitability of Philly campuses. Did you mention that ramp is tracking to your original plans?

Well it's actually a little bit ahead. On the other hand it kind of depends on where -- when in the year you start the campus because our summer terms are always lower then our spring terms. So in the case of Philly which we started in the fall, the summer term would be the fourth term but if you normalize for that I would say it is you know slightly ahead.

Great. And did the revenue reclass have any impact at all on revenue growth in the quarter just ended?

Well it produced a little bit, I mean, that revenue would have gone in -- we took, you know, it was about half a million dollars out of revenue and out of expense. So, but we also had some pretty good growth in non-tuition revenue, in fees. So it basically balance itself out.

Okay. Good. And than as you look at fiscal '05 and you think about the number of new campus opening that you're considering. What are you thinking in terms of number?

Well our first objective is to see, how we do this year, and this will be our second year in a row of opening five campus and our policy is to watch that very closely. When Mark and I and the management team sit down in the late summer and start looking thinking about our budget for next year, one of the first things we'll look at is what is the supply of personnel that we have internally to staff increase campuses, because we really benchmark ourselves on that figure and then if we find from the outside it's [grave] if you will. And we would hope that we would be -- well our attention is to open as many campuses as we can. And I would surely hope that it's not less than five and we'll take a look at what it can be little later on here. Again, based on the supply of people that we have internally that we can send out to man these campuses. We've got a fair amount of unmet demand in places where we currently have authorizations, that there is a fairly high clamor for them. And so, it really be a question of what we can staff.

Okay. Thanks, I'll turn it over.

Thanks Mark.

We'll take our next question from Greg Cappelli, Credit Suisse First Boston.

Hi Guys.

Hey Greg.

I -- tell a couple of quick ones. You did such a good job the other day. I think you've taken a lot of the questions away.

That was the objective.

If we looked back at all the schools you have taken over Rob, pretty consistently when I go back and look at my notes on the conference calls, you've said 'Hey, we're ramping up a little faster than we thought'. Can you quantify, I mean, has it been -- how much faster would you say that you've got to student counts for breakeven and then started to ramp then you would have originally thought when you started pulling this together?

Well it's probably a quarter or two on average. We have opened, -- what Mark 14, 13

13, I think.

Yeah, 13 campuses and the model that we built, based on the historical experience of the university with six quarters, and I don't think any of them have been six quarters. And some of -- the fastest one's were the three in North Carolina, which were -- but that was based on -- we opened in a summer, which I think from the standpoint, of the quickest time to breakeven, its probably the summer vacation, because you get that big fall, and then you have another big quarter in the winter right after that. But just doing the historical analysis, I would say its been between four and five quarters, versus six.

Okay. But you wouldn't necessarily run out and sort of change the expectation for that at this point I'm guessing.

No

Especially if you go on to some different geographic areas.

Yeah.

Is that and also, I think you mentioned the other day, I just wanted to verify that the cost per lead as you go into these new market like Georgia, or Atlanta sorry, and Philly, and then I guess you are working on new states, out of areas, as well. I mean double the cost to lead, what are we looking at?

It can easily would be double and more importantly it's the cost per student acquired, which can be much more than double. We actually generally get a lot of leads when we first open a campus. But you know in a brand new market and particularly we don't have an experienced team at the campus and we are also trying to be very careful in terms of the way in which we ramp the campus consistent with our faculty. You end up with a heavy expenditure on a lot of indirect media early in that process, it doesn't translate into new students starting for several quarters. So, the cost per lead can be higher but what is definitely higher is the cost per student acquired and that as it comes down is what gets you to profitability because your spreading those costs over more students.

Okay, just one final one. Are you guys right now, I know, that the campuses that you've talked about you are obviously in planning stages and you are looking and you are probably talking internally about the states to come. Right now, on the [drawing] bar or do you have states, as far west as from where you are now, is sort of Midwest may be Illinois or Indiana or something like that?

Well we, we've got in the Mississippi river with the Memphis campus. So, I feel like you can be contiguous north and south of Tennessee and be consistent with our plan.

Ok, All right. Thanks a lot.

You bet.

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

Yes, congratulations. Quick question on instruction in educational line, expense line, only grew about I think 18% or 19% in the quarter, that's lower than the revenue. Obviously, you got good leverage on that line item. Is there anything special happening there when we look at maybe the last two years that line has grown at a faster pace then revenue?

Yeah. We are starting to get some leverage with regard to some of our online expenses. And we are also doing classrooms more, I mean, the ramp rate at some of our newer campuses is helping us. We actually ended up with slightly higher student per class count as opposed to seats per students; I don't want to get people confused. But you know that certainly helps because you have less adjunct professor costs as that number goes up slightly. So there was a combination of things.

Do you think we are new prototype buildings that you are putting in place, is helping that or --

Yeah, there is definitely little bit lower lease costs. I don't think it's going to be that [dispositive], Richard, just because the, you know, those least cost aren't that big in number. And if you put one or two new buildings in place that has slightly lower footprints I don't think it's going to move it that much. I think the higher students per class both in the classroom -- [between] the classrooms is where that's going mostly because our students per class in the online has always, you know, we always max that out each quarter any way.

Okay, and then just may be a follow up to that is, is that a -- is what happened in the first quarter or something that we should you know look at in subsequent quarters or is this just, you know, great improvement in the first quarter and then normalizing?

You know, I think on a normalize basis Mark, it's about 32 or 33% usually.

Yeah.

I mean, I don't think it's that far of, of our historical trend. I think 33%ish is probably where we would model.

Okay. Great. Thanks guys.

Our next question comes from Gary Bisbee, Lehman Brothers.

Hi. I'll agree with Greg that we learnt so much on Monday that I don't have a lot of questions. But give you a couple.

You'll sound intelligent anyway, Gary, just go ahead.

Yeah, thanks for making me [belief], thanks so. The -- in terms of UVA program who's going to be marketing this? Is this more coming from them? They've got students in this campuses who'd like to get an MBA or are you guys going to be involved in the marketing it at all?

Well we'll certainly be involved in marketing it, now that it's real. It was a push [fly] down and I know they are marketing it as well but we will certainly do it. I guess the answer Gary, is both.

Yeah. Can you give us any sense as to how many students they have in these campuses that could be considered for this program?

I don't. Do you have that Mark?

No.

I would say several hundreds at least. But I don't know.

Yeah. And moving on to the Atlanta openings. Atlanta at least compared to the other large public traded for-profit guys is one of the more competitive markets out there and I know, you know, University of Phoenix there, DeVry has got a bunch of their Keller Graduate Centers. Are you doing anything different or you anticipating anything to go differently given what could be slightly more competitive market?

We're not doing anything differently. We do anticipate that it will be a very competitive market. We certainly anticipated Philadelphia would be a competitive market and DC is a very competitive market. I think that's one reason why our confidence is at the ramp rates that we have in our model and when, you know, when and if we outperform that we see that as a nice surprise. But we have never had a situation where the limitation on our growth was set by competitive factors and I don't expect that to be the case in Atlanta either.

Okay. And then just one last one, as we continue to see the drift in the mature markets of students taking more classes online. Are you looking at any opportunities to actually decrease your physical plan in any of those campuses? I know you have talked about this in the past but is that something that, you know are going to be opportunities over the next year or two as we see the strength get the rest state, if we see the strength continue?

Well, there have been opportunities which we have taken advantage of as we speak. We just reopened a brand new Annapolis campus; it's actually Southern Baltimore Campus. Was it this quarter Mark? I think we would be in April, right?

Right.

And that is we moved out of space where the campus had opened. I think its five six years old, the [Indiana] campus, and moved into a building, which we had build, we don't own it, we are leasing it, and we have less square footage and that square footage is certainly more attuned towards supporting students, many of them who are taking online classes. So, that's going to be an ongoing process, Gary. I think every year as we look at our capital plan and look at our retrofit of buildings, we are going to make the physical campus match what our students -- how our students want to use it, rather than try and force it the other way. And so, yeah, that is, has been and will be an ongoing effort on our part.

Okay. And then just one last one, G&A, was up a bit more than we had expected in the quarter. Is there anything incremental in that spending or is that just normal? Staffing up ahead of what, you know the continued growth you are looking for?

I think it's the latter. I mean, it's certainly staffing up with regard to the big campus opening push we have in the second half of this year. And so I -- that number again bounces around a little bit based on when in the year we open campuses, and we've got a bunch coming up right now.

Yeah. Okay. Thanks a lot.

Thank you.

We'll go next to Mark Hughes, SunTrust.

Thank you very much. Any meaningful impact from the plan to originate the loans and not hold the portfolio but to sell those off immediately? I know you talked about those you know different fees impacting revenue this quarter but does that have a material impact on the P&L?

No, I would say it does not have a material impact on the P&L

Is it more positive on sort of quarter-to-quarter basis that's just good fee your income, maybe helpful to margin?

I would say slightly negative on a quarter-to-quarter basis because we were taking a high level of interest income, it was running through our revenue line and going right to the bottomline. Now, we were offsetting a lot of that with loan loss reserves and we got a big pop last year, because when we sold the portfolio, we actually had very good experience in managing the loans. So, we reversed a lot of that out, those loan loss reserves out and took it as income last year. That was that big increase. On a GAAP reported basis, we were at 227 and I think on our, -- what we really think about an on-going basis is 217 last year. But so it is a slight negative impact but not material one way or the other.

Right. And then just with respect to the students you are targeting from a marketing standpoint, it's obviously a -- partially a function of Washington DC but a lot of minority folks in schools that we visited this week. Is that in consistent with focus in other markets that you try to segment the market a little bit more and focus on a more an underserved community, lets say?

We don't segment our marketing at all on a racial basis. We do it on an economic basis and we are very successful. We are an open access university and we are very successful, you know, lot of communities whose access to education has been denied for any number of reasons. But you know there isn't a community that we have looked out that doesn't have a very high percentage of working adults that have a high school degree and don't have a college degree, and we think that probably our racial makeup in any given campus is going to match that makeup in the community because the predominance of college graduates and the working adult or the lack of predominance of college graduates and working adults. Population segment, pretty much trends to match the racial make up as well.

Got you. Thank you.

Yeah.

Our next question comes from Bradley Safalow, J.P. Morgan.

Hi, good Morning. As a proud graduate of the University of Virginia, I would like to welcome you on board and hopefully you can uphold those Jeffersonian ideals.

I think we need to rethink this deal Mark. I didn't realize Brad was a graduate.

Yes, you might want to go back to the table. Seriously, though I just wanted to see if you could speak to the impact any of these campus relocations have had on the enrollment trends onsite in your mature markets? Have you seen any pickup? Have you seen higher, and whether it be retention levels or it sounds like you have seen a higher overall satisfaction level with the student. Is there anything on the enrollment side you can speak to?

Well I think the fact that we have shown, you know, single digit enrollment growth in these markets over the last couple of years in a period when I was expecting it just to be flat is partly related to the investments that we are making in these facilities. As you stated the more important thing for us is we're clearly seeing higher satisfaction levels. And in the long run that's you know, we think that's the most beneficial thing that we can do on behalf of our owners capital is increase those satisfaction levels. I am not sure I could tie specifically on a return on investment basis. The dollars that we are investing in upgrading these facilities to any of these -- to this increase, this single digit in increase in enrollment. But directionally and just conceptually it's a kind of university that we want to build and we think in the long run that will have a very high return on invested capital.

And in terms of the migration from outside the online. Do you expect that to subside at some point as, I don't know, satisfaction onsite grosses certain level, you'd think that students would stay there rather than go online. I know, some of it is the function of the fact that the DC traffic is terrible and commuting to the school can be difficult, so they go online. But is there anything along that you see out there that would say -- suggest that may be that migration will slow?

Well, the answer to your question is, yes, I think it's already slowing. I mean, that as I said the mix shift number, which is the rate of growth of students taking 100% of their classes online, regardless of whether they are out of area or in area that is slowing. And it's a lower number than our out of area growth and has been for the last couple of quarters. I would not say Brad that the shift to online is necessarily an evidence of dissatisfaction with the campus-based environment. I think it is clearly evidence that the most important characteristic outside of academic quality for our working adult students is convenience and by making the process and the experience more convenient there is a large subset of students who will want to take advantage of that. Now, where that balances out, where that equilibrium is, I just don't know. I mean as we talked on previous call I don't think it's greater than fifty-fifty because some of our new campuses were there is a large bias towards online. So, we don't offer all the catalogue courses in the -- physically in the classroom. It doesn't seem to get much above fifty- fifty. So that, as best as I can tell that seems to be about a cap, but I really don't know. And we will just watch it and support it whatever way we think the students find it most attractive.

Sorry, and just one last one, I know [lauding] efforts are not a, any part of your P&L, so to speak. But wanted to see if could speak to or provide some commentary on the proposal coming from the House last night on the Higher Education Act Reauthorization?

I am not sure Brad, exactly what came out last night, the -- my understanding of last couple of days is this there was a Democratic proposal which was potentially more aggressive towards maintaining tight Title IV restrictions and potentially more negative towards the concept of for-profit companies. In general -- but first of I don't think anything is going to happen this year anyway. And when it does -- our planning is based on the concept that -- there is not a whole lot of upside that is going to happen legislatively for us. But we don't really think there is much downside either because notwithstanding any sort of, sound and fury associated with the political season. There is a very-very strong base of support and cross section and momentum of political support for these kinds of educational opportunities. And so I don't put it very high on the risk factor either. But we just want be sure we spend a lot of money on it one way or the other.

Okay. I will turn it over.

Thanks Brad.

Once again ladies and gentlemen, that is "*", "1" for questions, or follow-up questions. We will go next to Corey Greendale, First Analysis.

Good morning.

Corey Greendale: Good morning Corey.

First of all I just wanted to ask, when you gave the margin that your model would suggest, you'd get for the full year, did that contemplate the effect of the accounting reclass?

It did, at the upper range and we gave -- we said we would be flat, moderately improved, moderately improves was taken into account, the accounting reclass. And in this last quarter we did better then that as well. Now there is about may be half of that 180 basis is true increase in operating leverage.

Okay. And the portion of the employee discount scholarships and awards, what line, what expense lines had those been running through?

The employee discount had been running through G&A and the scholarships and awards have been running through I&E.

Okay, great. And then actually following up on something you talked about on Monday you went through a fairly extensive list of the things that can influence revenue, particularly revenue per student, in any given quarter a mix then corporate and military discounts drop rate etc. And I was just curious on those latter two the corporate and military discounts and drop rate would you say those are net year-over-year positives, negatives or kind of neutral when looking at the revenue per student change year-over-year this point?

For the first quarter, I would say the drop rate was slightly negative, nowhere near to where it was in the fall when we had the hurricane but slightly negative. And the military discount is also slightly negative because we have an increase in military students, and that's the area where we actually do have a fairly significant discount on our tuition.

And how is the, the drop rate different would you say between the new campuses and the more mature campuses?

I am not sure I would draw a conclusion, Corey, I mean, we have some new campuses where it's quite a bit lower than the average and some where it's a little bit higher then the average.

Okay, great. Thanks a lot.

Yeah.

Now we'll take a follow-up question from Mark Hughes, SunTrust.

Thank you very much. Any difference in terms of the course intensity of out of area online students, do they take about two courses?

Yes, same thing. It's about the same on both graduate and undergraduate with regard to the campuses they take. The ones who are undergraduates, you know, take two and sometimes three. The ones who are graduates rarely take more than one.

Right. And then just to be clear about online number when we are talking about the not out of areas, that's kind of a virtual number based on the number of online courses being taken by those campus-based students. Is that right?

It is a -- it's an actual number, I am not sure what meant by virtual, its an actual number which we can measure in any given quarter, which is the number of our students who are registered to a campus and have a faculty advisor at that campus, they live in the zip code of that campus, but they happen in that particular quarter to take there 100% of their classes online.

Oh I see. So they could -- the subsequent quarter takes a campus course at least in that quarter they are all online?

Correct.

Okay. Thank you.

Yeah.

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

Thank you Bill. I would like to thank everybody again who participated on the Investor Day. I appreciate the listeners on the call and we look forward to talking to again in August. Thank you.

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