Strategic Education Inc (STRA) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Strayer Education, Incorporated Fourth Quarter and Full Year Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Strayer Education Senior Vice President of Corporate Communications, Ms. Sonya Udler. Ms. Udler, please go ahead.

Thank you, Operator. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education, and Mark Brown, Executive Vice President and Chief Financial Officer. For those of you that wish to listen to the conference via the Internet, please go to Strayereducation.com where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1 p.m. Eastern through Monday, February 18th. The replay is available at 888-203-1112, passcode 8322948. 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 fourth quarter and full year of 2007, after which I'll comment on our enrollment results for the winter academic term, provide an update on our growth strategies, and finally end up with the Company's earnings outlook for Q1 2008.

Strayer Education, Inc. is an education service company whose primary asset is Strayer University, a 37,000 student, 55 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 65% of our revenue comes to us from federally insured Title IV loans issued to our students. We estimate approximately 25% of our revenue comes to us from our students' employers, either directly to us from the employers as payments under one of our many corporate alliance agreements or indirectly to us in the form of tuition assistance benefits paid to our students.

Non-Title IV private loans make up only 3% of our revenue, of which we estimate that no more than .25% of our revenue comes from private loans to students whose FICO scores may cause them to be classified as subprime borrowers. That was one quarter of 1% of our revenue coming from those private loans. We do not now nor have we ever had any recourse or risk sharing agreements with any of the lenders to our students, nor do we intend to do so in the future.

All of the lenders who participate in serving our students in either the Title IV or non-Title IV market, including Sallie Mae, have recently reiterated to us their desire to increase their loan volume with our students and we are confident there are more than ample sources of credit available to our students today.

Our expenses at Strayer Education include the cost of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs. We currently operate campuses in 13 states in the eastern half of the United States as well as throughout the world over the Internet through our online courses. We serve students in all 50 states and over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Association of Colleges and Schools.

Mark, you want to run through the financials?

Sure. Revenues for the three months ended December 31, 2007 increased 20% to $89.1 million compared to $74.3 million for the same period in 2006 due to increased enrollment and a 5% tuition increase, which commenced in January of 2007. Income from operations was $29.2 million compared to $24.1 million for the same period in 2006, an increase of 21%.

Operating income margin was 32.8% compared to 32.4% in 2006. Net income was $19.5 million compared to $16 million for the same period in 2006, an increase of 22%. Diluted earnings per share was $1.34 compared to $1.11 for the same period in 2006, an increase of 21%. Diluted weighted average shares outstanding increased to 14,536,000 from 14,452,000 for the same period in 2006. Revenues for the year ended December 31, 2007 increased 21% to $318 million compared to $263.6 million for the same period in 2006 due to increased enrollment and a 5% tuition increase effective for 2007.

Income from operations was $97.6 million compared to $79.5 million for the same period in 2006, an increase of 23%. Operating income margin was 30.7% compared to 30.2% in 2006. Net income was $64.9 million compared to $52.3 million in 2006, an increase of 24%. Diluted earnings per share was $4.47 compared to $3.61 in 2006, an increase of 24%. Diluted weighted average shares outstanding increased to 14,517,000 from 14,492,000 in 2006. At December 31, 2007, the Company had cash, cash equivalents, and marketable securities of $171 million and no debt. The Company generated $81 million from operating activities in 2007. Capital expenditures were $15 million for the same period.

During the fourth quarter 2007, the Company repurchased approximately 102,900 shares of common stock at an average price of $175.86 per share under a previously announced common stock repurchase authorization. During the year ended December 31, 2007, the Company repurchased approximately 260,800 shares of common stock at an average price of $146.05 per share. As of December 31, 2007, the Company had $82 million of share repurchase authorization remaining under this plan.

In the fourth quarter 2007, bad debt expense as a percentage of revenue was 3.6% compared to 3.5% 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 fourth quarter 2007 compared to 13 days at the end of the same period in 2006.

Rob?

Thanks, Mark. Just a few amplifying comments on the financials from my perspective.

Our revenue growth for the quarter was slightly ahead of our model with our previously reported 15% enrollment growth for the fall term. We had expected around 19% revenue growth in the fourth quarter. We had a relatively stable mix of graduate and undergraduate students in the quarter and lower drops versus the same quarter last year. And that meant that all of our 5% tuition increase was added to our enrollment growth bringing our revenue growth up to 20%. That extra 1% of revenue growth really flowed directly to our bottom line and was responsible for the $0.03 per share earnings outperformance versus Mark's forecast for the quarter.

We have -- in our own model, we continue to look at between 4 and 5% revenue growth per student. Again, that assumes that the mix of undergraduate and graduate students will remain stable. We really don't know what that number is going to do and we'll just let you know during the year as it -- as we know in each quarter.

On expenses, we were right on budget for the quarter. The bad debt expense was basically stable at 3.6%. On operating margin, based on the expenses that we incurred in opening eight new campuses last year, much of which was backloaded toward the back end of the year with our campus openings. We had expected that Q4 would bring slight margin compression versus the prior year. However, that outperformance on revenue, as I said, flowing to the bottom line, we ended up with almost a 40 basis point increase in operating margin.

A couple of key points on the full year results. First, on the income statement, in 2007, 16.5% average enrollment growth led to 21% revenue growth, 50 basis points of margin expansion, and $4.47 per share of earnings. What I really take from that is the relationship between our enrollment growth, our revenue growth, our operating margin, and our earnings per share during the year were all basically consistent with the financial model that Mark and I have developed.

Secondly, on cash, while net income was up 24% for the year, distributable cash was up a healthy 36%. As Mark mentioned, we generated $81 million in cash from operations. We also had $27 million in proceeds and tax benefits from stock option exercises which we don't calculate in terms of our distributable cash flow. We also generated $6 million in proceeds from a building sale. With that $114 million of total cash, we invested $15 million in CapEx and growth, we invested $38 million in the repurchase of our common shares during the year, and we returned $19 million to our owners in dividends, and we added the remaining $42 million to our balance sheet, which, as Mark said, brought our cash and cash equivalents at the end of the year to $171 million, which was up from $129 million from the year before.

So, in retrospect, as we look at that, we really come to the conclusion that there's really nothing changed with regard to the model. We continue to be a fairly efficient generator of cash relative to our net income.

Now, we did use $29 million of that $171 million on our balance sheet at year end to pay a special dividend in January of this year, the effect of which will show up on our March 31, 2008 balance sheet. Although I guess you do have the dividend payable in the December 31, although the cash (inaudible).

Turning to the winter term enrollment results, we had a pretty strong quarter. Total university enrollment increased 16% on a year-over-year basis. That's up from 15% for the fall term. Continuing student enrollments were up 16%. Our retention rate was up approximately 20 basis points on a year-over-year basis. Our new student growth was up 17%. With regard to the student mix, business administration, accounting, and economics degree seekers continue to make up 65% approximately of our student body for the winter term, with computer science degree candidates at about 20% of our total student population. Our graduate population remained at 28% of our student mix in the quarter. Again, that was the -- that causes an uplift on revenue per student because the undergraduate students actually take more classes than the graduate students.

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

On our first objective for the winter term, we were ahead of target at our mature campuses, showing 5% growth. With regards to the new campus activity for the winter term, we opened a third campus each in two existing markets. That's the Raleigh and Charlotte, North Carolina markets. We actually just went down a couple of weeks ago and hosted campus opening events at both of those facilities.

We announced today our intention to open two campuses for our spring academic term. That would be a third campus in the Orlando, Florida market as well as a sixth campus in the Atlanta, Georgia market.

In the global online unit, our growth rate was 32%. Our capital redeployment, we announced this morning our regular quarterly dividend of $0.375 per share. We also announced that we had repurchased approximately $18 million worth of our common stock during the fourth quarter of 2007.

On the business outlook for the first quarter of 2008, based on the university's strong enrollment growth for the winter term, offset partly by the increased expenses associated with the new campus openings, we estimate our first quarter EPS will be in the $1.57 to $1.59 range. And in the first quarter, we actually expect a slight increase in operating margins versus the prior year.

With that, Operator, we'd be please to answer any questions.

(operator instructions.) Edward Yruma, J.P. Morgan

Your business continues to generate cash in excess of your ability to kind of redeploy it back to owners or to invest in the business. How do you think about a minimum cash balance and should we expect to see you to continue to repurchase shares and increase the dividend throughout the year?

Well, I would say we continue to generate cash at a rate, at a healthy rate. I wouldn't say it was in excess of our ability to redeploy it owners because we are redeploying it to owners. And we're certainly investing as much of it as we can as quickly as we can in growing the business. But, again, the cash is not the limiting factor on that. It's the growth of our internal management pipeline, which we think is key to maintaining academic quality.

I don't expect that we would increase our common dividend during the year. We tend, as a board, to look at that once a year when we've got our -- pretty close to our year-end results and a pretty good idea of what the next year's activities are going to be. We do expect to be a repurchaser of our common stock at any time that we have excess capital and that we think that the stock is trading at a discount to its intrinsic value. And that's an ongoing activity. Each quarter we look at that as a board and then Mark and I look at during the quarter in the open period with regard to market activities.

But one of the really attractive things about this business for us, as owners and as managers, is that it really doesn't seem to matter how fast we grow. We're not going to put a dent in excess cash because the speed with which our new investments, our new campuses, ramp the profitability and then become very high generators of cash doesn't -- hasn't seemed to slow down. So the faster we redeploy the cash, the faster it's going to grow. And so effective redeployment back to our owners in a value-enhancing way is really a focus that we have to maintain as well.

Great. And one follow-up, if I may. I know that you've added significant talent over the past six to nine months, including Dr. Stallard. I think you've introduced the new dean of School of Arts and Sciences and I think a new Student Affairs professional. Are there any other open positions and how do you view kind of your talent bench going forward?

We do have open positions. One significant one that I know Dr. Stallard is in the market for is the dean of our School of Business. Those particular areas in the senior leadership of the academic structure that Dr. Stallard runs really haven't been a bottleneck with regard to our growth. Because we actually had individuals who were, if they weren't precisely in those roles, were filling those functions working in our university leadership. The real bottleneck has been the growth of lower level managers, campus deans, individual campus deans, and directors. And those we don't look to fill from the outside. Those are ones in which we think are quite important to promote from within from our own faculty and our own administrators because that's really what's going to be necessary to maintain the culture and keep the focus on the academic quality as you get a farther flung -- a wider geographic expanse of our campus network.

Amy Junker; Robert Baird

I just had a quick question with respect to the selling and promotion line. You saw some good leverage there in the quarter. And I guess I'm curious, is this a function of you're getting, I guess, more efficient with your marketing spend, have you shifted your mix around to some extent, or is it a matter of perhaps just opening more campuses in existing markets, which is helping you out?

Well, I think it's a combination of the growth of the campuses that we've already opened. The ramp to profitability of those campuses. And that's where we tend to see the most leverages on the selling and promotion line. Because we generally spend about as much in advertising in a market at the very beginning that -- when we open it, as we do several years later when we have a lot more students. I think that our marketing team continues to be quite efficient in terms of how they employ the dollars that we earmark for that.

And in terms of changes within the quarter, that team really changes each quarter in each market. There's nothing really specific about the last quarter that I would point to. They're constantly looking for the most effective means of building the brand in a given market. And mainly the -- I think the leverage that you see is just the increase of profitability of campuses that we've opened in the last two or three years.

Great. That's helpful. And, then, I just had one other quick one. As congress has really focused on affordability of post-secondary education, does that change at all your thoughts on tuition increases going forward or is that something you've looked at that you might change?

No. With regard to tuition, it's really quite simple for us. First off, we're at the lower end of tuition for bachelors and masters degrees really across the country. Certainly within -- with regard to the for-profit sector and, with the exception of some instate students at state schools, significantly below most of the educational establishment. I think actually somebody had a piece in the last year or so that broke down the tuition by providers and -- it kind of tracked the data that we have as well. We're really at the low end of that.

The second and more important issue is that the degree to which you can command real price increases with any product or service I think is the degree to which the value, the utility that that product or service provides, is continuing to increase. And we have a high degree of confidence that the need for education is not going to get less in future years; it's actually going to get more. It's going to get higher. And the value of the education that we provide appears, with regard to our own research with regard to our students and alumni, to continue to provide significant increases and value to them. And so that 5% rather predictable stable tuition increase I think is something that works for us, it works for our students, it allows us to continue to invest more dollars with regard to our faculty and our facilities and increase the benefit and the value of the education we provide at the same time that it's providing a significant value to the students. So, as long as we're right sort of in the middle of that value chain, I don't really foresee much concern with regard to that.

The only thing that could significantly affect that would be if for some reason we stop shifting from a manufacturing-based to a knowledge-based economy and education, as a factor of production, stopped increasing in importance, then we would have to take a look at pricing strategy. But I think that's a relatively low risk myself.

Great. Thanks for the color. I appreciate it.

Gary Bisbee, Lehman Brothers

The first question, Rob, what's your take on how you expect the weakening economy to impact the business and, in particular, versus the last recession where I think your business grew nicely through it? The consumer's balance sheet is in a lot worse shape. You might have some people, given that you're focusing on all of the students, mortgages aren't going well. Have you heard any feedback or anecdotal commentary from students that they're less willing to take on the debt even at the attractive government rates to go to college or do you think it's really not an issue?

Well, we haven't heard that, Gary. I mean, I don't think I could speak to the full universe of consumers, but we certainly haven't heard it and we certainly haven't seen it with regard to our enrollment statistics. In general, I think that a weakening economy doesn't have a whole lot of an impact on our business, either positively or negatively. There's kind of a natural internal hedge that we have. One is, is that I think that, particularly for a working adult, the drive to return to school is, first and foremost, based on a sense of economic insecurity, a desire to improve their earnings potential in an economy that's limiting opportunities for them.

And so a weakening economy I think tends to accentuate that motivation. On the other hand, a weakening economy may make it more difficult for corporations to continue to invest in their human capital and that can have a negative impact on our direct corporate alliance program. But, in general, it tends to balance out. And I've always believed that our business is dependent on the broader economic shift of the economy from a manufacturing base to a knowledge base. It's not that affected by the more cyclical shifts associated with GNP or employment or interest rates or any of those other things. And so we're pretty sanguine with regard to that.

Okay. Moving on to the P&L. It looks like over the last two quarters G&A has grown a bit faster, high 20s, a bit faster than what the trend line has been. Is there anything, in particular, going on there? Some of these new people you've brought onboard or anything else? Or is it not -- nothing out of the ordinary, just maybe a few extra costs?

I think we've been paying Mark too much. No, I actually think probably the biggest contributor to the G&A line is bad debt. And bad debt is up over the previous year, although not so much this quarter at 3.6 versus 3.5. And that's probably what's driving that.

Okay. I saw in the press release you issued restricted shares this year. Is that the new policy instead of options or is it going to be a mix of the two? And, then, just a technicality question. Is the expense for the restricted stock, is that in the stock-based comp line that you break out in the press release or is that only the option expense?

Let me take it in reverse order. It is in the stock-based comp line, which we break out. It is what makes up our equity compensation plans. Our plan is based on restricted shares, as opposed to stock options. And it's not new. We've been doing that for three or four years now was the -- we switched from stock options to restricted shares.

Okay, and then, just one last one. Do you know, Mark, if your bond fund that you've got your money in owns any of these auction rate securities that have been front page news over the last few days?

I don't think they do, Gary.

But no change from your perspective in terms of the liquidity of that fund where you've held your excess cash?

Correct.

Mark Marostica, Piper Jaffray

It's actually Mark Skitovich for Marostica. Just a question regarding the categories of your funded revenues. In the last recessionary period, did you see any fluctuations in the corporate funding piece?

We didn't. It stayed at about 20%. What we did see occasionally, I think it was in the summer of 2002, we have situations where corporate alliance partners would suggest they were concerned there was going to be a problem, but it didn't manifest itself really in 2002. I mean, I think it's a realistic issue, if a corporation is quite concerned about expenditures and is reducing. But the thing that I actually feel, again, fairly confident about is most of the corporations that we have these alliances with tend to be pretty heavy investors in human capital and most of these tuition assistance programs are really designed to limit turnover in some of their lower grade employees where the cost of turnover is pretty significant to them. So, I mean, my answer to the previous question, I feel fairly strongly about. I do not believe we're going to see much of an impact with regard to our business should the economy enter a recession. But, then, that's also -- I don't really think we're going to get much of a positive impact either. We get a lot of questions as to whether we're counter cyclical. I really think we're acyclical.

Sure. That makes sense. And just one clarification. The remaining 7% of funded revenues, is that all out-of-pocket student funds?

Out of their own pocket or family pockets. I mean, we've got about 4% or so international students that don't qualify for any sort of Title IV loans. They tend to be direct payers. And then it's a smattering of other things.

Okay. And the 3% private funds, how would you characterize that as a percent of enrollments?

I think it's probably pretty similar.

Yes, maybe slightly higher because I think they each borrow slightly smaller amounts.

Yes. But, yes, around -- I think it's pretty consistent with enrollment.

Okay, great. Just one final question. In this election year, I'm just curious, are you planning any shifts in your media mix and should we expect advertising as a percent of revenue to be up year-over-year?

No, and no.

No, and no, okay.

I mean, we -- the marketing team is always planning tactical shifts in individual markets quarter to quarter, but I don't believe that the election -- cost of media associated with election is going have a significant impact on how we do that.

Susie Stein, Morgan Stanley

Most of my questions have been answered, but I guess just quickly back to the funding issue. Let's say, for example, that the 25% declined in an environment that maybe some of the corporations were pulling back on these employer reimbursement programs. Do you have room on the Title IV side given the students that you serve to increase that or are you set up on the private loan side to increase that? Where would that come from?

Well, we certainly have room on the Title IV side because, I mean, as an institution, we're about 20 points, 25 points below any kind of regulatory limitation on that. I think you can go to 90% of your revenue. The individual students have room because our tuition is not near the caps that they can borrow under. There are a lot of private lenders who have expressed an interest in lending to our students. So, yes, I would say that there's significant availability there.

And, then, ultimately, on the Title IV side, I mean, you would always have the -- as I said, you can go up to 90%. So, I mean, I just -- no, I don't think there's -- there's plenty of availability, yes, and plenty of capacity.

I was just thinking kind of for the age of your students and what they're entitled to, how much room you have there? But, okay, I think that pretty much answers it.

I don't think there's a limitation with regard to the age of the student and their entitlement. The amount of students entitled to is independent of their age under the Title IV program.

(operator instructions.) Jerry Herman, Stifel Nicolaus

I'd like to go back to the selling and promotion line item.

Do you remember the phone number, Jerry?

It's in memory.

Go ahead.

Selling and promotion, it was actually down for the first time for the year since you've got there, or you and your team. Should it start to level off at this point now that you have some economies and critical mass in terms of where you're positioned in the states?

It really depends on our rate of expansion into new markets. That's the single biggest determinant. And, hopefully, in the future that rate of expansion will remain high. So I don't anticipate that it will level off significantly or start to drop significantly, unless we really concentrated for a period of time in markets where we were already -- had built a brand presence. But our desire is to expand to a national presence. And that entails, requires us, investing and building brand in a lot of markets that we have not operated in before. So, over the mid-term, the several year horizon, I would not look to see significant downward leverage on this line. I think it's going to remain a significant area of investment for us.

Great. And, then, Rob, with regard to the program mix that you mentioned earlier, I think you said 65% business economics in accounting and then 20% -- I'm sorry, what did you say, 25%?

20 -- (inaudible) 25.

20 to 25?

Yes.

Okay. And then the rest would be education, healthcare, and healthcare administration, public administration?

Mainly. We're up to about -- about 10% of our population is that -- are those new masters programs. We also have -- I guess economics is included in that. That's basically it.

Any new news on program introductions? I know you guys talked a little bit about that at the Investor Day.

Yes. I think that we -- well, first off, within our existing programs we're in the midst of a complete retrofit of our MBA curricula. And that should be, hopefully, completed by the fall term. And we have this three-year, so this tri-annual, review of our key curricula. We'll move on next year into our arts and science curricula.

With regard to new programs, we actually do have a staff that's looking at one additional undergraduate program. We're still a ways from finalizing that. But it's something that we could see by the end of the year announced or, hopefully, by 2009. But it would be consistent with our focus on professional management competencies. We're not going to get very far afield from what we do now.

Okay, great. And just one last one. I know you were proud of the increase in graduates last year in your shareholders letter. Can you -- care to update us on the number for '07? And, just generally, can you speak to graduation rates, any movement there?

Yes. And my -- we'll print my letter to shareholders and put it on the Web site in a couple of weeks. But, yes, I do reference that again. I think it's over 7,000 students this year. And it's -- it continues to be a significant increase over the previous year. Our graduation rate is something that we focus on quite a bit and a large amount of investment attention from Dr. Stallard and her staff in terms of looking at across all of our programs. And from an administrative standpoint, it makes Sonya's job a little more difficult because we're up to about eight ceremonies in five or six different cities now. But that's the end game. That's really what we're trying to accomplish.

Is there any specific percentage change year-over-year?

I would think the percentage change is probably up 100 or so basis points. It's had a steady but slight increase as our increase in continuation rate kind of moves through multi-year programs. But I don't have that right in front of me, Jerry.

Corey Greendale, First Analysis

(Inaudible) philosophically I guess about bad debt. I know that there was kind of a question of where you should target it. How close is this to the target and where do -- what are you aiming for at this point?

What we target is rate of change. We want to make sure that our bad debt expense is not growing at a faster rate than our growth and students or revenue because that, to us, is a indicator that maybe the quality of the student or the satisfaction of the student and their ability to complete the program is suffering. So we have run this business for a long period of time at around 2%. It's, over the last several years, jumped up into the mid-3s. It was the jump itself that was of most concern to us about a year ago. I think a lot of the steps that we've taken, the focus that we've had on it, has caused it to stabilize. I mean, ultimately, you'd like to see it go down and be zero, but what we really want to do is just watch it closely and make sure that it's, as a percent of our revenue, it's not increasing any faster than our -- the growth of our business.

So, the fact that, I understand it's stabilized now, but the fact that it is a little higher now than it was a few years ago, is that a function of credit standards that are slightly broader through the system or what would you attribute that to?

Well, no, the credit standards actually have been tightened down. That's what I think is what's got it under control. I would attribute it to -- well, there's a really a couple of different major causes. One is the administrative efficiency with which you process your financial aid applications, your Title IV, your loan processing. And we are certainly working closely at that. And, then, separately, once you get it at a stable level so that it's not changing, it's really a question of are your students that you're enrolling satisfied with the programs; do you have high continuation rates; low dropout or no-show rates. And that, for us, over the last year has been quite positive. We have seen that stabilized.

Okay. Given that that has stabilized and I think you've made nice strides in retention and I think your new campuses generally continue to ramp, at least according to your plan and generally ahead of your plan, are there any leverage points you see where there's room for meaningful improvement or is your job at this point really to make sure stuff kind of keeps going as is and stays the course?

Well, the one thing, Corey, that I really want my shareholders to understand is, is that with everything running perfectly the single biggest challenge is expanding the university. Expanding an education institution and maintaining a level of academic quality is not an easy thing to do. So I would characterize as our focus here in the corporate office and the university president's office is the idea that we want this organization to run as efficiently as possible, both as an academic institution and as a company, and at the same time to be able to expand at a very rapid rate, a very healthy rate. And we have a long ways to go. We have a lot of expansion to do in order to accomplish that. We're only in 13 states out of 50 and we're probably only fully invested in 3 of those 13 states. So staying the course, I just don't want to minimize that as a focus or an obligation of this management team because we think we have a pretty attractive and aggressive growth profile ahead of us.

Yes, no, understood. And I think it's understood that it's a nontrivial task to maintain the consistency as you keep expanding.

The last question I had, do you guys participate in the direct lending program at all and is that something that you would look at if there's disruptions to the [FELT] program?

We are available to participate. I don't believe any of our students have done so, Mark. Is that correct?

I think that's correct, yes.

We would certainly, if for some reason private sector participants in the Title IV program were no longer available, we would assist our students in dealing directly with the federal government.

Brandon Dobell, William Blair

A couple of quick ones for you. If you look at the, I guess, the demographic of the student that's wholly online versus out-of-area online, any difference there in what those students look like or what kind of courses they're taking or any shifts you're seeing in the directions that those people are taking?

No. They tend to be very similar types of students.

Any difference between those students in terms of how they're paying their education versus kind of the core on-campus student?

I don't think so, no.

I don't think so either. No, I would say no.

Okay. And in your conversations with community colleges recently, given the fears about an economic downturn, recession, property tax issues, are they rethinking how they're going to approach their local market opportunities? Are they looking to you guys for more potential opportunities? Just trying to gauge a sense -- gauge their current level of expectations with their own enrollment base and how that might impact what you guys see?

Yes. That did happen back in 2002.

Okay.

We had a number of situations where community colleges came to us and said, look, we've got to shut down this program because we don't have the funding and can we shift the students to you, or will you build up -- we weren't -- in 2002, we were really only in Maryland, Virginia, and North Carolina and that was sort of the only places where that we had visibility into that. I have not heard any of that to date. We do have a pretty expansive program of aligning ourselves with community colleges through our articulation agreements. In fact, we have one campus which is co-located on a community college in New Jersey. But, to date, Brandon, I have not heard that raised.

Okay. And I think I might have missed your comments about corporate reimbursements or what their outlook or perspective is right now. If you could just kind of give some more color there, I guess. In particular, are there any particular states where you've seen either [outlying] responses, good or bad, relative to your questions about what their commitment is for tuition reimbursement?

We have not seen anything negative. I think my response to a previous question was a hypothetical somebody asked of where would you anticipate there to be a problem if there was a recession.

Right.

We have not seen anything to date. As a matter of fact, the sort of increased growth in the global online division really, in large measure, is driven by pretty healthy and significant improvements or increases in enrollment for many of our corporate alliance partners.

Jeff Lee, Signal Hill

Over the last couple of years total enrollment growth has been pretty consistent but I know you've always said you're sort of agnostic about the division between online growth and ground growth. But I think online growth is sort of ticked down over the last two years and on-ground growth has ticked up over the last couple of years. What do you think is sort of driving that?

I'm not sure I understand the question, Jeff. If you're referring to our global online or the number of students who, in our campuses, are taking all their classes online?

Sort of global online. Both of those combined.

Yes. Well that actually is up. 32% growth is significantly higher than it's been in the last year or so. And so --

Well, I mean, online enrollment as a total, with both the online enrollments coming from campuses and the out of areas is down as a percentage, a growth percentage, over the last couple of years.

Yes. The problem with that question, Jeff, is that we really don't think about it that way. Because when we report those students who are enrolled at a campus but take 100% of their classes online, that is a measurement of that quarter. They're not discrete students, i.e. that same student the next quarter may take half their classes in the classroom or half online or may take all of them in the classroom. So it's really a capacity utilization, kind of an inventory measure for us. Do we have enough professors who are prepared to teach Accounting 100 online and do we have enough in our Nashville campus and our Tampa campus and our Philadelphia campus? So that rate of growth is, as an individual item, it's almost not measurable because the base is constantly changing.

The way we think about it is that the online classes are a fully integrated and integral part of Strayer University. It's part of the value proposition we offer a student when they enroll, which is you enroll in Strayer University, we're going to make it as logistically convenient as we can for you to attend, i.e. you can take classes at any of our physical campuses or you can take any of your classes online. And our focus is to make sure that the academic quality in all of those venues is equivalent because we do want to be agnostic. We do want to make it just available to our students and let them decide how they want to take it.

The only area of online which is a discrete growth parameter, if you will, is the global because we don't have an opportunity to offer them classroom classes because we don't have a classroom there. But that, as a strategy for us, is, frankly, to bring that number down to zero, except for international students, because over time we want to have a campus throughout the United States in really every venue or someone would need one. So that's how we think about it. I mean, it's -- all I can do is tell you how we look at it and why it is that we think that being agnostic, as you put it, and focusing on the needs of the students and the desires of the students is really the best approach on behalf of our owners.

Okay, great. And, then, one more question. It looks like revenue per student growth has sort of ticked up a little bit over the course of the year. Is there any sort of seasonal impact there?

There's no seasonal impact. The impact is the more stable mix of graduate and undergraduate students.

Kevin Doherty, Banc of America

I know last quarter you talked about when -- about half of your new campuses would be open up in new markets and about half in existing markets. And it looks like the first four you've done are already in existing markets. So is it still fair to assume that the balance of those will be in new markets? And I guess, particularly, I'm trying to think about the impact on S&P and why that might tick up a little more in the next couple of quarters.

The answer to your first question is yes. That is a fair assumption. I think the -- for the remainder of the year we will be in new markets. And the answer to your second question is that can have a -- that may require a slightly higher investment of -- actually, probably the right way to answer that is we're going to make the same amount of investment with regard to brand building and advertising. We'll have less students in those new markets to amortize it over. So, as a percent of revenue, it can have an impact, but I don't expect to see it to have a material impact. As I said, in the second -- in the first quarter, we actually expect some margin expansion. And I think that only opening nine campuses this year, only, opening nine, even though it's an increase versus eight the year before, I think we should be able to handle that with fairly stable operating margins.

Okay. And, then, just -- what's a good tax rate to use for the rest of the year? I know it ticked down in the fourth quarter. I'm just curious if we should still use 38%?

Yes, Kevin, I think 38% is a good number to use.

And we have no further questions at this time. I will turn the call back over to Mr. Rob Silberman for any additional or closing remarks.

Thank you, Operator, and thanks to all of our shareholders and interested participants. We look forward to talking with you again in our first quarter earnings call in May. Thank you.

And that will conclude today's conference. We thank you for your participation.