Strategic Education Inc (STRA) 2004 Q4 法說會逐字稿

Good day everyone and welcome to Strayer Education Inc. fourth quarter 2004 and full year earnings conference call.

[Operator Instructions].

With us today 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 on the Internet, please go to www.strayereducation.com, where the call be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1:00 p.m. Eastern Time through Monday, February 21. The number to call for the replay is 888-203-1112, again, 888-203-1112, pass code 923055, again, the pass code 923055. 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 Litigations 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 that could cause the Company's actual results to differ materially.

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

At this time I would like to turn the call over to Mr. Robert Silberman. Please go ahead sir.

Thank you operator. Good morning ladies and gentlemen. As is our custom, I would like to begin this morning with a brief overview of our 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 fourth quarter and full year 2004, after which I will comment on our enrollment results for the winter term, provide an update on our growth strategies and finally end up with the Company's outlook for Q1 before we take questions.

Strayer Education Inc. is a for-profit education service company whose primary asset is Strayer University, a 23,000 student, 32 campus post-secondary 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 adults who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. Approximately 55% of our students are receiving federally insured title 4 loans. Our expenses include the cost of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs. We currently operate campuses in eight states on the Eastern Seaboard as well as throughout the world over the Internet through Strayer University Online. We serve students in all 50 states and in 39 foreign countries through Strayer University Online. Strayer University is accredited by the Middle States Association of colleges and schools.

Mark?

Revenues for the three months ended December 31, 2004 increased 21% to 52.3 million compared to 43.4 million for the same period in 2003 due to increased enrollment and a 5% tuition increase which commenced in January of 2004. Revenues in 2003 included a 0.6 million gain on the sale of the Company's student loan portfolio, excluding this gain revenues rose 22%. Management believes that excluding this loan sale provides a useful indicator of the Company's underlying operating performance.

Income from operations rose 19% to 20.8 million from 17.4 million for the same period in 2003. Again, excluding the 2003 gain on the sale of the student loan portfolio, income from operations increased 23%. Net income rose 20% to 13.3 million compared to 11.1 million for the same time in 2003. Excluding the 2003 gain, net income increased 23%.

Earnings per diluted share rose 20% to $0.89, compared to $0.74 for the same period in 2003. Excluding the 2003 gain, earnings per diluted share increased 24%. Diluted weighted average shares outstanding decreased to 14,953,000 in 2004 from 15,36000 for the same period in 2003.

Revenues for the year ended December 31, 2004, increased 25% to 183.2 million compared to 147 million for the same period of 2003 due to increased enrollment and a 5% tuition increase effective for 2004. Excluding the 2003 gain on the student loan portfolio, revenues rose 25% in 2004 as well.

Income from operations rose 24% to 65.5 million from 52.9 million for the same period in 2003. Income from operations in 2003 included a 1.8 million gain on the sale of the Company's Washington, DC, campus building and 0.6 million gain on the sale of its student loan portfolio. Excluding these gains income from operations increased 30%.

Net income rose 22% to 41.2 million compared to 33.7 million for the same period in 2003. Excluding the 2003 gains on asset sales, net income increased 28%. Earnings per diluted share rose 21% to $2.74 compared to $2.27 for the same period in 2003. Excluding the 2003 gains on asset sales, earnings per diluted share increased 26%. Diluted weighted average shares outstanding increased to 15,57000 from 14,857000 for the same period in 2003.

At December 31, 2004, the Company had cash, cash equivalents and marketable securities of 122.8 million and no debt. The Company generated 57.7 million from operating activities in 2004, capital expenditures were 10.6 million for the same period. As of December 31, 2004, the Company had 25 million available for repurchases under its previously announced common stock repurchase authorization. No shares were purchased in the fourth quarter of 2004.

In the fourth quarter 2004, bad debt expense as a percentage of revenue was 2.9% compared to 2% for the same period in 2003. Days sales outstanding adjusted to exclude tuition receivable related to future quarters was 11 days at the end of the fourth quarter compared to eight days in the same period of 2003.

Rob?

Thanks Mark. Just a couple comments on the financials. All of which presuppose, as Mark said excluding the gain on our loan portfolio sale in the same quarter last year. As we exclude that gain last year remember, discussing our results.

Our revenue growth of 22% was actually a little bit higher than our model predicted and was a source of about half of the earnings out performance above -- what Mark and I were looking for the quarter. And let me just go through that in a little bit detail, so that everybody is on the same page.

We had previously announced a 17% enrollment growth for the fall term and a 5% price increase. However, our continued growth in the graduate population relative to the undergraduate population has reduced our seats per student ratio pretty consistently across the year. And our model that we were looking at three months ago predicted only about 400 basis points of revenue growth above our student population growth, there are about 21% revenue growth. That was what Mark and I were looking at in October as we were forecasting.

In addition, when you adjust for the effect of the revenue reclassification which Mark and I have discussed before, the minor reclassification we went through on our investor day, our revenue growth in Q4 was actually 23% versus the 21% that we're looking at, if all 600 basis points in excess of our student population growth.

Now we believe that, that higher revenue per student was the result of a significantly lower drop rate, which we enjoyed in the fourth quarter, which we in turn believe is a result of some of the tighter credit standards we put in place during the fall enrollment cycle to address the bad debt expense. So we got a little bit of positive impact from some of those steps.

Turning to the operating margins. We reported a 30 basis point increase in operating margins for the quarter. But again, on an apples-to-apples basis if you back out the effect of the revenue reclassification, our operating margin would have actually decreased by about 60 basis point. That was pretty consistent with our model that slight decrease is the result of the operating losses that we incurred at five new campuses that we opened in 2005 and a slightly exacerbated by the fact we opened those campuses with couple of them earlier in the year then we did the year which is we have talked about before. It can have a slight influence either up or down on the operating margin.

We do continue to wrestle with bad debt expense, in the quarter 2.9%. Mark and I talked in detail on the last call some of the steps that we're taking to deal with this. But these are prospective steps and there is about a six to nine month tale for them to have an effect or to have an overriding effect, because that initial impact takes that period of time to work through our income statement. We're going to continue to monitor this, Mark and myself or operation team and manage this line item as closely as we can.

Finally, the 24% EPS growth on 23% operating income and net income growth reflects the effect of the share repurchases we did in the second and third quarter. About 1.5 cents of our EPS out performance against our model came from lower tax expense associated with the investment in tax exempt securities during the year. I noticed that somebody had a note out earlier today that miscalculated that, had a little bit higher. So that we are all clear, what Mark and I do is take a tax provision during the year, put that expense on the basis of what we believe our tax rate on our operating income will be.

We do not adjust that during the year for the amount of our financial assets that we hold in either taxable or tax-exempt securities. Because, frankly, we really make that decision on a quarter to quarter basis looking at the other charge between tax and tax exempt interest rates and then we adjust at the end of the year and in this year we had most of our financial assets and tax exempts for the whole year, so we made the adjustment in this quarter. But it is only worth about 1.5 cents. So when you look at that EPS, we were a little bit surprised by almost $0.02 and another cent or 1.5 cents was associated with adjusted income tax rates.

Our cash flow, our distributable cash from operations minus CapEx, including all the CapEx of opening new campuses, was up about 16% for the quarter, which was slightly below our 22% increase in net income. When you look at the full year, which we like to do, just kind of stand back and cut through all the change in revenue classifications, ignore 2003 gains from asset sales -- its realty the way Mark and I try to look at this, we have a little bit over 21% enrollment growth for the year and approximately 26% revenue growth. We opened five new campuses and have roughly stable margins, which was what we expected, leading to a 26% operating income, net income, and EPS growth. And our growth and distributable cash from operations for the year was also just a little bit above 26%, which is consistent with our model.

Turning to the winter term enrollment results, total enrollment increased a little over 18% on a year-over-year basis. Our new student enrollment was up 22% and the continuing student enrollment was slightly less than 18%.

We did have an increase in our continuation rates, remember our fall term enrollment number was just under 17% enrollment growth. So we started the term with 17% more students. We ended up with 18% more continuing students, so that gives you a sense of how that continuation rate behaved.

Our out of area on-line enrollment was up 53% over the previous year. We continue to see in this quarter high demand from the campus based students for online class's. We continue to try and support that as much as we can.

With regard to student mix, our business administration and accounting degree seekers continue to account for slightly over 60% of our students for the winter term. Computer information science degree candidates are now just under 30% of our total population. Our new graduate programs, those three programs that we introduced last January, master's in education, public administration, and health services administration, now account for actually about 3% of our total student population. That is affecting our graduate students mix. We are now up to 25% of our total students are in the graduate programs, which is up 21% from a year ago.

Turning to an update on the growth strategy. Many of you will remember that it is based on five objectives. The first is to maintain enrollment in the Company's mature markets. The second is to accelerate the rate of growth at new campuses, particularly in the new states. Third invest in and build up our on-line offerings. Fourth, a increase our corporate institutional alliances. And the final objective is to look selectively at acquisitions and the ultimate redeployment of capital. Let me just go through those one by one and give you a brief update.

On the first objective, for the winter term, we had a solid quarter as matured campuses, showing 5% growth, again, mature campus student continue to exhibit the interest to take on-line class as they did later in their career with us. With regard to the new campus activity we announced this morning that we're opening two campuses in the Tampa, Florida market for the spring term of this year. These campuses are currently just finishing up construction. We have assigned campus directors and deans and faculty down there, and we're currently in the process of recruiting students.

In our out of area on-line unit, our growth for the winter term was 53%, basically in line with our model. And again, bear in mind that as we expand in to places like Florida, we take those students out of our out of area base and assign them to campuses when we get a campus in those zip codes.

In the area of capital redeployment, let me go through again briefly and simplistically how we think about it. We generated $41 million in net income for the year, which in turn generated $57 million for cash from operations. Part of that increase is a favorable tax impact of some option exercises during the year. When you combine that 57 million in cash from operations with approximately 12 million option exercise proceeds, the actual payments that were made in to exercise those options, we basically had $69 million to invest or distribute in 2004.

And what we did with that, we invested $11 million in CapEx, which includes the five new campuses. We distributed $7 million in dividends. We used $37 million to repurchase shares of our stock. And we put about $15 million in our cash for short-term security accounts, which gets us to be $123 million on our balance sheet at the end of the year that Mark discussed.

We did declare this morning our increased quarterly dividend of 12.5 cents per share to shareholders of record as of February every 28, 2005. As I mentioned in my letter to shareholders last year, the board and I are convinced that our business model allows us this luxury of fully funding a strong organic growth strategy and still makes a periodic return of capital to our shareholders and still keep sufficient liquidity to make other investments in the sector should they present themselves in a way which we find compelling.

We as what the management team and a board continue to weigh all uses of cash every quarter to determine the most value enhancing after-tax return on owner's capital and we make those decisions accordingly.

Now on our business outlook for the first quarter, due to the strong enrollment growth for the winter term, offset partly by increased expenses associated with the new Tampa campus openings, we estimate the first quarter EPS will be in the $0.91 to $0.93 range. However, we do expect this increase shift to graduate students is going to hold our revenue for student increase in the 3.5% to 4.5% range on top of whatever enrollment growth we actually produce.

And with that, operator we would be pleased to answer any questions.

Thank you.

[Operator instructions].

Our first question will go to Howard Block, Banc of America.

Good morning, Mark and Rob. First question is on the on-line enrollment growth. You said a while ago that you expect the growth in the 100% online course takers to be the mean between the rate of growth on campus and the rate of growth out of area. Is that still what you're saying? If so, would that be a 5% plus 53% and plus you know whatever that 29%?

I think it was actually 15% or 53%.

Okay. So it's the on campus number that I'm trying to get. That would not be mature on campus you were just talking.

Total on campus. Mature and new. Our new campuses, particularly because of the fact we do not offer the full course catalog right away on a new campus, we do get quite a few new students who are rolled to the campus who then go ahead and take some or all of their classes on-line.

Is that still the best way to think about the direction?

Yes, I believe so.

Okay. And then on the bad debt side, you mentioned in the last call that the increase was attributable to some management of credit risk primarily I think you said mature locations. Was that the issue in this quarter as well?

Actually we had improvement in the quarter. What happens is there is a tale associated with collections in the summer term and we had some slight improvement in those campuses that we focused on and at on line in the quarter, but they were still worse than they were the year before.

So that's why we say it is about a six to nine month process. You got to stop the problem on a go forward basis and it takes about three-quarters to work the previous problems through your income statement the way we reserve the bad debt.

Okay. So the issue that is working through that is manifesting again in this quarter is still above those original mature campus credit risk management?

Correct.

Okay, and then the last question, is there any issue with regard to selling or promotion? I know that couple of quarters ago I believe you mentioned that you did not have enough capacity and you sort of stand the lead flow growth until you have more capacity. Is it possible that the big growth we saw in selling and promotion spending this quarter was an investment in the capacity to manage lead, more than just buying more lead there?

Well, the biggest impact on us was the effect of opening the two campuses. Mark and I have gone through in terms of our investment model that we lose about $1 million in that first year when we open a new campus. Most of that is undercover marketing expenses in those first few quarters because you're building your names in those markets. The year before when we were opened five campuses, we had that, but a lot of that was overwhelmed by the revenue growth because we were in excess of 20% enrollment growth in those quarters then the previous year.

When you get back to what I think is the more rational normative growth that we would expect, as I said its based on this investment plan -- we're looking at 15% to 18% enrollment growth, maybe higher, maybe lower we don't really know but in that range, you would expect to have an increase in selling and promotion expenses as a percent of revenue. And then over time you get leverage on that. And then we do get leverage on the instructional education and on the G&A line just as we're growing our basic campuses and keeping our management overhead -- corporate overhead relatively stable.

So I think most of that -- we spent what we intended to spend on marketing. We actually got more leads than we expected and our cost per lead was down in the quarter. Our cost per student acquired was about flat or maybe slightly less on a year-over-year basis slightly lower. But it's basically the effect of opening new campuses.

Great, very helpful. Thank you.

Next we go to Greg Cappelli of Credit Suisse First Boston.

Hi, Rob and Mark. I just wanted to follow on to that. So if you look at the 13% delta (ph) between the 22% revenue growth and the 35 in selling and promote, are you saying that most of the 13% delta is from the additional cost of the new campuses, or was there anything else in that side from there?

It was all from that.

Okay. I just wanted to be clear on that. The cost per lead being down some and the cost to acquire students flat is better than we are hearing from some other companies in the group. Are you going through a similar shift to interactive leads over the past sort of six to nine months? Has your marketing mix changed at all or your lead mix changed at all?

Well our marketing spend, it changes every quarter. We look at this Lisa (ph) and her staff and myself almost on a weekly basis and she does it on a daily basis. We try in market by market, ascertain the trend that give us the most efficient use of those marketing dollars both for building our name in a brand-new market as well as directly producing leads for the campuses. I would say the most significant -- broad change over the last three years, not the last six months, is the rise of Internet marketing as a means of reaching students. That has continued to be a pretty strong part of our portfolio there.

On the other hand, you have to bear in mind that the biggest single impact of our business strategy is the effect of opening new campuses in brand new markets at a very high rate as a percentage of our existing footprint.

So a lot of our dollars goes into you know building the brand in those brand new markets and it shifts as the media sources we use on a quarter-to-quarter basis shift on that quarter-to-quarter basis based on how many new markets we have and how much we have to spend to build that brand recognition.

At a big picture level, Internet has been a very valuable source. We continue to use it. We have actually beefed up our internal staff to manage that process. It is not rally a six-month or nine-month basis, significantly different from one-quarter to the next.

Okay. Is the effectiveness of the marketing in all your new areas in about as planned or within reason?

I would say it has gone better than plan.

Okay, just in terms of building your brand early on?

Yes.

Okay. One another follow-up, just to go back to the bad debt for a second. We have heard now most companies in the space talk about higher bad debt this year, and or I guess over the past couple of quarters.

My question for you is, do you think we are actually looking at maybe a slightly bigger problem in the space just from the fact that title 4 you know growth in programs where you have guaranteed funds has not kept pace with third-party providers or financial guy you had, not just you guys but the industry continues to have price increases, so you have more students going to third-party providers where they're obviously is not the same guarantee that you have from title 4 . I just wanted if you could you comment on that bit, something that outside of the issues that you spoke about that you are dealing with and making improvements in and, that this is something you have to deal with, as well.

Well, I couldn't really comment on the other companies Greg, but with regard to us, I really don't think that is the issue now. I think this is a problem that we created and we have to solve. And the reason I say that is is that our percent of revenue from Title IV fund is actually going up. It's gone up from you know the high 40's to the high 50s. So, and we are getting a big benefit from that. Our Cohort Default Rate is you know significantly lower than you know certainly the (indiscernible) as it's shrinking each year.

So, the quality of the students that we're bringing in and the availability of Title IV funds to that student seems to be sufficient. I do think that operationally when you get ahead of yourself and you end up with students who may be potentially shouldn't be in the classroom seat; you do end up with problems with collections. And that's were you know we are very, very focused on individually and trying to make sure that we get that under control.

Got it. That's helpful. And then just finally bid did you give I am sorry did you give the credit hours per student? I know you talked about the shift with the graduate Mex.

I did not. 1.9 -- 9 credit hours.

Right, right.

But I think he is asking how many seats per student. It's like 1.9.

Got it. Okay, thanks a lot guys.

Yeah.

We will now go to Richard Close of Jefferies & Co.

Yeah. Congratulations. A question on the new campuses and then I guess on the marketing spend. You know 35% growth in the fourth quarter, considering your opening up the two Tampa campuses, should we expect similar growth in the first quarter?

You know I don't have that, Richard. He is asking about what is the percent of S&P of revenue in the first quarter?

Actually the growth year-over-year increase. I guess it grew 35% in the fourth quarter. Would you expect a similar growth rate in the selling and promotion on the first quarter, considering the new campuses?

Yeah, I would say yes Richard. I haven't looked at it, but --

Okay.

-- if you think about, in '04 we opened the Atlanta market, Greenbelt, South Carolina, and do we have any other new markets?

It was Memphis and Philadelphia, so those were existing markets.

We had two new markets in '04. In '05 we are starting right off in the spring with a large new markets. So, that yeah there will be a lot of dollars. That $0.91 to $0.93 range assumes a fair amount dollars being spent to open those campuses.

Okay and then you said five campuses, put that bogey out there. But there was no details with respect to where those other campuses are coming. Can you provide any additional clarity there?

Not at this point Richard. I guess we are still in a little bit of the planning process on that. You know they will open either in the summer or the fall term. And you know we have liked -- we have a number of new markets that we are already approved in that I think we owe campuses to and we are trying to as well as we have existing markets that have pretty high demand and that are you know asking for additional campuses. So, we are really just finalizing that. I think it will probably be those next three campuses will be a mix between brand new markets and existing markets.

And any change related to the past profitability, the timeframe of the profitability with the new campuses that you have opened over the last year?

All the '03 campuses have reached profitability. And we're looking for the '04 ones to do so this year.

Okay and one final one obviously considering all the outstanding issues within the industry, and Legislature -- legislators talking about you know doing more research on the IV profits and such, have you seen any slowdown as you look to go into new states or a slowdown in existing state in terms of approval processes or any additional questions being or scrutiny being asked of you guys?

We have not Richard. But then again I would you know emphasize, this is a heavily regulated industry. At least it appears so to us. And the process of being approved in new states is a fairly rigorous one already and so the you know the level of scrutiny and the sensitivity that we have to making sure that our academic programs are student service and our ability to meet the standards both of our regional accreditor and our states that we're going into is quite important to us. And I don't think you could get any higher frankly. So, but no we haven't seen anything.

Okay. Thanks a lot. Congratulations.

Thank you Richard.

We will now go to Derrick Wilder of Piper Jaffray.

Hi, it's Mark Marostica with Piper here. Good morning. A couple questions for you. The first is related to your comment Rob and I will take a question regarding cost per start declining a bit, cost per lead going down as well, which implies a better conversion rate. And I wonder specifically if you could you tell us where you are seeing conversion rates trending up? Is it because you're converting online leads at higher rates or doing better in new markets in terms of conversion than you had in the past? Can you give a little bit of color there? Thanks

Yeah. Our online conversions I would say have been relatively stable. Not a lot of improvement there although you know the leaves are relatively inexpensive and you know that hasn't been an issue for us in terms of building up the out of area online. You know so on quarter-to-quarter basis, I would say it was you know more associated with improvements in conversion rates at the campuses, without having the actual facts in front of me I would probably surmised that it is the aging process, the maturing process of the new campuses. Because the conversion rate of an admissions officer at a brand new campus is actually pretty low and then overtime it gets more effective. And I would suppose that's what that is.

Okay. Fair enough. And then following on Richards' question concerning the time to break even, as you look at the Florida market, how would you I suppose compare that to some of your existing markets in terms of ramp to profitability? I know I have heard Florida tends to be highly competitive area for post-secondary proper education. Could you comment on that point? Thanks.

Well, we don't have any information to comment on at this point. We really are brand new there. But I would also you know eliminate question by saying that every market that we operate in is competitive. You know there isn't a single market that we operate in, in which there is not a significant presence of both traditional and non-traditional entities offering education some specifically for working adults. In our case it is as that you know with all that, there is still a huge imbalance between the demand for working adults for secondary accredited education and the supply engine we can add value in these markets by opening campuses.

And then last question I will turn it over, to the degree that you can't forecast this, where do think bad debt expense as a percentage of revenue will pique over the year and I will turn it over? Thanks.

Sure. You know I don't know the answer to that Mark. But our targets is to get it you know down to 2% and we are doing a lot of steps to do that. And we are deliberately making a trade off it should be understood. We are deliberately making trade offs to do that some of which can affect enrollment growth. So, you know I hope it's not higher than where we are right now.

We will now go to Gary Bisbee at Lehman Brothers.

Hi, guys. Several questions. The ship to grant programs that you continue to see, is that more dramatic in new markets, or is that something that's pretty much happening continue to happen across the board?

I think it is actually slightly more dramatic in new markets. We have been surprised in some of our new markets at how high the percentage of graduate students the graduate class are you know as we started the campuses. It is growing; particularly the three new programs are growing mostly in the existing markets because that's where they were available in the first half of last year. But you know the MBA program seems to be coming out the box quite fast some of these campuses.

Okay. We have seen just heard anecdotally from a bunch of more traditional brad schools that applications are actually down and I think historically we would have guessed that graduate programs maybe somewhat more counter cyclical. Do have any sense have you seen anything in terms of lead flow anything that might lead you believe that you'd see similar trends or are you expecting this mix shift to continue throughout '05?

I don't know Gary. To answer the first part of your question, we haven't seen anything in terms of lead flow, which suggest it's going to shift or decelerate. But you know we don't predict the future from that standpoint.

Okay. Any given the potential to start expensing options throughout this year, at some point in the middle of this year, any change in your policies or how you are thinking about issuing options on a go-forward basis?

No, we actually had a board meeting yesterday and discussed that in some detail. The accounting for equity base compensation is not really going to drive the board's decision on how we do it. The fact of the matter is it does not matter how you account for it. The economic cost of issuing equity as a means of compensation occurs when you issue it. Our board understands that. That is how we think about it. As soon as the rules are clarified and standardized, we will happily conform to that. It does not really affect our thinking with regard to equity based compensation.

Okay. Anything that has happened over the last quarter to change your generic plan that you would have flat to potentially slightly higher operating margins assuming same number of new openings in a given year versus the previous year.

No.

And then lastly I guess any updates on this UVA program that you announced a couple of quarters ago?

Yeah, actually that's going quite well. We are very pleased with it. We have a staff internally that coordinates with UVA both on the position of the academic material, the actual courses, as well as coordinating on some marketing, particularly on the corporate institution side. And so far we're quite pleased with that.

And as I remember, when you first talked about it, it seemed like they took a bunch of classes first at the UVA and then finish the program with you guys. Is that correct?

You know, that's interactive; I think the way it was laid out, that is the way it works. Although just a couple of weeks ago I got updated on this. It is not required, in other words we have a pretty even mix between the two programs of what would be considered entry-level or building block level classes for the NBA and those that are higher-level collectives. We could see it go either way.

So it does not sound like you would expect at some point in this year to have an increase in your enrollments as a bunch of these kids transition to your programs?

Well we hope to have an increase in our Romans from a lot of different things. We will manage this like everything else and try and make sure that we have got the appropriate quality in place. And then it will be what it is.

Okay. Thanks allot.

We will go to Bob Craig of Legg Mason.

Good morning guys, just a couple of question. Given the success of the graduate programs, any further introductions plan there? And just to expand that question more broadly. What is the focus of your new program development efforts?

Let me take it in reverse order. Our focus on the new program development efforts is mainly updating our existing curriculum, particularly in the Information Technology area, and make sure that we're current and then academically sound and that we are attracting students. Bare in mind we are offering college level courses. These are not training courses. Big deal more with Barry and practice. Actual changes in technology do not necessarily require changes in the curriculum to be relevant to what we're offering. We do not have extensive development work going on right now outside of our core areas. It was a big shift for us to offer the Education Help Services Administration and public administration.

We worked on that for 18 months before we rolled out. We have had in place for year. We do not have any graduates from it. That will happen this year. I want to wait to see how that works and confirm that we know how to teach those programs. When we do, I think we actually have a fair amount of expansion we can do in those three programs just in terms of marketing. We have not done that yet. We look critically and carefully and new programs from the standpoint that we have been teaching basic business, accounting, Information Technology such as it was for over 100 years. And we look outside of that area only quite carefully and after we convince ourselves we can actually add value there.

Looking for some of our old archives, we did offer-Strayer University, or college at the time, offer degrees in both the civil service exam preparation as well as teachers training back in the 1920's. Going to public administration in education was not completely foreign to us. But it was a bit of a stretch. We want to make sure we get that under control or make sure that we do a good job before we get too far out on anything else.

That's helpful. Thank you. Another question Rob you have been consistently helpful in indicating how the newer schools are ramping to profitability and it has generally been better than expected. If you look at the continued ramp, in most of those markets and predominately the interest would lie and in major markets like Philadelphia. Is that continued ramp generally been inline with your expectations that would appear so?

Yeah. In those cases where a school ramp to profitability faster, three-quarters as compared to 6 quarters, generally it reverts to what we expect our long-term investment profile to be. That is because we are funding and budgeting at those campuses for an increase in student population of only a certain amount per quarter. Otherwise, you get stretched hiring faculty in making sure they're trained in doing things properly. When we first start a campus, we have to have a minimal amount out there.

And so you can ramp to profitability much faster than we expect because you fill the seats Baxter, but then you're not going to increase that sort of 100 or 150 students a year after that. Because that's basically we were investing to. So the answer to your question is, it has been on model even for those that have been much faster to get profitability on our investment model going from there.

Okay. Last quick one. Tax rate assumption for 2005?

Mark?

39% is probably a safe assumption, in the ballpark of this year's a effective tax rate.

Okay, great. Thanks guys.

We will now go to Mark Hughes at Suntrust Robinson Humphrey.

Thank you very much. 3.5 to 4.5% range of revenue per student is down a little bit from what you saw this quarter. Is it a function of being conservative, or that effect of the drop rate or lower drop rate, was that a temporary issue?

Since we were surprised by the lower to operate, I hesitate to build that into our model. It is logical for me because if you are winnowing out for quality, more of those students ought to stay in. We were more concerned about controlling for the bad debt expense. We have the 5% price increase. The biggest impact on how much of that price increase flows through per student is how many classes they take.

Since we do not try to up sell the number of causes of the student takes, clearly on the Graduate School side they take less, we have looked starkly and said and said with their increased roughly 25% of our students being graduate students and the consequent decrease in the sea to student ratio, we would expect that would be about 3.5 to 4.5%. If the tightening effect on bad debt does lower our drop rate in the Q1 relative to Q1 last year, it may be a little bit higher than that we just don't know at this point.

What is the tax rate outlook for Q1 and for the year?

39% would be a good effective tax rate to use. Of course as Rob, described you know that could go up or down depending on our posture on investing the excess cash that we have, whether we ought for the tax- exempt versus the taxable.

Exactly, thank you.

We will go to Corey Greendale at First Analysis.

Good morning, just a couple of quick ones. On the S&P, Rob I know you said that materially all of the increase there was due to new campuses. The increase as a result of revenue due to spending out of area on-line. Are you giving any thought to allocating more capital to marketing offering and trying to grow that a little faster?

No and no. And the reason for the second no is that growing online is our ability to get hired trained and assure the quality of on-line professors. And at the rate at which we are growing, I am comfortable that we're putting as much capital to work as we can to ensure quality. Through this calendar year, I do not expect that to increase significantly. If it can, we will. Right now it's above the rate which we feel is sustainable.

Great. And just to sense the IRR on that investment compared to the new campus, can you give us a sense where that comes in?

There is not a whole lot of capital. The IRR and the actual expense is very high. I'm not sure how to calculate it, Corey, you know, it's an immediate pay debt.

Okay. And then the second quick one. Could you give us a sense of your CapEx outlook for 2005? I think you've talked about upgrading your student information system. Can you update back on that plan and how much of the defending they would run through the P&L versus CapEx?

Go ahead, Mark.

In terms of our outlook for the year, in prior years we said 5 to 6%. In 2005 it will be six to 6.5% in part due to the student administration system investment. It is a large investment for a long very useful life. I think the bulk of it will be incurred in 2005. It will be still shown in 2006. In terms of the P&L effect, it will be estimated over a -- I think we would amortized over a 10 year period most likely.

Thank you very much.

[Operator Instructions].

We will go to Bradley Safalow at J.P. Morgan.

Hi, good morning. Just a question on the performance of the four or five campuses you started last quarter, where you may be you saw more acute issues with the bad debt expense and tightening credit policies. You did have a sequential improvement in the starts overall as a company in enrollment growth. Did you see improvement in the performance of those schools in particular?

Yes. I'm trying to think in my head. At least two or three of them did significantly better. We also have some management changes at a couple of those campuses. But yes. They were a source of the higher percentage of new student growth.

So from your perspective, implementing these higher credit standards, you have gotten past a point where there is any issues at least with ongoing enrollment growth?

I would hope. The thing is, Brad is that I do not see that managing the business to what we perceive to be an acceptable rate of bad debt expense over the long term should affect the enrollment growth. There are a lot of students or a lot of individuals who will benefit from an undergraduate or graduate degree, working adults. We certainly have the capability and the desire to pay their bills. I do not think over the long term it is an either/or kind of situation. I think in some situations in the short term it could have an effect, but that is not that important to us.

Okay, and then to shift gears on the tuition reimbursement, are you seeing any improvement in reimbursement levels? Is there something in the pipeline that it suggested the next year that could change?

You mean from corporations?

Yes.

We have not seen any shift but it has remained strong. We're still at the high teens, low 20% of revenue it at any given quarter coming from those. In the last four years, our compounded growth rate has been pretty high. So the actual increase in revenue coming to us from corporations and institutions is pretty significant. We got a team that works on setting up those relationships. We have another team that works on executing them and coordinating with the campuses. Particularly in new markets is been a great way to get ourselves tied into the community, which helps in a lot of other ways, as well.

If we look at some of the major markets (indiscernible) which you expanded into in the last couple of years, is low level of reimbursement somewhere at the corporate average or it is that an area that has grown and still has room for growth?

Some of them been higher, some have been lower. There is a variation in markets. Some of these -- smaller markets do not have that many big companies. In some cases you have a lot of corporate headquarters but the companies themselves are not that particularly interested in this and in other case they are. So it is a pretty wide variation across markets. I have not seen anything Brad that suggests it is not going to continue to be a significant source of revenue for us.

Great I'll turn it over. Thank you.

We do have a follow-up from Howard Block at Banc of America.

Thanks. It looks like be on campus population is probably permanently large -- I'm sorry, online is probably permit larger than on campus now? At some point when you are in 50 states, it may again turn the other direction or not both?

I missed the question. Could you say it again?

It looks like the on-line campus other than a head sake in the second quarter looks like it's the first time that online is larger than on campus. Do you think that is a direction that is permanent at this point in time?

You mean number the total students taking 100% of their courses on- line?

Right.

I do not know the answer to it but when we think about the growth of our university, we are assuming that a large percentage of our campus based students are going to take classes on line. We think that is the nature of the student that we have and frankly the way we are offering our courses. I do not know the answer to your question, but the more relevant issue for us is, how do you manage your university and how do you -- what kind of decisions do you make in growing that university bearing in mind that your students want to take class is on line and trying to meet that demand.

Okay. The bad debt, the issue that surfaced as a tale, is there anything in the composition of that bad debts, I know you mentioned them matured campus -- is there any thing in the composition of bad debt as we think about moving into many new more states and offering many more new programs? Is there some dynamic in bad debt that we should think about and anticipate? Is there some range of bad debt? To setting expectations and modeling, what are the variance here? Give us some comfort level.

I can give you what Mark and I are managing to. We think to provide open access, which is one of our educational values, to the broadest number of students who can benefit from the education and bearing in mind that we're going to have some people that do not paying, we would like bad debt expenses at the campuses to be around 2%.

With the out of area on-line, it could be slightly higher given the nature of how -- your ability to interact with those students. In all, we would like bad debt expense from the University as a whole to be around 2%. We think that is the right way to run. We were at or below that for a long period of time. We got a little bit out of control in the summer and early fall. And as said was isolated to a half-dozen or so campuses in the out of area on-line. I am quite comfortable with the progress and improvement we're making at those units. It is a question now of working on an accounting basis to make sure we keep it under control.

Thank you very much again.

Gentlemen, we have no other questions in queue at this time. So I would like to turn the call back over to Mr. Silberman for any closing comments.

I appreciate your participation on the call. We will be pleased to answer your questions through -- for the next several weeks, if you can just get an hold of Mark and I and we look forward to talking to next quarter.

Thank you.