Strategic Education Inc (STRA) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Strayer, Incorporated fourth-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 Sonya Udler, Vice President of Corporate Communications for Strayer Education.

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

For those of you that wish to listen to the conference via the Internet, please go to www.strayereducation.com, where the call will be archived for 90 days. 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 through Tuesday, February 21. The number for the replay is 888-203-1112, pass code 7104929.

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 provision of the Private Securities Litigation Reform Act. The statements are based on the Company's current expectations and are subject to a number of uncertainties and risks that the Company has identified in the press release and 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. Now I would like to turn the call over to Rob. Rob, please go ahead.

Thank you, Sonya. Good morning, ladies and gentlemen. As is our custom, I would like to begin this morning with a brief overview of our Company and our business model for any listeners who are new to Strayer. I will then ask Mark to report on the detailed financial results for both the fourth quarter and the full year of 2005, after which I will comment on our enrollment results for our winter term in 2006, which just started, provide an update on our growth strategies, and finally, end up with the Company's earnings outlook for Q1 2006.

Strayer Education, Inc. is a for-profit education service company whose primary asset is Strayer University, currently an over 27,000 student, 39 campus post-secondary education institution, which offers associates, bachelor's, and master's degrees in business administration, accounting, information technology, public administration, and education.

Strayer students are working adults who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. Approximately 55% of our students are receiving federally insured Title IV loans.

Our expenses include the cost of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs. We currently operate campuses in eight states 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, do you want to run through the financials?

Sure. Revenues for the three months ended December 31, 2005 increased 19% to 62 million, compared to 52.3 million for the same period in 2004 due to increased enrollment and a 5% tuition increase which commenced in January of '05.

Income from operations rose 12% to 23.3 million from 20.8 million for the same period in 2004. Operating income margin for the three months ended December 31, 2005 was 37.6%, compared to 39.7% for the same period in 2004. Net income rose 13% to 15 million, compared to 13.3 million for the same period in 2004.

Earnings per diluted share rose 16% to $1.03, compared to $0.89 for the same period in 2004. Diluted weighted average shares outstanding decreased to 14,590,000 from 14,953,000 for the same period in 2004. Revenues for the year ended December 31, 2005 increased 20% to $220.5 million, compared to $183.2 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 74.9 million from 65.5 million for the same period in 2004. Operating income margin for the year ended December 31, 2005 was 34%, compared to 35.7% for the same period in 2004.

Net income rose 17% to 48.1 million, compared to 41.2 million for the same period in 2004. Earnings per diluted share rose 19% to $3.26, compared to $2.74 for the same period in 2004. Diluted weighted average shares outstanding decreased to 14,741,000 from 15,057,000 for the same period in 2004.

At December 31, 2005, the Company had cash, cash equivalents, and marketable securities of 119.8 million and no debt. The Company generated 55.1 million from operating activities in 2005. Capital expenditures were $12.3 million for the same period.

During the fourth quarter of 2005, the Company repurchased approximately 81,000 shares of common stock at an average price of $98.56 under a previously announced common stock repurchase authorization. During 2005, the Company repurchased approximately 410,000 shares of common stock at an average price of $92.59. As of December 31, 2005, the Company had a 32 million authorization remaining under this plan.

In the fourth quarter of 2005, bad debt expense as a percentage of revenue was 2.8%, compared to 2.9% for the same period in '04. Days Sales Outstanding adjusted to exclude tuition receivable related to future quarters was 10 days at the end of the fourth quarter of '05, compared to 11 days at the end of the same period in '04. Rob?

Thanks, Mark. Just a couple of amplifying comments on the financials from my perspective. The revenue growth at 19% for the quarter was right on our model. We had 16% enrollment growth in the fall plus the 5% price increase, offset by the slightly lower seat per student ratio as our graduate students continued to grow at a slightly higher rate than the undergrads. So we end up with about a 300 basis point increase in revenue growth over enrollment growth. So that came in about where we expected.

On the expense side, the operating margin in Q4 ended up better than target, which we ended up with about a 210 basis point drop versus the previous year. When Mark and I looked at it at the beginning of the quarter, we thought it would be closer to 300 to 350 basis points at the beginning of the quarter.

There were basically two sources of that outperformance -- the lower bad debt expense, which Mark already commented on and a more efficient marketing spend. We ended up spending very effectively in the markets, not so much in opening the new markets where we had full expenditures, but in some of the other markets where things just broke our way with some real good management by our marketing staff.

We were particularly pleased with the results on the bad debt expense. Q4 is the first quarter, I think in two years, Mark, where we have reduced our bad debt expense as a percent of revenue versus the same quarter in the prior year. And that has been a focus of ours for the last year.

On EPS for the quarter, the $1.03 versus the $0.90 to $1.00 that we had guided at the beginning of quarter was basically the result of that slightly higher operating margin.

On distributable free cash flow -- and again, we define that as the after-tax cash from operations minus any required CapEx for our growth -- when you adjust for the cash tax benefit we enjoyed in 2004 because of option exercises, our growth in distributable free cash flow for the full year was 32% on 17% growth in net income. Again, that was quite a bit ahead of our model.

What we like about this business is that in certainly all the years since Mark and I have been here, the Company generates cash which can either be reinvested or returned to owners in excess of the rate of growth of our net income. And that just goes to the cash efficiency of this business.

Again, just like last quarter, the adjustment that you would make on the cash flow statement that is contained in our earnings release to get to that 32% growth number is on the 2004 income taxes payable line, which would be a -1 million in 2004 versus the positive 13.7 million without the cash tax benefit in that year associated with the option exercises.

On the balance sheet, the only point of note that I would address investors' attention to is the reduction in both cash and additional paid in capital that results from our year-to-date share repurchases which we were able to accomplish.

Turning to the winter term enrollment results, we had a really solid, balanced quarter in the enrollment campaign for the winter term. The total enrollment was up 16% on a year-over-year basis. That is consistent with where we were in the fall. The continuing student enrollment was up 16% and the new student enrollments were up 17% compared to the same quarter last year. Out-of-area online enrollment was up 41%.

With regard to the student mix, the business administration and accounting degree seekers continue to account for slightly over 60% of our students in the winter term. That is consistent with the previous several quarters. And the computer information and science degree candidates just under 30% of the total population, also consistent with previous quarters.

The new graduate programs are now up to 6% of our student population, so that continues to grow at a faster rate than the rest of the student population. It is also driving our overall graduate population, which is up to 27% of our student mix in the quarter, and that's up from 25% a year ago.

Turning to just a brief update on the growth strategy, 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. The second is to accelerate the rate of growth of new campuses, particularly in new states. The third is to invest in and build up our online offerings. Fourth, increase our corporate and institutional alliances. And the final objective is to look selectively at potential acquisitions and the ultimately redeployment of capital back to our owners.

On our first objective, for the winter term we were ahead of our target, just slightly ahead at the mature campuses, showing 3% growth. And mature campus students continue to exhibit a preference for taking online courses, particularly in their later terms.

With regard to the new campus activity, for the winter term, we successfully opened two campuses, one in downtown Philadelphia and one in Wilmington, Delaware. We had strong starts in both of those locations. We now have five campuses in the greater Philadelphia/Wilmington area.

And we announced today that we will open two new campuses for the spring term in the Pittsburgh, Pennsylvania market, which is a brand new market for us. These facilities are actually completely fitted out as we speak. We're currently advertising and recruiting students for an April 3 start of classes, as well as hiring faculty. We have our full-time supervisory staff in place for those campuses and are building up our faculty pool for an April 3 start of classes.

We expect to open the remaining four 2006 campus openings evenly throughout the balance of the year. We are going to do two for the summer term and two for the fall.

In the out-of-area online unit, the growth rate of around 40% was basically in line with our target as we looked through the year. In the area of capital redeployment, we declared this morning our quarterly common stock dividend of $0.25 a share. We also announced that we have been able to repurchase approximately $8 million worth of our common stock during the fourth quarter.

I want to reemphasize that the Board and I remain 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 will continue to weigh all uses of cash every quarter to determine the most value enhancing, after-tax return on our owners' capital.

It is clear to us, though, that even as we increase our rate of unit growth from five to eight campuses this year and employ all the cash necessary to do that, including expense as well as capital -- because of course most of the investment in opening up a new campus runs through our income statement as expense -- we're still going to generate enough cash to be in a position to at the same time increase our capital redeployment to our owners through the year, as evidenced by the higher dividend.

On the business outlook for the first quarter, based on the University's enrollment growth for the winter term, offset partly by increased expenses that Mark and I have talked about in the past associated with our new campus openings, we estimate that our first-quarter earnings per share will be in the $1.10 to $1.12 range before the impact of implementing FAS 123R.

In the first quarter, we expect to incur about 150 basis points of operating margin compression, compared to the same quarter in 2005. Most of that will be in our selling and promotion line, which is used to support the rollout of the new campuses. We also expect that the impact of the FAS 123R accounting change will be an approximate $2 million of additional expense in the first quarter. Most of that will be in the general administrative line, or approximately $0.08 per share.

And we will make sure to break that out in our Q1 earnings release as a separate notation on the income statement so you can all track it quite easily. We do not intend to restate prior years for FAS 123R. We think we can make it quite clear without that.

One last point I wanted to mention is to congratulate our President of Strayer University, Dr. Chris Toe, who many of you have met at our various investor days. Chris has been appointed by the new democratically elected Government of Liberia as that country's Minister of Agriculture. Chris is originally from Liberia and he holds a Ph.D. in agricultural economics, so he is well-suited for that post. We are very proud of his decision to return and serve his native country.

He will resign as president of Strayer University on April 3 at the start of our spring term, but will actually remain as an adjunct faculty member and teach courses for us online from Monrovia. He ought to be able to provide some interesting case studies for students in his economics classes from that post. We will conduct a formal search for his replacement upon his resignation.

With that, operator, I would be pleased to answer any questions.

(OPERATOR INSTRUCTIONS) Bob Craig, Stifel Nicolaus.

I take it from expanding in Pittsburgh, we can assume Cleveland is next?

We don't comment on new markets until we get there, Bob.

Couple of questions for you, Rob. Your thoughts on tuition increases going forward? I take it that this year you're still incorporating a 5% increase.

We are.

Okay. And that has not changed. Could you comment on retention or persistent trends, any evidence that a stronger job market may be potentially starting to siphon off existing prospective students? Certainly, that wouldn't be evident by your results.

No. The best quantitative or numeric evidence we have is our rate of growth of continuing students, which in the winter term basically matched our rate of growth of total students for the fall. So mathematically, our retention rate on a year-over-year basis was slightly positive.

But again, our student population is, I think, less affected in terms of its desire to return to school and complete their education by what is happening on a day-to-day basis in the job market. They are already working, for the most part, so I would not expect there to be much of an impact.

With regard to the job market, or the economy, the most important factor I believe in terms of our continuation rates and then ultimately our graduation rates is our ability to make it logistically possible for students to go back to school given the complexities of their lives. They are very, very busy people. And so we focus quite a bit on how we serve those students in a way that makes it as easy as possible for them to get to the classroom, while making it as challenging as possible in the classroom academically. And so far that seems to be working pretty well.

Last one, Rob, and I'll turn it over. You mentioned the more efficient marketing spend. As you look at it on a trend line basis, have you made any significant changes to your marketing efforts, changes to your advertising message or mix? I know you have said the past that you change that mix by quarter.

We change the mediums that we use by quarter, by market somewhat. The actual message we have not changed much at all since we've been here. I mean, we are trying to build a first-class nationwide university for working adults, and we want our prospective students to understand that. So Lysa Hlavinka and her marketing staff spend a lot of time fine-tuning messages, but it is not really a major change to the overall thrust of the university.

And the other thing is that we were slightly more efficient, spent a little bit less than we expected. There will be quarters where we spend a little bit more than expected. We have a pretty low share count, which is one of the beauties, I think, of the business to our existing owners. And so just a few hundred thousand dollars in one direction or another can have an impact.

So I would not call too much long-term trend on that. We are going to spend whatever is necessary to build the brand and support the rollout of the campuses into new markets. And we are pleased to do that; we think it's a very good investment of our owners' capital.

Great. That's helpful, Rob. Thanks.

Mark Marostica, Piper Jaffray.

First question, regarding your new campus openings for the balance of the year, do you contemplate entering into any new states this year?

Well, we haven't announced any, and we have a lot of unmet demand in existing states. But I certainly don't want to commit to either one or the other at this point. We will make final decisions on the balance of the year and then on our first-quarter earnings call in May, we'll certainly be in a position to announce the summer openings and potentially the fall ones as well.

Okay, great. Following up on Bob's question regarding retention, could you give us a sense if your remarks on retention were consistent with both online and the land-based business, in that in both areas you saw a slight improvement year-over-year?

Yes.

Okay, great. On the new graduate programs that you rolled out, I definitely see they're meeting with a lot of success. Are you planning to launch any additional graduate programs in the coming months or where do you sit on that front?

Well, not in the coming months. We are very committed to the basic academic offerings that we provide. We have been doing that for over 100 years and we feel like we're pretty good at it and we can serve students well there.

We do have an internal focus on both fine-tuning the course offerings that we have in those various academic areas, as well as listening to our students and letting them tell us what other subject matter areas they're likely to want to take. And that is where the Masters in Education, Health Services Administration, and Public Administration arose from.

So that is an ongoing process, but it tends to have a relatively long development time, and we don't have anything that is imminent in the next couple of quarters. But we'll continue to look at that.

I think the most likely development is probably not at the graduate level, but over some period of time, moving those graduate programs that we have down into the undergraduate level as well on those three areas.

Got it. One last question and I'll turn it over. I was hoping you could clarify the 150 basis points of margin compression. Does that include the $2 million in stock-based comp that you mentioned?

No.

It does not?

That's correct.

Okay. Thank you.

Howard Block, Banc of America Securities.

Congratulations on another strong quarter, and very sincere congratulations to Dr. Toe, who I absolutely recall meeting at your analysts' day. The first question is if you could elaborate a little bit on what you said about the more efficient marketing spending in the mature markets. You said things broke our way and it was good management by our marketing staff. Can you offer any more color on those?

Just that we set out at the beginning of a quarter with a certain amount of money that be expect to spend on television, radio, events, things of that nature. And we track our lead flow during the quarter, and there are times when we have to spend a little bit more because television costs us more than we thought or radio or newspaper ads, and times when we have to spend a little bit less. This was a quarter where we had to spend a little bit less.

So it was really in the traditional broadcast media, not necessarily around Internet?

There was some in Internet as well.

Okay. I know that you don't give guidance on new student growth, but I think you recall we are coming up on the anniversary of the 0% growth in 1Q of '05. Seeing that as the base, I imagine that the outlook for this upcoming quarter is going to be pretty robust, maybe estimates of as high as 20%.

Do you want to sort of caution us away from thinking so bullishly about the upcoming quarter on new students?

I don't comment on the upcoming quarters, Howard, so I don't intend to start now. I guess I would amplify by saying that I hope it will be more than 0.

Okay. In what we saw coming out of this quarter, it looks as though the traditional enrollment patterns are holding, and that might be our best gauge for thinking of upcoming quarters.

Well, the way we think about it is we are investing our capital the way we expect to. We are opening the new campuses. We are serving as best we can our students in our existing campuses. And we believe in the demand for what we do. We believe in the business, as simply as that.

So over time, we think it is the right use of our owners' capital to invest in the business that way. And I hope that our performance in terms of the numbers of students that we attract and how well we do at educating them is going to continue to build off of those investments.

So we try not to get too wrapped around the tactics of on a quarter-to-quarter basis, but we want to build a nationwide university and we think we have got the capital and we are building the manpower to do that. So that is what we intend to do.

Okay. The last question is, in terms of the cost per start, which I know you follow closely, any changes in trends in terms of cost per start, either in mature markets or new markets or overall or online? Any color on any of those different dimensions of cost per start?

No, it's been pretty standard over the last three quarters -- pretty standard with regard to our investment model.

And Howard, I can't believe you of all people is not going to congratulate us on Pittsburgh.

I did that on a prior call, and I figured I would've irritated some of my other analysts, so I didn't. But certainly a sincere congratulations on that.

Matt Litfin, William Blair & Company.

Rob, a question about the eight new campuses this year. Knowing that you believe in the business and that there is abundant opportunity out there over the long-term, do you foresee opening as many campuses in '07 and beyond, or is there something special and one-time about the opportunity in '06 for some particular reason?

There is nothing special or one-time about the opportunity in '06. We won't comment on the number that we will do in '07 until we sit down and do our planning for '07. Which is really not based on a market analysis; it's based on a human capital analysis, because we already know dozens of places where we want to open campuses.

So it's really a question of figuring out how many prospective campus directors and deans do we have on our bench that we can invest and apply to opening new campuses. We do that on a planning cycle that starts in the summer. We will take it to our Board in October and then we will announce that in November for '07.

But my basic preference, the preference of the Board and the management team, is to open as many new campuses as possible. So our prejudice is towards more, and it is always limited by the amount of -- the supply of human capital necessary to do more and at the same time ensure a very high adherence to academic quality.

Okay, that's helpful. Just a follow-up there, from where you stand today, you don't see any roadblocks to potentially having that human capital in place, although you haven't started the process until this summer?

I haven't seen anything in the first six weeks of the year that is different from what we expected when we did our planning cycle last summer. But because it is such a discrete and specific analysis, we just don't think about it until we sit down with the list of individuals this summer.

Okay. Mark, what is your best guess at a tax rate in 2006?

I think our best guess is in the neighborhood of 38.5% to 39.

Last question. The final four campuses that have yet to be built in the '06 plan, do you plan to spread those evenly across the final three quarters of this year? Will they be front- or back-end loaded? What are you thinking on timing?

They will be even, and it is actually the final two quarters, because we have already built the campuses for the spring term. Those are the Pittsburgh campuses.

So we will start very shortly in terms of finalizing two that will open for the summer and then we will have two more that we open for the fall.

Great. Thank you and congratulations.

Gregory Cappelli, Credit Suisse.

Just to be clear, Rob, we are good to do with that 0 to 20% enrollment range next quarter? (Laughter) Just checking.

No comment.

My question -- the first one I have is the additional P&L hit you're taking for the newly issued RSUs, the restricted stock, just generally, how you looking at those versus options going forward? And does that keep you within your goal of your comp expense as you have historically looked at it? I think it does, within your -- as a percentage of pretax income.

It does. Actually, I think the best thing to do is look back. If you look back at our press releases going back to 2001, we have always broken out the stock-based compensation expense in the release. So with or without FAS 123R, you can see and track exactly what our expense would be for those stock issuances -- in those cases, they were stock options -- for a long period of time. And it runs between sort of 6 and 13% of pretax income.

The amount -- or the nature of the issues in this last year has been restricted stock -- or in this Board meeting -- versus stock options. Philosophically, we have had a pretty thorough debate over the last year on that on the Board. Our view is that without regard to the income statement impact, which is exactly the same, you can provide at least equivalent amounts of retentive and incentive value to employees with restricted shares at far lower dilution to owners, which is the real economic cost.

From my perspective, FAS 123R is really just a means of restating the economic cost that is already there whenever you issue any kind of stock-based compensation, which is the increased dilution to the owners. And restricted shares allows you to do that in a way which is less dilutive to owners and arguably at least adds valuable to the recipients, if not more so.

But time will tell on that. There is a free market for labor, so you get a constant feedback as to how you are doing on that.

Okay, got it. That's helpful. One more -- I guess a question, little bit bigger picture terms. Has anything changed in terms of the way you view the potential growth and penetration opportunities for Strayer as a company that is going to primarily focus and continue to focus on working adult students going forward, with everything that is sort of being talked about in the industry right now?

No.

Okay, clear enough. One more -- on the mature campuses, it looks like enrollment growth is sequentially down a little bit. Just talk to us a little bit about how you view investing in these schools versus new areas and -- I guess that's the question. How do you think about that and where would you expect to see that growth -- I guess, would you expect it to be in the same range throughout '06?

That's a fair question, Greg. It is really a comparative use of owners' capital and management time question, which is would you rather drive higher enrollment in a mature market or use your time and effort to build out new markets? Our preference has always been to build out new markets, because we think there is real value in building a nationwide university.

But there is another really important reason, and that is that we believe there is an inherent natural demand in a community for reasonably accredited, strong academic, working-adult-focused programs. That has been our experience as we move into these new markets. There's a very predictable rate of growth of these campuses, which we are both creating with the rate at which we expand the campuses, hire the faculty, schedule the classes, as well as receiving from the standpoint of the number of inquiries and new students that we get.

Our view is that if you try and drive that rate in an existing market above what we think is the natural rate, that's where you run into risk. That is where you have problems with regard to losing sight of yourself as a university and losing control of some of the disciplines that are necessary to provide a first-rate education.

So we are very happy -- and we have talked about this at a number of public forums, that we think there is a notional rate of growth. It can be a little bit above or a little bit below in any given market. But we're not trying to drive it above that because we think that is where you potentially run into problems -- and that rate of growth plateaus.

When you get to a saturation point, when you have a mature market -- and that tends to run about 1000, 1200 students, given the commuting distance to one of our campuses -- that's where it stops. Then you get basically population rate growth plus the 5% price increase. That's what our model is based on and we like that. We think that is a very effective use of owners' capital, it creates a very high return on our owners' investment, and we've got a lot of the country left to go after in order to build that out.

That's very helpful. Thanks, Rob. Thanks, Mark.

Mark Hughes, SunTrust.

What was the title IV exposure? I think you might have given that at the beginning, but I didn't get it.

It was about 55 percent of our students -- which is down a little bit from previous quarters -- it's about 10 points more than that in revenue -- as a percentage of revenue markets. So sort of the 65ish to 70% with regard to revenue.

Is that up a bit? If so, what is driving that?

It's actually down a bit from last quarter. It's up a bit over previous years. And it has been steadily up over the last four years. I think what's driving that is as we move into new markets, we have less existing corporate alliances and less arrangements with employers, who, for the most part, are the ones that offset students borrowing under Title IV.

Got you. Then the adjustment to exclude tuition receivables related to future quarters, could you give just a little detail on that? I have not looked at that closely. What is involved there?

Sure. It is just that, Mark, at the end of our fiscal quarters, a good percentage of the receivables correspond to the students who have registered for the following term. And we have an offset in the form of unearned tuition.

So what we do for the purposes of Days Sales Outstanding, we eliminate that, because it really is not relevant, and we calculate Days Sales Outstanding just based on the receivables that are against revenue that we have actually earned.

Okay, thank you.

Mark, one other thing I would say with regard to the Title IV is we are -- I think one of the things that we are most satisfied with with regard to the quality of our student experience is the very low cohort default rate that we enjoy. So we track that pretty closely.

I think the benefit of a working adult student is they do have other access to capital, either their own capital or through employers or something like that. But we still pay an awful lot of attention to how our Title IV students perform. And in the last year, what was it down to, Mark? 2.7% was the default rate for the '03 year, which was the last one they reported. So we do try and pretty careful track of that.

Thank you.

Gary Bisbee, Lehman Brothers.

I will add my congratulations on the quarter. Just one sort of big picture question. I have asked you in the past about the growth of the mature market essentially picking up as more and more of the growing campuses fall into the mix. I think five more -- if my numbers are correct -- will become mature markets throughout the course of 2006.

So I guess it raises two questions. First of all, does it make sense at some point to adjust your first goal of the five goals and now actually expect some modest growth overall from mature markets?

Secondly, has the model you guys talked about when you took over five years ago held true in that -- are we still seeing the new schools continue to grow through, say, their sixth year, and then maybe have more moderate growth beyond that point? I guess maybe more specifically, the schools you opened your first year in '01, and your second year in '02, are those still seeing relatively healthy growth at this point?

I think they are seeing relatively healthy growth because my definition of growth -- of healthy growth at that stage includes both the pricing power as well as some modest population growth. Under the notional model, it should take you really 7 to 10 years to get to 1000 students. A couple of the early ones have gotten there much faster and have moderating levels of growth now, but are still growing at a measurable -- a significant amount.

Each campus is going to be a little bit different, which is why we do it on a notional basis. But your first point I think is valid, which is we arbitrarily picked a four-year point as the definition between new and mature for the purposes of reporting to you all. And most of our campuses are still growing, albeit at a reduced rate, but a significant rate in years 4, 5, 6, and 7.

So yes, as more of the campuses that we opened since Mark and I have been here, since '01 and '02, move in for measurement purposes into the mature category, we should see a little bit of growth and we will be watching that pretty closely.

We have not changed the way we define it in our notional model or how we measure it for the purposes of our earnings release because it is arbitrary anyway. I mean, you could pick one year. You could pick seven years. We just had to pick a point of measurement so that everybody could in their own models keep track of how we're doing.

But in general, those campuses are performing at least as well as we would have expected, which goes back to the answer to Greg Cappelli's question. I was not trying to be curt, but the answer is we have not seen anything that changes our view of the business. And our experience in the business over the last five years, frankly, has amplified all of the assumptions that we have made, with the possible exception of the attractiveness of acquisitions. And it is why we are following the strategy that we are.

Okay, second question. A couple of competitors have been touting and seeing pretty big growth in a lower-priced online associate degree program. I guess I wanted to take your temperature as to, first of all, how your online associate business is doing and is the current price point still being well-received?

Secondly, since you have seen the continued mix shift towards graduate level, within the undergraduate segment are you seeing any better performance from the associate level or is it still largely bachelor degrees?

It is still largely bachelor. We're really not designed or focused on the associates’ level. We have some associate students, and those are students who, frankly, leave before they finish the bachelor's degree; but if they are here two years, we give them an associate's degree.

But our focus is on the four-year bachelor's degree, and we have not -- we are comfortable with our price point at that and our ability to command pricing increases. So no, we have enough on our plate with what we're trying to accomplish without looking at other ages or types of students in terms of those sorts of associates levels programs.

As a matter of fact, we're kind of going in the opposite direction, because we're reaching out to community colleges as much as possible to form alliances with them, and we are taking their students, their graduates in through articulation agreements, if they have sufficient academic preparation, into our bachelor's program because we find those students perform better over the long run.

Do you have any recent -- any deals you've signed or anything to mention there?

We've got a number of them. We don't normally release them. But in each of the -- I can get you the data. In each of the markets that we operate in, we probably have two or three of the large community colleges that we partner with on that basis.

Just one cleanup question. I want to make sure I am understanding this right. If 55% of students use some or all Title IV, how can 65% of revenues be -- even if they used 100%, you would think it would be capped at 55%. I guess maybe the obvious answer is -- are the corporate sponsors getting such a tuition discount that 55% of students are paying 65 percent of the revenue?

No, it's a simple explanation, Gary. Many of the students are taking more courses. So if you're measuring by students, you're not measuring by courses. So mathematically, a lot of those 55% are taking more courses than the people that aren't using Title IV funds.

Okay, that's a good answer. Thanks.

(OPERATOR INSTRUCTIONS) Corey Greendale, First Analysis Research.

First question is, just wanted to ask about the new campuses, since this was your first time doing winter term new campuses -- whether -- I think in the past, the ones that have opened in the fall have done -- started with larger classes than the others. Just wondering whether these look more like the fall term starts or kind of the other quarters, and just whether those came in in line with what you've been looking for.

They were among our strongest starts ever, so they are definitely in line with the fall term.

Okay. Second question is, last quarter, I think you'd mentioned some students taking only one class for the summer. Was that just a summer term phenomenon and do you see that continuing more than in the year prior period in the fall term as well?

No, we didn't. The fall was more consistent with our prior results.

Okay. And then on the bad debt, just wondering if you have any thoughts on where you're thinking about managing that to, if you are content with the current levels or thinking about managing it down going forward or where?

It got down faster than we expected, and so I think what we're probably going to do is not do any other management decisions that are designed to affect it. We're going to watch it for a year and see where it settles out. I want to make sure it doesn't pop back up again. I want to see if there is a natural tightening that's bringing it back down, without affecting our enrollment growth.

So the answer to your question, Corey, is we're not going to do anything different for the short-term. We'll look at it at the end of the year and then decide.

My last question is, I was just wondering if you can comment on the metrics that your incentive compensation is tied to, whether you have changed those at all and broadly what those are for '06.

We have not changed them, and they are generally related to revenue and earnings growth and return on capital, maintenance of appropriate accreditation and licensing authorities, things of that nature.

Thanks and congratulations.

Trey Cowan, the Stanford Group.

Looking at your graduate students and the trend that continues to rise there, is that a function of some strategy in place there? Or can we look at it as far as as you roll out new schools, you get more graduate students in new schools? Is there something behind that number, that trend?

It is not a result of strategy, Trey, and frankly, it has been a little bit surprising to us. Because it is the area where I think we have less comparative advantage than we do in the bachelor's level for working adults. There is a lot of really good traditional universities that have relatively convenient programs at the graduate level, particularly in business.

But we are also not complaining about it. We think it has been a nice driver of growth. And the other thing I like about it is that, particularly in some of these new markets, it speaks to a higher level of academic quality. Just the general way that creditors and licensors think about universities is standards are higher at the graduate level than at the undergraduate level.

So with the growth of the graduate level I think that ultimately that will benefit the undergraduate as well, because you build a better brand. You build a better reputation for the university in a brand-new market, and so we're pleased by that. But it was not a result of strategy, and so therefore, I don't really know where that mix is going to go.

Okay, great. Continuing along those terms, the themes of your marketing message that you're currently putting out there to working adults, how do you think that differs from the schools that are marketing towards a more traditional student?

Well, that's a pretty broad question. I would say that what we try and do with our marketing message is emphasize the fact that we can provide a traditional level of academic content in a very convenient manner, and that is what our marketing staff focuses on. And we build on it each year through talking to our students, focus groups, things of that nature.

But it has been successful so far, and again, it is critically important, because when you go into a brand-new market, they don't know you. You're starting from scratch. And so I think actually much of our success has been the fact that in the new markets, we have done a good job educating students. And that feeds on itself and that level of satisfaction and referral makes everything else that we do for the paid advertising just be that more relevant.

And that was going to be my last question. On referral rates, have you seen change there, good or bad, indifferent, as far as number of students referring other students to your programs?

No. Honestly, we don't measure it as specifically as you'd need to to answer that question. But anecdotally, it has been a really big part of the more rapid than expected growth in many of these new markets.

Okay, great. Thanks a lot, guys.

That concludes the question-and-answer session today. At this time, Mr. Silberman, I'll turn the conference back over to you for any additional or closing remarks.

I just like everybody for participating and we'll look forward to talking to you again in May. Thanks.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation and you may disconnect at this time.