Strategic Education Inc (STRA) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Strayer Education, Incorporated third quarter 2007 earnings conference call. Today's call is being recorded. And now I would like to introduce your moderator, Ms. Sonya Udler, Vice President of Corporate Communications. Please go ahead, ma'am.

Thank you, operator. 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 a real time, a replay will be available beginning today at 1 p.m. Eastern time through Monday, November 5th. The replay is available at 888-203-1112, passcode 7473218. 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 & Exchange Commission.

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

Thank you, Sonya, and good morning, ladies and gentlemen. As is our custom, I'd like to begin this morning with 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 third quarter, after which I'll comment on our enrollment results for the fall academic term, provide an update on our growth strategies, and discuss the Company's earnings outlook for both Q4 and full year 2007. Finally, we'd like to share our thoughts on Strayer's business model and investment plans for 2008.

Strayer Education, Inc. is an education service company whose primary asset is Strayer University, a 36,000-student, 51-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 costs 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. 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 September 30, 2007 increased 23% to $69.8 million compared to $56.7 million for the same period in '06 due to increased enrollment and the 5% tuition increase which commenced in January of '07. Income from operations was $13.1 million compared to $9 million for the same period in '06, an increase of 45%.

Operating income margin was 18.7% compared to 15.9% for the same period last year. Net income was $9.3 million compared to $6.3 million for the same period in '06, an increase of 46%. Diluted earnings per share was $0.64 compared to $0.44 for the same period in '06, an increase of 45%. Diluted weighted average shares outstanding increased to 14,557,000 from 14,462,000 for the same period in 2006. Revenues for the nine months ended September 30, 2007 increased 21% to $228.9 million compared to $189.3 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 $68.4 million compared to $55.5 million for the same period in '06, an increase of 23%. Operating income margin was 29.9% compared to 29.3% for the same period in 2006. Net income was $45.4 million compared to $36.3 million for the same period in 2006, an increase of 25%. Diluted earnings per share was [$13.13] (sic - see press release) compared to $2.50 for the same period in 2006.

Three dollars, Mark.

I'm sorry, $3.13 compared to $2.50 for the same period in 2006, an increase of 25%. Diluted weighted average shares outstanding increased to 14,510,000 from 14,506,000 for the same period in 2006.

At September 30, 2007, the Company had cash, cash equivalents, and marketable securities of $162.4 million and no debt. The Company generated $48.8 million from operating activities in the first nine months of 2007. In June of 2007, the Company received $5.8 million in net sale proceeds related to the sale of its Loudoun, Virginia campus building.

Capital expenditures were $11.9 million for the same nine-month period. During the three months ended September 30, 2007, the Company used $4 million to repurchase 25,150 shares of common stock at an average price of $158.93 as part of a previously announced common stock repurchase authorization. During the nine months ended September 30, 2007, the Company paid $13.6 million of regular quarterly common stock dividends and received $13.7 million upon the exercise of stock options.

For the third quarter of 2007, bad debt expense as a percentage of revenue was 3.5% compared to 3.2% for the same period in 2006. Day sales outstanding adjusted to exclude tuition receivable related to future quarters was 12 days at the end of the third quarter of 2007 compared to ten days at the end of the same period in 2006. Rob?

Thanks, Mark.

Thirteen dollars would've been really impressive.

Just a few comments this quarter on the financials. We exceeded our forecast by $0.02 per share, which was caused by both slightly higher revenue and slightly lower expenses than our model, nothing really extraordinary in either case to point to, just slightly better in both conditions and along with about a half cent of lower tax rate.

Bad debt expense was consistent with our forecast of 3.5%. We continue to really focus on that and operating margin expanded by 280 basis points, which was slightly above the forecast that we looked at last quarter when we were talking about it.

On operating cash flow, for the first nine months of the year, we're up almost 22% on 25% net income growth, so basically in line with our model. When you include stock option exercise proceeds and the resultant tax benefits, our distributable cash flow is up in excess of 50% for the first nine months of the year.

Turning to the fall term enrollment results, we had a strong quarter. Total university enrollment increased 15% on a year-over-year basis, and new student enrollment was up 16% versus 10% for this quarter last year and continuing student enrollments were up 15% also.

With regard to student mix, business administration, accounting, and economics degree seekers continue to make up approximately 70% of our student body for the fall term with computer science degree candidates at just below 20% of our total student population. Our new graduate programs are at 7% of the student population and total graduate student population is up to just under 30% of our mix in the quarter.

Turning to an 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 market. Second, accelerate the rate of growth of new campuses, particularly in the new states. Third, invest in and build up our online offerings. Fourth, increase our corporate and institutional alliance partners, and the final objective is to effectively redeploy our owner's capital.

On our first objective, just going through these, for the fall term we were ahead of target at our mature campuses showing 4% growth. With regard to new campus activity, we had a busy quarter. We opened four new campuses for the fall term. That's the most we've ever done in one quarter. The four campuses included one in Knoxville, Tennessee, one in Atlanta, Georgia, which is our fifth in that market, and two in southern New Jersey, Cherry Hill and Willingboro. We had solid openings in all four markets. We also announced today that we will open two new campuses for the winter 2008 term. One each in Charlotte and Raleigh, North Carolina, both of which will be our third campuses in those respective markets, so we continue to look to increase investments in markets that are doing well for us.

In our global online unit, our growth rate was 27%, and I'd like to come back to the fifth leg of our strategy, capital redeployment, after we discuss our business model for 2008 because it's related. On our business outlook for the fourth quarter 2007, based on the university's strong enrollment growth for the fall term, offset partly by increased expenses associated with our new campus openings, we estimate our fourth quarter EPS will be in the $1.29 to $1.31 range, and that will include approximately $0.11 of after-tax stock-based compensation expense.

Now, in the fourth quarter we expect slight operating margin contraction versus the prior year, as we will bear the full earnings drag of opening four campuses in the same quarter in that fourth quarter. With clear visibility into our fourth quarter, we're now also in a position to provide guidance on our full year 2007 earnings. I want to re-emphasize, this is the only time of the year when we actually provide guidance on the full year. Every once in a while I read a report that has that concept not quite accurate, but when we have our fourth quarter enrollment, we know what basically our fourth quarter's going to look like and so then we can give you outlook on the full year.

Now, if you think back a year ago to when Mark and I provided our business model for 2007, we talked about the campuses we were going to open and our tuition increase and what our investment intention was. We said that with that cost structure, if we achieved a 15% increase in our student enrollment, we would expect an 18 to 19% increase in revenues and roughly stable operating margins versus the prior year, which would lead to earnings per share in the $4.10 to $4.25 range.

Well, now we know what we've done. We've actually achieved approximately 17% student enrollment growth for the full year of 2007, which we project consistent with our model will lead to a 20 to 21% increase in revenues for the full year, and that'll give us approximately 50 basis points of operating margin expansion for the full year even though the average age of our campuses continues to go down, and full year 2007 earnings per share in the $4.42 to $4.44 range.

So, what was important about that for Mark and I and which we want to share with you all is that our model works analytically for us. As we add students, we tend to see that revenue flowing through in a way we would expect into both operating margin and increased earnings and that helps us calibrate and think about what the impact of our future investments are on our operating model.

Now, turning to our 2008 business model, because this is the time in the year in which we make a decision with regard to 2008 and then announce it to you all, we announced today that Strayer University intends to open nine new campuses next year and will implement, again, a tuition price increase of approximately 5% effective January 1, 2008. Now, similar to last year, Mark and I believe that if the university achieves 15% enrollment growth in 2008, we would expect an annual revenue increase of 18 to 19%, roughly stable operating margins, even with the additional campus openings, and diluted earnings per share in the $5.15 to $5.25 range.

If the enrollment growth is lower than that, than we would see some margin contraction and lower earnings. If the enrollment growth is higher than that, as we had this year, we would expect higher revenue growth, which can lead to some margin expansion and higher earnings per share. Our intent is to announce to you each quarter exactly what our enrollment growth is one quarter ahead, and then you can run those through your models, as well, the same way that Mark and I do for ourselves.

Now, I'd now like to turn back to the fifth leg of our value creation strategy, capital redeployment. When the board and I recently look at where our cash balances are likely to end up this year and where more importantly these cash balances are likely to grow to next year, even after significantly increasing our investments and expanding university, we decided to take the following actions for 2008.

First, we are increasing our annual common dividend by 20% to $1.50 per share. Second, we are paying a special dividend of $2 per share to shareholders of record on January 2, 2008 and, third, we increased our share repurchase authority by $88 million to $100 million. Now, the board and I remain convinced that our business model allows us the luxury, and I do think of it as a luxury, of fully funding an aggressive organic growth strategy and still make periodic returns of capital to our shareholders.

We as a management team and a board will continue to weigh all uses of cash, every quarter, to determine the most value enhancing after tax return on our owner's capital. And then finally, I'd like to invite all of you to join us at our investor day, which will be held next week at our downtown Philadelphia campus. There is a dinner with students and alumni on Tuesday evening, I believe, and then presentations by members of the management team on Wednesday at the campus. The details are available on our website. If you haven't already signed up or you can contact Sonya in this office. We only do these investor days about once every three years, so it's a good opportunity to meet Strayer University students, faculty, and alumni, as well as receive in-depth briefings from the Company's management team.

And with that, operator, we'd be pleased to answer any questions.

Absolutely. (OPERATOR INSTRUCTIONS.)

We'll go first to Edward Yruma from J.P. Morgan.

Hi. Thanks very much and congratulations on a nice quarter.

Thanks, Ed.

Robert, you've had some strong performance out of some of your more mature campuses for a number of years now, and I know your model tells you that at some point you revert to kind of more tuition-like increase growth there. What's driving some of that strength and when do you expect those mature campuses to, in fact, become more mature?

Well, one thing that's driving it is that in the calculation of mature campuses that we provide in the press release, we include campuses that are only four years old. And our model suggests that a campus is probably going to continue to add students till it gets to be seven, eight, nine years old. So, we're getting a little bit of growth just definitionally by including those four-year-old campuses in the mature category.

Among those campuses that we have which are older than eight years old, we have, indeed, had small increases in student population over the last couple years, and I think that's variable. I think in some years they'll be -- depending on graduation rates and enrollment rates, you could have slight decreases, some they'll be slight increases, but in general our model suggests that you reach a saturation and we're quite happy with a campus of somewhere between, say, 800 and 1,500 students, which is fully mature and providing enormous amounts of operating cash from the campus because the margin's quite high at that point, and more importantly providing a solid educational experience in that market. We become a accepted answer to the question in that market of where do you go to school if you want to go back and get a bachelor's or master's degree as a working adult.

So, it has been better the last couple years. It doesn't change much in my view about what the model should look like. We're certainly delighted to see that growth, but we expect it to be roughly stable on an ongoing basis.

Gotcha. And one follow-up, if I may. Can you talk a little bit about your thought process behind the decision to do a special dividend versus accelerating your share purchases? Thank you.

Sure. Well, we did accelerate the share repurchases significantly, more than doubled it in authorization. We had more cash than we could use this year. We frankly expect to have more cash that we can use next year. We've always felt that -- when we have an opportunity to repurchase shares at a significant discount to intrinsic value on behalf of our owners, that's a good way to do it and we're going to continue to do that. On the other hand, we also like to give shareholders their own option to either buy a bigger stake in the company or redeploy that capital elsewhere, so we thought a mix of increased share repurchase authorization, as well as a special dividend, was a good way to deal with that.

And we'll take our next question from Mark Marostica at Piper Jaffray.

Good morning, guys.

Hi, Mark.

Hey, I wanted to ask about student retention trends in the quarter.

Okay.

Specifically, how did they trend? If you could comment on what retention was and how it compared to the year ago period and sequentially.

Sure. The retention rate was basically stable compared to a year ago if you look at it from the standpoint of a spring term to a fall term, which is the way we tend to do this. It was down sequentially from the summer -- spring to summer and then summer to fall. What happens, I think I mentioned last quarter, we're continuing to try as much as we can to drive the seasonality out of our student enrollment pattern to get more students to take a summer term on. We still have a significant number of our students who are enrolled in the traditional academic year and then take the summer off even though they're working adults, but because their kids have time off for the summer and they're trying to schedule vacations and things like that. So, when we make small increases in our student enrollment for the summer, it tends to drive and outsize retention rates spring to summer, and then in this case we had those students enrolled in the summer. Most of them enrolled for the fall, as well, but because our summer enrollment was so much higher than it was the year before, the sequential retention rate was down slightly, but the actual retention rate for the year is trending quite a bit higher than the year before, about 80%.

Got it. And just moving on to a question on selling and promotion spend, you got a lot of leverage on that line item this quarter compared to the year ago period and it came in below what we were thinking. Is there anything to read into that? Did you see a much higher efficiency on the cost per start or did you see the opportunity to cut back in any way to take advantage of lower cost of leads or what have you? Any explanation there?

Sure. It's really related to student growth and revenue growth. I mean, we spent exactly what we intended to spend and that was a very efficient spend. I mean, our marketing team continues to do a great job in building the brand in these various markets. Because remember also, we had four new markets that we were investing in this quarter. But, the real effect on selling and promotion costs as a percent of revenue is that revenue went up quite a bit based on the fact that student enrollment went up so high in the quarter.

Okay. And last question and I'll turn it over. Rob, you've been very steadfast in the programs offered at the Strayer campuses around the country for some time now. Are you looking at perhaps into '09 or -- excuse me, into '08 or '09 launching any new verticals, or should we consider the current footprint of programs to be what you all go through '08 with and '09 with, as well?

It will be mostly what we go through with. I mean, we're quite comfortable with the academic offerings that we have. We think that they are the offerings that are most closely in line with what our students want to take and our prospective students are looking for. It's unlikely we would have brand new verticals. We're always looking at our course structure and we've got a product development group that's thinking about ways in which our existing curricula can be expanded and made more relevant and timely, but I would not expect to see radically different verticals that we'd be offering in the next couple of years.

Great. Thank you.

Thank you, Mark.

And we'll take our next question from Bob Craig at Stifel Nicolaus.

Good morning, guys.

You guys still cover us, Bob?

We do. Question for you to follow up on Mark's and based on our estimates and Lord knows our estimates could be wrong, as you pointed out to us before, but we're showing cost per starts down somewhere in the neighborhood of 5% year-over-year in the quarter, and I'm just wondering if you could generally comment on where you're seeing overall marketing efficiency, number one, and, two, if you look over a several quarter basis, and I know, Rob, you've indicated before that you change things on a quarterly basis, what kind of shift have you made to the marketing mix over time?

Well, the broadest shift over a seven-year period has been the use of internet relative to media sources like direct mail, which is consistent with what I think business and economy as a whole is doing, but on a quarter-to-quarter basis I wouldn't say there is a definable or specific trend or shift. We really give our regional marketing managers and our marketing team the opportunity and the authority to pick whatever media they are interested in in that particular market and it'll go back and forth. We'll have orders where in one market we're quite heavy in radio and television and then the next quarter we're much heavier in direct mail and the next quarter we'd be heavier in the internet.

We do think it tends to be a regionally based decision and we have a lot of confidence in the team that we have in place that makes those decisions. And I think, finally, the broadest trend, probably the most helpful aspect with regard to our marketing mix is the performance of our existing students in the classroom and our alumni. I mean, clearly, I think I've said many times that the marketing is important and we like to be efficient at it, but it's nowhere near as important as the quality of the academics and the experience of the students because that's what's going to drive the brand identification in these markets and over time really drive the student growth and revenue growth independent of what we spend on the advertising side.

That's helpful. You take a look at that 17% growth you achieved this year versus the original model of around 15%, and relative to what you were expecting in that 15%, where did the out performance come from, Rob? Was it new school ramp? Was it greater marketing efficiency? Was it something else?

Well, again, the greater marketing efficiency would affect the cost side. It wouldn't necessary affect the growth of students. It was pretty broad-based. I mean, we did quite well in our new student -- in our new campus openings and we did I would say better than our model would've predicted on some of the '06 and latter half of '05 campuses in terms of their ramp rate. We had some pretty good performance in some of our mature markets, and the global online did fairly well also. Two percentage points of student enrollment growth can have a very large impact on our earnings per share because we have a fairly low share count, but over the next ten years, Bob, I have no way of predicting, nor do I try, the variability above or below the rational sort of model norm. We could have a percent or two below or a percent or two above in any given year just based on the vagaries of when the students want to come to class, and we really don't try and push that. We want to build out a university structure that will be there to serve what we think is very high demand and we tend not to get too wrapped up around on a quarter-to-quarter basis what that enrollment growth is.

Okay. Last one and I'll move on. You mentioned where the first of the nine openings next year's going to come and a couple of existing markets, but just taking a look at the balance new versus existing, how might that spread look?

I think it's likely to be close to half and half. There's no real magic or strategy to that. It's really a one-off decision we make each year and each quarter as to where we want to invest our scarcest resource, which is our management talent in penetrating new or reinforcing existing markets. Raleigh and Charlotte were crying for additional investment. They've been great markets for us and we held it off a little bit while we had other things we wanted to do. We knew we had to go back there. We've got a couple other markets that we think during the year we're definitely going to have to supplement, but we've got several new markets that we're excited to get into, as well, so I think it's likely to end up at about half and half, or as close as you can get with nine campus openings to half and half.

Well, we're still waiting on Cleveland, Rob.

Okay.

Thanks a lot.

Thanks, Bob.

And we'll take our next question from Amy Junker at Robert W. Baird.

Good morning. Just a couple of questions for you. The first, Rob, you talked about your initiatives to try and improve your corporate alliances. What are you doing in that respect and have you seen any improvement thus far?

We actually had a really good year in that area. We have a small, but hardworking staff that focuses solely on that. As a matter of fact, some of the growth that we had in the global online was driven specifically by alliance partners that have allowed us to penetrate operating activities that they have well outside of any of our campus footprints. And we think that's a really important part of our business. It's important from a commercial standpoint in that it does tend to drive a lot of student enrollment, but it's also equally important from a reputation and brand identification standpoint that these are -- employers and large employers are people that we want to be satisfied with the outcomes and results of the Strayer University education. And so by maintaining these relationships we get a lot of good feedback with regard to our curricula and our learning practices and it's self verification that we're achieving a mission that we want to achieve with regard to that, so it's a big part of what we do.

Can you just tell us roughly how many employers do you have relationships with at this point, just ballpark numbers?

Oh, it's over a hundred.

Okay. Great. And then last question I had, just with respect to your '08 business plan, can you share with us kind of what your assumptions are in terms of tax rate and then perhaps just interest income as the other area I guess I would ask on and what your thoughts are for CapEx going into 2008?

Mark?

Yes, Amy, what we're modeling for tax rate is 38%, and in terms of CapEx, in the neighborhood of 5% of revenue.

And just interest income? Any thoughts there with the special dividend being paid in the beginning of the year?

Kind of depends on how we use the authorization.

Okay. Okay. Thank you.

And we'll take our next question from Trace Urdan at Signal Hill.

Hey, good morning.

Hey, Trace.

Rob, I want to push back a little bit on back to Mark's question about leverage at the sales and marketing line because the truth is that you've had two quarters of positive leverage there and none prior to sort of June of '04, and I think you're on track to have positive leverage at the sales and marketing line for the first year that you guys have been running the company. So, I'd like to kind of push a little bit harder on that and understand what you see as the source of the turn there. Does it have something to do with the brand being more recognizable? Is it sort of ambient change in the market, or is there something to do with your marketing mix or the dynamics in the ad marketplace or the lead marketplace that might be signaling that because it's actually a pretty significant turn for you guys?

Well, I mean, I don't want to minimize it. I mean, we're certainly delighted with it as business managers of the enterprise. As I mentioned to Mark, the tactical decision making with regard to how dollars are spent really does happen at the local level. Some of us here at the office in D.C. once a quarter will get a briefing on it, but it's frankly more informative to us rather than any direction that we're giving and I think we have a very talented group of people that are doing that.

I don't think there's anything significant in terms of either the cost of media or structural changes in the type of media that we're using. I do think that over time what we would expect to see leverage in our operating model is as our reputation gets bigger and as we have a longer history in some of these new markets that we've moved into, we're going to get more students for basically the same advertising spent. And that's really the crux of it. We spend about the same amount of money per quarter, per year anyway, per market. When you go into a brand new market like -- take Raleigh, North Carolina we moved into four years ago. We didn't get very many students. We were brand new and nobody knew us. Now after four years of operations and a couple of graduating class -- graduated classes and a great expansion of our faculty in that market, we're still spending about the same on advertising, but we're getting a lot more students, so that advertising cost per student enrolled goes down.

I think the thing that for us is most relevant and there may be some confusion in the way other people look at this is that the marketing cost or the marketing efficiency or the advertising cost per student enrolled is a derivative, it's not a driver. We spend what we expect to spend on advertising and then that advertising cost as a percent of revenue will go up or down based on the number of students that we get enrolled and that we expect over time to grow with the maturation and the knowledge of the brand in that market.

That makes a lot of sense and that's very helpful. The other question I wanted to ask was is you guys -- I mean, you've described in detail how the most important controlling factor in campus expansion is the talent that you have internally in order to be able to do that, but I wondered if you feel a sense of urgency to expand into new markets from the sense that do you feel like, I don't know, whether it's aging baby boomers in your target market or the rise of online offerings from traditional schools or is there any factor that makes you feel like we've got to get to these markets sooner rather than later or do you sort of have the feeling like the market will respond the way it responds when we get there?

Well, we have a sense of urgency from the standpoint of employing our owner's capital because there aren't a lot of businesses I've been associated with where you can execute an organic growth strategy, invest in your own business, and achieve in excess of 70% on weathered returns. So, as business people, Mark and I look at that and say, "Look, let's do as many of these as we can."

I don't have any sense of urgency with regard to the strength or the longevity of the market. I think that what drives demand for what we do is a long-term, very long-term secular shift from a manufacturing based economy to a knowledge based economy and a consequent increase in the value of education as a factor of production in the economy, and I don't see that changing in the next 10 or 15 or 20 years, nor am I at all concerned about the aging of the baby boomers or generational cycles. There's an awful lot of unmet demand out there and we, frankly, haven't found a market where the investment of a Strayer University campus doesn't create a great return for our owners because the market responds to that. So, the urgency is based on the fact that such a great high return use of our owner's capital, it's not at all related to a sense of timing for the market. And it's always, always, always constrained by the knowledge that if you do it wrong, this whole really virtuous investment cycle could fall apart quickly. All you need is one campus in one market that doesn't meet the needs of the students and faculty in that market and everything that we're working so hard to build would be at risk. So, we feel no urgency whatsoever to run risks on the quality side and frankly, we won't. So, that's how it all kind of balances out.

Well, I'm glad you put it that way because I think that that -- I think that it's true that investors are delighted to have you returning cash to them when you can't put it to work, but they'd probably prefer rather than getting the $2, they'd probably just as soon see you open up new campuses. So I'm wondering if you guys are looking at that situation and thinking that there's anything you need to do differently in terms of being able to sort of accelerate your talent pool growth or anything like that in order to be able to sort of step up that pace.

Well, it's really not an either/or. It's kind of an interesting financial model because, frankly, if -- we could open 20 campuses next year and we'd have a larger cash distribution issue the following year based on how quickly these campuses ramped their profitability. So, no matter how fast we can accelerate our campus openings, we're probably going to be in a position where we can -- we'll have access to (inaudible) cash flow either it can return to owners through dividends, special dividends, or repurchase of shares. So, they don't really counterbalance each other. We definitely are always looking at ways, and Karl McDonnell and his team is focused extremely hard on this, is that how can we accelerate the growth of internal management talent both on the faculty and the administrative side such that we can open more campuses.

Last year we opened eight. This year we'll open nine. Hopefully in future years we'll open even more, but the one thing that we are extremely cognizant of is that it's not an easy thing to do and having the right academic leadership in place is the difference between having a successful university expansion and having an unsuccessful one, and as nice as this all looks, we're going to err on the side of making it successful.

Okay, Rob. Thanks.

You bet, Trace.

And we'll go to our next question from Gary Bisbee at Lehman Brothers.

Hey, guys. Good morning.

Hi, Gary.

Rob, I want to ask a question around the special dividend. With the -- if you forget about that for a second, your payout ratio either to cash flow or book GAAP earnings is 30% or something. How do you make the decision to do a special dividend rather than raise the common dividend substantially higher? It's great to get the cash, but I think some people would argue that having a higher ongoing yield might be something that would be valuable to your valuation.

Right. Yes, and we had a spirited discussion about it at the board level, I would say. My view is with regard to financial engineering it's more art than science. I can tell you what drives our decision making, and that is is that the first thing we should do is invest as much of our cash as we can in expanding the university, investing in the business, because it is the highest return for our owners, but as I mentioned to Trace, it's got this virtuous problem of the faster you do that the more cash you generate to deal with in terms of return to owners and it's kind of a rare opportunity from that standpoint.

With regard to a common dividend versus a special dividend, we do feel that given that model it makes sense to have a common dividend, that it's an ongoing commitment to your owners that you're going to return capital to them and that in some way it ought to reflect some percentage of your ongoing cash flow, whether it's 25 or 30 or 40 or 50%. I really can't tell you that we feel very strongly that there's an exact number that would work there and it's more of a judgment call on an ongoing basis and in this case we've increased the common dividend by roughly what we think the increasing cash flow is going to be next year.

We have an amount of cash that we feel we need to keep on our balance sheet in order to fund our operations and allow for the expansion that we want to execute. We have over the last couple of years, three years, been an active repurchaser of our shares because we have distributable cash flow in excess of that amount. We felt like we were going to have distributable cash flow at the end of 2008 well in excess of that amount and made a major increase in our share repurchase authorization and then for the remainder, we felt that paying a special dividend made sense given the fact that we had already increased our common dividend, or we're planning to increase our common dividend, by an amount roughly analogous to our increase in distributable cash flow for the year.

So, we look at that without any preconceived notion and have a, like I say, a fairly spirited and full-throated debate by a number of people on our board who have very well thought through and sincere opinions on this and then we reach a consensus and that's what we've done.

Okay. One more question on the return of capital. I know your opinion and I know you're probably gonna -- you're going to give me a hard time for asking this. I know your opinion as to why you don't think splitting the stock would make sense, but given some restrictions on the amount of stock you can buy back, have you put any thought to splitting the stock at some point to make the stock more liquid, which might make your ability to increase buyback without having a real impact on the market change at all or you still think that's something that doesn't make sense?

Well, I would never criticize you for asking a question, Gary, but my view on stock splits is that they don't really affect the intrinsic value of the business and that ultimately I expect with the shareholder base that we have that share price will reflect the intrinsic value, and so it doesn't really drive more liquidity or more ability to purchase at the amount of dollars that we're trying to invest on behalf of our owners through repurchasing shares if the market allows us, whether the stock trades at $200 or $100 or $50, it's really not going to have a meaningful impact on our ability to execute that. So, to this point, no one's convinced us otherwise and so we don't really have an intention of splitting the stock.

Okay. If I look back at the last couple of years, you've entered a pretty good mix of what I'd call really large, say, Top 50 markets and also a bunch of Tier 2 and maybe even a couple smaller markets. As you look at that strategy, has there been any real difference in performance either on the ability to ramp enrollments quickly or what you have to spend to get those and the resulting profitability or if you look at the last five years you're seeing pretty similar performance across most of the markets that you've entered?

Well, the advantage of the Tier 1 markets, the large markets, the Philadelphias, the Atlantas, is that while it's more expensive for the first campus or two, it gets less expensive for the incremental fifth or sixth campus because you've already invested quite a bit in the brand built. But, when you normalize for that, take an average for the big market, against some of our smaller markets, I don't really see a meaningful difference. The real difference is the caliber of the leadership that we have at the campus with regard to the ramp rate of students. Our students are smart. They're very discerning consumers and if they don't feel like they're getting what they're looking for, they won't enroll and they'll leave, and so -- and it also tends to reinforce itself in those campuses that really are doing a great job. They'll grow at a much faster rate, so regardless of the size of the market, the real variability that we see -- although, frankly, it's all been variability on the upside; we really haven't seen one that's below what our investment model would say -- has been with regard to the caliber of the campus leadership talent and not so much related to the size of the market, which is why going forward we will continue to have a mix of larger and smaller markets that we go into.

Okay, and then just one last one. I know the fall's the hardest quarter to get the big year-over-year enrollment growth, just the biggest absolute number, but it looked like in the mature market you did have some deceleration not only versus last quarter, but versus the first half. Is there anything going on there? Is there any obvious trend or is this more just because it's the biggest intake of the year, the number's a little tougher?

I don't think there's anything going on and I think the appropriate comparison because of that is to the prior year, and in that case, I think we were fairly solid in those markets relative to the prior year. The enrollment moves around, Gary. It -- I don't -- we don't see it as predictable as some people do, nor do we frankly want to be in a position of trying to massage it. I mean, we're making these investments in the campuses. We have a high degree of confidence in the underlying demand and we do a good job educating. We're confident that the value will accrue to our shareholders as the campuses grow.

Okay. Thanks for all the color.

Thank you, Gary.

And we'll go next to Brandon Dobell at William Blair.

Thanks. Couple of quick ones. As we think about the logistical comparisons between '08 and '07, so I guess I would say the timing on school openings, timing of graduations, those kind of things, anything that we should be aware of as the current model, the quarter-to-quarter fluctuations there?

Well, we're going to try, Brandon, and have the campus openings be a little smoother. We experimented with not opening in the summer and trying to open for the fall and just logistically evening out your openings we think is probably a smarter idea. So, we'll try and do it more of a sort of 2, 2, 2, 3 if we can or 2, 2, 3, 2 or something like that, but a lot of it has to do with the -- some real estate considerations and the rate of which our people are ready, but we would hope to have it be a little smoother in terms of campus openings by quarter than we had it this year.

And then in terms of graduations, there's really no change there. I mean, we -- students complete their requirements for graduation each quarter, and so that is an ongoing process for us. I don't see that as having a major impact. Mark, do you?

No.

No, I don't think so.

Okay. Kind of leveraging on Gary's question, actually, as you look at a small market versus a large market, any material differences in what you guys have to pay for teachers or media rates or facilities cost, i.e., is there a difference in, even a slight difference in the return on capital that you guys see in those different markets?

There can be a slight difference. I mean, salary structure and lease rates and all expenses are higher in higher cost of living areas. But, large cities in a high cost of living area, as I said earlier, give us the opportunity to open many units in the market, so it's spread over a larger base and so it can be a little more effective. And there are some smaller markets that have lower cost of living; they're in lower cost of living parts of the country. But if I try and calculate what the difference in return on capital is, it's all so far above our investment decision that it doesn't really have a meaningful impact for us.

That's what I expected, but I just want to make sure. And then leveraging on an earlier question about new curriculum areas. I guess from a different perspective, we've heard a lot in the industry about specializations and how they impact either student retention or just the attractiveness of the institution to new students. What's your thoughts on those micro segmentations or micro editions to curriculum that you guys have right now?

Well, to the degree that they are enhancements or improvements to our base curricula in business accounting and computer science, then we think it makes sense. Outside of that, we haven't found it compelling or attractive.

Okay. And then final question, I would assume that implied within your '08 business model, there's no change in terms of how we should think about the new school ramps, the time to profitability, anything like that?

It's based on our -- the model that we've shared in the past and Mark will go through in detail on Wednesday in Philadelphia, as well.

Okay. Perfect. Thanks a lot.

Thank you, Brandon.

And we'll take our next question from Corey Greendale at First Analysis.

Hey, good morning.

How are you doing?

Good. Also following up on a couple of questions, another slightly different angle on the F&P. Do you happen to know off the top of your head about what percent of your students are now coming from referrals and corporate relationships and how that's trended over the past couple years?

I don't know anything off the top of my head, Corey. That's a -- Mark, do you know? I mean, in our mature markets, it's well over 50% of our students are referrals, and I think we know that roughly 20% of our students are coming in some kind of corporate alliance. So, we'd have to sort of back calculate. Maybe you can think about that before Wednesday, Mark, and -- I would say a high number, Corey.

Yeah, that'd be interesting for investor day if you could do that.

Yes.

The second question I had was in talking about quality, how close are you, do you think, to your goal of making sure that the student experience is exactly the same campus to campus? Is there still a lot of room to grow there or is it pretty close to what you want it to be?

I think it's an ongoing effort. It's -- the maintenance of it is as much an effort as anything else, particularly as you're spreading your footprint farther and farther. I mean, there's more disaggregated units . Operating it becomes a more complicated responsibility. So, I mean, I'm happy where we are now, but I think there's a significant amount of work that we're going to have to do to keep it at this level going forward, particularly as we get expansion farther and farther west and north.

Okay. And my last one is, it looks like the global online growth actually accelerated a bit sequentially in what you'd think would be a harder comp quarter, and I know you mentioned corporate relationships helping there. Is that -- are you saying you would point to that drove the acceleration or was there anything else?

That's the main thing I would point to. That team down there works quite hard and I think demand for what we do continues to grow and we're really trying to focus on the quality, not just of our instruction, but actually of our technology of -- the use of technology and media in our online classes, but in a short term what drove I think this quarter was some very good performance with some of our corporate partners.

Thanks very much.

You bet.

(OPERATOR INSTRUCTIONS.) And we'll go next to Victoria Capalbo at Zweig Associates.

Hello? I think we lost Victoria, Tony.

Please go ahead, Victoria. Your line is open.

Oh, I'm sorry. I was (inaudible).

Oh. Do you have a question, Victoria?

No, I do not.

Oh, okay. Go ahead, Tony.

(OPERATOR INSTRUCTIONS.) And with no further questions left in the queue, I would like to turn the conference back over to your presenters for any additional or closing remarks.

Thank you, Tony. Well, thank you very much for participating. We look forward to seeing all of you next week in Philadelphia. We'll have, as I said, a dinner with students and faculty and alumni on Tuesday night. We'll also take a tour of our downtown Philadelphia campus on Tuesday night and then we'll have a number of presentations on Wednesday, which will go into significant detail on some of these questions that have been raised and also hopefully give you all a feel for the depth and breadth of our management team. So, I look forward to seeing you all on Wednesday. If you cannot be there, you can, I think, log on on the web. It'll be webcast and you can check with Sonya's office if you're trying to figure out how to do that, and for those of you who can't make it, we will talk to you on the next call. Thank you.

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time.