Strategic Education Inc (STRA) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Strayer Education Incorporated’s first quarter 2006 earnings conference call. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions, and instructions will be given at that time. If you should need any assistance during this call, please star, zero, and then an operator will assist you. Today’s call is being recorded. At this time, I would like to turn the conference call over to Sonya Udler, Vice President of Corporate Communications for Strayer Education. Please go ahead.

Thank you, operator. Good morning. With us today to discuss the results are Robert Silberman, Chairman and CEO of Strayer Education, and Mark Brown, Senior Vice President and CFO. For those of you who wish to listen to the conference via the Internet, please go to www.strayereducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in real-time, a replay will be available beginning today at 1:00pm ET through Monday, May 8th. The number for the replay is 888-203-1112, passcode 3204811.

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 litigation reformat. 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.

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

Thank you, Sonya, and good morning, ladies and gentlemen. As is our custom, I’d like to begin this morning with just a brief overview of both our company and our business model for any listeners who may be new to Strayer. I’ll then ask Mark to report on the detailed financial results for the first quarter, after which I’ll comment on our enrollment results for the spring term. I’d like to provide an update on our growth strategies and finally end up with a company’s earnings outlook for Q2 of 2006.

Strayer Education, Inc. is a for-profit education service company, whose primary asset is Strayer University, a 27,000-student, 41-campus post-secondary education institution, through which we offer associates, bachelors and masters degrees in business administration, accounting, information technology, public administration and education.

Strayer students are working adults that 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 costs 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 some 39 foreign countries through Strayer University Online. Strayer University is accredited by the Middle States Association of Colleges and Schools.

Mark, you want to run them through the first quarter?

Sure. Revenues for the three months ended March 31, 2006 increased 19% to $67.1 million, compared to $56.2 million for the same period in 2005 due to increased enrollment and a 5% tuition increase, which commenced in January of ’06. Income from operations was $25 million, compared to $22.5 million for the same period in 2005, an increase of 11%.

In 2006, the company began recording stock-based compensation expense related to the adoption of FAS 123R, which amounted to $1.3 million before tax for the three months ended March 31, 2006. Excluding stock-based compensation expense, income from operations was $26.3 million, an increase of 17% compared to 2005.

Net income was $16 million, compared to $14.1 million for the same period in 2005, an increase of 13%. Net income for the three months ended March 31, 2006 includes $800,000 after tax related to stock-based compensation expense. Excluding stock-based compensation expense, net income was $16.8 million, an increase of 19% compared to 2005.

Diluted earnings per share was $1.10, compared to $0.94 for the same period in 2005, an increase of 17%. Diluted earnings per share for the three months ended March 31, 2006 includes $0.05 per share related to stock-based compensation. Excluding this $0.05, diluted earnings per share was $1.15, an increase of 22% compared to 2005. Diluted weighted average shares outstanding decreased to 14,559,000 from 14,950,000 for the same period in 2005.

At March 31, 2006, the company had cash, cash equivalents and marketable securities of $126.2 million and no debt. The company generated $24.9 million from operating activities in the first quarter of ’06. Capital expenditures were $3.3 million for the same period.

During the three months ended March 31, 2006, the company spent $14 million for the repurchase of 143,800 shares of common stock, at an average price of $97.16 per share, as part of a previously announced common stock repurchase authorization. The company’s remaining authorization for common stock repurchases was 18 million at March 31, 2006.

For the first quarter 2006, bad debt expense as a percentage of revenue was 2.5%, compared to 2.2% for the same period in ’05. Day sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 10 days at the end of the first quarter of ’06, compared to 9 days at the end of the same period in ’05. Rob?

Yes, thanks, Mark. Just a couple of comments on the financials in what was a pretty solid quarter. The revenue growth of 19.5% was slightly ahead of our model. We had just under 16% enrollment growth in the winter term, and you had the 5% tuition increase offset by slightly lower seed-per-student ratio. But what helped us is we had a lower rate of student drops during the quarter, which gave us about 50 extra basis points of revenue growth, which contributed to about $0.01 on the upside.

On the expenses, the operating margin in Q1 also ended up better than we expected. Based on the expenses that we’re incurring in opening four new campuses in the first half of the year, we had expected about 150 basis points of margin compression in Q1 versus the prior year. However, we only ended up with about 80 basis points, largely because of a very efficient marketing spin. And this is the second quarter in a row where we’ve actually done quite well on that.

We had expected our cost per lead and our cost per student acquired to go up in Q1 with all the investments that we’re making in new markets, but in reality, our cost per lead was actually about 18% lower, and our cost per student acquired was about 33% lower than the same quarter last year. Now, that’s helped somewhat by the fact in this same quarter last year, we didn’t do quite as well in recruiting new students. But even accounting for that, we were really firing on all cylinders, I think, on the marketing side.

We were also helped on the operating margin by the fact that three of our 2005 campuses – the campuses that we opened in 2005 – will break even in the first quarter, which was a couple of quarters ahead of our schedule, and, again, created less of a drag on our earnings because of that. So all in, the operating margin helped us as well.

On the EPS for the quarter, and I’m speaking to the pre-FAS 123 [sic] because that’s the way we had discussed it on the last call, the $1.15 versus our guidance of $1.10 to $1.12 was the result basically of a higher revenue, which I described about $0.01. The higher operating margin on that revenue was a little over $0.02, and a lower share count based on some share repurchases in the quarter was about $0.005.

With regard to FAS 123, we did have a tiny adjustment to the start of the expensing of some of our equity grants, which lowered the stock-based compensation expense in the quarter to $0.05 versus what Mark and I had forecasted at $0.08, but we still believe the full year expense will be approximately $0.36, so most of that was just pushed into the later quarters based on what our auditors told us as to when we could actually start the expensing of some of the grants.

On the distributed free cash flow – and again, when Mark and I look at that, it’s after-tax cash from operation minus all required CapEx necessary to fund any expansion in our business plan. Our growth in that distributed free cash flow for the quarter was 22%, a 19% growth in net income. Again, that’s 19% excluding stock-based compensation, which is ahead of our model.

As we go forward into ’07 and ’08, and we’re just comparing apples to apples on a post-FAS 123 basis, what we’re going to find is our growth in distributed free cash flow is going to be significantly higher than our growth in net income just because of the nature of the non-cash charge to the stock-based compensation expense.

On the spring term enrollment results, again we had a real solid quarter, total enrollment increasing 15%. New student enrollment was up 22%, which we were quite pleased with. Continuing student enrollments were up 14%, and the out of area online enrollment was up 25%.

With regards to student mix, business administration and accounting degree seekers continue to account for slightly over 60% of the students for the spring term. We seem to have reached a bit of an equilibrium with regard to the mixture between computer information science students and business and accounting students. We’re about 2/3 to 1/3, whereas many of you will remember that it was closer to ½ and ½ when we started four or five years ago.

Our new graduate programs remain at 6% of out student population, and the overall graduate population is 27% of our student mix, and that still continues to creep up. That’s up from 25% a year ago, so we’re doing quite well on the graduate programs.

Turning to an update on growth strategy, I think many of you will remember that it’s 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 the new states. Third, invest in and build up our 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 our owners’ capital as we build it up.

On the first objective, for the spring term, we were ahead of target at the mature campuses. We had 3% growth, while mature campuses continue to exhibit a preference to take online courses in their later terms. And just to try and jump a little bit ahead of what Gary’s question is going to be, yeah, I do think some of that 3% is associated with the fact that we have younger mature campuses rolling into that mix, and I think on a net basis, it’s probably closer to what our target is, which is basically maintaining enrollment in our mature markets.

With regard to the new campus activity, for the spring term, we opened two campuses in the Pittsburgh market. We had strong starts in both locations. We were benefited by getting a little bit of advertising in the local markets right in the middle of the Superbowl, and I think we got some pretty good coverage on that. We announced today that we will open two new campuses in the summer term. These are both going to be used to meet increasing demand in two of our existing markets. We’re going to open a fourth campus in Atlanta, Georgia and a third campus in the Norfolk, Virginia area. We expect to open the two remaining ’06 campuses for the fall term.

In the out of area online unit, the growth rate, at 25%, was slightly below our target. We are seeing that that out of area online growth is trimming down, as we had expected, to our overall rate of growth. Particularly as we expand into new markets, we’re continually taking market geography away from the out of area online and putting it against our campus locations. But we were actually pleased with the results there.

On capital redeployment, we declared this morning our quarterly common stock dividend of $0.25 a share. We also announced that we’ve been able to repurchasing approximately $14 million of our common stock during the first quarter. Again, the board and I remain convinced that this business model allows the luxury of fully funding a strong organic growth strategy and still make a periodic return of capital to our shareholders, and we think of both of those exercises, whether it’s a common dividend or a repurchase of shares, as return of capital to our owners.

Now, we continue to weigh all uses of cash every quarter, whether it is increased expenditures around marketing, increased expenditures in opening new campuses, paying a dividend, buying back shares. All those are a use of owners’ capital, and we weigh them each time independently against each other to determine the most value-enhancing after-tax return on our owners’ capital.

On the business outlook for the second quarter, based on the university’s enrollment growth for the spring term offset partly by the increased expenses associated with what will now be six new campuses for this year, moving towards eight by the end of the year, we estimate our second quarter earnings per share will be in the $1.02 to the $1.04 range before the impact of FAS 123R, and we expect approximately $0.09 of stock-based compensation expense in the second quarter. And I don’t think we’ll be pushing this anymore towards the end of the year, so I think the $0.09 is probably pretty solid.

Now, I should point out that, based on the strong performance to date of those 2005 campuses, Mark and I have sort of updated our model, and it looks like we will actually expect to achieve roughly stable operating margins in Q2 compared to Q2 of ’05 within a pretty narrow band. It might be a little bit below or a little bit above, but roughly stable and notwithstanding the acceleration of campus growth to eight campuses this year, where the faster growth of the ’05 campuses offset some of that.

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

Thank you. [Operator instructions] We will take our first question from Howard Block with Banc of America Securities.

Thank you, operator. Good morning, Rob and Mark. Good job in the quarter. I did have a question, though, on the continuing student growth, which was a little bit below our estimate, but perhaps you might want to share some of the components in terms of number of graduates, number of drops and how it came out versus your model.

Sure. It was a little bit below. I mean, we had over 15% enrollment growth the previous quarter. About half of that – actually, the better way to say it is our retention rate, if you think about it that way, was down about 100 basis points. We went from 83% the year before to 82% this year. About half of that was associated with increased graduations. Our rate of growth in the previous 12 months was slightly below what it had been in the 12 months before that, and so as that cohort moves through, you have higher graduates as a percentage of your student population. So that was about half.

The other half I think is part of the variabilities of the business. We’ve had some quarters where we’re quite a bit above and some where we were below. We were actually quite pleased with the fact that the drop rate in the quarter was significantly below what we’ve been in previous quarters, and I think our efforts on retention are actually making some strong performance or strong results in that area, and we’ll just focus on the roughly half of that retention rate that we think is associated with just students who decided to take the spring term off. But I’m not particularly concerned about it, Howard. I think it’s within the variability of what we’re expecting.

Okay. So just relative to the 80% retention or so for ’05, is there a likely that ’06 is sort of flat, or are you trying to drive it higher? And what role – maybe if you could even elaborate on any details of what role the new retention managers, who I think are at about a one-year anniversary now – what role are they playing?

Oh, I think they’re playing a very important role. Remember, we did that because over a year ago our view was that the biggest risk to an expansion strategy is losing sight of your existing customers, in our case our students, and we wanted to have a very fulsome student support activity in the campus independent of the academics. So I do think they are providing a significant benefit to us, as evidenced by the lower drop rate.

The retention rates that we have achieved over the last couple of years have been quite high, and we were not – you get towards a theoretical limit with a working adult student. If we have sort of 5 to 7% academic failure, and then you have a level – you, hopefully, have a high level of graduating students, and then you end up with a working adult that just has different that happen in their lives – they have job changes or pregnancies or marriages or other kinds of things that legitimately distract one from their academic pursuits.

To be in the low- to mid-80s we think is probably a fairly solid performance. To go from 83 last year down to 82, as I said, part of that is the result of higher graduations. Part of it is things we haven’t quite put our finger on, but we’re going to be looking pretty closely at it, and hopefully we’ll shake it out and maintain this level.

Great. Thank you. I’ll jump back into the queue.

Okay, thanks.

We’ll go now to Mark Marostica with Piper Jaffray.

Hey, guys. Nice job on the quarter.

Thanks, Mark.

Hey, just following up on Howard’s question. The retention drop that you described that’s not explained by the graduations, was that more tied to online or campus?

It was fairly consistent. It was actually more tied to, I would say, a series of campuses in one geography, but only marginally more. I mean, it’s a pretty small number, Mark. It’s 200 students across 27,000, so there wasn’t really anything specific that we saw out of it, frankly.

Fair enough, fair enough. And then on the question on marketing, you had a great result of cost per lead and cost per start. I’m just wondering, what do you think you’re doing differently than some of your peers in this regard that’s keeping you so fixed on the marketing side?

Well, Mark, I never comment on my peers, so I really couldn’t answer that. I mean, I’m quite pleased with the team that we have and the efforts that we’re making. And I actually think, in many ways, marketing is probably over-focused on by a number of people who watch these businesses, because I have always believed that the effectiveness of your advertising is nowhere near as important as the effectiveness of your performance in the classrooms and the way you satisfy your current students. And I think that makes the marketing team’s job a lot easier.

Maybe to put it a better way, have you changed anything this quarter of the last on the marketing side that may have improved the situation there?

Well, we change a little bit each quarter. I mean, we try and stay abreast of some of the things that we want to accentuate. We’re always mixing and matching media in various markets to try and get the optimum blend in a market. But we didn’t change any more than we have in any other quarter.

Okay. Last question, and then I’ll turn it over. You mentioned out of area online 25% growth year-over-year was below what we were thinking and came in below last quarter and a couple of quarters before that. Are you seeing more competition that’s maybe driving that, or is there anything in particular you think that might be putting some pressure on that growth rate?

Well, one thing is that we keep taking geographies away from the areas that our out of area online can focus on as we expand our campus population, and they tend to be geographies that are relatively close to where we have existing markets, and so there’s a little more name recognition. So that’s part of it.

I think the other part of it is – I wouldn’t say it’s getting more competitive, it’s always been very, very competitive, and as we build up that organization and build up our focus on that, we want to make sure that we’re committed to providing the same kind of experience to those students that we do to our students in the classrooms, and that’s a scaling operation. It takes some time.

But we’ve always felt that it was a fully integrated and important adjunct of our university. We don’t think of it as a separate higher growing business or something that we capital separately. It just gives us great advantages and an ability to reach students that we otherwise can’t because we haven’t gotten to the investment in the campus there yet. But eventually, that whole segments going to go away. When we have campuses everywhere, we won’t have an out of area online.

Thank you.

Yes.

We’ll go now to Jerry Herman with Stifel Nicolaus.

It’s Stifel Nicolaus. Thanks. Good morning, everybody.

Good morning, Jerry.

Nice. Just a follow up on that out of the area online question. Rob, can you give any feel for – as you move further away from your footprint, are the leads or the conversions lessening in any way? I know you guys have got a lot of brand equity, you’ve got good quality in the classroom, but in light of what appears to be competition increasing for the other players, are you seeing the further away you go from your area, the weaker you might see those leads or conversions?

Are you talking about for the out of area online?

Yes.

Well, if it’s close to one of our campuses, it isn’t assigned out of area online. It’s assigned to one of our campuses.

Right.

So all of our out of area online are relatively far from anyplace that we have brand equity. And our conversion – I mean, for five years, the conversion of leads that we assign to out of area online because they come from a zip code but we don’t have a campus has always been significantly lower than the ones that we have that we’re serving through campuses, so I’m not seeing any real change on that. It’s always been that way, and it’s the nature of that part of the business, that without real firm identification between the institution and the prospective student, I think it’s more difficult to convince them that it makes sense to spend the kind of money and the kind of time and effort to go back and get your degree.

Just a quick follow up for Mark. This should be an easy one. Mark, though, $1.3 million pre-tax number for FAS 123R – can you help us allocate that?

It’s in the release.

You mean, across our external line items?

Yes.

Yes.

Yes, sure, Jerry. They can read the release. Give it to them. It’s on the last page of the release.

All right. That’s fine. I’ll just get it from there. Thanks.

You’ve got to work for your living, Jerry.

We’ll take our next question from Greg Cappelli with Credit Suisse.

Greg, you there?

[Operator instruction]

Hello? Can you hear me?

We got you, Greg. Go ahead.

Okay. Sorry about that. Just following on to the out of area online point and the 25% growth. Did you spend everything you wanted on that area this quarter? And then secondly, Apollo, of course, has been talking about how they’re starting to spend again and more money. Any impact of that that you can tie the growth to there?

We did spend everything we intended to in the out of area, although, frankly, our out of area spend is based in large measure on the brand building that we’re doing on the Internet to focus on our campus base population, so it’s somewhat less of a discreet item there. And we were very pleased with our new student results this term, Greg, so whatever has gone into that, we’re happy for it.

Okay, Rob. And then secondly, I know there have been a lot of questions about the online competitive environment, but when you are building, the more campuses that you build – I know for a fact that some of them are near competitors. How are the ones doing that are closest to your competition, specifically those campuses?

Well, they’re doing great. I mean, in many cases they do better than ones we have on a standalone basis, and that’s why for those competitors that we respect and that we think do good demographic analyses, that’s not an uncommon situation for us when we go into a new market, is to find where they are and assume that that’s going to be a pretty good location.

Okay, great. Thanks a lot.

Thank you, Greg.

We’ll go now to [Tim McCue] with William Blair & Company.

Yeah, hi, it’s Matt Litfin.

Hey, Matt.

Hi. Rob, I know you’ve often said that one of the biggest constraints to higher growth for your company is the people to manage and work at new campuses. Can you give us an update on your view of the availability of good managers, and is a tighter labor market influencing your decision about whether to open new campuses in existing versus new markets at all?

Well, let me take it in reverse order, Matt. The latter question, no, not at all. Our decision of where to allocate our new campus openings is based on a desire to get nationwide as quickly as possible tempered by an equal desire to make sure that we fill out and satisfy demand in markets where we’ve already made an initial investment. I don’t see the labor market having a significant impact on our ability to create campus leadership teams because we’re not, for the most part, hiring externally for that. We’re growing people internally, and so we’re hiring at entry level and trying to develop them through our various positions in the organization into, for those who have leadership potential, into a management role. So I don’t see that the economy has that much of an impact on our ability to do that.

What is a problem for us, what is an issue and is a bottleneck is it’s just hard to do, period. I mean, these are relatively complicated jobs managing both a business and an educational institution in the same building and in the same organization, and we do it with a co-manage structure so that it gets even more complicated because an individual may have responsibilities for part of the success of the organization, and then a counterpart has responsibilities for other missions within the organization, and they have to work together quite well. And so it’s inherently, I think, a somewhat complicated management challenge, and we’re pretty careful about making sure that we have sufficient supply of individuals that we trust with that responsibility before we open a campus.

Just as a follow to that, if you step back and look at your broader workforce, do you measure things like employee turnover or the percent of offers that are accepted? And if so, can you quantify any trends in those particular areas?

I don’t know that we have anything on the latter. I just honestly don’t know what our percent of offers made versus accepted is. We do monitor employee turnover quite closely, both for administrative personnel and for faculty. It is extremely low for faculty, and among administrative personnel, it is relatively low. We have some spots that we find, particularly in some entry-level jobs, where we need to focus on it somewhat. And also, as we get to a broader and broader geographic scope, we find that some markets – the need for educational institutions and the desire for people to work in them might be a little bit higher than in others.

But in general, employee turnover hasn’t been a limiting factor for us. The maturation process and the growth of employees to a level at which we’re comfortable with them as managers of disaggregated units of the university is probably the biggest bottleneck.

This is the last question I’ll ask on employee information, but I know that you had turnover at the president level. Can you update us on the search for a new president?

Sure. First off, we have a terrific interim president, Dr. Joel, who is doubling as the dean of the graduate school and is doing a great job. He’s a full member of our management team, and we’re delighted to have him. We have engaged a search firm. It is a somewhat stylized process to pick a president of a Middle States accredited university, and we’ll go through all of those steps and efforts, including canvassing our students and our faculty and other constituencies. And it takes some time, so it’ll be several months probably before we have an announcement. In the meantime, we feel like we’re very well served with Dr. Joel running the university from the academic side.

Okay. Thanks a lot.

Yes.

We’ll take our next question from Mark Hughes with Suntrust.

Thank you very much. I see you’re opening another campus in Atlanta. Has that market done better than expected?

Yes.

Any relationship you can establish with some of your competitors’ issues in that market?

No, not really. I mean, first off, I don’t comment on competitors, Mark, but the reality is that’s not a market where we’ve heard a lot of noise around that.

Okay. And then you’d given some retention numbers suggested, from 83 last year down to 82 this year. When you’re describing retention, is that simply how many students carry over from the winter to the spring?

Correct.

Okay. And then, presumably, starts would be the [inaudible].

Correct.

Okay. Thank you.

Yes.

We’ll go now to Corey Greendale with First Analysis.

Hi. Good morning.

Good morning, Corey.

The first question [inaudible] you and Mark updated that the models for the better than expected performance in a couple of campuses from ’05. If it started to, assuming that you kind of remained within the 15 to 18% enrollment range, that EPS may end up – that the range for EPS could be coming up as a result of that?

I’m not sure I would jump yet to that, Corey. If the performance of those campuses allows us to have stable margins relative to last year through the end of the year, then, yeah, I guess that’s a fair mathematical assumption assuming enrollment rates, but we just don’t try and get that far ahead of ourselves beyond a quarter-to-quarter basis, because we had models that we would have some margin compression year-over-year because of the extra campuses, so if that goes away, then, yeah, we’d have higher EPS.

And second question is on the – I know you somewhat answered this by saying you’re pleased with the results, but given that you had a relatively easy year a year ago [inaudible] student growth, I thought this quarter might have had a good chance to be more towards the upper end of the 15 to 18%, so any color you could put around that or what we should expect going forward?

Well, we don’t know, so we don’t comment on what to expect going forward beyond that we’re employing our owners’ capital to expand the university, and ultimately, over time, if we’re doing a good job, our rate of student population growth ought to mirror our rate of capital employment – growth in capital employment because you’re opening new campuses. We worked these with the enrollment results particularly on the new side. I mean, that feeds your future growth, and being on the low end of the range is where it was.

I mean, we give the range to you guys to have a bounded mathematical area as a model, and we try not to predict things that we can’t predict. But having strong performance on new campuses is always – brand new markets is always an important indicator for me. Having overall good new student growth is a very strong indicator, and then we measure continuing student growth very closely because we think it’s a good short-term indicator of our students’ sense of the quality of what we’re providing. So it all goes into a package for us as we look at it.

Okay, thanks. And just a quick one – any noteworthy changes in employer reimbursement trends?

No. I mean, we actually had, I think, a pretty good quarter in terms of expanding those programs to new entities, but I don’t have any data that says overall within the economy that employers are more or less likely to provide education benefits to their employees. I mean, I think that’s – since 2002, where there was a little bit of a down turn, that’s remained quite strong for the last couple of years.

Great. Thanks very much, Rob.

Okay, thanks, Corey.

We’ll go now to Mike Adams with Adams Capital.

Yes, hi, guys. Nice job on the quarter. Just a question. The student enrollment numbers you give in the press release – what date is that a snapshot of?

It’s what we call our ad drop date, which is a date one week after classes start, after which students cannot either – we have four distinct academic terms, and after the ad drop date, a student cannot enroll in that term, and if they drop, there is a financial penalty for the student.

Okay. So that’s one – so like April 7th, around there?

Well, I think classes started – that was the last week in March. I think it was April 1st or 2nd. We’ll get it to you. I don’t remember [sic] it in front of me.

Okay. And just so I understand, what constitutes a student enrolling? Is it an actual fee being paid, or is it some other consideration that gets them into the new student category?

It is fulfilling the requirements for enrollment, which means going through the admissions process, having the appropriate academic background, and then it’s not a fee, it’s paying the full tuition, unless they’re under a category under which – our campus directors are allowed to extend credit through, I think, the first month of the term under certain circumstances. But in most cases, it’s having fully paid the fee or providing evidence of a Title IV guaranteed loan, which Mark and his team then draws down, what, about a week or two into the quarter, two weeks into the quarter?

That’s correct, yes.

Yes.

Okay, great. Thank you.

Yes.

[Operator instructions] We’ll go now to Trey Cowan with Stanford Group.

Yes, thanks. Great job on the quarter, guys.

Thanks, Trey.

Looking at opening up new campuses, could you contrast for us what it looks like as far as opening up a new campus in an area where you already have campuses existing versus opening up a new campus in a new territory?

Well, it’s easier, obviously, to go into a market where you have campuses, and it’s probably less valuable in the long-term. I mean, we’re trying to get into new markets as quickly as possible, but, again, it’s a balancing act. I mean, we have some markets where we know that there are students who very much want to enroll and who can’t deal with the complication of traveling from one side of the city to the other, and we react to those circumstances and try and get as many physical campuses in the market as necessary to serve those students.

Okay. And along those lines, have you been approved for any new states here recently?

None that we’ve announced.

Okay. Thank you very much.

We’ll go now to a follow up from Howard Block with Banc of America Securities.

Thanks, operator. Just to clarify something, when you stated business and accounting was 60%, is that inclusive of graduate programs or exclusive?

Inclusive, both undergraduate and graduate.

Okay. So the graduate programs are doing very well, yet I noted in your letter to shareholders you said that we have less of a competitive advantage in that area. What did you mean by that, and why isn’t it manifesting in the results?

Well, what I meant was as I looked at this business five years ago, I didn’t see a lot of people, with one obviously exception that I thought was doing a good job, providing regionally accredited education solely for working adults. But in most markets that we go into, there are pretty strong traditional programs, traditional universities that have night and executive graduate programs, and so that’s where I say we have less of a comparative advantage. I mean, in all the markets that we operate in, there are maybe a dozen different well known traditional universities that have fairly open access extension and adult graduate programs, either at the MBA or masters in management or masters in technology. So that’s what I meant.

Okay. So it’s really just that the capacity is there. It’s not necessarily that they have any other competitive advantage, per se.

Only the brand name, which I assume would be valuable.

Okay. And then if you look at the new campus expansion, obviously going well – I imagine that’s still Christa and Jones’s team that heads that. What would it take, or is it possible, that in the next 12 months you would actually expand her team in order elevate the number of openings?

Well, I hope she’s not listening because she’ll be lobbying for it. It’s a really important part of our business, and we’re going to staff it with the personnel necessary to do a good job on it. I think one reason why we were comfortable going from five to eight campuses this year is by controlling the variability around a campus opening under one executive who we really trusted, and so whereas we may expand per team as necessarily, it’ll still be one team. I think that’s an important part of the process, is having one individual, one entity, one manager who’s looking at our quarter after quarter, year after year opening processes, because that way, as I said, we lower the variability, we get the lessons learned, and I think we do a better job.

The bottleneck that I see are the constraint on increasing the number of campuses that we open in any given year is not Christa and her team, it’s the people that she hands off to, which is the campus director and the campus dean, and making sure that we have enough of them that we as the senior management team and the board of trustees are comfortable with before we accelerate that rate of growth.

Okay. So in that regard, what did you mean when you also wrote that if the Dean tries to hire too many professors at once, it’s almost impossible to ensure the quality of the students’ experience.

Well, that has to do with the rate of growth of the unit, not the rate of units that we grow.

Okay.

So that’s why, again, for six years Mark and I have been talking about this sort of notional way these campuses behave. You get to about 300 students in a couple of years, and then it tends to grow at about 100, 150 students a year. That happens for two reasons. One is, I think that tends to be sort of a natural rate of demand in these markets, and then the second is that’s how we’re managing to meet that demand because that’s a rate at which we’re comfortable. If a dean is hiring a few professors a year, we can be pretty sure that they’re doing a good job bedding those professors. If you tell them, “Go out and hire 50 tomorrow,” it’s hard to believe that you’re going to have a pretty good control on quality there.

Okay. And what is the average number of credits with which an entering student starts school? And the reason I ask is I know you’re trying to build up the channel with the community college schools. I think there are about 40 of them now that you have partnerships with or articulation agreements with. Is the number changing, and would that have some impact on student retention just in terms of the average lifecycle of the student?

Well, I don’t know the answer to your first question. I’ll let Mark try that in a second, although he’s shaking his head. But the reason we’re going for students that have credits on the way in is that the most difficult time for a working adult coming back to school is the first quarter, and they’re sort of intuitively obvious reasons. You’ve been out of high school for 15 years, you’ve got a job, you’ve got a family, you’re a busy person, and you go through the mental process of – you screw your courage to the sticking point, and you say, “I’m going to go back to school.” And then that first night you’re sitting in the classroom and you’re just overwhelmed with the enormity of what it means to be back in an academic setting, so we always have a higher drop rate or a lower retention rate for students with zero credit in their first time if indeed they’re in their early 30s.

And so if that individual has shown the commitment and the initiative, gone and gotten their associates degree, again, it’s sort of intuitively logical, they’re going to perform better, we’re going to have a higher retention rate for those students, and that’s why we’re actively seeking those kinds of students. I don’t know the answer as to what our average number of credits that an incoming student has, but I would say that, logically, your point is correct, that if that number goes up over time, we would hope and expect that our retention rate would go up over time, even though it’s a student that is only going to be with us for two years because they already have the associates degree. We think that’s actually a better customer to serve from that standpoint.

I mean, we’re still going to do everything we can to serve – we’re an open, active university, and we’re going to serve whatever students can meet the requirements and come to us, even if they have zero credit, but as a matter of performance in the classroom, we do find that the ones who have already gone back to school and gotten an associate degree perform better.

Okay. But you wouldn’t even have an approximation of what percentage of students were entering from community colleges?

Well, I don’t know – I couldn’t tell you are entering directly from these programs. I would say there’s a high percentage of our students that have some credit when they get here. I mean, I know that anecdotally. We have very few students that have zero credit.

Okay. Well, I’d ask another one, but were there people behind me in the queue again? That’s why I’d circled back. If there are, I’ll circle back again. If there’s not, I’ll ask another.

I don’t know, but go ahead, Howard. I mean, we’ve got plenty of time, and we’ll stay on if people need.

Okay. You also had noted that more students are taking remedial math and English courses, which is obviously a necessity for students who particularly are not entering from community colleges. Is that a change? And when they take those courses, I imagine they’re not for credit, but they are, obviously, for revenue, so wouldn’t that in effect be a countering force and extend the lifecycle of the student?

Well, it definitely extends the lifecycle of the student because the students that we give it to are ones whom we feel don’t have the basic skill sets in those areas to succeed. So if they don’t get it, they’re going to fail out. So it’s clearly an important initiative for us. It helps across the board. You get higher graduation rates, you get higher student performance, and yes, it translates into higher revenue and earnings as well. There are some of those courses that can be offered for college credit in certain circumstances. The majority of them we offer without credit, and we look at the pricing structure of the course depending on whether it’s credit or not credit in terms of how we price it.

Okay. You wouldn’t happen to know what percentage of students are taking any kind of remedial course?

Well, we just started a little over a year ago, and so I think it’s probably relatively small, but we can get you the exact number, Howard.

Okay. All right, thank you.

Yes.

We’ll go now to a follow up from Jerry Herman with Stifel Nicolaus.

Thanks. She did it. With regard to new students, Rob, are you seeing any trends there in terms of mix? I guess what I’m really asking is are you seeing any up-tick on the computer side, the computer information services systems side?

We haven’t really seen an up-tick. It’s been stable for a couple of years now. I mean, we saw a down-tick in ’02 and ’03, and we’ve been about 2/3 business, 1/3 IT for, let’s say, about six or eight quarters now, and there wasn’t any real change in this quarter.

And just a clarification on your cost per lead and cost of acquisition metrics that you offered. Are you just talking about advertising there, or are you talking about –

Yes, just advertising.

Just advertising?

Yes.

Okay. And then just last one. Norfolk, where you’ll open your third campus – that seems to be a pretty small market, maybe 250,000 people. Is there something unique about that market, or is it in any way indicative of the penetration you’d hoped to get in some of your other markets?

I don’t think there’s anything unique about it. I mean, it is in the state of Virginia, where we have a pretty good brand name, but we don’t try and outthink the market, we just react to it, and it’s one that’s done real well, so we’re going to invest behind it.

Great. Thanks a lot, guys.

You bet, Jerry.

We’ll go now to Gary Bisbee with Lehman Brothers.

Hi, everyone. This is [Bryan McGuire] in for Gary, so you’re off the hook on the younger campuses entering the mature campus mix.

Well, tell him that I preempted him on it just in case.

I’ll let him know that. My question for you was – it seems like you’re on a good, solid short-term enrollment growth trend here with the new campuses being opened this year, but just looking long-term, I was wondering if you could give some comments about how new program offerings fit into that, your long-term growth strategy.

They haven’t been a big part of it. We are quite comfortable with the curriculum that we offer. I mean, we’ve taught business and accounting and technology for over 100 years, and we think we’re pretty good at it. We have expanded gingerly at the graduate level into programs that are management-related, professional skills like education, public administration, and health services administration is really an MBA in the health field. And we were reacting to student demand for those, so that – to the degree that we do move into other program areas, it’ll probably be similar to that. We’ll be reacting to student demand, and it will be areas that are close to what we are already doing and that we have a high level of confidence in our teaching ability at. But outside of that, it’s not a real high part of our growth strategy.

And on that note, have you seen a lot of student demand for any particular program offerings that you don’t currently offer? Is there anything that stands out?

No, nothing that we’re prepared to discuss at this point.

Okay, great. And then just one housekeeping thing. Was the second quarter operating margin guidance that you expect to be relatively flat year-over-year, that’s excluding the effects of the stock-based compensation, right?

Absolutely. Yes, sir.

Okay. All right, thanks a lot.

Yes.

We’ll go now to Andrew Boord with Fenimore Asset Management.

Hi, guys. Thanks for taking my call. I too am interested in new unit growth going out. I guess I’m not too worried on whether you accelerated, I guess, from eight campuses a year, but I’m curious, is this kind of a blip year? Could that number come down next year? Is there something unique about this set of eight, a lot of them being infield?

No, and again, the way we do our planning is not based on the markets. We really have a surplus of markets. We have so much unpenetrated market that it can’t be a constraint on that number. The constraint is our internal manning, and yeah, it could go down. I mean, it’s a separate discreet decision that we make every year with regard to what’s the depth of our bench strength and how confident are we as the senior management team on the teams that we’re going to put in the field, because they really are the ones that make a difference for us. And so we’ll start that process again this summer and then build our budget for next year through the fall, and we’ll let you know at the third quarter release what it is for next year. But we hope it’ll be a lot. It could be less, and the one thing you can be certain of is we’re not going to extend it beyond a risk tolerance that we have for our ability to succeed in these new campuses.

Okay, great. That’s the information I’m looking for. I appreciate that.

And we’ll go now to a follow up from Mark Hughes with Suntrust.

Thank you very much. Your guidance for the roughly stable margins in the second quarter, you’ve got a much easier comp in terms of the year-over-year. Is that conservatism, or are you planning on accelerating spending?

I don’t know how you could consider stable margins in a year in which you’ve greatly increased your rate of investment, which in our case is almost all expense, conservatism, but – I mean, it is what it is. We think we’ll be roughly stable next quarter, and at this point we have a pretty good view of the quarter because we’ve got our revenue locked up and we think we know what we’re going to spend.

Okay. Thank you.

Yes.

We’ll go now to another follow up from Howard Block with Banc of America Securities.

He’s back.

Go ahead, Howard.

I actually wanted to ask, what percentage of entering graduate students are stray or alum?

That’s a great question, which I also don’t have the answer of, but we’ll get that for you, Howard. I mean, anecdotally, I think it’s a measurable amount. I mean, just shaking their hands as they come across the stage, I mean, I know that there are quite a few who are going on to graduate programs. But we’ll get you the exact number.

Okay. And then the rate of graduation has improved very nicely. I think it was 39% growth versus 24 versus 12, if I’m recalling the numbers, of 25 versus 12.

Correct.

Any chance you’d give us absolute numbers with those percentages?

Well, we can go back and take a look at it. I don’t have them in front of me. We’ll go back and see if we can put them together.

Okay, that’d be great.

Yes.

Okay, that’s it. Thanks.

You bet.

And we’re standing by with no further questions at this time. I’ll turn the conference back over to management for any additional closing comments.

Thank you, Janie. Thanks, everybody, for participating, and we look forward to talking to you on the next call.

Thank you. Once again, ladies and gentlemen, that concludes today’s call. Thank you for your participation. You may disconnect at this time.