Strategic Education Inc (STRA) 2008 Q1 法說會逐字稿

Please standby we're about to begin. Good morning everyone and welcome to Strayer Education, Inc. First Quarter Earnings Results Conference Call. This call is being recorded. Following today's call we will offer the opportunity for questions and answers.

At this time for opening remarks and introductions I would like to turn the call over to Strayer Education's Senior Vice President of Corporate Communications, Miss Sonya Udler. Miss Udler, please go ahead.

Good morning. 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 time through Sunday, May 4th. The replay is available at 888-203-1112, pass code 4368500.

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 Annul Report on Form 10-K and its other filings with the Securities and Exchange Commission.

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

Thank you Sonya, and good morning ladies and gentlemen. As is our custom I'd like to begin this morning with 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 first quarter of 2008, after which I'll comment on our enrollment results for the spring academic term, provide an update on our growth strategies, and finally end up with the company's earnings outlook for Q2 - 2008.

Strayer Education, Inc. is an education service company whose primary asset is Strayer University, a 37,000 student, 55 campuses, postsecondary 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 student's 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.

Our expenses at Strayer Education include the costs 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, in 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 March 31, 2008 increased 21% to $97.1 million compared to $80.2 million for the same period in 2007 due to increased enrollment and a 5% tuition increase which commenced in January of '08.

Income from operations was $35.6 million compared to $28.9 million for the same period in 2007 an increase of 23%. Operating income margin was 36.6% compared to 36.1% for the same period in 2007. Net income was $23.5 million compared to $18.8 million for the same period in 2007, an increase of 25%.

Diluted earnings per share were $1.64 compared to $1.30 for the same period in '07, an increase of 26%. Diluted weighted average shares outstanding decreased to 14,340,000 from 14,490,000 for the same period in '07.

At March 31, 2008 the company had cash and cash equivalence of $119 million and no debt. During the three months ended March 31, 2008 the company sold its $77 million investment in short-term tax-exempt bond funds and invested the proceeds in money market funds. This sale resulted in a gain before tax of $800,000.

The company generated $34.2 million from operating activities in the first quarter of '08 compared to $19.4 million during the same period in '07. Capital expenditures were $5.1 million for the three months ended March 31, 2008 compared to $3.9 million for the same period in '07.

During the three months ended March 31 of '08, the company invested $56 million to repurchase approximately 353,000 shares of its common stock at an average price of $159.36 per share as part of a previously announced common stock repurchase authorization. The company's remaining authorization for common stock repurchases was approximately $26 million at March 31, 2008. During the three months ended March 31, 2008 the company paid a regular quarterly common stock dividend of $5.3 million and a special common stock dividend of $28.9 million. The company also received $3.4 million upon the exercise of 100,000 stock options.

For the first quarter 2008 bad debt expenses or percentage of revenues was 2.5% compared to 2.6% for the same period in '07. Day sales outstanding adjusted to exclude tuition receivable related to future quarters was 12 days at the end of the first quarter of both 2007 and 2008. Rob.

Thanks Mark. Just a few amplifying comments on the financials from my perspective. Our out performance of $0.06 versus our predicted EPS for the quarter was a little larger variance than we'd normally expect just three months out so I think it deserves a little deeper explanation.

First off we had a combination of higher revenue and lower bad debt expense than Mark and I were expecting which gave us 50 basis [point-ish] of market expansion in the quarter. A little bit more than we were expecting and that contributed roughly $0.03 or about half of the EPS out performance. The higher revenue was a result of both the stable mix of undergraduate and graduate students versus last year which is eliminated what with a downward pressure on our revenue growth per students as graduate students take less classes, as well as our revenue was helped by higher application fee income in the quarter based on very strong spring term new student enrollment. The remaining $0.03 of outperformance came below the operating line, $0.01 was due to a slightly lower tax rate and $0.02 is on Mark's shoulders as the result of -- we had the lower share count. We did have a larger than normal share repurchase in the quarter, but in addition to that even though we had less cash we actually had higher interest income due to the one-time gain from liquidating the tax exempt bond fund position that Mark described.

On distributable cash flow growth, and again which we define as cash generated from operations minus all CapEx, including all growth CapEx, we actually show a 90% increase year-over-year for the quarter, however that comparison is benefited by a reclassification of tax benefits associated with stock option exercises in the first quarter of both years.

Now when you adjust out those benefits, and if you're keeping score at home, the way to do that is the line on the cash flow statement excess tax benefits from stock base payment arrangements. Our distributable cash flow in the first quarter was still up a pretty healthy 40% on 25% growth in net income. So that relationship between cash flow growth and net income growth is remaining quite strong.

Turning to the spring term enrollment results, we had a strong quarter. Total university enrollment increased 19% on a year-over-year basis. That's up 16% from both the winter term of 2008, the sequential previous term as well spring term 2007, the year-over-year comparison. Continuing student enrollments were up 17%. Our retention rate was up approximately 100 basis points which definitely helped that. Our new student growth was up 28%.

With regard to student mix, business administration, accounting, and economics degree seekers make up almost 70% of our student body for the spring term. Computer science degree candidates are at around 20% of the total student population. The graduate population is up only slightly as a percent to 29% of the student mix in the quarter.

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

On our first objective for the spring term we were well ahead of target, a number of mature campuses showing 7% growth. With regard to new campus activity for the spring term we opened two new campuses. It's a third campus in the Orlando, Florida market, and a sixth campus in the Atlanta, Georgia market. We also today announced our intention to open two campuses for the summer academic terms as well. Both of them will be in new markets for us, Jacksonville and Palm Beach, Florida.

In the global online unit growth rate was 45% for the quarter, and on capital redeployment we announced this morning our regular quarterly dividend of $0.375 per share. We also announced that in the first quarter we had repurchased approximately $56 million worth of our common stock.

On the business outlook for the second quarter of 2008 based on the University's strong enrollment growth for the spring term offset partly by increased expenses associated with the accelerated rate of new campus openings, as well as lower interest income due to lower cash balances and lower interest rates versus the prior year, we estimate our second quarter EPS will be in the $1.45 to $1.47 range. In the second quarter we again expect a slight increase in operating margins versus the prior year as we continue to roll through the costs of the investments of the new campuses.

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

Thank you. The question and answer session will be conducted electronically. (Operator Instructions). We'll pause a moment to give everyone an opportunity to signal for a question.

We'll go first to Edward Yruma with JP Morgan.

Hi, thanks for taking my question and congratulations on a great quarter.

Thanks Ed.

Embedded in your 2Q guidance have you assumed that bad debt picks up to kind of more historical levels, or do you expect they be able to maintain this performance throughout the rest of the year?

Well the bad debt expense tends to be somewhat seasonal because the way our algorithm works you're writing off 180 day old receivables, so in the case of the first quarter we're writing off summer receivables which is our lowest enrollment quarter against one of our highest revenue quarters, Q1 because we have high enrollment in that quarter.

So Q1 is always a seasonally low bad debt expense. Q2 and Q3 are generally higher seasonally. The more important statistic for Mark and I is on a year-over-year basis comparing the same quarter year-over-year how that looks. That was pretty healthy this quarter because -- it's not so much 2.5 versus 3.5 last quarter, it's 2.5 versus 2.6 the year before. We would like to be similar to where we were last year. I think we sort of stabilized the bad debt. Improvement over last year would be nice but we just don't know. It's a question of the collections. What was it --

3.5% last year.

Last year for that second quarter.

At the end of the second quarter.

Yes, so that's kind of the guide that we're looking at.

Great, and if you could give us a quick update on your rollout of criminal justice program, thanks.

Sure, we've got a team working hard at it under President Stallard and our curriculum development group. We hope to have the actual development of the curricula done by the end of this year and in time to go through a process of regulatory approvals in the various states, and ideally by sort of the midpoint of 2009 we'll be offering the actual classes.

Great, thank you very much.

Thank you Ed.

We'll go next to Kelly Flint with Credit Suisse.

Thanks. Can you give a little more color on the new student growth and also retention which were both very strong particularly the new student growth, 28%. Anything going on there in the marketplace? I know you don't consider yourself countercyclical but maybe kind of comment on that theory and anything else. And then is it sustainable in the -- even in -- over the never couple quarters?

Well, our view Kelly is that our student growth is going to match over time the rate of our capital expansion, the rate at which we open new units. It will -- it has been and I expect it will be somewhat volatile around that trend line. We tend not to get too excited on the upside or the downside with regard to that. I mean I think if you really think about students and the decisions they're making to enroll back in school, and try and force them into calendar quarters that help your reporting as a company, you sort of lose sight of what we're all about as an institution.

So we sort of believe the students are going to come when they come, and we've had quarters where it's quite high. We've had quarters where it's lower. I really couldn't begin to comment on what's it's going to be for the summer or fall term.

I am quite confident that the investments we've made over the last three or four years in accelerating our rate of campus openings certainly assist our ability to attract more and more new students. We just have more locations on the ground in different areas and particularly the experience that our students have had in those new locations and the brand that we're building in those markets, the reputation that we're gaining among students and faculty is clearly quite helpful. But I would expect that over time, and we tend to have a very long-term view of this, the rate of new student growth and the rate of total student growth will match the rate at which we are able to expand the university through our units.

The retention rate that you mentioned actually was a very positive sign for us. I mean we look at that retention rate as a much clearer indication of the quality and the impact of our academic offerings because when a student first enrolls they don't really know what it's going to be all about. If you can get them to get through from class to class, from semester to semester, and then ultimately to graduate, that's the feedback that we're looking for. That the quality of our academics is really hitting the mark in the classroom and that students are satisfied and are encouraged by the progress that they're making.

Okay, can I ask another one on the lending bill that a lot of folks are talking about? If loan limits are increased, federal loan limits, how would you look at that? I think it's tempting to assume it would be a great opportunity to raise prices. I know your views on your value proposition are I think somewhat maybe different than others in this space, so price relative to what you offer, how do you think about that? And any sort of thoughts for us on -- and how we might think about that for the (inaudible) for the space?

Well I certainly couldn't comment with regard to how other companies or universities are addressing it. If the increase in loan limits passes, I think that's generally a good thing to make more access to credit available to students. It'll have no impact on our pricing policy. I mean, our pricing policy is well established. It's 5% a year. It's well within the loan limits now and I would not use an increase in loan limits as an opportunity to increase prices.

Is that it Kelly?

Yes.

Okay.

Thanks a lot.

Thank you.

And we'll go next to Mark Marostica with Piper Jaffray.

Hey thank you. Nice job on the quarter guys.

Thanks Mark.

A couple questions for you. I just want to drive down on the start growth question that Kelly asked and specifically did you see any strength from your business accounting economics, or visa versa, your computer science, or was the strength of the start growth kind of even across those two categories?

It was generally even Mark. I mean the mix of computer science and business accounting economics has been pretty stable for the last couple years now, Mark isn't it? Isn't about a high 60% in the business and accounting, and 20ish% in the computer science. So I wouldn't attribute it more to one rather than the other.

Fair enough, and on the subject of lead costs, could you give a sense for what you're seeing in the market as you acquire web leads. Are you seeing any change in lead costs?

Well we don't really think about the web advertising differently from our whole advertising media. We spend about the same amount in each market each year. We allow the regional and local marketing managers to decide the mix between advertising on the Internet versus advertising on TV or in the newspaper. They make those calls based on what they perceive the efficiency of the advertising spends going to be.

I didn't hear anything in our last quarter's marketing review that suggested that Internet advertising was any more or less expensive over the last quarter than it has been over the last year or so. And I know it's an important part of how we try and build brand, particularly for our type of student who tends to be doing a lot of research on the Internet with regard to figuring out what programs are all about. But I would not say that we saw anything, Mark, that was drastically different than we have over the last couple years with regard to that.

And one last question, Rob, we've obviously been hearing about Title IV lenders becoming more selective particularly on the higher default rate loans. With that said, and understanding your default rates are lower, I'm just curious are you sensing or feeling the impact of any of that selectivity with the banks that fund your student's, federally guaranteed student loans at this point?

We have not seen or felt the results of any of that selectivity from the standpoint of they've all encouraged us to send more students their way. I mean they're asking for more of our volume.

I mean, I have heard bank officials describe that as the funding costs for student lending goes up and as the return they receive on the interest rate goes down, and particularly as the amount that they're on the hook for net of the guarantee goes up, that that business is less profitable for them and it's a lot less profitable for students who don't repay their loans. And so that they are looking ways in which to legally discriminate towards those institutions that provide better business opportunities to them. I mean that's -- I have heard that described. It's -- from our standpoint it's always been under the rubric of could you please send us more students, but beyond that I think you'd have to talk to the banks themselves.

Great. Thanks very much.

Thank you Mark.

We'll go next to Amy Junker with Robert W. Baird & Company.

Good morning. You had some pretty good leverage on the selling and promotional line and I'm just wondering, was there anything that happened in particular this quarter that maybe got pushed back into the second quarter, or if that's -- that level of improvement we should expect to see going forward. Are you just seeing more perhaps efficiency coming out of that line item?

Well I can pretty much assure you that Mark accounts for the advertising costs in the quarter which they're supposed to be accounted for. There really wasn't anything out of the ordinary or different. As the campuses grow and as we gain maturity in markets, as I said I think to Mark Marostica, we spend about the same amount each quarter on building the brand.

The spend doesn't change. What changes is the number of students who enroll and then therefore the revenue, and so the spend as a percent of revenue goes down and that's what causes the margin expansion as the university grows. But there really wasn't anything special of the spend side. We ended up with a growing number of students particularly in newer markets where you're reaching that breakeven point and then moving into increasingly high levels of profitability and that's what drives that leverage.

Great, and then just regarding the last three campuses that you're planning on opening for this year, can you share if those are -- if you know if those are going to be in new or existing markets?

I believe they'll all be in new markets, Amy. We've got a lot of internal competition for those resources and we've pretty heavily invested in existing markets on the first half of the year, so I suspect that the -- well, the two for the summer will be in new markets and think the final three will also be in new markets.

Great, thanks so much, and good job.

Thank you Amy.

We'll go next to Jerry Herman with Stifel Nicolaus.

Thanks, good morning everybody.

Hi Jerry.

Rob, I wanted to ask a little bit more about the student metrics as they seem to be pretty healthy here and maybe explore what influence the campus age demographic is having. I know you talked a little bit about it in your shareholder's letter, and I know in your analyst day you talked about a growing number sort of in that two to seven year old timeframe. How important of an influence is that on the volume metrics?

Well I think it's definitely important. I mean if you think about our business and you break it down into right now we have, what 55 constituent units, we're pretty open about the fact that we believe these units behave in a certain way. They grow at about 100 to 150 students a year until they get to around 1000 students and then they sort of top off.

So the higher number -- the higher percentage of your units that are in the age group where they are growing, the higher your rate of growth for the institution as a whole is going to be. And that's really the benefit that we're seeing is the investment that we've made over the last three or four years of really accelerating the ramp of our new campus openings. And frankly given the demand for what we do and the increasingly high academic performance of the students, the increased retention rates, the increased graduation rates, and then what the students are doing with those learning outcomes in their lives, we'd like to put our owners capital work as quickly as possible and open more units. We just -- we can't do it any faster than we can grow the academic leadership necessary to really provide a first-rate education in the classroom, but as soon as Carl McDonald and his team and the people that are focusing on really maturing these campus deans and campus directors, as soon as we get a greater supply we will continue to increase the rate at which we open those units.

As long as we do that over time you're going to see metrics that increase. At some point in the future, and I suspect it's a long way off in the future when we have fully penetrated the opportunity in the United States and the rate of campus unit opening slows down, those metrics will start to slowdown in terms of growth of students. Of course at that point the operating losses you're incurring with regard to the new units will go away as well, and your margin will start to expand as a business. Your operating margin will start to expand but at lower rates of unit growth.

But as I said, we're only in -- what is it Mark, 12 states, 13 states. We've got another 37 to go to and we're going as fast as we can but I suspect it's going to be a long time before we get to that.

Given all those challenges but in light of some of those positive developments -- I'll put you on the spot here, any thought about adjusting the notional model enrollment target?

Well the notional model enrollment target is based on the number of new units that we've opened. And if we end up with a year in which we can greatly accelerate the number of new units, then in subsequent years the mathematics will describe what that notional rate of enrollment growth will be. But until we get that -- until we've made those decisions and announce those kinds of investments there's really no reason to do that.

I mean right now if all of the campuses behave the way that we expect them to, we're at a point where we can be at sort of a breakeven margin. No margin expansion or contraction at about a 15% rate of enrollment growth. When we have higher than 15% we're going to get a little margin expansion. If we -- if it's lower there'll be some contraction. But that's kind of notionally the way that business ramps right now.

And then just one quick one. Was there any -- the start growth at 28%, were there any geographies that performed particularly well?

Well the global online unit performed particularly well, but all the regions actually were pretty healthy. And we sort of spread our new campus openings around many of the regions as well which sort of helps even that out.

Great, thanks very much.

Thank you Jerry.

We'll go next to Gary Bisbee with Lehman Brothers.

Hey guys, good morning.

Hi Gary.

Just following up on that last point you made Rob, that online out of market or the global online was really strong. It looked like enrollments were up sequentially when normally it dips this quarter. Anything different you're doing, or anything you can assign that to better update to the marketing, or whatever?

Well, I mean I suspect I'm in the minority on this but I've never felt that the marketing is really all that relevant to that kind of enrollment decision. I mean it's just too big a purchase, and too big a life change. The advertisement really is just getting somebody's attention. What's going to cause the student to enroll is not the advertisement. Not to say that we're not really happy and proud of the efficiency and effectiveness of our marketing team.

I think the real impact is the fact that our online academics continues to improve. The experience of our students in online classes is very healthy, and you're starting to get a little bit of viral communication and chat associated with that which allows students to get excited about enrolling. And then as happened last quarter as well, we're also getting in our global unit a real push from some of our corporate partners who have facilities that aren't anywhere near one of our campuses and which we manage through the global online organization.

So it's a combination of a lot of those things, but it's something that we're pleased with and we're going to continue to support with investment and with -- more importantly with sort of the academic focus and oversight. I mentioned in my letter to shareholders that we've got a major initiative going on in upgrading all of our online courses -- our next generation online courses. All of that I think ultimately, Gary, will play into the health of that unit.

Okay. One of the questions I've got a lot recently is how can the corporate reimbursement hold up in a slowing economy? I remember last time through it wasn't an issue for you at all, but one of the things I think I remember correctly is that you've had a lot of success with like the Department of Defense and some other government groups that might be less likely to look at that as a cost cut. Do you want to quantify or give us any sense as to what percent of the corporate relationships you have are government or military?

Well, we can try. I mean it's about 3% of the students, which would be what, three out of 20% or 25% --

Yes.

-- would be kind of the -- what is that like [2]%?

Yes.

Something like that. I mean that's very rough, Gary. We can try and pin it down and get you a more exact number.

Would that include non-military government? The 3% of students, or is that just the military?

I think just military.

I think that's active duty. The government would be maybe another couple percentage points above that. But some of our fasted growing corporate partners -- well, all of the fastest growing corporate partners are not in government. They're not military or government entities. They're groups -- banks, telephone companies, things of that nature.

So theoretically in a prolonged down turn cert -- some companies are going to restrict their expenditures in their investments in human capital. It's possible that we could see that. We certainly haven't seen it to date, and for the most part the people that are -- go out of their way to enter into these kinds of arrangements with us are ones that are really focused on human capital investments and trying to lower churn and training costs for their entry level positions, and the tuition reimbursement and having an alliance with a university like ours is a big part of that.

So I would not say, Gary, that as we look at the business riffs over the next 24 months, even in a rather prolonged recession that I see that as having a major impact.

Okay, great. And then just three quick cleanup questions for Mark. The tax rate was bit lower than I'd expected. Is that a good number to use to the rest of the year?

We still think 38% is probably your best bet, Gary.

Okay.

Just because our investment income over the balance of year although it's not easily predicted it's a smaller percentage of our total revenue given lower yields -- the lower yield environment we're in. So --

And also the cash that we've already [used].

And the cash that we've used for various activities. So I think 38% is still the best number to use.

Okay. Do you know offhand what the interest rate is that the new money market fund that you're in is earning right now? Is that the rate you earn on your total cash likely to be a fair amount lower?

Yes, on average it's bouncing around Gary, but on average since most of it's in tax exempt funds it's in the neighborhood of 2% to 2.5%.

Okay, and then the last one, I noticed you changed disclosure in the press release a little bit around the stock comp. That wasn't -- it wasn't the schedule that broke out where -- what that was within the three expense lines. Are you going to put that in the 10-Q or is that -- you just decided for some reason not to?

No, no, absolutely Gary. Since this is the third year of FAS123R we just thought it was a bit superfluous, but however it will be footnoted in the 10-Q in the same level of detail that we used to have in the press release.

And what's the --

Yes, the actual numbers for those that are interested. You get some of this off of the cash flow statement, but the actual amount of stock base comp that we booked in the first quarter was $3.2 million in '08 compared to I think $2.5 or $2.6 million in '07. But all this will be detailed in the footnotes of the 10-Q which we hope to file within the next day or so.

Okay.

We can certainly keep in the press release if that's something that people are interested in.

Yes, I mean --

Yes it's just that --

From my perspective it's helpful because I know the SEC doesn't want you guys backing it up, but we like to look at it as its own separate line item, but that's just one man's opinion.

Well that's good feedback.

Yes, we're happy to keep in the press release.

Yes, that's good feedback.

Okay, thanks for all the color.

Yes.

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

Thanks. Rob, if you looked at comparing new markets with existing markets where you open schools, how much of a difference is there in the new school model either in terms of time to profitability, costs, marketing expenditures based on enrollments. Just kind of -- trying to get a feel for how different --

Right.

The returns might be especially over kind of the first year or two.

It's not significant Brandon. It's slightly better. It can be slightly better in an existing market just because the incremental advertising spend isn't quite as high. You also have personnel in the area, so as you're staffing the new campus you're not going to have relocation costs a lot of the times. You've got a whole stable of adjunct faculty that you can pick from right away. But none of those are really relevant.

Our fastest ramp to profitability of any of our campuses was a single campus in a brand new market. So the effectiveness of the leadership team can swamp any of the differential impacts of whether you are in an existing or a new market.

Okay, and earlier you mentioned a lot of competition for internal resources. When it comes down to you've got a choice in the back half of the year, new or existing market, and you probably got good opportunities in both, what tips the scales to say, we're going to put it in Jacksonville, or we're going to put in Atlanta again?

Well we try and stay balanced. We know we have more opportunity and more demand than we're currently able to supply. And so we try not to get too focused on one area versus the other. We have a slight preference -- some of us have more than a slight preference I would say, towards expanding the brand, and expanding the footprint and then backfilling more slowly. On the other hand, if you're doing a good job in a market and you've got students who are clamoring to enroll, but really don't want to drive 45 minutes, now you've got the issue of you got a brand and you've got existing students and potential students that you want to satisfy so you can't leave them behind. So it's really just -- there's no real hard and fast rule. There's no science to it. It's more of a judgment call and trying to stay balanced.

Okay. As you look at the incoming students over the last couple of years, any change in what their options were before they chose to go to Strayer or anything -- any change around the margin in terms of what people were looking or what they chose not to do versus signing up with you guys?

No, actually we just -- we had a board meeting yesterday and Lisa [Lovenka] gave a presentation on a new student survey that we had run. It was pretty similar to what we've seen for the last seven years. There's always a lot of competition from local either public or private institutions that have night or extension programs at the bachelor's level. There's a much broader set of competition at the graduate level because almost every university has a sort of part time or an executive graduate program. And then the other sort of large national brands who you all follow are almost always in every market that we go into as well, we're generally the newcomer in any market.

So students are -- our perspective students are looking a broad cross section of those kinds of opportunities, and the amount of those competing opportunities really hasn't seemed to have much an impact on our ability to attract the kinds of students that we want to and fulfill the expectations we have with regard to how these campuses will ramp.

Okay, and one from a different perspective. As you think about the economic impact on either providers ability to enroll students or student's choices, state funded institutions or state subsidized institutions, any noise you're hearing out there, any color on how those institutions are thinking about their prospects looking out the next year as the subsidies may be tougher to come by in a slowing economy?

It's not as severe as I saw it in the summer of 2002 right now, and we were much smaller then and we really had only had a couple of states that we were dealing with, but I do remember in that period states shutting down, both community college and public university particular programs, and directing students our way where we could be helpful. What I hear now talking to the heads of public institutions is sort of a slight anxiety but no real data points that they're funding is going to be cut significantly.

Okay. And then a final one for Mark, I think leveraging off of Gary's question. If you've got the stock base by line item on a pretax basis we'd take otherwise we can wait for the Q.

The numbers that I had given, I'm sorry I didn't make that clear. Actually were on a pretax basis.

Okay, gotcha.

Yes. Sorry. Thanks for that clarification.

Thanks guys, appreciate it.

Be much better for us if it was after tax. That's right.

And we'll go next to Cory Greendale with First Analysis.

Hi, good morning.

Hi Cory.

Good job on the quarter. I just had a couple of quick questions.

Thank you.

This just got to -- getting back to -- well, I think what Jerry Herman was getting at, ramp of new campuses obviously the growth number at newer campuses was pretty strong. Is it fair to assume that new campuses are generally ramping at least a little bit ahead of the notional model?

Yes. Yes that would be fair.

Okay, and is that true across the board, or are there any outliers on the upside or the downside?

There are -- there's none that are below the norm. There are some that are closer to the norm than others. The numbers are pretty small on a brand new campus. You're talking about several dozens of students in that first year. So there's a normal variation that doesn't really attract our attention that much. It can have kind of an outside impact on short-term EPS just given the small share count that we have, but not really relevant I think to the larger issue of building intrinsic value in the organization.

Okay. And then as someone asked earlier about the criminal justice, is that -- I'd imagine that you're going to be marketing that maybe to slightly different groups of people then would select to go to an accounting program, or an IT kind of program. Are there any startup costs associated with that in terms of marketing through different channels or anything like that going into '09?

They aren't significant or material or measurable from the company standpoint. We actually don't have a whole lot of specific marketing associated with any individual programs. I mean, we basically try and build the university's brand. What happened with criminal justice is we keep track of the students who come to us who get interested, think about enrolling, and then decide not to enroll because they don't -- the program that they're looking for we just don't offer. And in those kinds of surveys the program that was most often mentioned was criminal justice. So we were attracting the student anyway with our existing brand building activities and we just weren't able to serve them. It took us a little while to kind of screw our curves to the sticking point as to whether we had the academic [caps] to offer a realistic criminal justice program, but after some of our hires over the last couple of years we got more confident in that and that's really where the decision to go forward came from.

Okay, so no reason to think that the pace of introducing new programs changes. That will be maybe one every few years or something like that?

Correct. I would not anticipate us being a major developer of new programs, certainly not at anywhere near the rate at which we are focusing our energies on expanding the existing university through geographic and online expansion.

Got it. thanks very much.

Thank you Cory.

We'll go next to Kevin Doherty with Banc of America Securities.

Thanks, just a couple follow ups about some of the questions around your geographic expansion. When we think about I guess the cluster approach you take in particularly maybe some markets like Philly and D.C., when you're moving into new markets has that strategy changed at all? I know obviously with all the traction you've gained with online, is it at a point now where maybe you could move in, you might only need two or three new campuses in a given market versus maybe five or six historically?

No it hasn't Kevin, and it's kind of a key point because it -- I mean owners and investors should understand this how we think about it. We don't think of the online as a separate entity. We don't think of it as a sort of standalone business or a higher growth business. We think of it as being fully integrated in both our academic and our business structure. And we think that's the best way to serve the student in a metropolitan area.

The physical campuses become areas of community building. It's where you have -- your faculty has a place where they can come together. Even if a student decides to take all of their classes online, once or twice a quarter being able to come to the campus, see other students, see faculty, talk to their advisors, is really I think an important part of how our university is going expand.

So the use of the online has helped us in numerable ways. I mean, it helps us serve students much better than we could ten years ago. It doesn't alleviate from my standpoint and in the company's standpoint the idea that the way to expand to this university is by having a disaggregated physical model with a number of campuses in any given location such that it's very, very convenient, even if it's only once or twice a quarter for a student to get to that campus.

Okay, and that's fair. And then maybe just another way to look at it, has your strategy with the current expansion, has that really changed much versus how you've approached these markets historically?

No. We try and learn something each year, but the broad outlines which Carl, and Kristen Jones, our head of new campus openings provided at our investor day is what we put together in 2001 and it's what we're continuing to execute.

Thanks Rob.

Thank you.

We'll go next to Trace Urdan, with Signal Hill.

Hi, good morning.

Good morning Trace.

Rob I hope this isn't too big of a softball here but I'm wondering if -- obviously there was no impact on the quantitative enrollment results related to a weakening economy, but I'm wondering if your enrollment councilors are finding that the nature of the conversation is changing at all in terms of the student anxiety over either their employment status or their kind of ability to pay their bills and go to school at the same time. Anything that points to any kind of increased anxiety related to entering into their education given what's going on in the economy?

Well, students always have a significant amount of anxiety coming back to school as adults. That's probably the single biggest thing we hear from our admissions officers that they're dealing with is the fear of, can I actually do this? Can I sit in a classroom again after ten years and have any kind of positive experience, and do I have the time to do it?

But I have not heard and I've spent a lot of time over the last six months talking to our campus directors and our admissions officers on this exact issue. I have not heard any anxiety associated with the general economic situation. And so I just really couldn't tie in any way what we're hearing right now to what you read n the papers with regard to broad aspects of the economy whether it's housing or banking -- financial services.

The places where our students work is for the most part -- at least from what we've seen from our students are not having that kind of impact that is causing our students anxiety.

Okay, fair enough. And then the second question, kind of a more minor point, but as the insane media spending that took place around the democratic presidential primary in Pennsylvania is that likely to cause any kind of a blimp either in terms of marketing costs for your schools in that area, or I guess the flipside would be enrollment in those schools for the same quarter?

No. I mean our marketing teams knew three years ago that there were going to be presidential primaries and presidential elections this year. So their planning includes that and I don't expect that to have any impact.

Fair enough, although they may have been the only ones who knew that the primary was going to be contested in Pennsylvania in April but so be it.

I bet they didn't know that actually, Trace. That's a fair point, but regardless of that I just -- those kinds of short-term things really I don't see having an impact on a quarter-to-quarter basis for us. We've got a pretty stable plan. It just keeps going and it works for us. So we're not going to be that tactical honestly.

Okay, good enough. Thank you.

Yes.

(Operator Instructions). We have a follow with Kelly Flint with Credit Suisse.

Okay, thanks for taking my second question.

No problem.

On the one-time gain you mentioned, I think that I'm confused by the impact of that. It was $0.8 million which I thought was pretax was $0.03 or so, but kind of the upside you described implied it was less. So can you help me understand what I'm missing there?

Yes, it's the combination. What happened is we ended up buying back a lot more shares last quarter than we normally do and that we had sort of forecasted. And so -- and you don't get the benefit of the buyback until really future quarters because as you're buying back through the quarter your share count on a weighted average basis doesn't go down as fast you buy them.

So we actually should have had a lot less combination of impact of interest income along with the upside -- lower impact from lower interest income, upside impact because lower share count, but more of the upside impact of the lower share count happens in Q2 and Q3 and Q4 through the balance of the year.

What happened was that Mark very cleverly noticed that our -- at the time that we were funding both our special dividend and our share repurchase we were getting a lower yield on our short-term bond funds than we were on our money market fund and it was just an anomaly that was going there. And so he traded out of the short-term bond fund, the lower yield had associated actually with a higher net (inaudible) so we had a gain of the $800,000 and so that really offset the lower interest income from the lower cash balance. We'll get the benefit of the lower share count in Q -- more of the benefit in -- through the balance of the year and the onetime gain kind of kept us from having the flipside of that at a lower interest income in Q1.

We will have it in Q2 and Q3 because I don't think he has any of those trades left in his pocket. But it was a nice move at the time, and at this point actually given that the rates have shifted back around and you are getting a higher yield on a longer term investment, where he's trading them back, you're going back into the short-term bond funds now right. So that's what that is.

Okay, so you were basically speaking kind of a net impact. Is that --

Correct.

Okay, and -- but to be clear the results did include $800,000 from that gain?

Our results include an $800,000 onetime gain on the sale of that bond portfolio. They also include the lower interest associated with the fact that interest rates were lower and we had less cash.

Okay, I got you.

And to be clear Kelly, that gain is before tax.

Right.

The $800,000.

Okay. Right, thank you very much. Appreciate it.

You bet.

And we'll go next to Jack O'Hare with Sentinel Funds.

Hi, actually my -- thanks for taking the question. My question was why exactly you made the portfolio shift which you just answered. And -- but it had nothing to do with what's the peculiarities in the auction rate market now. Or is just a matter of looking at relative yields?

No, it was relative yields. We have no exposure to any auction rate securities whatsoever.

Okay. Thanks, and great quarter, thank you.

Yes, thank you.

And we have a follow up with Cory Greendale with First Analysis.

Hi, thanks. Sorry end on so much to do about the cash, but given what you've said about shifting back into the bond funds, Mark, do you have a suggestion that what interest rate we should model on your cash going forward?

Probably 2% to 3% right?

Yes, I mean you guys probably have a better idea to as what interest rates are going to be than I do.

Okay, thank you.

And it appears there are no more questions at this time. Mr. Silberman I'd like to give it back to you for closing or additional remarks.

Thank you Chris. And thanks everybody for participating. We look forward to talking to you again in July on our second quarter call. Thanks very much.

And once again this concludes today's conference. We do appreciate your participation, you may now disconnect.