Strategic Education Inc (STRA) 2007 Q2 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to Strayer Education Inc.'s Second Quarter 2007 Earnings Conference Call. At this time all lines are in listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. (OPE0RATOR INSTRUCTIONS).

With us today to discuss the results are Rob 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're unable to listen to the call in real time, a replay will be available today beginning at 1:00 Eastern Time through Monday, July 30. The replay is available at 888-203-1112 with the passcode of 4188646.

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, Dana, and good morning, ladies and gentlemen. As is our custom, I'd 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'll then ask Mark to report on the detailed financial results for the second quarter. after which I'll comment on our enrollment results for the summer academic term, provide an update on our growth strategies and finally end up with the Company's earnings outlook for Q3, 2007.

Strayer Education, Inc. is an education service company whose primary asset is Strayer University, a 32,000 student, 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 United States. as well as throughout the world over the Internet. We serve students in all 50 states and over 30 foreign countries with our online courses. Strayer University is accredited by the Middle States Commission on Higher Education.

Mark, you want to run them through the financials?

Sure. Revenues for the three months ended June 30, 2007 increased 20% to $78.9 million compared to $65.6 million for the same period in 2006 due to increased enrollment and a 5% tuition increase which commenced in January of this year.

Income from operations was $26.4 million compared to $21.5 million for the same period in 2006, an increase of 23%. Operating income margin was 33.4% compared to 32.8% for the same period in '06. Net income was $17.4 million compared to $14 million for the same period in 2006, an increase of 24%.

Diluted earnings per share was $1.20 compared to $0.97 for the same period in 2006, an increase of 24%. Diluted weighted average shares outstanding decreased to 14,509,000 from 14,497,000 for the same period in '06.

Revenues for the 6 months ended June 30, 2007 increased 20% to $159.1 million compared to $132.6 million for the same period in 2006 due to increased enrollment and a 5% tuition increase, which commenced in January of this year.

Income from operations was $55.3 million compared to $46.5 million for the same period in '06, an increase of 19%. Operating income margin was 34.8% compared to 35% for the same period in '06. Net income was $36.2 million compared to $30 million for the same period in '06, an increase of 21%.

Diluted earnings per share was $2.50 compared to $2.06 for the same period in '06, an increase of 21%. Diluted weighted average shares outstanding decreased to 14,486,000 from 14,528,000 for the same period in '06.

At June 30, 2007, the Company had cash, cash equivalents and marketable securities of $168.5 million and no debt. The Company generated $44.6 million from operating activities in the first six months of '07. In June of '07, the Company received $5.8 million in net sale proceeds related to the sale of its Loudoun, Virginia campus building. Capital expenditures were $7.4 million for this period.

During the three months ended June 30, 2007, the Company used $8 million to repurchase 64,764 shares of common stock at an average price of $123.75 as part of a previously-announced common stock repurchase authorization. The Company's remaining authorization for common stock repurchases was $16 million at June 30, 2007, having spent a total of $16 million during the first half of this year.

During the six months ended June 30, 2007, the Company paid $9.1 million of regular quarterly common stock dividends and received $12.3 million upon the exercise of stock options.

For the second quarter of '07, bad debt expense as a percentage of revenue was 3.5% compared to 2.6% for the same period in '06. Day sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 12 days at the end of the second quarter of '07 compared to ten days at the end of the same period in '06. Rob?

Thanks, Mark. Just a few comments on the Q2 financials. We exceeded our forecast by $0.06 per share, which is a little more of a variance than we normally do. When we went back and looked at the numbers, we found three main sources of the earnings outperformance. The first source was revenue; with 16% enrollment growth for the spring term, Mark and I had expected about 19.5% revenue growth; we actually achieved closer to 20.5%. That extra revenue was responsible for approximately $0.02 of the outperformance.

Most of the extra revenue relative to our model came from lower drops during the quarter and higher graduation fees versus the prior year; we had a significantly higher number of graduates.

The second source of the outperformance was operating margin. We had expected stable margins before FAS-123 expense given the investments we were making in opening new campuses in the quarter, and we actually achieved 90 basis points of margin expansion, and this led to about $0.03 of the outperformance. That increased operating margin was largely based on the strong performance of the campuses we opened last year. They were much less of a drag on earnings than our model would have suggested and that was particularly noteworthy given the fact that we did incur about 50 basis points more of bad debt expense in the quarter than we had expected, and I'll come back to that again in a minute.

And the third source of outperformance versus our model was higher interest income, which was worth about $0.01. We basically had more cash on hand during the quarter based on some stock option exercise proceeds, as well as the building sale that Mark just mentioned.

Our share count and tax rate were both right on our target and actually for the quarter at or above where we were last year, so there was no benefit on that.

Now based on our performance in Q2, Mark and I have modeled these increased assumptions on both revenue growth and operating margin into our third quarter forecast, so hopefully, we'll be a little tighter on that coming up on Q3.

Now, on the bad debt expense, we were not pleased to see that tick up again. Our tuition collections for the winter and the spring terms were actually pretty good, but our fall 2006 uncollected tuition balance, which we write off against our allowance for doubtful accounts at the end of the second quarter on June 30 was slightly higher than our model. I think we're going to be a little more conservative on our reserves for the rest of the year, so I wouldn't be surprised to see that bad debt expense at the mid-3s through Q3 and Q4.

But as I said before, our real concern is not financial; these numbers are relatively immaterial, but it's more a concern that we focus on making sure that we put the right kinds of students in the classroom seats, students who will benefit from the education and in the past, we've just always tried to really focus on this bad debt expense as one metric that we can keep our eye on with regard to the overall culture and quality of the organization. So I'm confident that our operating team has the appropriate focus on this issue, and Mark and I will just keep real close tabs on it.

On distributable cash flow, for the first six months of the year we're up almost 25% on 20% net income growth, so that's in line with our model. Our cash flow from operations is actually up about 40% in the first half of the year if you look at the release, but some of that is timing benefit on our income taxes based on the stock option exercises that I mentioned before.

We did generate approximately $6 million in proceeds on the building sale that Mark mentioned. The Loudoun campus was one of six campuses that we still own; we're now down to five, and it's actually in a great location that the impetus for the sale was not to move, but our rationale was the building required about $3 million-worth of renovations, and we were able to structure a deal to sell it for $6 million, have the buyer pay for all the renovations, including the upgrade. It's one of the last campuses in the DC area that hasn't been upgraded to our new fit-out, and then lease it back to us at a very attractive rate. The whole transaction is slightly accreted to earnings over the ten years of the lease because we'll amortize that gain over those ten years, and more importantly it's consistent with our policy of not tying up our capital in real estate.

Turning to the summer term enrollment results, we had one of our stronger quarters. Total enrollment was up 19% on a year-over-year basis. Continuing student enrollment for the quarter was up 20% and new student growth was up 16%. We were particularly pleased with our continuing student number. That growth of 20% is associated with about a 250 basis point increase in our retention rate during the quarter, which is also one of the statistics that we look at quite closely, independent of the economics of it, but just as an indicator of how we're doing on a quality basis.

With regard to student mix, business administration, accounting and economics degree seekers continue to make up approximately 70% of our student body for the summer term. That's consistent with the last couple of quarters. Computer Science degree candidates are just under 20%. Our new graduate programs are little over 7% of the student population. The overall graduate population in the summer continued to increase. We're up to 30% of our students are now enrolled in graduate programs.

We were very pleased to announce two weeks ago that Strayer University received an Accelerated Reaffirmation of our Regional Accreditation from Middle States. Middle States based its decision on their review of our voluntary institutional self-study, which we completed last year. Our accreditation now runs through 2017; we will not need to go through the accreditation review, which had been previously scheduled in 2011. We very much appreciate the hard work of all of our faculty and academic administrators which went into the self-study, and we especially appreciate the time and effort of our sister universities in the Middle States Region who contributed their staff and administrators to participate in our peer review process.

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

On our first objective, for the summer term, we were pretty strongly ahead of our target. Our mature campuses showed 9% growth.

With regard to new campus activity, subject to final regulatory approvals, we intend to open four new campuses for the fall term. The four campuses includes one in Knoxville, Tennessee, one in Atlanta, Georgia, which will be our fifth in that market, and two in Southern New Jersey, really suburban Philadelphia, the Cherry Hill area and Willingsboro. And one interesting highlight of our Willingsboro campus is that we were invited to locate our building on the site of the Burlington County Community College. That's a school that we've had an articulation agreement with in the past and has provided a number of students to us in the Philadelphia market. So we look forward to a strong ongoing relationship with that institution.

In the out of area online unit, which we're now internally referring to as our global region because we just thought that out of area was so grammatically awkward we had to come up with a better name. Our growth rate was 19%. On capital redeployment we announced this morning our regular quarterly dividend of $0.3125 cents per share. And we also announced we had repurchased approximately $8 million, as Mark said, of our common stock during the second quarter.

On our business outlook for the third quarter, based on the university's strong enrollment growth for the summer term, which will be offset partly by the increased expenses associated with these new campus openings, we estimate our third quarter EPS will be in the $0.60 to $0.62 range, and that will include approximately $0.11 of after-tax stock-based compensation expense.

As I mentioned before, in the third quarter, we do expect 200 to 300 basis points of operating margin expansion based on rolling forward some of these stronger revenue and operating margin assumptions from the second quarter into the third quarter. And that's notwithstanding the investments in opening the four new campuses, which will hit this quarter.

With that, Dana, we'd be pleased to answer any questions.

Thank you sir. (OPERATOR INSTRUCTIONS).

Ed [Euruma], JP Morgan.

Hi, thanks very much and congratulations on a great quarter.

Thanks Ed.

I know it's only been a quarter since Dr. Stallard joined, but what impact has she made and has she implemented any changes to your operating model?

Well, we're very excited about having Dr. Stallard come on, but I can honestly say she's had no impact because she doesn't start until September 1.

I got you; and in terms of your new strategy with the Southern New Jersey locations, do you expect any more cannibalization on your Philadelphia campuses?

No I don't, but this is consistent with how we think about entering a new market. A market as large as Philadelphia, like Washington and Atlanta and other places where we operate, we tend to invest as many campuses as the market will support with our key focus making it as convenient as possible, logistically convenient as possible for a student to get to a campus. So in our plan, we do think about adding campuses to the point where at the margin, you're drawing students that might have gone from an existing Campus into a new campus, but overall we think that's a very good use of our owner's capital because by providing the highest level of convenience to the students, over time we're going to generate the highest return for our owners.

Okay, thank you very much.

Thank you Ed.

Bob Craig, Stifel Nicolaus.

Hi Rob and Mark, congratulations.

Thanks Bob.

A couple of questions for you Rob; we're obviously impressed with the continuing student number. Where are you in terms of an absolute number for retention at the moment?

Well, it's always lower for a summer term.

Right.

Because you measure that quarter-to-quarter, and a lot of our students take the summer term off. I think it was about 72%, up from like 68.5% or something, or 69% last year. But on average through the year, it's about 80%.

About 80%; you taken any other actions, any other moves that you've made to improve that number at all?

It's just a continual effort Bob. I mean going back several years now, we've really committed ourselves to the idea that the stronger you make the classroom experience, the more investment you make on the academic support functions, the tutoring, the advising, the quality of your professors and of your curricula, the more likely it is you're going to get students who are very busy and have other claims on their time to continue to make the effort to go through over a multi-year process.

And so as I said, we've been really focusing on this for three years or so now, and we're quite pleased with the results. I mean, I think we are getting sort of towards a theoretically limit in terms of how much retention improvement you can get, and our view now is just try and keep it at this high level and over time, as we expand the University geographically, get more and more graduates.

That was going to be my next question; how high do you think that can get. But I'll move on to the marketing side. The marketing spend was a little less than expected. Could you comment on cost per lead and start trends?

Well, our cost per lead was down slightly. And we spent everything that we expected to that was part of our plan. Our team does a great job in that area and we continue to look at a lot of different media sources and mixes to try and help build the brand. But we also get some benefit from the fact that we've opened a lot of new markets in the last several years, and as those markets grow and as our experience there increases, you tend to get a true brand build which allows a lot of referrals and a growth in student inquiries, which is based on the satisfaction of your existing students and your faculty.

So our model suggests that your cost per inquiry should actually go up as you first open new markets, but over time and as you spend time in those markets, it should start to go down. And in this case, it went down a little faster than we might have expected, but it's not significantly outside of our model for how this should work.

Okay, Rob one more question and I'll turn it over. You've shown a couple of times that your analysts get together as the typical ramp-up of a new campus, and I know you've been doing better than that. What's the typical break-even now in terms of the number of quarters or the months of operation and/or number of students?

The number of students has come down a little bit just because of the use of the online. It's probably closer to 250 versus 300. And our investment model based on six quarters, but certainly over the last couple of years, I would say the average has been less than that. I don't have the exact number in front of me Bob, but it's been a quarter or two less than that.

Okay great, thanks Rob.

Mark Marostica, Piper Jaffray.

Hey guys, nice work on the quarter.

Thanks Mark.

Regarding the bad debt percentage that you highlighted, I'm just curious whether or not you've changed or relaxed any of your entry criteria that may have led to higher bad debt or any commentary around why you think it spiked up a little this quarter. I know it's not a gigantic leap, but it's noticeable.

Yes, well it definitely got our attention, particularly because we highlighted last year, last fall that we got concerned about this at the end of the summer then the beginning of the fall. We didn't relax anything; we actually tightened things up at that point. And our collections for the fall quarter in winter, in the fall and in the winter were actually okay. Our reserve model is based on the assumption that you're going to collect -- some amount of the uncollected balance will be collected within 90 days, some will be collected within 180 days, and you write off the rest after that.

And the collections of, our uncollected balance from the fall term during the last 90 days, which would have been 90 days after it was due, was lower than we expected. I think that's related to the fact that as we were enrolling students for the fall last year, when Mark and I got concerned about the collections for the summer, before we really turned the spigot down there may have been some that got through.

But suffice it to say we track this number far in excess of its financial implication. It really has a lot more to do as one of the few red flags you can see early on as to the quality of the students that you're getting in the classroom. And so everything that we were going to do to fix it, we've done already. I think our, the only financial impact now is we may be a little more conservative, as I said, when we do the reserves. We may go in excess of our previous model in the last half of the year to make sure that we're not surprised again. But I feel like from a management perspective, we've got the team's focus on this, and I don't expect this to be an ongoing problem.

Great; I also wanted to explore the mature campus growth; I think it was up 6% year-over-year this quarter. Is that a function of newer schools falling into that four-year-plus base, or are some of your legacy schools kicking in some outstanding performance to drive that?

The real relevant number for us Mark is the 9% growth of the mature campuses. The classroom seats was 6%, but again we don't make any discrimination or distinction between whether the student enrolls for a class in the physical classroom at that campus or decides to take classes online.

And the answer to your question is yes, we actually fully mature campuses in excess of ten-years-old that showed some significant growth this quarter, and we were pleasantly surprised by that. That's not what we expect; we certainly don't turn it away when it happens, but we're not really doing anything to try and drive the growth at those. We really think that once you establish that brand in the market, there's sort of a natural rhythm and take of a (inaudible) of students, and the fact that we did a little better than that this quarter was a nice upside and, but it's not something we're counting on permanently in the future.

And then last question; I'll turn it over. Just regarding conversion rates and show raters, how did they trend in the quarter? Thanks.

Yes, we don't really have a term "show rate"; I mean the show rate is 100% because we don't count them as enrolled unless they've shown up. The conversion rates were pretty strong. The conversion rate is the same concept as your cost per inquiry. In a brand new market and a brand new campus, it's going to be lower than in an existing market where you have quite a good reputation and a brand name and you have more experienced people at the campus.

So part of the ramp to profitability is you've spent the same amount on your advertising and you've hired the professors, you've hired the administrative staff. More of the students who have expressed an interest actually decide to enroll as the campus gets older. And that conversion rate was basically consistent with, in this last quarter with the age of our campuses and the ramps to profitability of those campuses.

Great, thank you.

Amy Junker, Robert Baird.

Thanks, good morning; Rob you said that, in the past, that if you opened up another eight campuses next year in 2008 you expect that your operating margins would improve just given it's the same number. Do you have a sense of a, or have you looked at how many campuses you can actually open to maintain kind of stable margins before you start feeling real pressure. Is that something that you'd consider?

Not really anything we'd consider Amy because we'd like to open as m any campuses as we can, and what we really look at is the return on invested capital in opening a campus, and whether that's the right use of our owner's capital. And so far, every time we look at it, it has by far the highest return, by our calculations in excess of 70% on an unlevered IRR basis. So we'll do as many as we can without regard to the operating margin.

What limits us is the amount of our [ceiling] capital, the number of people that we have who we have confidence in can take on a campus leadership position, either on the academic or the administrative side, and we're just starting that process right now for next year and we'll go through that over the next couple of months; we'll present it to our Board in October, and then we'll tell all of you on our third quarter earnings release what our plan is for next year.

But it's not, the decision won't be made in any way with regard to concern for the operating margin.

The other thing I wanted to clarify too Amy is just mathematically if we did open eight, it's not necessarily a case of you have an expanding operating margin because if all other things are equal, and you don't have outperformance in any given quarter, what really drives the expansion of the operating margin is if the average age of your campus is no longer, of your campuses across your network, is on longer getting younger, and it would take a couple of quarters of opening the same number of campuses given the amount of investment that we've made in the last couple of quarters before that would balance out.

That's helpful, thanks for that color. Last question, or just a quick question on accreditation and I just want to make sure I understand, does the early renewal mean that you don't have to go through another review again until 2017? Am I thinking about that correctly ?

Yes, you are correct.

Great, thank you.

Trace Urdan, Signal Hill.

Good morning; I know you just finished telling Mark that you guys don't care about whether students are online or on ground, but you still share those numbers with us. And it looked like the on ground growth in the quarter was particularly strong, and I'm guessing just sort of looking at these numbers that most of the retention gains took place in those students. I kind of want to go back to that question again and re-ask what Mark did; is there anything that's notable about what happens to those students in the ground campuses?

Yes, I'm not sure that there was distinction in the retention gain. Our retention gain was fairly even across the board. We had a fair number of new students in some of those markets as well as continuing students, and again, the -- it's not a distinct student. Once a student is enrolled in our campus, five times during their career here they'll switch back and forth between taking classes online or in the classroom.

We track the statistics and we share them with you because for us it's more of an inventory control issue; do we have enough physical classroom seats, professors teaching in physical classrooms, and do we have enough online seats and professions teaching online to satisfy the demand. And the stuff tends to go up and down a little bit.

For the most part, after several years at this, what we see is that clearly the global students, the out-of-area students have to take online classes, so that's kind of a base investment that you make. For our campus-based students, there is some percentage of them -- I don't know exactly the number, maybe 20%, 25% -- who just regardless if they live right next door to a campus want to take all their classes online. There's probably another half of those campus-based students that don't want to take any classes online. They really like the classroom-based experience. And then another 30% or 40% that will switch back and forth in any given quarter.

Our view is don't try and force them in a learning method that they're not comfortable with; just make them all available and let the student decide, and over the long run that's going to create the best institution.

Do you ever go into a market and say, "Wow, we really nailed it with the real estate that we got in this city" and then see sort of disproportionate strength in the campus-based students as a result of some anomaly like that?

No, as a matter of fact, when we have a good campus location it will tend to drive more online, more students taking online classes as well because our students use the campuses as a gathering point. I mean the library facilities are there, their academic advisors are there, it creates a sense of community both for the students and the faculty. And as that grows, we're going to get more online students as well.

Okay; there seems to be a little bit of a disconnect between the strong retention in the quarter and then what, the warning flag around the bad debt sort of leaning in the other direction. How do you reconcile the two data points?

Well, the data, it's self-correcting. In other words, the student that you have particularly in this case where it was for a fall uncollected balance, that student was for the most pat not likely to have been enrolled in the winter or the spring and chilling out the summer. So they wouldn't have really have fallen into the continuing student number.

The other thing is the bad debt expense is focusing on the relatively few number of students. Just by the percentages you can see that. For us, what draws our attention is its rate of change because if we see our bad debt expense growing at a faster rate than either our enrollment growth or our revenue, and we can isolate it to particular campuses or regions, what that suggests to us is that the people at that campus that are making the decision over what students enroll are not using sound judgment as to whether the student is likely going to be able to benefit from the education, because the students that benefit from the education almost always pay.

And so it's really a prism, it's like a microscope; it gives us a chance to find a specific operating metric and to deep dive into it and deal with problems before they get big. And that's why we spend a lot of time on it. I mean it's -- I've seen people talk about the fact that it's not that relevant to the financials and you're actually giving up revenue and profit growth by focusing on it so much, and I would concede that point; that's clearly the case. But for us, we believe in this model and we believe in the value that it creates, and what we're really concerned about is making sure that we deal with problems before they can affect the model as a whole, and that's, when you're dealing with a university, that's a key issue.

And is it a possibility that there's something else that goes into that number, such as shift in corporate reimbursement trends or maybe what's going on with the third-party lending related to those students that might have an impact on that number?

It's possible, but I don't think it's likely. I mean what really happens is you're talking about a relatively small number of students and it tends to be isolated to particular campuses or regions. It's usually that a student was allowed to enroll without a proper sense of that student's ability to pay a commitment to the education; the student drops out; and because of their dissatisfaction with the education, they're not inclined to pay.

All right, thanks Rob, I'll let you move on.

Gary Bisbee, Lehman Brothers.

Hi guys; I add my congratulations.

Thanks Gary.

I want to change gears a little bit from some of the other lines of questioning. Could we talk about the dividend payout ratio a bit? It's been around 30% the last couple of years. Clearly, with the cash flow you've had and even buying back stock and stuff, it feels to me like you could easily double that and still not eat into your cash balance. How do you think about that? I know you generally change dividend in the fall every year, but has there been any thought potentially dramatically increasing that payout ratio?

Well, as a Board we look at capital allocations every quarter, and we recognize that we have the good fortune of managing an enterprise that generates more financial capital than we can use internally really at any rate of growth that we can come up with. And so we now that redeploying capital is a key part of the value equation.

The payout ratio is actually a little bit higher; it's been I think closer to 50%, but we don't really peg to a payout ratio. What we've tried to do over the last three or four years is increase the dividend; we basically doubled it for a couple of years, and then last year we increased it at about the rate of net income growth. And keep sufficient excess capital available so that we can be opportunistic in terms of returning capital to owners through share repurchases.

And also we never know when some other opportunity that we haven't seen yet, an acquisition or some other major investment might come up that would allow us to reinvest the capital back into the business. We just haven't found anything to date that was more attractive than our organic plan. If we did, we would be happy to use cash and capital that way as well. We're not -- we're pretty agnostic. I mean we just want to get it back to the owners or create value for the owners in the most, the highest value way.

So that's how we think about it.

Yes, I know your view on stock split so I won't go there, but does liquidity of the shares, has that ever been a consideration as you think about the buyback or are you sort of indifferent about that as well? And the reason I'm asking is just if we try to take an 18-month view at this point, say okay you're going to continue to generate loads of cash flow, likely could take the dividend up, likely could continue to buy back stock, at some point it would seem like that could hurt liquidity. Does that matter to you?

No; we've never thought about the number of shares outstanding as a particularly relevant issue. We do think that you increase the liquidity of the Company by increasing the value of the Company because there's just more capital that can be employed. And that's not part of the calculation in terms of thinking about the best way to return capital to owners.

And I guess just one last one; as we think forward, '08 in the continued growth strategy, it seems like you've done real well opening multiple campuses in some of the bigger markets like Atlanta or Philadelphia, but you've also had a very successful strategy opening in some smaller markets with a campus or two in the Southeast. How do you think about that over the next two years in terms of continuing to move South and West and maybe even North? Is there a plan to continue to have a balance of big market versus these Tier-Two markets or is there one area that seems more attractive at this point?

There's definitely a plan to include both Tier-Two and Tier-One markets. The broader plan is to make Strayer University a national brand and footprint, a national institution. And we found that there are a lot of communities with relatively small numbers of people that can support a campus, and more importantly can support an academic environment that we can hire the faculty there and we can create a real academic community. So we definitely will not shy away from those.

On a financial basis, the larger markets can be slightly more profitable because you get a little bit of efficiency putting multiple campuses into one market, but we will definitely have a balance of both as we look to expand.

Okay and then if I could just sneak one more in there; it sounds like you still own five campuses. Any plans on the table to try to get out of those, or was this more opportunistic?

No this is clearly opportunistic Gary. I mean the five that we have are in locations that we plan to be at forever, so unless somebody comes and offers us an enormous value for them, and from a dollar standpoint it makes more sense to lease it back, I don't see this as a strategy going forward.

Okay great, thanks a lot.

Brandon Dobell, William Blair.

Thanks.

It's hard to keep track of where you are Brandon.

We keep playing musical chairs I know; every seven years, I have to do something different.

I want to focus for a second on trying to reconcile a couple of your comments; you talked about a little bit of revenue [oversight] from higher graduation fees, which would imply that you had more graduations than maybe normal, or that you expected, and yet continuing students were up more than expected. Was it just that those two things shouldn't be connected, or was there fewer graduations but higher fees per graduate? I'm just trying to understand how the graduation impacted continuing students this quarter, and then as you look prospectively, Q3 or Q4 is there a timing issue with graduations that would cause us to think differently about the continuing student number?

No, they're related positively. Your higher continuation rate over time should drive higher graduations as long as you're bringing in plenty of new students, which our new student growth has been pretty healthy as well for the last couple of years. And we did have, the fees did not go up. We did have more graduates and so that gave us a little bit of a bump on overall revenue.

And remember, we have a relatively low share count so it's only a few hundred thousand dollars to drive a penny or so growth in that. So they're related positively and having both of them, when we see one go up, we would expect to see the other go up as long as the new student growth stays up, and actually having all three work together is exactly what we're trying to accomplish.

Okay, so in terms of looking forward and thinking about the sustainability of the continuing student number, nothing from a timing-wise should, that we should think about. It's more just doing a good job with both the online and the on ground students, keeping them there? Is that fair?

I would hope that we would continue to get as high a percentage of our students who had initially enrolled to go on to graduate. I'd actually hope to see that number increase, and in doing that, that should cause our continuing number to stay quite strong. Over time, if everything works well, they should all be in balance. You should have your rate of continuing student growth should be equal to your rate of new student growth and your rate of graduation should be at that level too. I mean it's never going to be perfectly in balance, but that's certainly what we're striving for.

Okay, and then shifting gears a little bit from a new school perspective, two questions here; one, how far I guess mileage-wise or kind of geography-wise do you think you can go from an existing location before you start to lose some of the, your marketing leverage, brand leverage, infrastructure leverage? Can you go two states over, three states over, or do you really have to keep it within a relatively small radius?

Well, the marketing leverage you lose pretty quickly. I mean once you get outside of a media market, you're sort of starting over.

The oversight leverage is more of a continuum; the farther you are away, the more difficult it is to execute.

Okay.

Which is why we do try and move into continuous markets; it's just easier to get to Charlotte than it is to Seattle. Eventually, when you're in Portland and San Francisco, Seattle is not that much of a jump. But for now, in a human-capital-based business, in which quality I think is the most important metric and it's difficult to measure anyway, it's a little easier to execute.

Okay, and to that point, would it be fair to say that with the higher number of schools you've opened the last couple of years, there's an implicit, I don't know, validation of the (inaudible) of the people that you have in the organization; therefore, there's a bigger funnel of available assistant directors to feed into the prospective school opening. So shouldn't it get a little bit easier to open more schools because you've got a bigger base from which to draw from a human capital perspective?

If we do a good job on our leadership development, yes. I mean that is the plan, but it's not axiomatic and it requires a lot of effort by a number of people within the organization and we don't presuppose the outcome at all. And we put individuals through a very rigorous test before we decide that they're ready to take on a campus leadership role.

Great, and then final one if I could go back, kind of leveraging on one of Trace's questions; any difference or material difference in a continuing student or persistent metric at the mature campuses versus new versus the transition; just kind of trying to get a feel for where some of the surprise happened if not online versus offline but where else can we look?

There wasn't really, I mean it was a stronger quarter really across the board from that standpoint.

Okay, great thanks guys, appreciate it.

Corey Greendale, First Analysis.

Hi, good morning and congratulations on the quarter and the reaccreditation.

Thanks Corey.

I'll keep this quick. The first question is it fair to assume looking ahead to Q4 given that you've got four new campuses opening compared to two last year that you won't have the same kind of margin improvement that you will in Q3?

It depends on the enrollment growth. I mean we're sort of right at that cusp where if our enrollment growth is greater than our model, we may actually be able to get some margin expansion. If it's kind of right at the model, you are correct; I would expect it to be sort of at or maybe a little bit of compression and obviously, if we have less students, you could have a lot of compression.

Okay and looking ahead to '08, is it possible that you actually end up with a stronger start than fourth quarter, so you might end up repeating this kind of timing?

We're looking at that closely. We'll see how the starts go, but there's also a fair amount of complexity and hassle in doing 401s. So I have to take the pulse of my team and make sure they all still have pulses when we're done. So we might actually go back and do it in a more graduated way, just basically you're just paying that cost and that's an investment in the organization to open campuses in period where it might not be ideal for a profit maximization but it allows you to spread out the work and the effort and the oversight through the year. We'll take a look at that at the end of this quarter and decide what makes the most sense.

Okay and last quick one maybe for Mark, on the surface of the cash flow statement, it looks like part of the strength of the cash flow in the quarter might have been timing from tax payments. Can you just speak to that and whether that's something that reverses in Q3?

Yes, Q3 and Q4. But as Rob pointed out, we're comfortable with the growth in our operating cash flow being very consistent with the growth in our net income once you back out that timing benefit.

Thank you.

(OPERATOR INSTRUCTIONS).

Mark Hughes, SunTrust.

Thank you; any comment you could make on any change in your approach to marketing? Do you feel like you've sharpened up your procedures sort of more than usual recently? Any systems changes, working with different vendors, or has that been relatively stable?

Well Mark, it's been relatively stable but when I say that, that's not to belie the fact that Lysa Hlavinka and her team spent an awful lot of time and effort on it. So there is a fair amount of analysis each quarter, every quarter by our regional marketing managers as to what the best mix in that region is. We don't really dictate overall any kind of allocations, but we spend a lot of time as a group hearing about it and talking about it, and it does change quarter-to-quarter. Based on the market realities and the reactions of our perspective students and the age of the market, and sometimes we deliberately change things just to see what will happen.

But overall, given that tactical variance, it's been fairly stable for six or seven years now. These markets have developed in terms of dollars that we're spending on building the brand about exactly as we laid it out six years ago. So nothing out of the ordinary with regard to this quarter.

Got you, and then you talked about some specific retention numbers. Any lead conversion rates you care to share, or sort of a general pattern in lead conversions?

Well, I think our conversion rate of increase of students was relatively stable. I don't have the number in front of me Mark, but it's really nothing out of the ordinary with regard to that.

Okay.

It's lower in brand-new markets, and it's higher in existing markets usually.

Thank you very much.

And Mr. Silberman, we have no further questions, so I'll turn the call back over to you for any additional remarks.

Great, than you very much Dana and thanks everybody for participating. We'll look forward to talking to you again in October.

And that conclude today's conference call. Thank you for your participation. You may disconnect at this time.