Strategic Education Inc (STRA) 2005 Q2 法說會逐字稿

Welcome to the conference call. Today's call is being recorded. At this time, all lines are on 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 over to Sonya Udler, Vice President of Corporate Communications for Strayer Education.

Thank you operator, good morning. With us today, to discuss the result, are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education and Mark Brown, Senior Vice President and Chief Financial Officer. For those of who are wish to listen to the conference via the Internet, please go to www.stayereducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1:00 PM Eastern Time till Tuesday, August 2. The numbers for the replay is 888-203-1112, pass code 902675. Following Strayer's remarks, we will open the call for questions and answers. Please note the today's press release contains statements that are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Statements are based on the Company's current expectations and are subject to number of uncertainties and risks that the Company has been identified in the press release and that could cause the Company's actual results to differ materially. Further information about these and other relevant uncertainties may be found in the Company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission.

And now, I would like to turn the call over to Rob. Rob, please go ahead.

Thank you Sonya, and good morning ladies and gentlemen. As this is our custom, I would like to be in this morning with just to brief overview of our Company and our business model for any listeners who are new to Strayer. I'll then ask Mark to report on the detail financial results for the second quarter, after which I'll comment on our enrollment results and operational results for the summer term, and provide enough data on our growth strategies, and finally end up with the Company's earnings outlook for Q3.

Strayer Education Inc., is a for-profit education service education service company, whose primary asset is Strayer University, a 23,000 students, 35 campus for secondary education institution which offers the associates, bachelors 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 feather (ph) their careers. Our revenue comes from tuition payments and associated fees. Approximately 60% of our students are receiving (indiscernible) for loans. Our expense includes the cost of our professors, our admissions in administrative staff, marketing expenses and facilities and supplies cost. We currently operate campuses in eight states in middle mid-Atlantic region as well as throughout the world over the Internet, Strayer University Online. The substituents (ph) in all 50 states and 39 foreign countries to Strayer University online. Strayer University is accredited Middle State Association of Colleges and Schools.

Revenues for the three months ended June 30, 2005 increased 18% to 55.2 million compared to 46.8 million for same period in 2004 due to increased enrollment and a 5% tuition increase which commenced in January '05. Income from operation rose 6% to 19.5 million from 18.4 million for the same periods in 2004. Operating income margins was 35.3% compared to 39.2% for the same period in 2004, as the Company continues to invest for growth. Net income rose 10% to 12.5 million compared to 11.4 million for the same periods in 2004. Earnings per diluted share rose 13% to $0.85 compared to $0.75 for the same period in 2004, as diluted weighted average shares outstanding decreased to 14,791,000 from 15,164,000 for the same period in 2004. Revenues for the six months ended June 30, 2005 increased 20% to 111.4 million compared to 92.9 million for the same period in 2004 due to increased enrollment and a 5% tuition increase effective for 2005. Income from operations rose 14% to 42 million from 36.9 million for the same period in 2004.

Operating income margin was 37.7% compared to 39.7 for same period in 2004. The net income grows 16% to 26.6 million compared to 22.9 million for same period in 2004. Earnings per diluted share was 19% to $1.79, compared to $1.51 for the same period in 2004. As diluted weighted average shares outstanding decreased to 14,870,000 from 15,128,000 for the same period in 2004. At June 30, 2005, the Company had cash, cash equivalents in marketable securities of 111.3 million and no debt. The Company generated 25 million from operating activities in the first six months of 2005. Capital expenditures were 7.8 million for the same period. During the three months ended June 30, 2005, the Company spent 22 million for the repurchase of 251,238 shares of common stock at an average price of $87.59 per share as part of a previously announced common stock repurchase authorization. In the second quarter 2005, bad debt expense as a percentage of revenue was 2.5% compared to 2.2% for the same period in 2004. Days sales outstanding, adjusted to exclude tuition receivable related to future quarters, was eight days at the end of the second quarter 2005, compared to nine days for the same period in 2004. Rob?

Thank you, Mark. Just a couple of comments in the financials. The revenue growth of 18% was basically consistent with our model. We had previously announced 14.8% in enrollment growth for the spring term and 5% tuition increase. Now we are continuing to see the growth of our graduate population relative to undergraduate, which reduces our seat per student ratio. I'll give you more detail on that in a second.

On the expense side, if you talk about our last quarter's call, our operating margin in Q2 ended up about 390 basis points below the previous year. We continue to invest in our new campus roll out and our expansion plan on a lower than anticipated revenue base, and as we talked in the past we are going to continue to make those investments in our new campus expansion and the effect of those investments have on our operating margin is really a combination of two things, one is accompany more or less campuses we opened and given here versus the previous year whether or not we're in our notional range for revenue growth, and then finally when in the year we open the campuses.

I thought I'd take a moment and just break those 390 basis points down into its component parts. So you all can track the operating margin the same way Mark and I do. About 210 basis points of the decreased margin is the result of the lower enrollment growth in the quarter driving less revenue. About a 100 basis points is the increased expense of opening two separate markets in the quarter versus one quarter -- one market for the same quarter last year. Last year we opened the Atlanta market for the summer, this year we opened Greensboro in North Carolina and Columbia in South Carolina, and we lose a little economy of scale particularly on the marketing line when you are doing two separate markets at once.

30 basis points is the increase in bad debt expense for the quarter and the remaining 50 basis points was spread across the number of areas that it was, I think, significant about that I'd call (indiscernible). I was particularly with our results from the bad debt expense line. The last three quarters we'd averaged about 80 basis point deterioration in bad debt expense versus the same quarter in the prior year that started in fall of last year -- Q4 of last year when Mark and I really started focusing on this, and in this latest quarter that deterioration was only 30 basis points. We think we are stabilizing and improving our performance on bad debt expense a little faster than we taught we might when we looked at the beginning of the year because there is a scale as you work these on collective balances through your bad debt calculation, but our collections for the current quarter and our collection this quarter for the previous quarter were actually quite a bit higher than we were anticipating, and so that's what brings that number down.

On EPS for the quarter, we had a little bit of pick up on both the tax rate and on lower share count. We baked the end of that right about what Mark and I were expecting at the beginning of the quarter, so room out there. On distributed free cash flow, which again I'd remind everyone by our definition is our after tax cash from operations minus all of our CapEx, I think you need to subtract the CapEx particularly in the growth story like ours to figure out what we actually have is extra cash.

For this quarter, as for the first six months of the year, when you adjust for the cash tax benefit which we enjoyed last year in the first half of the year because of option exercises, our growth in distributed free cash flow for the first half of '05 is a little over 17% on 16% net income growth. So that's tacking right in line with our model. If you are keeping Strayer home, if you got that release in front of you, the line that you look at to make the adjustment is the income taxes payable line in 2004, and that adjustment would be instead of a positive 3.3 million which you see there in 2004, it would actually be a negative 3.2 million. I think we actually talked about that on the call last year that our growth in free cash flow in the quarter -- in this quarter in 2004 was about 70% but quite a bit of that was associated with that tax benefit.

Now, on our balance sheet the only point to note, I would highlight, is the reduction of our cash and additional paid in capital from the start of the year resulting from our share repurchases, which I will comment on a little bit more in a moment. Turning to the summer term enrollment results, total student enrollment increased 22% for the quarter. The continuing student enrollment was up 21%, and our new student enrollment was about 27% compared to same quarter last year. The out-of-area online enrollment was up 47%. We were obviously quite pleased with our growth in the new students for the quarter, but I would actually draw at least as much attention to our continuing student increase of 21% because we only started the Spring term with a 15% increase in students. So, you could just see mathematically our focus on the retention efforts and increasing our educational support functions are starting to bear some fruit as you get that significantly higher continuing student number relative to the total increase in students to start the quarter with.

With regard to student mix our business administration and accounting degree seekers are continued to account for a little over 60% of our students for the summer term. That's pretty constant over the last, I would say, three or four quarters. Our Computer Information Science degree candidates were just under 30% of the total population, again fairly constant relative to the last four quarters. Our new graduate programs are now up to 5% of our student population. Those are the three new Masters in Education, Health Services Administration, and Public Administration. They are having a larger impact than we had planned and now we are obviously quite pleased with that. They are raising our overall graduate population at the same time, which is now up to 26% of our total students, and that's up from 23% a year ago, which in itself was I think up from the mid teens the year before. So, we are continuing to grow our graduate student population at a faster rate than our undergraduate.

Turning to an update on our growth strategy, and many of you will remember that our strategy is based on five objectives. The first is to maintain enrollment in the Company's mature markets when you reach that full saturation. Second, accelerate the rate of growth of new campuses particularly in the new states. And third, invest in and build up our online offerings both for our out-of-area students and provide additional convenience and service to our in-area students. And fourth, increase our corporate institution alliances, and the final objective is to look selectively at potential acquisitions and open redeployment of capital to owners. And just a brief update on each of those points.

On the first objective for the summer term, we had a very solid, I mean, I would actually say higher-than-solid quarter at our mature campuses as we had 9% growth there. Our mature campus students continue to exhibit preference to take online courses in their later terms but the overall mix shift there seems to be reaching somewhat of an equilibrium. As I had mentioned in the last couple of quarters we think overall that our online growth, the growth and usage of our online classes over time will near the proportional representation of our out-of-area online growth which is obviously 100% online and our base campus growth which once you reach that equilibrium it's not the online or the campus-based population, the classroom-based population, neither of which is going to grow at a faster rate than the other. And that's kind of where we are heading right now.

With regard to new campus activity we successfully opened campuses in Greensboro, North Carolina and Columbia, South Carolina during the second quarter, and are now offering classes in both of those locations for the summer term. We announced this morning the opening of our third campus in the metro Atlanta region for the fall term. Now that building has opened and fully staffed. We are recruiting students now. That Atlanta campus completes our planned five new campuses for 2005. And in our out-of-area online unit, our growth for summer term of 47%, was slightly below our 50% model, but basically in the range. In the area of capital redeployment, we declared this morning our quarterly dividend of $0.125 a share. We also announced that we had repurchased approximately $22 million worth of our common stock during the second quarter, and that our Board has authorized an additional $25 million for repurchase, over the next 17 months, we basically used up our authorization in the last quarter.

As I mentioned in the my letter to shareholders last year, the Board and I remain convinced that this business model allows us the luxury of fully funding a very strong organic growth strategy and still make a periodic return of the capital to our shareholders in the from of the common dividend. We as a management team and the Board continue to weigh all uses of cash every quarter on whether its CapEx, dividend, share repurchases, or any other use we can think of to determine the most value enhancing after-tax return on our owners capital.

On our business outlook for the third quarter, based on the strong enrollment growth for the summer term offset partly by increased expenses associated with our new campus openings and in Tampa, Greensboro, Columbia, and Atlanta. For the year we estimate that our third quarter EPS will be in the $0.41 to $0.43 range. In the third quarter we expect our operating margin to be roughly in line with the same quarter last year, maybe slightly below. But it won't be evenly spread across our expense lines.

We expect according to our investment model to continue to increase our S&P spend as a percent of revenue to support the brand building in these new markets. But, offset with this revenue growth, most of that increases were saving on our INE and G&A lines as we leverage fixed costs over a larger revenue base.

And with that operator we will be pleased to answer any questions. However, I point out that were as Mark and I would normally stay around as long as there are questions. I did notice that Rennies' (ph) call starts today at 11. I don't want to intrude on his time. So, we will wrap up promptly at 11 on this call, and therefore because we do have a fixed end time, we will take one question at a time and then go around for follow-ups as long as we have time. And, of course, Mark and I will be available afterwards. For anyone who doesn't get their question asked you can just contact us directly.

And with that, Shawn we will be pleased to answer any questions.

[OPERATOR INSTRUCTIONS]. Greg Cappelli, Credit Suisse First Boston.

Good morning Rob and Mark. Rob, moving from 0 to 27% new student enrollment growth, stands out and I wondered if you could help us just talk about what allows you to do that. And secondly, maybe review the process there you are going through at the beginning of the year where you talked about some of the changes you made in your campus structure. I think in terms of putting in admissions, mangers on a retention department, which I think was new at that time. Was that staff that was completely new that came in form the outside? Was it from existing schools? And then, if they are new people, are they beginning to mature? Is this what is actually making the difference. If you could just give us some color on that it will be helpful?

Sure. The campus reorganization I talked about last quarter, 14 of our retention staffs was almost entirely, and I would say virtually entirely staffed by internal personnel. They were new in their positions and I think one of the negative impacts that we had in the recruiting for the spring term was, many of them had transferred out of the admission (ph) position. So, we had brought in some new people from the outside as entry-level admission officers. But, my view at the time -- we tried to communicate this was that there wasn't anything fundamentally different about our business last quarter. We thought we had some execution challenges. We had definitely tinkered with our swing a little bit and that (indiscernible) I think somewhat. But, there wasn't a fundamental difference and I would consider this -- it's a variable business. We were quite a bit variable on the down side last quarter. We had a really strong quarter this time. We think demand for what we provide is out there. We think that the educational product, the academic offerings that we are brining to there are of high quality and of high utility to our students. And if we continue to execute the way that we think we are capable of that over time our student population should grow with the rates that we were employing capital to build our campuses and expanding online. So, there isn't any -- one specific thing that I would point to and say we were so much better this quarter than we were the quarter before. We were a little more experienced in the roles that we had and we -- the whole team did a terrific job.

From a Human Capital perspective, which I know you have always talked about in the past, so do you feel comfortable that you have invested in that to the level of where -- I think you said your goals have been 15 to 20% total enrollment growth, given the amount of campuses you are opening and the investment in Human Capital, I am assuming that's staying the same.

We are pleased with our investment in human capital, and by the way you snucked in a second question, sure. But we are pleased with our investment in human capital and I think it will continue to get better. As a matter of fact, I think one of the more positive outcomes of this last quarter, at least to Mark and myself and our board, is not so much the near-term results in the quarter, but our increasing sense that we have developed that human capital in away that we are looking to -- we are certainly more confident that we continue to operate and open five campuses per year, and frankly getting slightly more confident, we haven't really started the planning process yet, but I feel more bullish about our opportunity to open more than five next year than I did at the beginning of the year.

Mark Marostica, Piper Jaffray.

Question is in regards to conversion rates for your Out of Area Online students, I recall that was somewhat problematic last quarter. If you could talk about how that trended this quarter?

I am not exactly sure I would described it as problematic. I think what I answered is it is always been less than our campus based population. I think that's a bit of nature of that process because we have so many leads, leads are so easy and cheap with regard to Out of Area online. It was slightly better, I would say this quarter than last quarter, but not materially. Our growth of new students in Out of Area online overall was slightly better than last quarter, but again not materially, so. And we are going to continue to try and support that with investment mainly on the academic infrastructure, making sure we have enough professors that are well trained to teach online and then continue to try and grow it, but understand that as we expand our campus network the geography that that group draws from gets smaller every time we open a new state or a new campus.

Howard Block, Banc of America Securities.

I wanted to ask my first question on the operating margin. You had mentioned that about 210 basis points I believe, of the year-over-year erosion was attributable to the lower enrollment in the quarter, and again just back of the envelope, I don't expect you to go through all the details, but if we look at sort of 750ish shortfall in new students at the end of last quarter, think about how much revenue they would have generated in the quarter and sort of apply maybe a 70% contribution margin from them. Is that what sort of gets us to couple of hundred basis points?

I could actually be a little bit more specific. The way Mark and I thought about it is that if you look at our investment model, when we say we are going to have between 15 and 18% enrollment growth, and I think that's 20 to 23% revenue growth. We just took the midpoint of that, -- we had been in the middle of our revenue growth calculation at 22%. I think it's actually higher than the 70% incremental margin because you have already paid for all your classes and your professors are there, and in the last quarter we actually had a few empty seats. And so, what we did is, applied the 22% revenue growth with not much of an increase in our operating expenses that would be necessary to support that and that translates to couple of hundred basis points.

And then on the operating margin still, and then I'm done. You had also mentioned that on the 100 basis points were attributable to new markets. So, if I look at the year-over-year growth in the selling and promotion margin of 200ish basis points, does that mean that half of that growth was because of the incremental one new market?

Yes.

And is that something that we could model perspectively.

Mark and I are both not in each other's, you said that, and I think that's mathematically correct. That's why I say that the impact on the operating margin is affected by not just the number of campuses you open, but more importantly the number of new markets that you open and when in the year you open them. But I think that is correct, yes.

Gary Bisbee, Lehman Brothers.

Hi guys and my congratulations that picks on strong enrollment. I guess that there is something that mathematically I'm having a bit of a hard time with. I know you don't give us the absolute number of new students and continuing students, but I'm wondering how you can drive 21% continue in student growth. When if you look at the last four quarters of new student growth, the average is like a low double-digit number obviously impacted by last quarter's number. But you said there is an improvement in retention. And can you give us the sense of order of magnitude? Is this several hundred basis point improvement or how are you driving that?

Well, it was almost a 1000 basis point. Our retention for spring to a summer normally runs about 60% and it was closer to 70%. And we can give you the numbers, I don't have in front of me. The way we're driving that is are two things. One is that we made a pretty deliberate decision at the end of last year to focus our organizational staff and making sure that we were driving retention as important as a goal of bringing in new students. That has this statutory benefit also of increasing your graduation rates overtime, which again is an important statistic for us. And we do it in two ways. One is on the administrative side, making sure we have enough logistical support, you know, think if it is customer service support from a business standpoint to those existing students and that's where some of our administrative personal and admission personnel were transferred to January. And the secondly, on the academic side, we have put in place a very significant investment in educational support functions, tutoring remedial education in it, and particularly in English and Maths, where we bring in students say of a valid high school degree, but they haven't been back to school in 15 years and even for the ones that are even a little bit younger, one of the unfortunate circumstances in our educational system is, you can have a valid high school degree and not really have to map in English skills, cardinal skills necessary to perform at the college level and we found in looking backwards in '04 and '03 that we walked not a lot of students because they enrolled and they just couldn't get it out in the classroom. And so it's a two-point effect. Treat them well as customers logistically and administratively and provide a lot of educational support to help with the underlying process of achieving the academic outcomes and we're actually quiet pleased with the result.

Yes, it sounds like you should be just I guess the one follow up on that is, you know, in terms of the administrative, what exactly, you know, giving more customer support, what is that mean just having more people there to answer the questions or you proactively contacting people from this class who don't turn in papers, I mean, what's the -- what is new about increased customer support?

Both of those and it is an investment in human capital of traditional people at the campuses and as I said many of them were transferred over from the admission side. I am going to be apologize from Mark to Mark's and somewhat and everybody get a second question, Mark, he will be first in line for the follow ups.

Richard Close (ph), Jefferies.

Congratulations. I was curious if you could take a little about conversion rates in the quarter. I know it's sort of have been asked here, but I think last quarter you talked about, you did have maybe one or two schools that had some problems. If you could just give us an update on that?

Yes, we did have a couple of campuses that had lower than we would have liked conversion rates because we did our pre-solid lead flow in that last quarter and I think in everyone of those cases, they regress back to a mean or indeed did a little bit better and so we're very pleased with that.

And was there any change in lead flow from spring to summer relatively speaking?

No. We had a solid regeneration for the summer terms as well.

Stacy Williams (ph), Robert Baird.

Rob, I wonder if you could comment on the cost per start trends you guys are experiencing just currently?

I will Trace, but first it's once more unto the breach. If you're going to quote my favorite play, you got to quote it correctly. Cost per start was about equal to last year. When we talk about cost per student acquired what we are taking is our advertising dollars and dividing that by our new student starts and that was about equal, which actually was a bit of an improvement because again we had these two brand new markets and we expect our advertising dollars per student start to increase with the amount of new markets that we have in the quarter. Our signing promotion line also includes the salary expense of our missions' personnel, and so while our cost per student acquired with the advertising dollars as the numerator was about equal or if you just take the student's charts and divide them in signing promotion expenses, so it is a little bit higher, because I think our signing promotion expenses was up about 35% over the previous year, and our students charts were only up 27%, but that's the -- again the investment in these new campuses are -- your staff, your admission staff and your administrative staffs that are not up to a level of production that you have in a more matured campus.

Corey Greendale, First Analysis.

Just wanted a quick follow up I guess, on Greg's question on the new students' number, I'm just hoping if you can give a little more granularity on -- I know you have moved some of the more experienced admission reps to the retention manager role, how many of those people you moved back to the admission role, how much you think that might have helped? And also just kind of qualitatively rather I know you talked, I don't want mischaracterize, but you said -- I think you talked about a kind of changing focus at the local level, kind of away from new student growths and just kind of any changes you might have put in place in terms of local management focus, it would be helpful?

Sure. Well, we only -- there was only two or three of our retention managers, who we have pulled from the admission staffs, who we moved back to the admissions. That did help at a couple of campuses where we did that, but it was not of a broad enough scale, I think, in and out of itself to have that kind of impact that we have had, I think that our -- what you call our qualitative focus, I think probably did have some impact, but the way I would describe that is -- in January of last year, we actually added a focus, we added a -- and that was on top of -- in the previous year our intense focus on bad debt expense control, which again I don't want to have that go through unremarked or unfocussed on, because at least from Mark's and my standpoint, its a very big deal that focusing on our bad debt expense starting with last fall was an additional constraint or attention that our campus staff has to deal with. Then we added in January, the fact that we really wanted the (indiscernible) to focus on retention and it took a little while, I think, for these additional rolls even with the training we are putting in place to come in to balance and allow the staff to kind of digest all that and be effective. So, we did try in this quarter to make sure that we were giving sufficient attention in training and focus on new student starts, although I don't think it was frankly all that necessary from the top -- from our standpoint. This is a fairly committed group of people out there and educators, and they expect their campuses to grow and I think a lot of it was self generated frankly.

Jack (ph) of Suntrust Robinson Humphrey

Couple of questions for you, just in terms of our new student starts, what sort of trends you are seeing among, I guess technology related enrollments? And also in terms of placement rates for those students?

Well our placement rates are roughly a 100% because our students are working when they come. So its not really a relevant statistic for us, our growth information technology students has been slower than that of our business and accounting in the last three or four years. But I would say particularly at the graduate level, it's starting to pick up quite a bit.

Thank you very much.

Douglas Pratt (ph), Mason Capital Management (ph)

Could you talk a little bit more about your actual experience on bad debt expense? It looks like you have drawn down the reserves on gatherings actually had recoveries as opposed to write rideoffs, and at what level do you figure that's normal level of reserves to bad debt?

What we do is, we take -- we have an algorithm where we take 15%, our reserve is equal to 15% of our uncollected balances at the end of the quarter, plus 50% of the uncollected balances of the previous quarter. We write off 100% of our receivables that are 180 days old against that balance, and then we top it up each quarter to make sure that it's equivalent to the amounts that would be calculated at the end of the quarter. So that as a percentage of receivables is that balance ought to be about the same in any individual quarter, what was happening was in the -- we started to this see late in the third quarter of last year, the best way to track this is, what are your collections in your current quarter, and it's also the best indicator to me of what caliber of student did you bring in that quarter, and that's why we jumped on that pretty seriously in the fall of the last year, and but normally, the amount that you collect once the quarter ends doesn't change materially as a percentage of that, we have tweak that up sum and it was helpful in the last couple of quarters, but probably the most important determinant of lower bad debt expense in this last quarter, was the fact that our collections for Q2 were quite a bit higher as percent of revenue than they were in the previous year.

I am sorry, you said you tweak that up, what you are referring to tweaking up?

You top-up those reserves each quarter at the end of the quarter. So it's equal to 15% of the uncollected balances of the current quarter plus 50% of the uncollected balance from the previous quarter. After you have already written off the quarter before that's 100% of the receivables from that quarter.

100% of the receivables you mean 100% of those that you told that are more than 100 (indiscernible)?

Correct. And rather than Silber (ph) do you want to call Mark directly, he can walk you through that algorithm in some detail.

Drew Crum, Legg Mason.

Quick question for you on new student growth and some promotional activity. We noticed that the -- at least at the end of the quarter, is that something new for you guys and maybe you comment how successful that was?

I am not sure what promotion you are talking about. We have a -- for our corporate partners and for military students we provide a discount situation. On the corporate partners, it's 5% and it's quite a bit more actually on the military side because we actually packaged to what their tuition reimbursement amount is. Now I think that's probably close to 25 or 30%, isn't it Mark?

Yes, I think it's.

And our military personnel -- (indiscernible) 1 or 2% of our students, so it's not overwhelming. We will occasionally use the -- once a quarter, we'll have a open house for new students where we waive the application fee and we will occasionally also, in quarters, provide vouchers for text books, but there was nothing out of the ordinary with regard to this previous quarters than quarters before from that standpoint.

I guess we had noticed the later, had not seen that before it sounds like that something you have done in the past?

We have done it on-line quite a bit in the past, we occasionally do it at campuses.

Howard Block, Banc of America Securities.

I wanted to ask you about the continuing students enrollment, because obviously it is impressive yet. When I look back at the growth rate for continuing students in the prior second quarters of '04, '03 and so forth. The growth rate, can we assume, looks to be pretty consistent in continuing as a sort of a percentage of the total students in the quarter also appears to be pretty consistent. So not to discount I guess the attractiveness of metric but what is better about if I guess this quarter versus prior second quarters?

In case, in the last three prior second quarters we started the spring term with many more students increased over the previous year, and about 15% is one of the lower student increases -- total student increases that we would start the spring term with, and to have a consistent increase of continuing students at about 20ish percent of a lower base implies or actually dictates a higher retention rate.

And then this is a subordinate question about then. Is there -- in terms of the improvement in that metric how much of it is your actual ability to change the behavior of a traditional student to take the summer off?

I think there is some of that, Howard, and I don't think you have the ability to do that as much going from the summer to fall because there is a little bit of low hanging fruit going from the spring to the summer because of the normal behavior. But that's helpful but it's not going to drive these kinds of numbers. I mean I expect that if we continue to perform in the retention area that we will continue to have real strong continuing students going to the fall and the spring as well.

Gary Bisbee, Lehman Brothers.

Just a follow up. When I look at the out of area online, it appears especially this quarter but also last quarter to that when you look at the adjustment in the year-ago base, it's a fair amount lower, which I guess means that a lot of those students were in markets that you now operate at campus. So, they have been put in a different bucket, how you are doing say west of the Eastern Seaboard, in the Midwest and the West Coast? Is that something that's doing well, and it's growing or is that growth primarily being driven as you do advance marketing in markets that you hope to open campuses?

The rate of growth is terrific but it's of a pretty small base. In general the majority of the students that we get in out of area online are in markets that are adjacent to where we currently operate and once in which we will occasionally do a little tactical pre-marketing to seed the ground before we open campuses there. So, we have a high rate of growth in west of Mississippi but it's of from a pretty low base and so, it's not driving that segment in it in a real meaning full way.

Are you focusing on that more and may it just, its certainly not scientific we have noticed lot more Strayer University online banner ads on the internet both New York specific sites but also national sites. Is that something you are trying to do more or is that just a bit of a shift in the marketing strategy?

We are trying to have some what of a national presence on the internet and draw more of those students, but the other thing which is I think prudent to that, Gary, is that we as an institution I think we may not be as good as some other people. We have a bit of a hard time dictating geographically our internet presence. So we will try and go ahead and increase our internet presence hoping to drive lead flow or potentially students from a broad area of the countryside western half of the United States and then that was lot more leads from where our currents campuses are as well. And our out-of-area online we don't really discriminate with regard to where they are geographically I mean those teams will work through and try and convert all of those. So, I think generally we want to build a nation wide university, and we want to have a strong out-of-area online presence. And so we are certainly not shying away from trying to drop students from the western half of the US but it almost as we build presence on the internet we by through a definition draw more leads from were we currently have a name brand no matter what we do.

[OPERATOR INSTRUCTIONS] Mark Marostica, Piper Jaffray

I wanted to follow up on your reply to Rob regarding more optimism in '06 that you may open up more campuses and you are planning for '05, (indiscernible) that said how many do think you will open in '06 what would the timing look like? And thirdly any of the new states contemplated for '06? Thanks.

We'd like to have new states, but we haven't announced any yet. I'd like it to be more than five. I couldn't really tell you how much it's going to be at this point Mark, because it is a very specific planning process where we pair personnel's opportunity, and we are not going to announce or even try to accelerate the campus openings beyond the level which we feel very comfortable with the internal personnel who would go to be leaders of those campuses. And we will start that process really next week. Well, we get that from markets back from vacations, and it's a process we go through in August and September and reach our internal conclusions and present to our Broad in October and then share it with all of you at the third quarters earnings call.

Corey Greendale, First Analysis

Wanted to go back to the new programs for a sec given that you are having success there. Can you just update us how widely are those rolled out at this point (indiscernible) let your plan for rolling those out further?

They are rolled out almost completely. We have two campuses in one state, and I think one other small state were they are not approved yet. But virtually 90%, 95% of our students have access to those programs, and we do want to make them and we want to work through on a regulatory basis (indiscernible) that we don't them in. And I think we really want to start frankly supporting them a little more because my concern was getting through at least one educational cycle so that we could be sure that we knew what we are doing teaching these courses we had very successful graduation in June with a number of students who started in January of '04 and who finished with Masters Degrees in those programs in June, and I got a lot of feed back from them and from the professors, and I think we feel more confident that those are academic subjects that we can teach well and it seems to have a fair amount of attractiveness to our student population.

Just one other quick one the cash flow. As I calculated CapEx was about 6 billion in the quarter, which is relatively higher for you guys. Can you could just comment on what that was?

We estimated CapEx for the year to be in the range of 14 million to 16 million. So that really just have to do with the timing of the CapEx that we deploy for new campus opening as well as systems upgrade.

Okay, So no change in your full year outlook?

No.

Gary Bisbee, Lehman Brothers

Given just what I'd say was one disappointing new student star growth and then a terrific one. What kind of confidence do you have in your ability to have somewhat consistent more consistent performance from here or other factors that are going on in the industry do you think could lead that metrics to continue to be somewhat choppy going forward?

I don't expected to be choppy, Gary, I dint expect last quarter to be low. We have a little more mustard on this quarter than normally. But, we expect that our new students starts, indeed our total student population opt to overtime track the rate of growth of our capital investment, the expansion of our campus networks and our growth in online. And there is nothing that I've seen in the sector broadly on the business, specifically that we operate in the customer segment that we are trying to reach. That seems to me to be at all different from what it was last quarter or a year ago, or four years ago, when Mark and I started. It's always been a competitive enterprise. There are a number of very strong traditional, as well as non-traditional in full (indiscernible) , that are trying to serve working adult students. We think notwithstanding that the supply demand ratio with regard to working adult to one regionally accredited high quality academic degrees, is quite favorable. And we are going to continue trying put capital at work to spurt that.

Going back to Greg Cappelli.

Thanks. A couple of quick follow-ups. One, Mark, on the tax rate you guys mentioned that it was low, obviously, it came in lower. We were using about 39% going forward, what took it down in the quarter, and then what do you think is good rates to be using over the next several quarters?

What took it down was a higher mix of tax-exempt investment income, which we benefited from in this particular quarter. We had indicated that we saw 39% was a good rate to use on a full-year basis, and we still think that's a good rate, it will be in the neighbor hood of that. But, of course, it all depends on investment income for the balance of the year and so --

Okay. But, it's more that, and it's not new schools and new areas where you are operating or something like that?

No, I think the state of (indiscernible) is pretty solid right now. Because, as you open a new state, you don't have that much revenue anyway.

Okay. And then one more on the new state, Rob, you had mentioned last quarter that a lot of your recently opened schools are running ahead of plan and then lastly you said Tampa was on plan, and I know that's a very competitive market, may be just quick update on how thinks are going in the Tampa?

It remains a solid market for us. It is isn't quiet as far ahead of plan as some of our other openings have been but we are quiet pleased with it. I think, Mark and I looked at the -- of the five campuses we opened in '04, four of them are now past breakeven. We just -- the one we opened in the fall is the only one that hasn't reached breakeven yet. So, we are still running a little bit ahead of our investment model on the new student openings.

Got it. Thanks.

Going back to Drew Crum.

Thanks. Just how far your stance is on expensing stock option? Is that something you are going to commence second half of '05, or just follow the requirement to begin that in '06, and going forward, is a good run rate, mid single-digit dilution and will you utilize retrospect of approach, in other words, you will restate your earnings?

Let me give you a philosophic answer first and then I give you the detail. Philosophically, I think it's completely immaterial. The expense -- the cost to the shareholder of stock options is incurred when you issue the option. It doesn't really matter how you account for it. And we are quiet open in each one of our releases which regard to exactly how many options we have issued, how many we have outstanding and what's the dilutive effect of that would be if those are either issued or exercised. So, from our standpoint, we are going to do what ever is required when it is required. Now, I really don't have a strong feeling about a run rate from an accounting perspective because this doesn't really matter to me. We certainly will not go back and restate because I just think that would be logistical hassle, which is not value, enhancing, I don't want to tie up my finance staff doing that. So, what expense right now is we will start to expense using the same Black Schales that we have included in our press release for the last five years, and we will start that, I guess, north of the first quarter of next year when it is required. But, you can calculate what the pro forma would be by just taking our old press releases, it's right in there specifically and that would be the comparison. The other point you put was the rate of dilution, I don't expect significant dilution, they are not real profit issuer of equity compensation. And so I think that you can take our outstanding shares right now.

And if you look forward which regard to the amount of authorized but un-issued, that will last us awhile and I am not expecting mid-to-high single digit dilution going forward.

And at this time we have no further questions, gentleman, I will turn the call back to you for an additional or closing comments.

Thanks everybody for participating and as I said, if you have other questions after the end of call today, just contact Mark and I here will be glad to go through things with you and look forward to talking to you next quarter. Thank you.

This does conclude today's conference. Thank you for your participation. You may disconnect at this time.