Strategic Education Inc (STRA) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to Strayer Education Inc.'s fourth quarter 2006 earnings conference call. Today's call is being recorded. 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 over to the Vice President of Corporate Communications for Strayer Education, Ms. Sonya Udler. Ms. Abler, please go ahead, ma'am.

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 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 PM Eastern time through Monday, February 19. The replay is available at 888-203-1112 passcode 685-1740. 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. Now, I'd 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 both our Company and our business model for any listeners who are new to Strayer. I will then asked Mark to report on the detailed financial results for the fourth-quarter and the full year of 2006, after which I will comment on our enrollment results for the winter academic term, provide an update on our growth strategies, and finally end up with the Company's earnings outlook for Q1 2007.

Strayer Education Inc. is an education service company whose primary asset is Strayer University, a 32,000-students, 47-campus post secondary education institution which offers associates, bachelors, and masters degrees in business administration, accounting, computer science, 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 12 states in the eastern half of the united states, as well as throughout the world over the Internet through Strayer University Online. We serve students in all 50 states and over 30 foreign countries through Strayer University Online. Strayer University is accredited by the Middle States Association of Colleges and Schools. Mark, do want to run them through the financials?

Sure. Revenues for the three months ended December 31, 2006 increased 20% to $74.3 million, compared to $62 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 $24.1 million, compared to $23.3 million for the same period in '05, an increase of 3%. In '06, the Company began recording stock-based compensation expense, which amounted to $2.5 million before tax for the three months ended December 31, 2006. Excluding this expense, income from operations was $26.6 million, an increase of 14% compared to 2005.

Net income was $16 million, compared to $15 million for the same period in '05, an increase of 7%. Net income for the three months ended December 31, 2006 includes the effect of a $1.6 million after-tax expense related to stock-based compensation. Excluding this expense, net income was $17.6 million, an increase of 17% compared to '05. Diluted earnings per share was $1.11, compared to $1.03 for the same period in '05, an increase of 8%. Diluted earnings per share for the three months ended December 31, 2006 includes the effect of an $0.11 per share after-tax expense related to stock-based compensation. Excluding this expense, diluted earnings per share was $1.22, an increase of 18% compared to '05.

Diluted weighted average shares outstanding decreased to 14.452 million, compared to 14.59 million for the same period in '05. Revenues for the year ended December 31, '06 increased 20% to $263.6 million, compared to $220.5 million for the same period in '05, due to increased enrollment and a 5% tuition increase effective for '06. Income for operations was $79.5 million, compared to $74.9 million for the same period in '05, an increase of 6%. Stock-based compensation amounted to $8.1 million before tax for the year ended December 31, '06. Excluding this expense, income from operations was $87.6 million, an increase of 17% compared to '05.

Net income was $52.3 million compared to $48.1 million for the same period in '05, an increase of 9%. Net income for the year ended December 31, '06 includes the effect of a $5.1 million after-tax expense related to stock-based compensation. Excluding this expense, net income was $57.4 million, an increase of 19% compared to '05. Diluted earnings per share was $3.61, compared to $3.26 for the same period in '05, an 11% increase. Diluted earnings per share for the year ended December 31, '06 includes the effect of a $0.35 per share after-tax expense related to stock-based compensation. Excluding this expense, diluted earnings per share was $3.96, an increase of 21% compared to '05.

Diluted weighted average shares outstanding decreased to 14.492 million from 14.741 million for the same period in '05. At December 31, '06, the Company had cash, cash equivalents, and marketable securities of $128.4 million and no debt. The Company generated $61.8 million from operating activities in '06. Capital expenditures were $13.2 million for the same period.

During the fourth quarter of '06, the Company repurchased 72,300 shares of common stock at an average price of $110.69 per share under our previously announce common stock repurchase authorization. During the full year 2006, the Company repurchased approximately 349,000 shares of common stock at an average price of $100.39 per share. As of December 31, 2006, the Company had a $32 million authorization remaining under this plan.

In the fourth quarter 2006, bad debt expense as a percentage of revenue was 3.5%, compared to 2.8% for the same period in '05. Days sales outstanding adjusted to exclude tuition receivable related to future quarters, was 13 days at the end of the fourth quarter of '06, compared to 10 days at the end of the same period in '05. Rob?

Thanks, Mark. We look forward in the next couple of releases to not having to torture all listeners with the line by line comparison of FAS 123, which we will be through once we start the next earning announcement. The other point I will just clarify is the remaining authorization is $32 million, not 32 million shares, which would be more than we have outstanding.

Just a couple of comments on the Q4 financials. Again, the revenue growth of 20% is slightly ahead of our model, with our fall term slightly under 15% enrollment growth. We were expecting 18 to 19% revenue growth in the Q4. And a relatively stable mix of graduate and undergraduate students meant that almost all of our 5% tuition increase is added onto the enrollment increase to get to revenue increase. Just, again, to clarify, the mix of our graduate undergraduate students has an impact on the number of classes taken per student, which is really the unit of sale if you think about it that way. So it is an important intermediate statistic for us to look that, in terms of projecting our revenue. In that case -- as I said in this case, with that relatively stable mix, we got a pretty solid pop on the revenue growth.

On the expenses, we were right on budget. As we expected, bad debt expense ticked up to 3.5% as we continue to work through the lower collections from our summer term that we talked about last quarter. On operating margin, based on the expenses that we incurred in opening eight new campuses during the year, we had expected in Q4 approximately 250 basis points of margin compression before FAS 123 versus the prior year. However, with the out performance on revenue and with expenses being basically right on target, we ended up with only 180 basis point decrease in operating margin, which is responsible for roughly half of the $0.04 upside versus our guidance for the fourth quarter. The other half, I think, Mark, was just a slightly lower tax rate.

Correct.

A couple of points on the full year. It kind of mirrors the quarter. On the income statement, we had 15% average enrollment growth for the full year, 20% revenue growth, again, a couple of points ahead of what Mark and I were expecting, or would have expected, given 15% enrollment growth in October of '05, as we laid out this model. And that, again, is just a result of the stability of the graduate and undergraduate population.

The additional revenue growth allowed us in the year to only have 80 basis points of margin compression, and that is notwithstanding the material increase in our rate of campus expansion from 5 per year to 8 per year. And I think that is probably the most important headline for the year is that successful acceleration of the campus expansion rollout.

The second point I wanted to make with regard to the full year, one thing Mark and I do each year with the Board is just go through and make sure that we are comparing cash to income and that everything is tracking the way we expect. As Mark said, before the impact of FAS 123, net income was up 19% for the year. Our distributable cash was up approximately 18%, so that was basically in line. We generated $62 million in cash from operations during the year. We also generated $8 million in proceeds and tax benefits from stock option exercises that some executives did during the year.

So with that $70 million, we invested $13 million in CapEx, that includes the CapEx for the eight new campuses, $35 million in the repurchase of common shares, we returned $15 million to our owners in dividends, and we added the remaining $8 million to our balance sheet, which brings our cash and cash equivalents, as Mark said, up to $128 million from $120 million of the end of the year before. In retrospect on 2006, I would say with the possible exception of the slight up-tick in bad debt in the second half of the year, our financial metrics for the full year 2006 were really right down the center line, given our enrollment growth.

Turning to the winter term enrollment results, we had a pretty strong quarter. Total university enrollment increased almost 17% on a year-over-year basis. Continuing student enrollments were up 16% as our retention rate was up, again, approximately 100 basis points. And our new student growth was up 20%.

With regard to student mix, business administration, accounting, and economics degree seekers continue to make up about 65% of our student body for the winter term, with computer science degree candidates at just below 25% of our total student population. Our new graduate programs remain around 7% of our student population and our overall graduate population is up to 28% of our student mix in the quarter.

Turning to a brief update on our growth strategy, many of you will remember that our strategy is based on five objectives. First is to maintain enrollment in the Company's mature markets. Second, accelerate the rate of growth of new campuses, particularly into new states. Third, invest in and build up our online offerings. Fourth, increase our corporate and institutional alliances. A the final objective is to effectively redeploy our owners' capital.

On our first objective, for the winter term, we were ahead of target at our mature campus, showing 5% growth. With regard to new campus activities for the winter term, we opened one campus each in two new markets Louisville and Lexington, Kentucky. We also announced that we intend to open two campuses in the Orlando, Florida market for the spring term. In the out-of-area online unit, the growth rate was 26%.

On capital re-deployment, we announced this morning our regular quarterly dividend of $0.3125 per share and we also announced that we had repurchase approximately $8 million of our common stock during the fourth quarter. On our business outlook for the first quarter, based on the University's strong enrollment growth for the winter term, offset partly by increased expenses associated with our new campus openings, the eight that we have got planned for this year, we estimate our first quarter 2000 EPS will be in the $1.27 to the $1.29 range, and that will include approximately $0.11 of after-tax stock-based compensation expense.

In the first quarter, we expect roughly stable operating margins versus the prior year, before that FAS 123 expense. As we're opening eight campuses this year, we did eight campuses last year. We think we can manage the losses associated with those campuses within a stable operating margin parameter.

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

(OPERATOR INSTRUCTIONS) Matt Litfin, William Blair and Co.

Good morning. Congratulations. Wondered if you raised tuition again this January and, if so, by how much?

We did and it was by our standard 5%

And are you seeing any change in the willingness of corporations to provide tuition reimbursement benefits for their employees?

No, we are really not. The one effect that our increased percentage of our student population which is coming from corporate reimbursement is having it is that I am finding them more interested in negotiating some kind of credit terms that allows them to pay the tuition either during the quarter or at the end of the quarter, as opposed to what our normal un-sponsored students have to do, which is pay before the quarter starts. And so our DSOs our starting to stretch out a little bit as we get more and more of those corporate sponsors. But I am not seeing any reluctance or unwillingness to either enter into the agreements or to support the overall tuition.

Thanks. Last question, what is really driving this acceleration that we saw in the ground-based enrollment growth? I am trying to get a sense of the sustainability. Is it all of the new campuses the past three or four years coming to bare and, therefore, it is sustainable? Or do you think it is some online students moving into ground-based? Can you just give us some color there?

If when you say ground-based, you mean campus based, then I think it is clearly the result of adding new campuses. If you're making a distinction between those students who are enrolled through our campuses and happen to take classes online versus in the classroom, I really don't know where that mix goes and nor do I particularly care about it. I want to serve the students the way they want to be served and make sure that we have enough academic inventory in both areas to do that.

That number has fluctuated around over the last couple of years and we just track it and make sure we have our professors capable of teaching in both modes.

Great, thank you.

Greg Cappelli, Credit Suisse.

Rob, coming out the quarter, we're at new enrollments were 10% accelerating to 20% this quarter. It seems like it kind of went right across when I just look through everything and also listen to your commentary. Certainly seems like it went right across the board, but I am just wondering, if on a course-level or program-level basis you saw more interest from students in one area or another or if it was about the same?

No, it was pretty even across the board. Our mix of students in the various program areas and our mix between undergraduate and graduate was relatively stable. So I think it was pretty much across the board. But as I have said in the past, the student enrollment is going to fluctuate and its rate of growth is going to fluctuate quarter to quarter. Over the long-term our confident view is is that our University is going to grow roughly at the rate at which we are able to expand the campus network. So we tend not to get to concerned on the quarter to quarter basis as to what the actual point in time enrollment growth is. But certainly, we were pleased with what we were able to accomplish for the winter term.

Okay, I understand. If it is possible, is there any update on the Middle States issue you brought up last quarter? I know you are putting together some work for them and perhaps how many schools you have approvals for now of the eight you're looking to open for the year. Sorry if I missed that in the opening remarks.

The answer to the first part of the question is we owe them a report on March 1, which we are basically prepared to give them at this point, but we will give it to them on March 1. Then we are hopeful that on their schedule, they will be able to take the issue up again at their spring meeting. They said that they will, so we are looking forward to that. We have four of the eight campuses that we planned for this year approved. And under the normal course of affairs, we wouldn't go to Middle States until later on in the year to get the latter half of the year campuses approved. So, so far, no impact on that.

That makes sense. Final quick one, on the bad debt that you talk about, I understand how that flowed through quarter to quarter, but is 3.5%, you think, a level that makes sense for all of '07 or is it just you're not able to predict it yet?

I am really not able to predict it. The 3.5% this quarter is roughly analogous to what we reported last quarter. It is a 70 basis point increase over the previous year, which is really the arithmetic manifestations of the under-collections in the summer that Mark and I noticed. We have got a lot of our operating staff focused on making sure that the students that we recruit, number one, expect to be in the classroom and want to be in the classroom, and then, number two, have an adequate means of paying for their tuition. The number can fluctuate some.

We grew this University pretty significantly in previous years with bad debt expense levels around the two to three range. And so I don't see a reason why over time that shouldn't be what we go back to, but it is also really a question of just managing the process. It is not so much the financial impact that grabs our attention, it is always, for us, whenever we see bad debt expense rise at a faster rate than overall revenue, or the converse, we see collections suffering at a rate which is something that grabs our attention. It is because we are concerned about the quality of the student that we have in the classroom and because there's a pretty high correlation between students who don't pay and students who don't do well.

That is really what we are going to focus on, is trying to keep that at the level that sustains the quality of the institution as a whole, and then financially the bad debt, I don't expect it to be significantly different, 2, 3% in there, and we're certainly able to from a financial standpoint manage that on our operating margin.

You guys are doing a great job. Thanks a lot.

Gary Bisbee, Lehman Brothers.

Good morning. A couple of questions. Any broadly-defined changes you have seen recently in your marketing mix? And the reason I -- I know you don't break out what it is, but the reason I ask, having traveled in a few of your markets lately, I feel like I have seen more billboard ads, more television, heard from radio and wondered if you had maybe made a -- you have always have a lot of traditional media, but maybe a switch away from the Internet towards more traditional media?

Well, what I would really be pleased with, Gary, is if you said that you had run into a lot of students or professors that knew us in those markets, because I think that is actually the most effective marketing. No, we haven't done anything significant. We mix and match the sources of media each quarter in each market, and Internet is still a reasonably large amount of our marketing mix, particularly in certain markets, but it has never been an overwhelming amount of it. And we have always felt the need, particularly in new markets where we're trying to grow our brand name and having a pretty healthy dose of traditional media as well.

But again, ultimately, it is those first few dozen students that you get in and the first couple of professors that you hire and their view about the institution as a whole which is really going to drive the name recognition and the brand acceptance. But the answer to your question is no, no significant change.

Okay. It appeared that the selling commercial expense as a percent of revenue bumped up at a more rapid rate than it had in the last few quarters. Is that just the new campuses, in particular too in brand new markets, or are you seeing any change in the cost trends overall with the marketing?

No, it is precisely the first thing that you said. The effect -- opening eight campuses for the year or three new ones, three more than we did the year before, was going to have that impact, particularly on the [signing] promotion line, and is exacerbated by having the number of new markets that we had last year. And in the fourth quarter, you're going to get the full impact of all of that.

Actually, our cost per lead was down slightly across the university as a whole, and our cost per student acquired was relatively stable. I think it might have been up just a touch. And again, that's where you flow through in your income statement the cost of opening these new campuses.

Lastly, has there been any issues with the continued fairly strong employment market in terms of hiring faculty, or do you feel like you've got that down to a science enough that as you enter all of these new markets, that continues to be pretty easy to do?

Fortunately for us and unfortunately for the academic world, the tight employment market doesn't extend to college professors. There is a large number of highly educated and trained people who like to teach and are capable of teaching, and we have never seen that as an issue as we go into new markets. And our turnover in our existing markets is basically nonexistent, beyond the turnover that we generate because we are not satisfied with their teaching capability. But that is usually within the first quarter or two of an adjunct faculty member's participation with us.

Thanks a lot.

Mark Marostica, Piper Jaffray.

Nice job on the quarter. My question relates to your planned expansion in the Orlando market, and I am curious as to whether if you could look back for us at your two campuses that you opened last year in Tampa and give us a sense how they have performed and how you have thought about your expansion going forward in Florida?

We think Florida is going to be a big market for us. It is obviously a large state. It has a strong demographic of working adults, and Tampa has been a good market. Our plan was always that Tampa was the first step, and then we would try and expand as quickly as we can across the rest of the state and then continue to fill in on our existing markets.

But we compete for our scarce resource, which is our human capital, in Florida versus all the other places around the country where we want to open campuses, so this was Orlando's turn. But we think Orlando is a various solid market and we are excited by what we have seen so far there.

Rob, you also mentioned that maintaining the quality of new students in the classroom or students in the classroom in general is obviously a key focus. I am curious with the bad debt modestly up-ticking, are you contemplating or have you made any changes to admission standards?

No, because it is really -- it's two separate issues. What happens is we are an open access university. We require a high school degree, but ultimately our mission is designed to provide an access to education to students who otherwise may not have gotten it. What we are trying to do is get better at doing pre-enrollment diagnostics with regard to whether a student who happens to have a valid high school degree really doesn't have the cognitive abilities in Math and English to perform at the college-level. And if we can identify that before we get the students enrolled, we can enroll them into a remedial course, a non-college-level course that then allows them to develop those skills and do better in the classroom. And we are rolling out a large amount of that.

We always have had the remedial courses, but we are moving towards a system where we are going to direct students into them as opposed to getting them enrolled in the entry-level college course and then having them maybe underperform academically.

What happens on the bad debt is there is a couple things that we can do in the admissions process to tighten up our ability to make sure that a method of payment is available and is fully filled out and fully operational. But we do like to give our campus directors and deans the authority at the campus level to make exceptions and enroll students who they think will be good students and will ultimately be able to be in a stable situation with regard to a method of payment but they're just not there right now as the class is starting.

Since we only have four starts per year, to not enroll the student means they have to wait another 16 weeks. Where we tend to have issues with bad debt is that that trade-off, that decision at the campus level is made inaccurately. And they get the student into the classroom and the combination of the student not performing well and the fact that there is no method of payment, and then there tends to be a drop-out, that is where that number goes up and down.

My answer to Greg's question, which I was really trying to emphasize is that you could run a business like ours with much higher levels of bad debt and be financially more profitable, because you could drive revenue growth that way. The problem is that the student who is unsatisfied in the classroom is not just making it more difficult for him or herself. Because the classroom is a collective process, it makes it more difficult for the professor and the rest of the students, and that is where we can have a quality impact.

So by addressing the diagnostics upfront separately, that is an important point, and then also as a separate point, making sure that because of the high correlation between uncollected balances and underperformance, that we have got balance side, the collections side squared away before the student enrolls, is really the way that we think we want to handle it. And then, finally, always trying to leave as much flexibility to the people we trust at the campus level to make these decisions. Mark and I and Carl are not going to make these decisions individually across as large a campus as we have. We want to have procedures in place that work and have people in place that we trust at the campus level who understand our trade-offs, understand what we're trying to get accomplished in terms of the institution as a whole. And then we are confident that is the right way to grow the University.

Thanks for the color on that, Rob. One last question and I will turn it over. Although kind of looking out over the next four quarters is tough on this point, but the mix of graduate and undergraduate students based on planned graduations, do you have a sense of whether or not that will be stable, relative to recent mix or if that's going to shift around?

Based on planned graduations, it would be stable, because we know the students who are enrolled and we know when they are graduating. What will affect it is what our new enrollment is like during the year and that is what we don't try to predict.

Okay, thanks.

Corey Greendale, First Analysis.

Good morning. Just a couple of quick questions. Can you comment just quickly, Rob, on trends in graduation rates?

They are up. In 2006, we increased our number of graduates by over 20% and we only had 15% more students. So it is certainly rising, but it is the end game. It is the important part of what we're trying to accomplish here, so we spend a lot of time focusing on it.

I think maybe around this time last year you had said that one of the biggest risks you thought in the model was retention. It seems like that is improving. Would you say that is still the case or what would you is the biggest risk to the model at this point?

If you are thinking about the model in terms of relatively short-term financial performance, then I would say the biggest variable is what our enrollment is. And I actually feel like the attention that we have paid in the last couple of years to retention has really paid off. I mean our retention rate has gone up every quarter this year, which is -- and was already at pretty high rates anyway. So I am quite pleased with that.

But we don't tend to think about the business that way. We have an awful lot of confidence in both the institution and in the market that we are trying to serve. And we know that we have a great deal of the country left to serve. And so that quarter-to-quarter performance tends to not be that relevant to us.

Okay. Just one last one. Do you think -- you said that excluding the option expense you would expect margins to be roughly flat year-over-year with the same number of new campus openings. Do you think if you stayed at eight new campuses for the next couple of years, at some point you see operating margin going up or do you think flat is kind of where the model is at?

I think that if we stayed at eight campuses indefinitely, the operating margins would go up.

Okay, thank you.

Trace Urdan, Signal Hill

It looks like the per student contribution has been, maybe, strengthened this year versus the past year. Wondered if there is anything in there other than tuition increases. I know you said mix shift was stable. Is there anything else that might be informing a contribution per student other than just price increases?

Our operating margin actually went down during the year, and so the per student contribution I would have thought would be a little bit lower.

I am sorry, I was thinking -- I said contribution, I really mean revenue.

Revenue, okay, sure. No, that is just tuition increase.

Okay. Then I know you don't comment on competitors, I am not asking you too. Phoenix redefined their enrollments and have introduced a new category of one-time course takers. Is this a category that you guys have, is it something that -- is it sort of a legitimate category? Are there people that you welcome into the system that are just interested in taking a single class and then going away?

We have students who are, we call them non-degree non-program students, who are not enrolled in a degree, but we don't manage it as a separate category, nor do we in terms of our enrollment results, even measure it, frankly. I don't know what ours is.

But there are people like that that you identify in advance and they're welcome to come in and pay their money and take a course?

Yes, actually I think we do know, because we know it from the standpoint of the revenue. It is like 3 or 4%.

And we have disclosed it in our 10-K.

It is in our 10-K. Sorry, Trace. Shows how much I'm paying attention to it.

Last question, Rob, our spies say that you have been spotted in Beijing and I am wondering if -- could you characterize how you think about international as a business opportunity for Strayer? How you think about it, what kind of time, might it become something that is relevant to the model or is it not really something that is in the offing at all?

I didn't realize after I left government that they had spies. Actually I was in Beijing last year, because I serve on the Board of Visitors of Johns Hopkins University and we have a program over there. And I took my wife along and went and saw the Great Wall. But international -- we already serve international students through the out-of-area online. I don't see us in the near-term having a interest in making physical investments in campuses overseas.

We have so much of the United States left to penetrate and so much to focus on. We love to have arrangements and associations with universities overseas who want to put their students into a U.S.-based program. And we have had a number of those in the past year. We have had one in Poland in the past. We have talked to various entities in China, but it is not a core part of our physical expansion strategy, nor of our capital employment. I would expect that it wouldn't be for relatively long period of time, until we get to Alaska and Hawaii and other places in the United States that we ultimately want to get to.

Great, thank you.

Howard Block, Bank of America Securities.

Good morning and congratulations on a great quarter. I wanted to go to your headline, Rob, you had said the headline would be that you saw margins compressed by 180 bits, I think, versus what you had expected of 280, or whatever the number was. Should we attribute that out performance to less spending on new necessarily, or could we also allocate some of that out performance to the faster-evolving, maturing new or even greater skill and efficiency from mature?

There is a couple of things there, Howard, that I think might have gotten confused. The headlines I was talking about was with regard to the full year, which is that the operating margin for the full year was quite a bit less compressed then I would have expected doing eight campuses versus five. In the quarter, it was also that the compression was smaller. I think that was almost entirely associated with that fact that when Mark and I model the operating margin, we only assume 350, 400 basis points of revenue growth over enrollment growth.

It was that more-stable mix shift, so that the seats per student stayed relatively stable versus the previous year, that allow us to get another point and a half or so of revenue growth. And since our expenses stayed the same, that is where the operating margin got higher than we would have thought. Our losses associated with our new campus openings were less than we would have expected.

That model has been pretty successful for us and our performance, really, across all of our campuses, with only one or two exceptions, has been significantly better than the investment model that we think about, in terms of how long do they take to ramp to profitability. But they are relatively small anyway, as a portion of the whole income statement. And I think the bigger impact on operating margin was that we had more -- the students that we had took more classes than we originally modeled.

Okay. As we look at the margin potential of a mature campus, is the only lever left at this point pricing growth or are there other ways that you can continue to drive profitability there?

We would expect that in a mature campus in a mature market, that they would be relatively slow growing on the top line, very high-margin cash generating entities and that the key profit driver would be tuition increases.

Okay. Then as we look at the eight versus eight, I know it is relatively fair apples to apples. But is it also fair in terms of the timing of the eight versus last year's eight and the expected expenses, meaning a newest market versus newer market kind of thing?

So far, it has all been new markets. So we are a little worse versus last year, but we are thinking about actually having all of our campus starts in the latter half of the year in the fall as opposed to doing two in the summer. The summer is a pretty expensive time to start, because you don't get that many students anyway. So that would be a little bit of a benefit. If we do do that, we are not going to make a final decision on that for a month or so. But net-net, if that is the way it goes, I would say it would be relatively even.

Okay. Then as you think about pricing, again, back to the earlier question where you would expect the margins to be stable. Implicit in that, based on or prior answer, would be there is no pricing growth there.

No, I was answering the question in the long-term. In the long-term in a mature market, we would expect relatively little enrollment growth, 5% pricing growth, very high operating margins, and a very stable cash-generative business. In the short-term, this year, we are saying that we believe margins should be relatively stable -- ex FAS 123, because there are some timing issues there -- because we're doing eight campuses versus eight the year before.

We're still going to be in a position where the average age of our campus is lower this year than last year and that is the single most-important criteria, in terms of modeling what the overall profitability or operating margin of the business is as a whole, because as the campuses get older and you get more brand recognition, you get more academic reputation built in a market, you are spending the same amount, in terms of your marketing exposure in the market, your professors, your building. All of that is paid for and your gross margin is relatively high in each individual new student. And so your overall unit margins are going to go up. That is the essence of the model right there.

Last question and then I will jump back into the queue. Could you just remind me of the statistic you shared? It was new grad students are 7% of --

The new graduate programs, the three new non-business, non-computer science programs that we introduced two years ago. The masters in health services administration, masters in public administration, and masters in education are now 7% of our student population.

Great, thank you very much.

Amy Junker, Robert W. Baird.

Quick follow-up on Howard's question with the campuses. Just in regards to four additional campuses that you have left to open, can you tell us do you expect those to be more in the new markets or existing markets? Last quarter you had kind of thought that the eight would split out evenly?

I think there is a high likelihood that will be more in new markets, but we haven't made a final decision.

And are there existing markets that currently have strong demand that you are considering, I guess, putting on hold in favor of opening in the new markets? And is there a risk if that does happen?

The answer to the first part of your question is yes. The answer to your second part is I suppose there is a risk. There is a risk to everything that we do. It is the way we manage it.

Okay. Last question, any comments or updates on plans to offer any new programs or additional verticals you might be considering entering?

No. We are quite comfortable and confident in the academic programs that we do offer, that tends to be the ones the students that we are trying to attract want to take. And so, no, I would say in the near future, nothing significant.

Thank you.

(OPERATOR INSTRUCTIONS) Jack Sherck, SunTrust.

Thank you very much. Just a couple of questions in regards to Middle States and the proposed improvements in terms of hiring more full-time faculty. Have you done that yet or are we yet to see that kind of impact on your P&L?

We have done it and it is fully accounted for in our model that suggest that we will have stable operating margins.

My final question is in terms of the new campus openings. The eight campuses you opened up last year and the proposed eight for this year, are they a similar or same square footage or a slightly less capacity, in terms of per campus, than campuses you had opened in prior years?

No, they are both about the same square footage.

Thank you very much.

Jon Christensen, Kayne Anderson.

History has made us all comfortable with the assumption that price increases will stay above the rate of inflation. Would you tell us about your comfort with that, what could change that equation, and does that -- do we need to doubt that now that the for-profit universities are gaining share on the traditional universities?

That doesn't sound like Jon Christensen's voice. That sounds like Bob Schwarzkopf's voice.

It is Bob.

I do remain confident in that. I think within the economy as a whole, it is probably the area where one can be most confident. I mean nothing lasts forever and no trend extends forever, but when you look at relative value creation in the economy, education, I think, is at the higher end of any factor of production. And the factors of productions that are most important get the highest returns. And so I think there is real pricing power.

I don't think that the rise of for-profit education providers as a percent of the whole is going to have much of an impact on that. The key impact is going to be is education continue to be an increasingly important part of the economy for individuals. On a micro level, does it help the individual?

Secondly, as a whole, the not-for-profit institutions are wonderful institutions are wonderful institutions. They're great academic institutions. They don't tend to be managed for economic efficiency. I think the risk that somehow their ability to control costs in a way which is going to have a long-term impact on competitive pricing power, I would say, is pretty small.

Thank you, Rob.

Howard Block, Bank of America Securities.

Actually to follow up on that last question, Rob. As you look at possible changes in loan limits, my guess is not much of effect, but do they ever have any effect on pricing strategy?

They don't have an effect on pricing strategy. If the Title IV loan limits for those students who have no college credit are increased, as I understand they are going to be, that will have a minor positive impact in that those of our students who are in that category, there is not that many of them. But those that are, they currently have to find other sources of credit, either through private lenders or their own credit, won't have to do that. They will be able to access the entire amount through Title IV. But I don't expect it to have a significant impact on us.

Okay. Then just the last question is the growth in campus-based -- mature campus-based students. I am not sure our numbers are good, but it looks like it is one of the only quarters -- maybe one other quarter in the past four or five years where that has occurred. Is that in aberration, was it pleasant surprise to you, should we read anything into? That is two quarters in a row of, one, a lesser decline and now growth?

There are two things there. One is is that our calculation of a mature campus being four years old means that we are getting campuses that grow into that category now that really still are in their high levels of growth. I mean these campuses tend to grow from years four through seven, so to use the term mature there is not the same thing as saying a fully-mature eight, ten-year-old campus that has kind of reached saturation. So there is a little bit of that.

The second part of your question is it is not really a pleasant or unpleasant surprise. I truly am not concerned with what either the rate of growth or the asset utilization is at the campus level. We will make the campuses fit the size and the mode that the students want to take classes in. We just don't have that much of a fixed investment to have to worry about it. The more important thing is to not get caught up in either a business segment measurement or some other kind of analysis that causes us to try and push students in one side or the other. I think that is a long-term mistake. I want to have a university where both geographically and by mode, we're making it as easy as possible for the student to take the classes in the way that they want to take them.

Great. Thank you very much and, again, congratulations.

Thank you, Howard.

Bob Craig, Stifel Nicolaus.

Good morning, everybody. Rob, just a question for you. Are you at all surprised that the percentage of students enrolled in CIS programs has not started to increase?

I can't really say that I have thought about it that much, Bob. This institution when I took over was really focused solely in Washington D.C., which is a very information technology-centric market. In the last six years, we are down to probably, I don't know, less than 30% of our student population in business here in Washington. And we have expanded into markets where business and accounting is just a more important and popular course to take. I really can't ascribe or predict where that mix is going to go. Nor am I particularly concerned about it.

We think that our computer science program is a first-rate program and we are delighted for the students that we get. But it is not the kind of situation where we need to move that inventory, because otherwise, we have a sunk cost that is going to somehow affect us. We really want to have the academic programs, a broad range of academic programs that we think are most likely to satisfy the students that we're trying to serve and computer science is clearly a big part of that.

That makes sense. Rob, are you noticing any changes in the average productivity of your student recruiters? Are you trying to drive that in anyway?

No. Well, we noticed a change in that the admissions officers at a brand new campus have a difficult job, particularly in a new market, because nobody knows us. And over time, the most important factor with regard to the proclivity of an interested student to actually become a student, I don't think has anything to do with, quote, productivity of an admissions officer. It has to do with what our reputation is in that market and the satisfaction that our current students and alumni and professors have with the institution.

Over time that tends to go up. We have had situations in the past where for other reasons, we have made wholesale changes of people and we have put people in brand new jobs. And if you do that across the whole institution, you can have an impact. But without those kinds of changes, we would expect that admissions officers jobs get easier over time as the campus and the University has a longer track record in a market.

Would it be fair to say, Rob, looking at the Corporation as a whole, that your growth in your recruiter base would about mirror your notional model growth of an enrollment?

Yes.

Okay, great. Thanks.

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

Thank you all for participating. We will look forward to talking to you in May. Thank you.

Ladies and gentlemen, that does conclude the Strayer Education Inc.'s fourth quarter 2006 earnings conference call. We do appreciate your participation and you may disconnect at this time.