Strategic Education Inc (STRA) 2005 Q1 法說會逐字稿

Good day everyone and welcome to Strayer Education Inc. First Quarter 2005 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. (Operator Instructions).

At this time, I would like to turn the conference call over to Ms. Sonya Udler, Vice President of Corporate Communications for Strayer Education. Ms. Udler, please go ahead now.

Thank you Operator, good morning. With us today to discuss the results are Rob 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 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, May 9. The number to call for the replay is 888-203-1112, pass code 333266. 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 may be 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 Rob. Rob please go ahead.

Thank you Sonya and good morning ladies and gentlemen. As is our customer, I’d like to begin this morning with a brief overview of our Company and our business model for any of our listeners who are new to Strayer. I’ll then ask Mark to report on our detailed financial results for the first quarter after which I’ll make a few comments on our enrollment results for the Spring Term, provide an update on our growth strategies, and finally end up with the Company’s outlook for Q2.

Strayer Education, Inc. is a for-profit education service Company whose primary asset is Strayer University, a 23,000 student, 34-campus, pro-secondary education institution which offers Associates, Bachelors, and Masters’ 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 IV loans. Our expenses include the cost of our professors, our admissions and administrative staff, marketing expenses, and facilities and supply costs. We currently operate campuses in 8 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 39 foreign countries through Strayer University Online.

Strayer University is accredited by the Middle States Association of Colleges and Schools. Mark?

Revenues for the 3 months ended March 31, 2005 increased 22% to $56.2 million compared to $46.1 million for the same period in 2004 due to increased enrollment and a 5% tuition increase which commenced in January 2005.

Income from operations rose 21% to $22.5 million from $18.5 million for the same period in 2004. Operating income margin was 40% for the 3 months ended March 31, 2004 and 2005. Net income rose 23% to $14.1 million compared to $11.5 million for the same period in 2004. Earnings per diluted share rose 24% to $0.94 compared to $0.76 for the same period in 2004. Diluted weight average shares outstanding decreased to $14.950 million from $15.091 million for the same period in 2004.

At March 31, 2005 the Company had cash, cash equivalents, and marketable securities of $135.5 million and no debt. The Company generated $19.3 million from operating activities in the first quarter of 2005. Capital expenditures were $3.1 million for the same period.

For the 3 months ended March 31, 2005 the Company spent $3 million for the repurchase of approximately 27,500 shares of common stock at an average price of $109 per share as part of a previously-announced common stock repurchase authorization. The Company’s remaining authorization for common stock repurchases was $22 million at March 31, 2005.

For the first quarter 2005, bad debt expense as a percent of revenue was 2.2% compared to 1.5% for the same period in 2004. Days’ sales Outstanding adjusted to exclude tuition receivable related to future quarters was 9 days at the end of the first quarter of 2005, unchanged from the same period in 2004. Rob?

Thanks Mark; just a couple of comments on the financials, breaking those lines down. Our revenue of 22% was basically consistent with our model that we had previously announced an 18% enrollment growth for the Winter Term, and a 5% tuition increase. And the continued growth of our graduate population reduces our seats per student ratio, so about 400 basis points of revenue growth above our student population growth is what we were expecting.

On the expense side in the first quarter, we sustained our operating margin at the previous year’s 40% level. Our S&P expense as a percent of total revenues increased on the year-over-year basis, but that is consistent with our internal model based on the investments we made in advertising and admission staff as part of opening our new campuses in the markets of Tampa and Atlanta.

We had decreases in our G&A expense as a percent of revenue which offset those selling and promotion costs. Again, that’s consistent with our model as we spread our fixed centralized expenses over more revenue.

Bad debt expense at 2.2% was down significantly compared to last quarter’s 2.9%, but part of that is seasonality and I suggest a better way to interpret that metric is that we appear to have stabilized our bad debt expense on an annualized basis in the high-2% range, 2.8% to 3.0% range. But we’re going to continue to pay attention to that.

Our free cash flow, again that’s a key metric that we track. That’s our distributable cash, which we calculate as our cash from operations minus all necessary CapEx on our growth was pretty healthy. It was up about 30% for the quarter, quite above our 22% increase in net income. And so we continue to do well on cash generation.

On the Spring Term enrollment results, our total enrollment increased 15% on a year-over-year basis. Our continuing student enrollment was up 18%, and our new student enrollments were basically flat compared to last year on the same-quarter basis. Our out-of-area online enrollment was up 42%.

Again, just a few comments on those enrollment numbers. The continuing student enrollment was fairly healthy, about where or a little bit higher actually than we had modeled. On the new student side, we did have robust lead flow. Our cost per lead was roughly flat in the quarter versus last year, and that included spending in 2 brand new markets. But we were not as effective as we have been in the past in converting those leads into new students. And we’re focusing a couple of operational and execution issues to improve those conversion rates and bring us back into better balance between our continuing and new student growth, which we’d like to be within a fairly narrow range of each other.

Now, with regard to student mix Business Administration and Accounting degree seekers continue to account for slightly over 60% of our students for the Spring Term while Computer Information Science degree candidates were just under 30% of the total population. This is continuing a trend that we’ve seen over the last couple of years where more and more of our students are enrolling in the Business Administration and Accounting programs relative to Computer Information Science degree candidates. Similar to last quarter, our new graduate programs are over 3% of our student population, so that’s maintained a fairly healthy portion of our student population of the last 2 quarters. And the overall graduate population is again similar to last quarter, about 25% of our student mix, which is up from 21% a year ago.

Now turning to an update on the growth strategy, which we try and review on each of these calls, many of you remember that our strategy is based on 5 objectives; first is to maintain enrollment in the Company’s mature markets; second accelerate the rate of growth of new campuses, particularly in the new states; third investing in build up on online offerings; fourth increase our corporate and institutional alliances; and our final objective is to look selectively at potential acquisitions and the ultimate redeployment of capital.

On the first objective for the Spring term, we had a solid quarter at the mature campuses. We showed 2% growth while mature campus students continued to exhibit a preference in their later terms particularly to take online courses, which we certainly encourage. With regard to the new campus activity, we announced this morning that we are opening 2 campuses in the Summer term; one in Greensboro, North Carolina and one in Columbia, South Carolina. These are markets, general Carolina markets where we’ve had high demand, and we felt like we needed to use some of our resources this year to fill in in areas where the demand was higher than we could serve with our existing locations. Those campuses have finished construction and we’ve assigned staff who actually this week are in the process of recruiting students.

In the out-of-area online unit, our growth for the Spring term of 42% was below our model. It was negatively affected by new student enrollments where the out-of-area online it was roughly similar to the rest of the University. On average, our new student enrollments were basically flat, just slightly better than they were the year before.

In the area of capital redeployment, we declared this morning our quarterly dividend of $0.125 a share, and we repurchased, as Mark mentioned about $3 million worth of our common stock during the first quarter. Just to reiterate, as I mentioned in my letter to shareholders this year as well as the previous year, the Board and I are convinced that our business model allows us the luxury of fully funding a strong organic growth strategy and still make a periodic return of capital to our shareholders. We as a management team and a Board continue to weigh all uses of cash every quarter to determine the most value-enhancing after-tax return on our owners’ capital, and we will continue to do that from the standpoint of looking at both dividend and repurchase policy on an ongoing basis.

On the business outlook for the second quarter, based on the University’s enrollment growth for the Spring term offset partly by increased expenses associated with the new campus openings in Tampa last quarter, which will be in their first full term in second quarter. Greensboro and Columbia, which will be brand new markets, we estimate our second quarter EPS will be in the $0.82 to $0.84 range. In the second quarter, we’ll see about 300 basis points of margin compression versus last year. Again, for those of you who are tracking that through the individual expense line items, most of that will be in the S&P line and a little bit in the G&A line. And the reason is our revenue growth is going to be at the low end of our model for the second quarter given our enrollment growth, and so you’re going to see a little bit more of the predicted margin compression during that quarter as we go ahead and make the expenses, make the expenditures and the investments in opening the new markets at a time where the revenue growth isn’t quite the size it has been in the past.

And with that, Operator we’d be pleased to answer any questions, and for our listeners we’ll stay around as long as you all need to get your questions answered, so there’s no need to worry about jumping in and out of line. We’ll go ahead and just run through all the questions everybody has.

Operator, go ahead.

Thank you sir. (OPERATOR INSTRUCTIONS).

Mark Marostica, Piper Jaffray.

Thanks, good morning. My first question relates to the new student and start growth metrics that you disclosed, and I’m wondering if you just take a step back here for a minute, is this phenomenon something that you feel is exclusive to your own situation, or are we seeing something broader in the overall higher education market, Rob from your point of view? We’ll start it off with that question.

Well, from my point of view there were a number of execution issues that we didn’t do as well as we would have liked. I make it a point, Mark not to comment on other companies because I really don’t know what they’re doing, and it’s hard enough running one. But in the broadest general sense, this has always been a competitive sector. For the last 4 years, we constantly reiterate that, both from traditional Universities and educational institutions that are trying to serve working adults, as well as from other strong institutions that operate within the for-profit sector as well.

I don’t see anything, Mark that is remarkably changed or materially changed from the standpoint of the attractiveness of the business, the attractiveness of the supply/demand ratio if you will with regard to what we’re trying to provide. And so focusing on the things that we can control, which a management team I think needs to, everything that we’re seeing are things which are for the most part within the range of where we ought to be able to execute and achieve the returns on the investment for the capital that we’re investing in the way in which we anticipate doing that.

So there’s nothing that I’m seeing right now which would lead me to believe in any significant way this is a different business than it was 3 months ago, so.

And on topic of conversion rates coming in below what you expected, can you point to anything specifically with respect to the mix or how you work those leads that led to disappointing conversion rates?

Well, I mean as I said our lead flow was pretty strong, and we didn’t have a shortage of leads. And they came from about the same mix that they came from the quarter before. In that last quarter, we had 22% new student growth. I mean, the number you’re talking about is about 700 students, and there were a number of things. It’s simple business in concept; it is a difficult business in execution if you take it all out, but it definitely suffers.

We have focused as a management team significantly in the last quarters on both bad debt expense control, as well as retention in management, and I would say that at my level that’s a little bit of a mismatch in balance. And we took the new student growth I think a little bit for granted honestly. But we don’t intend to do that going forward, and I think the attractiveness of what we’re offering our students hasn’t changed.

I think in the long run, I’d be even more concerned if our continuing student population precipitously dropped because that would be more of a comment on our quality. And we’ve talked before, this is a variable business. This season’s variability on the downside with regard to new students’ charts is below where I’d like it to be.

Then perhaps just talk about some of the things you’re doing or planning to do to kind of turn the tide here, and then when would you expect new student start growth to return to Strayer? Would it be this coming quarter, the fourth quarter? Any comments there would be helpful, then I’ll turn it over, thanks.

We try not to predict the future, but we weren’t expecting it to be low this quarter, so we don’t expect it to be low next quarter also. I mean, we’ll do everything we can to make sure that we are converting the students that we bring in as leads.

What we’re doing on the first part of your question is trying to refocus our whole organization and campus leadership staff on the process of converting a lead into an application into a new student. And it’s something we’ve been quite good at in the past, but I don’t have any reason to doubt that we won’t be successful at it going forward.

Trace Burden [ph], Robert Baird.

Hey good morning. I’d like to sort of stay on this topic if we could a little bit Rob. It seems as though you’ve described the lead flow being strong and we hear that across the board, and yet the conversion of those leads seems to be more difficult, not just for you guys in this current quarter for whatever execution reasons, but the issue seems to be more widespread. And as you, I know it’s we don’t have perfect visibility into how you intend to spend your money next quarter, but it seems as though you’re sort of stepping up the pace of spending relative to what the people had been looking for. And I guess my question is kind of in 2 parts; one is can you give us any sense of where you’re going to direct those resources? Are we talking about more counselors? Are we talking about more advertising, or more names that maybe you’re buying? That’s the first part.

And then the second part of the question is more sort of stepping back and saying on the margin, the incremental new student in out-of-area that you’re acquiring in the marketplace has the value proposition of that incremental sort of marginal student changed at all in your mind? Sorry for the complicated question.

No, I got a pad; I wrote them down. On the first part of the question, there was a bit of a bad assumption with regard to spending. We’re not going to spend more than we anticipated spending in our budget. We’re going to spend the amount we though necessary at the start of the year both to run our existing campuses and to open the new ones. What’s different and why there’s margin compression is we’re going to have less revenue. So the spending side will be pretty stable, and the revenue will be less and that will generate less operating margin.

On the incremental out-of-area online student, I think it’s a great question because clearly that’s an area where of all of the businesses that we’re involved in, I would say it’s the one that’s most susceptible to sort of traditional competitive concepts and pressures. You don’t have the opportunity to build up your brand affiliation and the relationship with the student as easily as you do with the campus-based population. And so over the last couple of -- I mean, it’s always been competitive and I think it continues to be competitive and maybe even grow slightly more so from that standpoint, which would partially explain lower conversion rates in that particular area.

That’s a relatively small part of our business. I mean it’s only about 10% or 15% of our business. So it’s not, that’s not the main driver of what happened in the last quarter, although it’s certainly a contributory factor.

But the best part of the question with regard to at the increment, at the margin is to change our view of the long-run profitability or value of that student and the answer is no because your return on investment on bringing that out-of-area online student is very, very, very high. And we’re going to continue to go after that market from the standpoint of addressing ourselves, building up our online offerings, and having as effective a marketing program as we can in that area. Whatever we get is going to be quite valuable for us, and we’re certainly not going to shy away from it.

On the other hand, it’s not the core part of our business. I mean, if you’re looking at our models in the next 5 to 10 years, we’ve tried to be quite open about the fact that our model was based on building a nationwide network, a nationwide University based on physical campuses with the online as a very nice supplement. And ultimately, when you build a nationwide network of campuses the way we manage it, our out-of-area online will be zero because they’ll all be associated with the campus.

Okay, thanks for the clarification Rob. That’s very helpful.

Greg Cappelli, Credit Suisse First Boston.

Morning Rob, if we could just break down enrollment, the growth -- and I understand that 0% enrollment growth doesn’t mean you don’t add new students. You obviously added people to the mix here. I guess it’s just the second derivative slowing a bit, but of all the components of new growth, are you finding that it’s simply more difficult to compete I guess for new students without having, you just mentioned the campus versus out-of-area, is it just more difficult to compete for that out-of-area student without having a campus in the area than perhaps it was even a year or two ago?

I’m not sure I can say that, Greg based on this result. I mean we had pretty healthy out-of-area online new student growth 3 months ago. So it’s just, I wouldn’t draw that conclusion from this data point.

I think in general, it’s more difficult relative to recruiting a student who is walking on one of your campuses, but we’ve always had lower conversion rates at the out-of-area online than we do at the campus population. In this last quarter, it was lower on a year-over-year basis, and we had quite a few more leads so we ended up with almost the exact same number of new students in the out-of-area online as we did the year before.

Okay, on the bad debt control, when do you ease off of that a bit if you do at all?

That’s not a quick question. We want to make sure that we’ve got the leverage under control. What got Mark’s and my attention most of all in the last Summer it was a metric that we weren’t intending to have it grow like that. I mean, we weren’t expecting that to happen, and when that happens we tend to really try and focus on that, make sure it’s under control. And then when it’s under control, maybe you can ease off as you point a little bit and maintain it within an acceptable level of control, but say no you’re willing to tolerate a higher bad debt expense because it generates more revenue and income growth.

In our case, that’s always amiliorated by the fact that we don’t, there’s a pretty high correlation between that bad debt student and the non-graduating student and so from an academic perspective we kind of want to keep that at a relatively low number, lower than might be expected from just a profit maximization standpoint. So what we do know, I mean I certainly know that when you say it’s an execution-based business, what you’re really saying is that you’re acquiring people to exercise judgment based on priorities you set throughout a broad geography. And when you set one priority quite a bit higher than another, you’re going to get that human behavior, you’re going to get that reaction, a certain amount of conservatism. Mark and I recognize that, and I think we’re going to try and manage that going forward with due respect for the effect that it has on new student growth.

Although I will say, and I said in my letter to shareholders a couple of months ago, and it was a deliberate decision that we made, that focusing on managing and controlling bad debt can have a negative impact on new student growth. I would have to admit I wasn’t intending to have this much of a negative impact.

Okay, I understand. Maybe just if you could give us some idea if you think of your school base, I’m sure you’ve taken some of your good people from existing schools and put them in the new schools. Can you talk a little bit about that and give us an idea of how many perhaps Presidents or senior people from existing schools you’ve put into new areas and if that’s having an impact?

It’s definitely having an impact. I mean, that is the limiting factor on our rate of growth. And it’s also a cumulative impact. We now have 34 campuses of which 22 have been opened in the last 4 years. Now, the ones that were opened in ’01 and ’02, you’re now, some of those are achieving our highest rates of growth and you’ve got individuals in charge of those campuses that although they were new 3 years ago, they’ve really started to hit their stride.

If we looked at it with regard to this year, we’re going to open 5 new campuses. Staffing those campuses with internal candidates, existing campus directors for the most part, means that you are really replacing 10 because you’re moving 5 from existing facilities into the new facilities and then [indiscernible]. So a third of our campus leadership population is brand new this year. That’s the execution challenge of having a high-growth enterprise with a lot of different operating units.

And that’s what we focus on, and we’ve made some really good decisions on the personnel side. We’ve made some that we’ve had to adjust in a relatively quick period of time. But one thing that I think is really attractive about this business is it’s not hidden. I mean, we can see right away numerically when we’ve got the wrong person in place, and we try and act on it soon enough. But in some cases, that doesn’t always happen exactly the way we want.

So it has an impact, but it’s an impact that we’re controlling for in terms of investing in our rate of growth and I wouldn’t point to it as an excuse. It’s just a fact of life that we need to manage.

Okay, one last quick one. You mentioned that the mix, now 30% I guess actually related or slightly under, as you’ve point out gone down consistently. With that going under 30% and maybe even continue to go lower, I know that you’ve already put in some new programs. Do you feel like you need to continue to broaden maybe your program mix to go after students that you could be attracting that you just don’t have the programs to get?

I really don’t, Greg and our decision process on that will be more along the lines of if there is a market demand that’s showing itself that’s consistent with our academic capabilities, i.e. can we teach it? Do we have a tradition and a track record we can point to? Is it close enough to something that we have done that we can feel confident about it? Then we’d look at it. I have a lot of confidence in the demand for Business Administration, Accounting, Public Administration, and Computer Information Science demand going forward.

And I think part of the reduction that we’ve seen is merely an artifact of the geographic expansion. In other words, we started 4 years ago in a region in Washington D.C. that’s very heavily IT-centric, and we’ve moved out into other parts of the country where the economies aren’t quite as IT-focused, and generally picked up students whose interest levels match the employment population in those areas. So no, I don’t think that that’s something that is a cause of any of the results for this quarter or something that I’m concerned about looking forward.

Okay, thanks for taking all the time. I appreciate it.

Mark Hughes, Suntrust Robinson Humphrey.

Thank you very much; any difference in the starts and the Masters versus the Bachelors program? I think you said that Masters continues to be solid in terms of the total population. How about from a starts perspective?

I think it was pretty consistent, Mark. I don’t have the data right in front of me, but nothing jumped out at me at it. So I mean, we can clarify and get back to you but I’m pretty sure it was relatively consistent with the starts on the Bachelors side.

And how about the number of new unit openings in Q1 and Q2 this year versus last year? I think I can go back and collect that data, but do you have that handy?

Yes, we have one more in the first half of this year versus last year. That’s 4 in the first half of the year, and we had 3 last year. No, Mark is shaking his head.

No we had 4 before, in the first half. Yes you’re right, because we had 2 in Atlanta for the Summer.

Mark’s correct.

So how many in the last year in the first half versus this year?

Four in both cases.

Okay, all right. And then in terms of lead quality, I think you’ve touched on this, but my assumption is that you probably weren’t doing much different in terms of your enrollment operations internally. You said the lead mix wasn’t much different. Why is it the quality of the leads has changed? Are people just filling out more interest cards for more schools and so you’re having a harder time cutting through that clutter? What do you think?

Well, I’m not sure the quality of the lead has changed. I mean, one of the things that we look at is the average tenure of our admission officer. And that’s gone down, that went down in this last quarter. And again, those are partly internal management decisions that we made. We took a lot of admissions officers and shifted them to focus on retention for us in the last quarter, which again in hindsight I think didn’t show due regard to the complexity on the new student side. And then also just because of our general expansion, we have a less experienced average admissions officer work for us.

So I think that definitely as we track that historically, we do an aggression analysis that has a big impact. The more experienced your admissions officer is, the more students they recruit. But from the standpoint of the lead flow, we got it from the same locations basically, and as I said we had 22% new student starts just a quarter ago. I couldn’t jump from that to any conclusion as to the quality of the leads. I think in general, as I answered on one of the previous questions, the out-of-area online lead is a more difficult one for us to convert. It always has been. And also I think technically is one who is more likely to have looked at other opportunities because it’s easy to do that.

Right, did you happen to look at sort of same enrollment, counselor, admissions performance if you looked at the same individual that you were able to hold onto year-over-year, how they might have done in terms of their performance?

Yes we did Mark. It’s a great question, and it was relatively stable. I mean, a lot of our impact has to do with the opposite of aging, the youthening of the admissions officer’s staff.

Right, and why the excess turnover there? Is it just a good job market, they go off and do something else with a little less stress?

No in our case on a specific quarter basis as I said, we took sort of the top 10% or 15% and put them in these retention jobs. And then as you consistently open new campuses, your general population of admissions officers is getting more, or less experienced on average also.

Okay, that’s very helpful. Thank you.

Gary Bisbee, Lehman Brothers.

Hi guys. A couple of questions I guess, within this new student performance, and obviously 5 new schools in the last 12 months, do you see some schools I guess by definition would have to have had fairly negative new student year-over-year. Do you see any pattern in terms of that regional or the old schools versus the newer campuses, any way to help us understand that a little better?

Yes, you’re correct mathematically and it was concentrated in some of our campuses in regions where Mark and I had really cracked down on the bad debt expense, as well as the out-of-area online.

Okay, you’d said 2 quarters I guess that the focus on the bad debt expense had led you to turn aside I think, if I remember correctly a couple hundred students. Do you have a similar experience this quarter?

I don’t know that we have -- well, I guess you can calculate that by the lead flow, the demonition [ph] in the conversion rates are the amounts that you would have had if you had the same conversion rate that you had the year before. We really didn’t look at that mathematically but the other part of it is also we replaced a lot of campus directors in that particular region. So, and it’s a question again of prioritization and emphasis and focus, and there’s a general tightening or conservatism that comes on the part of the campus director when you really focus him or her on that particular aspect of their management challenge. We need to keep things in balance and effectively convert our leads into new students among those that, under the right circumstances and the right payment mechanisms to make sure that our bad debt stays within reasonable control.

Because again, I go back to ’02 and the early part of ’03, we had very high new student growth and we had very low bad debt. So there’s no reason why we can’t have both. We just need to make sure that as we’re expanding, we’re sending the right signals and the right execution decisions to ensure that.

Okay, you said the lead mix has been fairly constant through the last quarter or two. Are the conversions different, by different media? In other words, are online conversions a lot with a negative delta there, or did it happen to the direct mail, online, everywhere?

I always hesitate to either answer or try and analyze the questions that way because of the fact that I don’t know that we can really identify a lead by media mix. We can identify leads clearly by geography. We know their zip code. But we really don’t know if the lead comes to us because the television ad or the radio ad or they saw a search engine entry on the Internet. We try to solicit from them that information but I hold it in a high degree of skepticism, and I do believe it’s a cumulative effect. As we exercise our marketing budget, we try and keep in mind that you want to optimize to the greatest extent possible, but you’re reasoning by analogy. I mean, you’re reasoning by [inaudible], and you stop doing one thing in the market and you see what happens, but you don’t really have I think direct enough data to generally say conversion rate by media source to be that effective.

That being said, geographically we try and mix things up in a way that gives us the best outcome. And we change it a little bit, we pick a couple of markets each quarter to change it around just to see if we get any different results. I didn’t see anything that was glaringly different with any of the results, any of the changes that we tried in the last quarter on that basis.

Okay, how about the Tampa starts? Were those good I guess both in terms of students? And then also how did the cost experience versus what you had seen in other recently-opened new areas?

Well, the cost, I mean Tampa is less expensive than Philadelphia and more expensive than Greenville, South Carolina. I mean, you can just look at the economy and see that. It was well within on the cost side our investment model. On the enrollment revenue side, it was in our investment model, but it was less than some of our other starts because some of the other ones had been well outside that on the upside.

Okay, and then I guess just in terms of the guidance for next quarter, understanding that revenues are going to be several million below maybe what we would have previously projected given the enrollments in the mix, the graduate. It seems to me that’s not enough to explain a $0.10 to $0.12 sequential decrease in the earnings guidance. And I guess is there anything else you can point to that drives that? The experience last year opening the same types of schools was just a modest sequential decrease. Is there anything else going on here, investments to spend outside of new campuses or anything else?

No, and if you do the math on the year-over-year, what do we have, 20% enrollment growth last Summer, Mark?

Something like that.

It was like 25% revenue growth, we’re going to have 18% revenue growth this quarter. That 7% will pretty much compute down to the difference in operating margin. We’re spending the amount, Gary that we thought we’d spend at the end of the year.

I cannot, well I don’t want to make a qualitative statement and say I overreact or under-react. We cannot react that much on a quarter-to-quarter basis to the input or the influence of what our enrollment starts are. I mean, we’ve got to launch an investment plan that we’re executing under, which includes our expense side, and that’s what we’re going to do.

So with the roughly 300 basis points of year-over-year margin contraction driven by lower revenues, it seems to me I mean I guess you said most of that from selling and promotional, so would it be reasonable to expect that to be over 16% of 16.5% of revenue? Do you think about it that way?

I do, but I don’t have it in front of me. But I mean it’ll be a similar S&P spend as we had in this last quarter off a lower revenue base.

Okay, all right. I guess moving beyond that one, was the lead flow as strong in out-of-market online in there, or it was just pretty much just the conversion rates as well?

Actually it was more pronounced in out-of-area online. In other words, we had more leads than we were expecting in out-of-area online, and our conversion rates were that much lower in that market relative to our campus-based markets.

Okay, and then just one last one. I know that you haven’t always commented on your guidance from the beginning of the year, but any sense on that 320 to 330, is that still a reasonable number at this point?

If we have enrollment growth within the range of our model of 15% to 18% that is reasonable.

Okay, great.

That’s why we put it out as a model.

All right, thanks a lot.

Richard Close, Jefferies & Co.

Yes, Rob I was wondering if we could focus a little bit more on human capital. It seems as though the inexperienced admissions rep is an issue throughout the industry. We’ve heard it on several calls, and retraining admission reps. Do you really see human capital as a major issue here in terms of stifling growth and expansion in the industry? You’ve commented on that before.

Well, not with regard to the industry because I wouldn’t make the general comment, but I have clearly commented with regard to Strayer that it is the limitation on our growth. And it runs particularly at the campus leadership position, and from the standpoint of being able to ensure academic quality and good service operations, which protect the brand and allow you to build the long-term value in the entity. And we’ve always said we’re just not going to get out ahead of that and run the risk that we destroy long-term value by not doing what we say we can do for our students in the process of both recruiting them and educating them.

And so that’s not a surprise. I mean, we have always believed that and I think it is the key limitation on our growth in a general sense, in the long-term sense. The more specific issue that has been raised and we’ve talked about is as your admissions officer, at least in our experience, as your admissions officer force is less experienced, that is it’s younger in its tenure, there’s a pretty strong aggression analysis as to how they mature and how they get more effective over time. And so we really need to focus on keeping our quality admissions officers as long as possible in that role and managing our expansion and managing our growth in a way that doesn’t cause too much negative impact from that standpoint. That’s more of a short-term profitability impact. It’s really, our overall limitation is driven by the qualitative sense of not growing ahead of our ability to ensure quality.

How long does it take admissions reps to really ramp up?

Well obviously it depends on the rep. On an average, I guess it’s a couple of years or so.

Okay, and then in looking at conversion rates, I mean are you able to ascertain from I guess potential students in terms of why they’re not essentially becoming students, or is that just information that’s too hard to get?

We get some of it anecdotally. I wouldn’t say we’re great at canvassing it more completely. But in general, the reason that in the past, and I think this is true for the last quarter, when we lost students, when we don’t become students for the most part it’s because they’ve been uncomfortable with the time commitment and the percentage of their life attention commitment that has to go with going back and getting a degree. Some of them may go to other institutions. A lot of them go on to a community college which we actually support. We’re in favor of that. We’d rather recruit the student for the last 2 years from the community college in many cases because they have a much higher completion rate and academic success rate.

But I didn’t really see anything significantly different in this quarter versus the last ones on that Richard. It’s generally a process of making sure that the student understands the requirements of them in the program, and that we’re capable of running the program in a way that it fits their life. And we use that as a tag line in our advertising. But it’s really essential to what we do. If we can’t make it convenient for them logistically, they just can’t get it done. They’ve got too many other claims on their time.

Okay, and last question here. I’m going to jump back to the human capital side. Do you see any of the human capital issues out there as changing your stance in terms of opening 5 campuses versus 3 campuses per year, or anything like that going back to the old ways?

My preference would be to go in the other direction, to increase it. I think that the return on invested financial capital in these campuses is so high that we really owe it to ourselves to do it as quickly as we can. So a big part of our human capital development program is to try and make sure we can do that in a way that doesn’t hurt our short-term performance, but does it as fast as we can.

But you don’t see the current issues as limiting the number of schools you could open?

No I don’t. I mean, Richard in general I don’t see the current issues as being capable of providing long-term guidance for us in a lot of different ways. This is a variable business. Sometimes the variability is going to be below where you want, sometimes above. We try and keep a steady hand look at this.

Thanks, that’s very helpful.

Howard Block, Banc of America Securities.

Thank you Operator, good morning everybody. Mark, just a real quick maintenance question; in the press release you made reference to $3.1 million in CapEx and in the cash flow statement it looks like you go with $1.6 million.

You get the prize. Technically, Howard, the right presentation is that if a component of that is non-cash, in other words if it’s in your accounts payable due to timing, then you have to show the actual cash outflow that was made at the end of the quarter. And you can see down at the very bottom we disclosed another I think $1.5 million or $1.6 million that is the non-cash component that technically is in our accounts payable at the end of the quarter. But we have committed $3.1 million in the quarter, and that’s why we reported that number.

Okay great, thank you. Rob, in terms of the -- and I’m forgetting about ’05 guidance. I’m thinking more out beyond. As you look at your own model, is there any reason that you would have altered your expectation for the sustainable growth in students?

On the basis of this quarter’s results?

Right.

No.

Okay, and then in terms of the out-of-area online new student growth rate being equally as you said to the other dimensions in enrollment in terms of growth rates and new, that’s what you say, correct?

Yes.

How did those growth rates compare with each other last year and was this convergence a trend? Would you have expected this convergence?

No, I didn’t expect it, and last year’s comparison the comparison the growth rate of new students at out-of-area online would have been slightly higher than the campus population, which means that the effect on the year-over-year basis is more severe at out-of-area online versus the campuses.

But just slightly higher.

Yes, I mean not orders of magnitude.

Okay, and then in terms of the 700 or 800 student shortfall which is also what we had in our model for the quarter, was that shortfall approximate between out-of-area and other?

It actually would have been about a quarter, maybe a third or so would have been out-of-area and another third or so would have been one region, and then the rest spread among the other 3 regions.

Okay, any chance you’ll share with us where that one “particular” region is?

No, but I mean it’s the area that we have in the past focused on other operational issues in the past 6 months, particularly on the bad debt side.

Okay, and then in terms of the execution issues that you mentioned, again I guess the execution really is just about conversion?

Yes, in this particular case yes.

Okay, and then in order I guess to achieve your outlook for the growth hasn’t been altered as a result of the quarter. How fast does the new student growth rate need to recover to more of an equilibrium with the continuing student?

Well, I mean that depends on what your time horizon is for changing your view of the long-term view of the business. From our standpoint, it’s going to take us a while to build a nationwide network, and nothing in this quarter suggests to me that that’s not the right thing to do, and that’s not the best use of our owners’ capital, and that over time it won’t sustain the growth rates that we have in our internal investment models.

I mean, I try not to predict the future, Howard and so I can’t tell you how fast that needs to happen in order for that to confirm that. But, well let me put it this way. We’ve had 4 years of evidence of results that have been well above our investment model, and we’ve had one that’s at the low end. And so I’d be prepared to sustain evidence at the low end of the model for a while before somebody could convince me that it wasn’t the right model going forward.

Okay, and then maybe I could ask this a different way then. Are there still opportunities to continue to improve the continuing student growth or retention while we’re waiting for new student growth to recover?

I think we’ve gotten an awful lot out of the continuing student side. So I would say that that’s not particularly right. We’re running at a sustained high retention rate and our graduation rates as a result of that are starting to move up. We obviously would like to get 100% retention net of graduations. But on the law to admission returns, I think in the first couple of years we got an awful lot. The last couple of years it’s been a little bit less, but it continues to improve. And I think our long-term rate of growth is going to be based on sustaining a high continuation rate and increasing of numbers of new students.

Okay, and then the last question, just for illustrative purposes really only, can you give us an example of a campus where the shift of enrollment advisors to retention practices as well as maybe the migration of enrollment advisors to new locations has been great, and may quantify it. I mean, are we talking about a mature campus that had 30 enrollment advisors focusing on enrollment who were mature and a year or a quarter later, there are only 15 because 5 moved and 10 shifted, or whatever?

Well, they are smaller numbers because even in our biggest campus there are only 6 or so admissions officers, but we do have certain stances where between the promotion of some to retention managers and the movement of some into other positions, you could have 4 or 5 of the 6 basically less than 60 or 90 days old.

Great, thank you very much.

Corey Greendale, First Analysis.

Hi good morning Rob and Mark. Just a couple of quick follow-ups on things you’ve already commented on, but in terms of the bad debt impact would you put the out-of-area online issue, I believe when you discussed the bad debt question originally you mentioned out-of-area online as one of the places where that was going up. Would you attribute the issue there to the bad debt issue kind of fall into the physical campus fit?

I’m sorry Corey, I didn’t understand the question. Say that again.

I apologize, the issue with the out-of-area online, would you just kind of put that in the same camp as physical campuses where the issue is happening as being one of the places where bad debt was trending up and your focus there was on bad debt?

Yes, yes, and it’s also on a corollary basis one of the areas where we made the most improvement on bad debt was in our out-of-area online.

Okay, and you said we should be thinking bad debt has kind of stabilized in the 2.9% to 3% range?

For the year. It’ll bounce around on a seasonal basis because the way we calculate bad debt, your bad debt is expensed as the amount necessary to create a reserve sufficient to cover your uncollected balances, but you actually write off the balances against that reserve. And when you’re writing off the Summer term, which is a lower revenue, you’re doing that 180 days later in the Spring, which is the Winter term that we just did, you’re writing off a smaller number of collectibles seasonally against a larger amount of revenue seasonally, and then that kind of reverses through the rest of the year. So on an annual adjusted basis is why I said I don’t get too excited about that 2.2%. It’s probably kind of 2.8% to 3% the way we’re running right now. Now we increase collections even more if we go down, and it deteriorates if we go up, but that’s where Mark and I kind of feel like we’ve kind of stabilized this.

Okay, understood. Again is that kind of toward the upper end of the range that you’ve done recently? Does that suggest that the campuses where there were issues, do you think there are still issues or has that kind of trended up at the other campuses as well?

I think it’s partly associated with the fact that at the rate at which we’re growing, that may be a more normal number. We’d like to bring that back down over time, but the first thing was to stabilize it, and then you can start to put in place procedures that can bring it down. But the last couple of quarters, we’ve had pretty marked year-over-year increases which we’re now starting to get a little more under control.

Okay, and I think my last question is you mentioned the Tampa site. Could you just comment on the few campuses that had opened immediately before that, the Atlanta campus and the Philadelphia campus how those have trended well with this year’s model?

Philadelphia was pretty much right on, and Atlanta’s been a hit.

Great, thank you.

Bob Craig, Legg Mason.

Good morning Rob, hi Mark. Just a couple of questions, just to make clear in terms of corrective measures that you’re taking, have you effectively then communicated to your enrollment counselors to focus on new student intake?

I’m not sure I want to comment on that Bob.

Okay.

The way we manage the business from that standpoint -- to say we’re disappointed is probably an overstatement frankly. We were surprised. We think over time it will be higher. And except in a couple of leadership positions where we made changes, we’re quite pleased with the effort and the effect that our admissions officers have on recruiting new students.

I guess just the one thing that just puzzles us is the fact that since we’ve been covering this space, it has tended to be a business that just doesn’t change that fast. And to go from 22% new student growth to 0% obviously belies that, and we’re just puzzled as to how that could have changed so quickly.

That’s a very fair comment, and honestly that’s from our standpoint why we feel as if the long-run fundamentals of the business couldn’t possibly change that quickly. We make a lot of decisions, particularly when you’re executing an aggressive growth strategy, many of them personnel, some of them as I said question of emphasis and procedure. And we’ve been fortunate over the last 4 years. We’ve had more than our fair share of those go right, and there are occasions when you get more of your fair share going wrong. I mean I think it’s more, that’s becomes less an issue of fortunateness and just bad judgments that I made. But the fact that it changed so abruptly and there are a number of issues that we look at internally that we point to is one of the reasons why I look at it and say yeah, you’re below the level of variability that you’d like to see, but it’s also not one which should suggest something that is so different about the business -- it couldn’t change that quickly from our standpoint. It gives us a high level of confidence.

When you look at it Rob, the timing of an admission officer or admission counselor additions, does that tend to be steady, or is there some lumpiness to it?

There’s lumpiness to it based on both when you’re expanding your campus network so you have people who are leaving existing facilities to go to new ones; and also just lumpiness in terms of your general promotion procedures and when the jobs become available.

Now are you planning on changing your marketing spend by mix at all during the second quarter? You mentioned the absolute dollars really aren’t going to change from your initial plan, but how about the mix change?

Well we change the mix slightly each quarter anyway, as I said to try and determine by exception information as to what the most effective mix is. But beyond what we had planned, no we are not changing it.

Okay, last question. There have been a number of enrollment shortfalls this quarter, and we’ve heard execution issues certainly more than anything else from most folks. Nobody has mentioned the economy. Do you happen to have any thoughts on any economic influence on your business?

Well, the evidence that I have is looking back over the particular history of Strayer. Its rate of growth has not tended to be correlated with either inversely or positively with the economy. It’s been much more related to our rate of investment with occasional blips associated with execution issues. And I’ve always felt for the working adult student that the economy is less of an impact on the short-term basis than maybe other types of students because we’re not competing with our students for jobs. They’re generally in jobs and they are looking to further their careers because over a long period of time, they’ve realized that in the job that they’re in, they really can’t achieve the economic or financial outcome that they want for themselves and their families without the college degree.

I definitely believe that if for some reason the economy stops shifting from a manufacturing base to a knowledge base that could have a devastating impact. But I just don’t think that’s a likely probability. As to what the rate of growth for the economy is, the CPI or the rate of growth, the GMP or what the Fed does with interest rates, I honestly believe that has less of an impact over what we do. But I also would argue strenuously against a great deal of evidence across a broad cross-section of companies in the sector. The only point I would made to curtail that a little bit is there’s really only one other model that’s kind of exactly the same was as we’re doing it, and the other ones I think continue to have more or less impact with regard to the economy than ours and not have it be a reflection of a trend, at least with regard to our students.

Okay great, that’s helpful Rob. Thanks.

Lisa Intz [ph], Alliance Capital.

Hi, my question was answered partly in Richard Close’s answer. But I just wanted to know if you have any sense for where the students went. Did they just not go to school? Did they go to public school? Did they go to community college? Did they go to a competitor?

I don’t have great data on that Lisa. As I said, anecdotally we didn’t really see anything that was remarkably different from the ones we would normally not get through our conversion process. Quite a few decide not to go, they just can’t deal with the time challenge. I’m sure some went to other educational providers, including public institutions, community colleges, things like that.

Okay, thanks.

Richard Close, Jefferies & Co.

Yes Rob, real quick I wonder if you could talk to us a little bit about the length of stay in terms of whether you expect that to change. Are students coming in with more or less credits, any commentary on that front?

Well, we’re actually trying to move to bring in more students with more credits. Our arrangements with the community colleges I think are an important part of our operations going forward. The 2 plus 2 is where we take in students who have graduated from community college, and are in the last 2 years of the program. And the reason as I stated earlier is that we find those students have a much higher rate of academic success. They have, going back to school for a couple of years in your mid-30s, they’ve sort of re-oriented themselves to an academic requirement. And so we’d love that number to go up.

There’s nothing in the current data that suggests the number is changing, and our current average rate of stay is about 8 quarters. And that hasn’t moved significantly, so we’ll continue to watch that.

Okay, thank you.

Mark Mickelson [ph], Sycamore Yield [ph] Capital Management.

Hi guys, thank you for taking my questions. I have 2 questions; the first question is just in terms of your student acquisition costs, I mean the last few quarters, sales and marketing has been up like 30% to 40%. I guess this quarter the new student enrollments were flat. So doesn’t that suggest I guess that even admission costs are going up, I was just wondering what’s the best way to think about that going forward? I mean is that something that we can start to see improvements in?

Well, I think there are 2 important points to be made on that; 1 is our student acquisition costs would go up according to our model regardless of a shortfall on new student growth because of the fact that we’re investing in brand new markets where we spend a lot of advertising and admissions officer salary dollars and you don’t get your normal return on that right away based on the process of which those campuses mature and you start to ramp your new student growth.

And so on a percentage basis, it’s going to continue to go, the absolute dollars spent are going to continue to go up as we open up new markets. The cost per student acquisition, i.e. dividing those dollars by the number of students that we bring in clearly is going to go up in Q2 because we brought in less students. And that we would expect to see over time to be more in line with traditionally how that’s behaved. But in a normal state, according to our investment model our cost for student acquisitions should go up as our overall campus population reduces in age.

Can you maybe comment on how student acquisition costs have been in the mature market?

Well, they were relatively stable up until this quarter.

Okay, and then just in terms of, I know you really don’t want to get too specific on the outlook, but I mean are you pretty confident that you can return to new student enrollment growth in the teens? Are you confident, I mean is it possible that we could see a quarter where it’s down year-over-year? Or could you make some comments please?

Well, it’s possible you could see anything. But my view of the attractiveness of this business model hasn’t changed. And so we’re going to continue to execute on it, and it’ll be where it is.

Okay, thank you very much.

Greg Cappelli, Credit Suisse First Boston.

Hey Rob, just a quick follow up; any thoughts with the stock down here where it is on repurchasing of stock?

Well, we have both an approved authorization, and we have a stated objective of returning capital to owners through share repurchases any time we can repurchase shares at a discount to the intrinsic value. So if we get that opportunity in our open period, we would intend to take advantage of that opportunity.

Okay, thanks. But no change in the terms of the amount that’s in that program right now?

No, not right now. I think, Mark is it $22 million?

Twenty-two million.

Is authorized right now. And again Greg, our view on that is the first step is how much do you have that’s truly excess to the business, and then how do you best return that to owners in the most after-tax value-enhancing way?

Got it, thanks a lot.

And with that ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Silberman I’ll turn the conference back over to you for any closing remarks.

Thank you Operator. Well we appreciate your attention on the call and we look forward to chatting with you next quarter when we do the next earnings call. Thank you.

And ladies and gentlemen, this does conclude today’s Strayer Education, Inc. First Quarter 2005 Earnings Conference Call. We do appreciate your participation and you may disconnect that this time.