Strategic Education Inc (STRA) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Strayer Education Incorporated second quarter 2006 earnings conference call. At this time all lines are in listen-only mode. Later we'll 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 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're unable to listen to call in real-time, a replay will be available beginning today at 1 PM Eastern Time through Tuesday, August 1, and archived at www.strayereducation.com for 90 days. The replay is available at 888-203-1112, pass code 431-2214. 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 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. 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 will then ask Mark to report on the detailed financial results for the second quarter of 2006, after which I will comment on our enrollment results for the summer academic term which we have just started, provide an update on our growth strategies, and finally end up with the Company's earnings outlook for Q3 2006.

The Strayer Education Inc. is a for profit education service company whose primary asset is Strayer University, a 27,000 student, 43 campus post-secondary education institution which offers associates, bachelors and masters degrees in business administration, accounting, information technology, public administration and education.

Strayer students are working adults who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. Approximately 55% of our students are receiving federally insured Title IV loans. Our expenses include the cost of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We currently operate campuses in nine 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 over 34 countries through Strayer University Online. Strayer University is accredited by the Middle States Association of Colleges and Schools. Mark, do you want to run them through the financial?

Sure. Revenues for the three months ended June 30, 2006, increased 19% to $65.6 million compared to $55.2 million for the same period in 2005, due to increased enrollment and a 5% tuition increase which commenced in January '06. Income from operations was $21.5 million compared to $19.5 million for the same period in '05, an increase of 10%.

In 2006 the Company began recording stock-based compensation expense which amounted to $2 million before tax for the three months ended June 30, 2006. Excluding that expense, income from operations was $23.5 million, an increase of 21% compared to '05. Net income was $14 million compared to $12.5 million for the same period in '05, an increase of 12%. Net income for the three months ended June 30, 2006 includes the effect of a $1.3 million after-tax expense related to stock-based compensation. Excluding that expense, net income was $15.3 million, an increase of 22% compared to 2005.

Diluted earnings per share was $0.97 compared to $0.85 for the same period in '05, an increase of 14%. Diluted earnings per share for the three months ended June 30, 2006 includes the effect of an $0.08 per share after-tax expense related to stock-based compensation.

Excluding that expense, diluted earnings per share was $1.05, an increase of 24% compared to 2005. Diluted weighted average shares outstanding decreased to 14,497,000 from 14,791,000 for the same period in '05. Revenues for the six months ended June 30, 2006 increased 19% to $132.6 million, compared to $111.4 million for the same period in '05, due to increased enrollment and a 5% tuition increase which commenced in January of '06.

Income from operations was $46.5 million compared to $42 million for the same period in 2005, an increase of 11%. In 2006 the Company began recording stock-based compensation expense which amounted to $3.3 million before tax for the six months ended June 30, 2006. Excluding that expense, income from operations was $49.8 million, an increase of 19% compared to 2005.

Net income was $30 million compared to $26.6 million for the same period in '05, an increase of 13%. Net income for the six months ended June 30, 2006, includes the effect of a $2 million after-tax expense related to stock-based compensation. Excluding that expense, net income was $32 million, an increase of 20% compared to 2005. Diluted earnings per share was $2.06 compared to $1.79 for the same period in 2005, an increase of 15%.

Diluted earnings per share for the six months ended June 30, 2006, includes the effect of a $0.14 per share after-tax expense related to stock-based compensation. Excluding that expense, diluted earnings per share was $2.20, an increase of 23% compared to 2005. Diluted weighted average shares outstanding decreased to 14,528,000 from 14,870,000 for the same period in '05. At June 30, 2006, the Company had cash, cash equivalents and marketable securities of $122.6 million and no debt.

The Company generated $30.7 million from operating activities in the first six months of '06. Capital expenditures were $6.1 million for the same period. During the three months ended June 30, 2006, the Company repurchased 80,452 shares of common stock at an average price of $95.15 per share and a cost of $7.7 million as part of a previously announced common stock repurchase authorization.

The company's remaining authorization for common stock repurchases was $10.3 million at June 30, 2006. For the second quarter 2006 that debt expense as a percentage of revenue was 2.6% compared to 2.5% 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 second quarter of '06 compared to 8 days at the end of the same period in '05. Rob.

Thank you, Mark. Just a couple of comments and then we'll turn it over to questions. On the financials, our revenue growth of 19% was basically right on our model actually. We had 15% enrollment growth which we had announced for the spring term, plus a 5% tuition increase as Mark said, offset by slightly lower seat per student ratios, so 19% was right in the glide path there.

On our expenses, our operating margin in Q2 actually ended up better than we expected. Based on the expenses that we are incurring in opening six new campuses in the first half of the year versus three that we would have -- that we did open in the first half of last year, we had expected relatively flat margins in Q2 versus the prior year.

However, we ended up with a 60 basis point increase in operating margin, and that was responsible for most of our outperformance on the EPS, at least from Mark's and my forecast.

On marketing we had expected our cost per lead and cost per student acquired to go up in the quarter with our investments in these many new markets that we're opening this year, as well as ones we have opened in the last couple of years, but our cost per lead was actually about 10% lower in the quarter versus the prior year, and the cost per student acquired was roughly flat versus the same quarter last year.

We were also helped on the operating margin by the fact that our 2005 campuses continue to ramp slightly ahead of our schedule and be a little more profitable than we had expected.

Shifting to cash, which I think is probably the more important metric, our growth in distributable free cash, which again we define as our after-tax cash from operations minus all the required CapEx for our growth, that distributable free cash went up 23% in the first six months of the year on 20% growth in net income, again not counting the FAS 123 (R) expense. So slightly ahead of our model but very healthy on that.

Turning to summer term enrollment results, we had a pretty solid balanced quarter for the summer term. Our total enrollment increased 15% on a year-over-year basis. The new student enrollment was up 15% and our continuing student enrollment was also up 15%, compared to the same quarter last year. We were particularly pleased with our growth in the continuing students this quarter.

As some of you may remember, last year we had our largest ever increase in retention rate for a summer term. It was about 300 basis points, so we sort of expected our retention rate be flatter or maybe even go down a little bit this year, just on that comparison. But it actually went up another 30 basis points. And so that was, you know, very good news from our standpoint and showed the result of some of the investments we made over the last couple of years on our retention efforts.

The out of area online enrollment was up around 25%. With regard to the student course mixes, our business administration, accounting, and economics degree seekers currently account for 65%, about 65% of our students for the summer term, with our computer information science degree candidates at about 25% of our total population.

The new graduate programs increased to 7% for our student population for the summer quarter and our overall graduate population is at 28% of our student mix for the summer, and that is up from 26% a year ago and that is again most of the cause of a slightly slower -- slightly lower seat per student count versus the prior year.

Turning to an update on the growth strategy, many of you will remember that it is based on five objectives. The first is to maintain enrollment in the Company's mature markets. 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 the final objective is to carefully manage the financial capital which we are accumulating on behalf of our owners as we execute this strategy.

On the first objective just for a brief update, for the summer term we were ahead of our target at the mature campuses showing 4% growth. With regard to the new campus activity for the summer term, we opened one campus each in two of our existing markets, Atlanta, Georgia, and Hampton Roads, Virginia. We had pretty healthy starts in both those locations.

We announced today that we will open new campuses in the fall term in two new markets for us, Birmingham, Alabama, which is also a new state for us, and Charleston, South Carolina. These will complete our planned eight new campus openings in 2006.

In the out of area online unit, our growth rate of around 25% remains above the growth rate of the overall university is roughly consistent with last quarter.

On capital management, we declared this morning our quarterly common stock dividend of $0.25 per share, and we also announced that we been able to repurchase approximately $8 million worth of our common stock during the second quarter. The Board and I remain convinced that our business model allows us the luxury of fully funding this strong organic growth strategy and still make a periodic return of capital to our shareholders. And 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.

On our business outlook for the third quarter, based on the University's strong enrollment growth for the summer term offset partly by increased expenses associated with our new campus openings, we estimate our third quarter EPS will be in the $0.50 to $0.52 range before the impact of FAS 123 (R), and we expect approximately $0.11 a share of after-tax stock- based compensation expense in the third quarter.

In the third quarter we expect about 100 basis points of operating margin compression, compared to the third quarter of 2005 as the costs of our increased investments in this accelerated new campus openings are massed in Q3 against our lowest seasonal quarter of revenue.

We're also pleased to announce today the addition of Karl McDonnell as our President and Chief Operating Officer. Karl comes to us with experience from some first-rate organizations, very strong organizations, and we look forward to his contributions. And with that, operator, we would be pleased to answer any questions, except the one thing I want to say is we normally go as late as there are questions, but I noticed this morning that [Renny] also has his call today at 11. We don't want to step on his toes. So we will wind up this call at 10.55 promptly, and Mark and I will be around all day if there are any questions. Actually, I will be around all day. Mark is going to have surgery on a broken arm. But I will be here all day if there are any other questions. So with that, Amanda, we will be delighted to answer any questions.

(OPERATOR INSTRUCTIONS). Howard Block of Banc of America.

Thank you, operator. Good morning and congratulations on a nice quarter. First question is obviously you are managing the eight campus openings, the accelerated number pretty well, so it certainly begs that question of when would you make a decision regarding '07 and the possibility of again accelerating?

Well, we will make that decision through our budget process this summer. We have just started that now and then we bring that to our Board in October and we will announce it to all of you with our third quarter earnings release.

But as I said in the past it is really a question of matching our human capital supply against the various market opportunities that we have. Going from 5 to 8 was a pretty big jump, and we're delighted that we have been able to do as well as we have. We would like to do as many as we can next year, but we will make that decision discretely as a separate matter as we look at the number of people that we have that we think will be ready to take campus leadership positions next year.

And on the selling and promotion, as you recall, the first quarter you spoke bullishly about the efficiencies that you saw and some of that does seem to have persisted into the second. Any reversal at all in terms of the media spots that you're buying or anything that would give us reason to think that those efficiencies might dissipate a bit through the rest of '06?

Well, we feel pretty good about our marketing plan and we are spending a lot of money in new markets to build the brand. And there is a certain variability from quarter-to-quarter in that, but there is nothing that we are looking at through the second half of the year that looks remarkably different from the first half of the year.

Let me squeeze one last in. I know we are limited on time, but in Pittsburgh, the second location that you have, I notice it's part of something unique which is this regional learning alliance that they have. If you have two questions there is, one, what does that model mean to you in terms of perhaps achieving profitability sooner just because of the shared facility and, two, are you seeing anything like that in other states?

No, it was kind of a rare and unique opportunity and we're probably going to grow out of it pretty quickly anyway. But we were looking around for space in a specific geography and Larry Gudis and I, our Head of Operations, happened on this facility. We didn't even know it was there; we kind of drove by it. It turned out to be a shared facility among a number of universities. And I forget what the host campus is; I think Penn State or something like that. And so we just went in and introduced ourselves to the administrators there, and they were pretty excited to see us and invited us in.

It obviously means a little less lease cost early on in the process in the first couple of terms, but I don't think it is going -- we will maintain a relationship with the alliance, but we'll fairly soon have our own facility there, so I don't think it is going to have a meaningful impact on the profitability of that campus over the long-term.

Thank you and again congratulations.

Mark Marostica Piper Jaffray.

Congratulations and, Mark, I'm sorry to hear about your broken arm.

Thanks, Mark.

Rob, you mentioned cost per lead was 10% lower and I think you also said that cost per start in the quarter was flat year-over-year and, given what we are seeing across the peer group and industry, I'm curious as to why you think you are seeing that phenomenon and if perhaps you have changed the mix of leads in any way?

Well, we haven't changed the general marketing plan in any way, although, as I have said in the past, we try and tweak it every quarter within a pretty broad parameter, based on the particular market that we are in. I really couldn't comment on the other companies and what they are seeing. We have a pretty straightforward objective and that's to build our brand in these new markets. And we have been doing it fairly successfully for the last five years, and we're pretty excited about our opportunities to continue to do it.

And just a question in regards to Apollo's initiative with advertising.com, are you seeing any effects at all in your ability to garner leads at all on that front?

Well, I hope it is working for them. It seems to be okay for us.

And then just one housekeeping question. I think you mentioned student retention was up 30 basis points year-over-year. What was the actual student retention rate in the quarter?

It was closed to 70% which is seasonally always quite low because you're going from a spring to a summer term. When we first started, that number would have been in the low 60s. And then we got it up to about 65% and then last year, we got a big jump up to over 68%. And we even got a little bit more of an increase this quarter as well, as I said. But I am not sure it is going to get much higher than that. Even for working adult students, they themselves have kids who have summer vacations and we tend to see a drop-off in the summer term where students who are enrolled take the summer. We've taken a little bit of the seasonality out, and we are pleased with that obviously and we will continue to work at it.

Greg Cappelli, Credit Suisse.

Just following up on that persistence rate. Rob, what specifically are you doing? Now two summer in a row, where you have been able to move the needle on that, on the persistence, is it the time of year that allows you to have more success in the summer term, where you guys are having more of an impact of keeping people in school, and -- or is it something else specifically you are doing to keep that going in the right direction in the summer?

No, I think it is mainly trying to take the seasonality out of the business or to put it another way, you know, support the student in a way that it's comfortable or possible for them to take courses in the summer.

We have actually had an increase in it really every year since we have been here. We had the biggest increase last year. I mean it was an outsized increase and, as I said in my answer to Mark, I mean there is a certain amount of consumer behavior we're just not going to change, nor do we want to try. So we will always have a lower enrollment in the summer than in the other quarters, but the variation, we have taken some of the -- we've dampened down the amplitude on it so it is less of a variation and that's had a big impact on our rate of growth for the summer terms.

Great. And then just back to the -- obviously, five new schools last year; you're doing eight this year. When I think about the margins for the rest of this year and then the guidance in the third quarter of 39 to 41 after stock comp, is the fact that you have been able to increase the margins initially even in the face of higher spending, I mean, you put these schools in areas where they have probably just ramped up faster than you had originally expected. Is that the case and, as we see a little bit more margin pressure for the rest of the year, I guess what you're saying is we're just talking about the timing of when those expenses hit and the losses head for those schools?

Well, we actually had a lot of the expenses in the first half of the year. The reason that there is margin compression in the third quarter is we have less revenue. And so you get more of an impact from that increased expenses.

I don't know what the fourth quarter will be like. It will depend on our enrollment growth for the fall term. But when Mark and I looked at this the other day, I mean we actually asked ourselves that exact question. In terms of our operating model where we had said if we're at 15% to 18% enrollment growth, we would be at -- what did we say? -- 32.5% to 33% for the full year. We certainly feel very comfortable with that. We've done better than that in the first half of the year and so if our enrollment growth in the fall is within that range, we would certainly expect to be at or above that range for operating margin.

Got you. Thank you, guys.

Bob Craig, Stifel Nicolaus.

Just a quick question on the online versus on ground side. You did a little bit less than we thought online; a little bit greater than what we thought on ground. Just wondering the factors behind it. You mentioned I think in the past the equilibrium point and getting closer there. Is market conditions contributing to that in any way?

Well, it's hard for me to second-guess what you had in your original, Bob, and we really don't think about it that way. Our view is, is that we want to have plenty of inventory available for our students both in the classroom and online and let them choose, with the exception obviously of the out of area online where it is by necessity only online.

I do think that in the first few years that we were here when the availability of online courses to our campus-based students was new that there was a very high rate of change because it was a new opportunity, a new service that we were providing them. That has slowed in the last couple of years as we reached sort of our rate of equilibrium, as you put it. We see a fairly constant balance at a lot of our mature campuses that is around 50% of our students will want to take online courses enrolled through the campuses. But I don't really know where that goes nor are we trying to predict it. I mean it is relatively low-cost, has sufficient inventory in both places, and that is what we try to do each quarter and let the students tell us how they want to take the classes.

That's helpful. Rob, one other question relating to the new programs. Could you explain some of the rationale behind the decision to start in the hotel or hospitality area and tourism area and also what other areas are you considering right now?

Well, those are concentrations within areas that we already teach in business administration. And what we try and do is be responsive to our students' request in terms of the kinds of areas that they want to study, as well as having Lysa and her marketing team try and reach out a little bit and see what prospective students might want to take that we are not offering. We always caveat that or constrained that with the overlay of making sure it is subject matter area we know we can teach and we can teach well.

These retail management and hospitality and tourism management were issues that have come up periodically over the last couple of years and not as a concentration aren't much of a stretch from what we're teaching already in our business administration areas. We've got a pretty active curriculum development team that looks at those, and they spent some time putting the new curricula together and we were pleased to be able to roll it out for the fall term.

That's helpful, Rob. Thanks.

Matt Litfin, William Blair & Company.

I want to follow up on Bob's last question there, on offline versus online. Are you actually seeing a shift in student preferences back toward offline, or is it more that the long-term trend toward online is just sort of downshifting a little bit?

I would say it is more of the latter, Matt. I mean we still have quite a few students, an increasing number of students who want to take online courses, but it is not quite as fast a shift as we had in the first couple of years and I think we are getting close to an equilibrium. At least the last couple of quarters would suggest statistically we are getting close to an equilibrium. We're not in the habit of predicting the future on this. We'll just let it go where it does.

Great. I wanted to ask about another mix shift that you have been experiencing and that is the one toward graduate programs for sometime now. Where are you at on that? I know it was up year-over-year this quarter, but I guess the real question is how much longer do you see this shift continuing, in your opinion?

I really don't know, Matt. It's slowed some, but we are getting close to a third of our students are now in our graduate programs, and we are delighted to have them. We think that particularly academically and as you get into new markets, the caliber of the University is improved and increased by having this a broad array of graduate programs and this large number of graduate students. But we are also -- have a rapidly growing undergraduate program as well and how that matches against each other -- we don't market them separately. We don't try and reach them as separate students. And we are building our brand in these markets with both of those programs highlighted and available and it will just go where it goes.

Final question has to do with your new president and COO. Can you just talk about what the impetus was for that hire? Are you looking at things like succession planning or where there are specific operational areas that you thought needed to be addressed or was this just kind of an opportunistic hire of a great guy? Can you just sort of go through those and give any others?

Sure. We are a serial acquirer of talent. And I've said that in the past. We're a rapidly growing institution and one which is really only limited, in my judgment, by the availability of human capital. The shortage has been more frankly at the campus leadership level, and that is a more acute problem that we see from the standpoint of wanting to accelerate rates of growth. But as an institution gets bigger, there's an awful lot of other moving parts that come up. And when we saw an opportunity to get a guy like Karl in, with his background on operations management and customer service, from the kinds of institutions he has been at, as well as some strong analytic abilities, we jumped at the chance. So it was really, I think, a valuable hire for us and we will continue to look for opportunities to bring good people into the organization because we're growing pretty fast.

Great. Look forward to meeting him.

Gary Bisbee, Lehman Brothers.

Congrats on another strong quarter. I guess a couple of questions, the growth in online students in the mature markets has been slowing as I guess obviously would happened. But can give us a sense, early on you had the DC schools in Northern Virginia that were fully mature and weren't growing and you've added to that, so you have got a bunch of years worth of schools that are still growing somewhat. But are you seeing that in a lot of them -- online gave you a little extra growth and now you've sort of tapped out a bunch of the schools, or is this something that you still think that adding online is growing a lot of the market in the mature market they're in?

Well, I think once we get to a certain level of saturation in the market, we don't expect to see a whole lot of growth. I think improving our product quality and both the quality of our teaching, the availability of our classes, the kinds of programs that we offer is an important part of maintaining our market share and maybe even growing it a little bit.

And the availability of online classes is just one other service offering that we provide. I mean it provides a level of convenience and a choice to student that they might not otherwise have had. And so I just think that it is an important synergistic part of the whole that we offer, the entire experience that we offer the student. It doesn't change my view of what the lifecycle of one of these investments is, which is they tend to grow pretty quickly until sort of a seven to ten year period, and then you get to a level of saturation and then you are going to get hopefully a break-even or maybe some low single-digit enrollment growth and get a price increase on that. That view hasn't changed. When you look at our presentations and think about our investment model, that is how we view it. We think the online is a really important part of that, but it doesn't fundamentally change it.

When you look at the schools that you first started when you joined the Company in 2001, are those first couple of years worth still seeing growth, or are they beginning to really mature at this point and you're harvesting the profits in cash flow?

Well, we opened three that very first year, and those are still growing a little bit but they are only five years old. As I said, the lifecycle is -- it tends to plateau around seven to ten years, if we look historically at the DC market which is the only thing we have for a record. So there is still some growth there.

I guess, secondly, hearing an increasing amount of chatter about more and more traditional schools offering online to programs and starting to get slightly more savvy with how they are marketing their programs. It seems to me you are still low to mid end on the pricing curve, so probably well positioned there. But I guess your thoughts on two things. Number one, the increase in traditional competition, traditional state schools offering online programs, and number two, anything you're hearing on the pricing front as some of these people like UMass tries to get a lot bigger at a very low price point, etc.? Any thoughts on those two subjects?

Yes, I haven't heard too much on the pricing, to be honest. It has not been a real area of focus for us. And the traditional universities have always been very competitive. For the six years that we have been at this, we have been in markets where there are very extensive and very competent traditional universities offering working adult programs. Notwithstanding that, we don't think that they fill the market completely; that there is still a mismatch between demand and supply. And that is what we are trying to invest our owners' dollars into in order to create a return.

Great. And then just lastly, I noticed you haven't authorized additional money for buybacks in a while. Is that just more an issue of timing on when the Board meets or --

We do that, Gary, like a lot of corporate activities, we do that once a year. And we do it when we look at our budget for the upcoming year and decide really what we believe our true distributor free cash flow is going to be. We generally do that as part of our budget cycle in our October meeting.

Lastly, nice timing on the repurchases this past quarter. It looks like you got a good price and congrats again on a good quarter.

Thank you, Gary.

(OPERATOR INSTRUCTIONS). Corey Greendale, First Analysis.

It's Tom in for Corey actually. Just a quick question. It looks like DSO's our trending up a little bit. Would you comment on that?

You are correct. They are up a couple of days. There is variability in that. We try and be pretty careful on cash management, but we are also cognizant of, in those cases, where we do provide turns particularly to corporate and institutional partners to pay later in the quarter and that will have an effect.

Howard Block, Banc of America.

I just wanted you to clarify something for me again. When you move into Alabama this quarter, does that mean that any Alabama resident who is an online student will fall out of out of area and become in area?

No, we do it with regard to a radius of ZIP codes around the campus that's -- I forget the exact radius, but -- and it depends on whether it is an urban area or rural area, but it is designed to -- anything that can be served by -- any student that can be served by the campus, we assign to the campus. If we have, you know, students online in Alabama from -- I cannot -- I'm not that familiar with the geography of Alabama, but someplace far away from Birmingham, then they would stay as out of area online.

And then I apologize for this administrative matter, but I am struggling to find the eighth campus for '06. Can you rattle them off real quickly?

Sure. In the winter we did downtown Philadelphia and Wilmington, Delaware. In the spring we did two campuses in Pittsburgh. In the summer we did the fourth campus in Atlanta and the third campus in Norfolk, Virginia, and for the fall we will do one in Birmingham, Alabama, and one in Charleston, South Carolina.

Okay. And then last question is do you have sort of a quasi P&L for the out of area online student in that business?

Well, we keep a P&L for the out of area online. It is not quasi.

Well, do the margins look materially different than for the say overall business?

They are a little bit higher than the overall business. The more relevant question for me, Howard, is how does that match up against a campus or a region that is actually bigger than the size of the campus. And it is considerably more profitable than a brand-new campus or a brand-new region because you are not at full operating margin and you're sort of at or slightly above -- could be slightly below our most mature campus or most mature region. So that is why we're pretty indifferent from a financial standpoint.

We think that the online -- we don't think about as an infinite scale, infinite margin expansion business. There is a lot of cost that I think are necessary to support that student in the way that our students are -- have come to expect. And so it will be immediately a more profitable student, but over time it will be about as profitable as one of our campus-based students.

And that margin structure has been relatively static even as the out of area online has compressed.

Correct.

(OPERATOR INSTRUCTIONS). Trey Cowan, Stanford Group.

Excellent quarter. A quick question. When you look out to next year, if you did just open up eight campuses, what would your expectations for margins be? Would they be similar to what you're experiencing in 2006 or would you -- because just with increased employment costs or things, would you expect margins to diminish just a little bit?

I would expect them to be relatively stable without any other change to the business if we didn't have some other initiative that we were pushing. But all things being equal if we opened eight in 2007, compared to eight in 2006, you know there might be a little bit of compression based on the fact that the overall age of the campus population is going down but not significant and roughly stable is how I would describe it.

And if your 2006 new openings do as well as your 2005 new openings, would you expect that to be something that would contribute favorably to margins?

Yes.

There are no more questions in the queue. I would like to turn the conference back to our presenters for any closing or final remarks.

Thank you, Amanda, and thanks everybody for participating. We look forward to talking to you in October and, as I said, I will be around the rest of today if there are any other questions. Thank you. Bye-bye.

That does conclude today's conference. We thank you for your participation and you may disconnect at this time.