Strategic Education Inc (STRA) 2008 Q2 法說會逐字稿

Good day, everyone and welcome to today's Strayer Education, Inc. second quarter earnings results conference call. Today's conference is being recorded. And 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, Ms. Sonya Udler. Ms. 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 1:00 p.m. Eastern through Monday, July 28. The replay is available at (888)203 1112 pass code 4492436.

Following Strayer's remarks we will open the call for questions and answers. Please note that today's press release contains statements that are forward looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. The statements are based on the Company's current expectations and are subject to a number of uncertainties and risks that the Company has identified in the press release and that could cause the Company's actual results to differ materially.

Further information about these and other relevant uncertainties may be found in the Company's annual report on Form 10 K and its other filings with the Securities and Exchange Commission. And now I'd like to turn the call over to Rob. Rob, please go ahead.

Thank you, Sonya. Good morning ladies and gentleman and thank you for joining us today. As is our custom I'd like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. I'll then ask Mark to report on the detailed financial results for the second quarter of 2008 after which I'll comment on our enrollment results for the summer academic term. I'd like to provide an update on our growth strategies and finally end up with the Company's earnings outlook for Q3 2008.

Strayer Education, Inc. is an education service company whose primary asset is Strayer University, a 37,000 student, 57 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 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 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, do you want to run through the financials?

Sure. Revenues for the three months ended June 30th, 2008 increased 24% to $97.9 million compared to $78.9 million for the same period in 2007 due to increased enrollment and a 5% tuition increase which commenced in January of this year. Income from operations was $33.6 million compared to $26.4 million for the same period in 2007, an increase of 28%. Operating income margin was 34.3% compared to 33.4% for the same period in 2007. Net income was $21.3 million compared to $17.4 million for the same period in '07, an increase of 23%.

Diluted earnings per share was $1.50 compared to $1.20 for the same period in 2007, an increase of 25%. Diluted weighted average shares outstanding decreased to 14 248,000 from 14,509,000 for the same period in 2007. Revenues for the six months ended June 30, 2008 increased 23% to $95 million compared to sorry; increased to $195 million compared to $159 million for the same period in '07 due to increased enrollment and a 5% tuition increase which commenced in January of this year.

Income from operations was $69.2 million compared to $55.3 million for the same period in '07, an increase of 25%. Operating income margin was 35.5% compared to 34.8% for the same period in '07. Net income was $44.8 million compared to $36.2 million for the same period in '07, an increase of 24%.

Diluted earnings per share was $3.14 compared to $2.50 for the same period in '07, an increase of 26%. Diluted weighted average shares outstanding decreased to 14,294,000 from 14,486,000 for the same period in '07. At June 30th, 2008, the Company had cash, cash equivalents and marketable securities of $118 million and no debt.

During the three months ended June 30th, 2008, the Company invested $30 million in a no load, short term tax exempt bond fund. The Company generated $43.5 million from operating activities in the first six months of '08 compared to $44.6 million during the same period in '07. The Company's cash flow from operations for the six months of '08 was negatively affected by the timing of employee stock option exercises in '08. That negative timing affect will reverse itself in the third quarter of '08.

Capital expenditures were $10 million for the six months ended June 30th, 2008 compared to $7.4 million for the same period in '07. During the three months ended June 30th, 2008, the Company used $13 million to repurchase 66,599 shares of stock at an average price of $195.45 as part of a previously announced stock repurchase authorization. The Company's remaining authorization for stock repurchases was $12.6 million at June 30th, 2008 having invested approximately $69 million during the first six months of this year.

During the six months ended June 30th, 2008, the Company paid regular quarterly dividends of approximately $11 million, and a special dividend of approximately $29 million. The Company also received $10.3 million upon the exercise of stock options.

For the second quarter 2008 bad debt expense as a percentage of revenues was 2.8% compared to 3.5% 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 second quarter of '08 compared to 12 days at the end of the second quarter of '07. Rob?

Thanks, Mark. Just a couple of comments on the second quarter financials. It was a pretty straight forward quarter. At $1.50 we were $0.04 ahead of the midpoint of our predicted EPS range. Three of those $0.04 were generated by a combination of higher revenue per student and lower bad debt expense that Mark just noted. That led to about 90 basis points of increased operating margin in the quarter. That's a little more than we were expecting, but pretty much within the range.

The remainder of the out performance, the other penny, was really the result of lower share count which was caused by share repurchases which we accomplished during the quarter. And as Mark mentioned our distributable cash flow growth looks a little flat for the first six months of the year, but that really is the impact of the timing of the stock option exercises and I guess more importantly, the result in cash tax benefits, which are reclassed out of the operating cash flow this year versus last year. That negative timing affect will reverse itself next quarter indeed. I think we're pretty confident that our rate of cash flow growth for both the first nine months of the year and indeed for the full year will be at or above our rate of net income growth for those same periods.

Turning to the summer term enrollment results, we had one of our stronger quarters. Total university enrollment increased 20% on a year over year basis. That's up from 19% last quarter and 16% for the same quarter last year. Continuing student enrollments were up 21% as we increased our retention rate by approximately 100 basis points. And so the 19% enrollment growth last quarter translated with that increased retention rate into 21% increase in continuing student enrollments.

Our new student growth was up almost 18%. Our student mix for the summer term is very similar to last quarter. Business administration, accounting and economics degree seekers make up approximately 70% of our student body. Computer science degree candidates at just below 20% and our graduate population remains approximately 30% of our student mix for the summer term.

Turning to a brief update on the growth strategy. Many of you will remember that our strategy is based on five objectives. The first is to maintain enrollment in the Company's mature markets. Second, open new campuses particularly in new markets. Third, invest in and build up our online offerings. Forth, increase our corporate and institutional alliances. And the final objective is to effectively redeploy the owner's capital which we are generating through these operations and also our investments.

On our first objective for the summer term, we were well ahead of target actually this quarter at the mature campuses showing 8% growth. Again, part of that is the reclassifications of campuses that are growing at a fairly rapid rate in years four, five, six, seven of their maturity that are reclassified into our mature campuses when they reach year four. Although we did have some pretty strong growth actually even at our significantly older campuses as well.

With regard to new campus activity for the summer term, we opened two new campuses both in new markets Jacksonville and Palm Beach, Florida. We also today announced our intention to open three new campuses for our fall academic term. These campuses will also be in new markets for us. One will be in Savannah, Georgia and two in the Fort Lauderdale, Florida area. And that will bring the total number of campus openings for the year up to the full nine that we had budgeted.

In the global online unit, our growth rate was 51%. On capital redeployment, we announced this morning our regular quarterly dividend of $0.375 per share and as Mark just mentioned we also announced that we had repurchased approximately $13 million worth of our common stock during the second quarter.

On the business outlook for Q3 based on that strong enrollment growth that I mentioned for the summer term, which is the summer term matches up against our third quarter financials and that's offset partly by some increased expenses associated with the new campus openings that I just mentioned, as well as lower interest income due to lower cash balances and lower interest rates versus the prior year. When you add all that in, we estimate our third quarter EPS will be in the $0.79 to $0.81 range in the third quarter.

Notwithstanding these costs associated with the new campus openings, we do expect a fairly healthy increase in operating margin versus the prior year.

And finally, Mark, I guess I should mention that between those lower cash balances, the lower interest rates and the fact that you've been partially invested in tax flows during the year, we could see a little upward pressure on our tax rate for the full year.

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

Thank you, sir. (Operator instructions). Our first question comes from Mark Marostica with Piper Jaffray.

Thank you. Rob, I just wanted to ask a question that I think has been asked on many calls. But given the economic situation that were in, I'm curious whether or not you're getting any push back on tuition reimbursement among your corporate alliances?

Mark, we haven't so far. We've been pleased with that. As a matter of fact, a fair amount of our new student growth in each of the last two quarters has been associated with a couple of particular corporate alliance partners. And so, so far so good on that. We really just haven't seen any downturn and we've been watching very closely for it.

Great. And then I wanted to just touch on conversion rates in the quarter. If you could comment on how those have been trending?

You mean the rate at which our inquiries become new students?

Correct.

Well, it was up. I mean, we did quite well on new student enrollment and there was quite a bit of interest, obviously. We had a large number of inquiries, but the economics of that just in terms of the selling and promotional expense would indicate that it was up. Part of that is affected actually, negative pressure on that is created by the fact that as you get into newer markets we expect that that conversion rate is going to be lower.

In a brand new market with a new campus before you have any real brand identification it's a little more difficult to convince a perspective student that it makes sense for them to commit so much of their time and money into that kind of enterprise. But notwithstanding that, the direct answer to your question is it was up on a year over year basis and is pretty healthy.

Great. And one last question. I think you touched on this and I may not have got the point, but student retention in the quarter. Can you go over that point that you raised, I think, on the commentary?

Sure. Our student enrollment for our spring term was increased by 19% over the previous year. If our retention rate stays stable then you would expect a 19% increase in our continuing student enrollment for the summer term. It was actually up to 21% and when we went back and looked at that that calculated about 100 basis point increase in our continuation rate or retention rate from a spring to summer term. That was actually the best news of all from our standpoint with regard to the quarter.

We had a very strong start of new students last spring and to see even more of them then we had the year before successfully complete their classes for the spring term and decide to enroll for the summer term suggest that the quality of our academics and the service that the students are receiving is something that they're pleased with and excited about. And getting them to actually enroll for a summer term is not always the easiest thing, also.

So, the fact we had an increase in retention rate going into the summer and that really helped the growth of continuing students was for us probably one of the more significant statistics with regard to the quarter.

Sounds good. Congratulations.

Thanks, Mark.

Our next question comes from Susie Stein with Morgan Stanley.

Hi. A couple questions. I know the number is very low, but are updated what your private loan exposure is following the passing of HR5715?

Have you looked at it, Mark?

No, I don't think it's changed significantly from what we discussed before.

It's still below 3%, but I don't know exactly what it is.

Okay. And also can you just be more specific about what you're doing to drive down bad debt and how low do you think that number can go?

Well, I mean it's possible to make bad debt zero in a business like this because all of our students are supposed to pay 100% of their tuition before they start the classes. So, the only reason that you get bad debt is in those circumstances where the campus leadership, the Dean or the Director, allows a student to enroll without perfecting their payment mechanism, whether it's a cash payment or a finalization of their loan agreements.

We only have four starts per year, so it's somewhat inconvenient if a student doesn't have all of their payment methodology finished to make them wait another three months. So, we like to give our campus Deans and Directors the authority at the campus level to basically extend a small amount of trade credit, if you will, for a week, two weeks whatever is necessary.

Bad debt really comes from situations where you've done that and then the student drops out after starting, but prior to completing their payment mechanisms. And so, for us the issue is making sure that at the local level the Deans and the Directors are making appropriate decisions. They're motivated by the right sensibilities in terms of what we want to accomplish at the campuses and then keeping a close eye on that.

When we see it get out of hand at a campus level we just pull back that credit authority. It makes it a little harder to enroll students, but it brings it under control. And then where it stays under control, and by definition for us it means basically not increasing at a rate faster than your rate of enrollment growth, then we're happy and delighted to actually provide that credit authority at the local level because it better for the students.

So, it's really just a question of monitoring it closely and pulling the credit authorities in and out as necessary to get the results that you want.

Okay. Great. Thank you.

Thank you.

And our next question comes from Bob Craig with Stifel Nicolaus.

Hi, guys. Congratulations.

Thanks, Bob.

Rob, you mentioned in your commentary the better than expected growth in the mature campus structure. Is your existing mature campus footprint right sized for current demand? In other words, are you undertaking any increases in existing campus seat capacity?

Well, we have a couple of mature campuses that we've renovated in the last two years and a couple more that we're going to be going through this year. Whenever we do that we look at the actual seat demand and make sure that we've got the right amount, obviously, and then in some cases several years ago when we started to do this when there was a market increase in campus based students taking online courses much of the campus was renovated in those circumstances to support that kind of student. So, there was more advising and tutoring capacity put in at the campus faculty facilities, things of that nature.

But in terms of the numbers that we report for our mature campuses enrollment in that 8% growth that includes students who are taking all their classes online. So, there really isn't they're almost by definition always right sized because it's very easy for us to expand or contract physical seat capacity and it's really just a means as part of a budgeting process looking out a year or so and making sure that you have the right number of classroom seats.

It doesn't constrain or keep us from growing the student population at those campuses and so it's not really that relevant to the [related] growth issue from that standpoint.

Hopeful. Total enrollment has pretty consistently topped your notional model here for a few quarters. Are you at all being structurally challenged by this level of growth from any aspect of your business?

Well, by definition, we hold the level of growth to a level at which we're quite comfortable that we can add academic capacity Professors and Deans in a way that will ensure the maintenance of academic quality. When we start the year the number of campuses that we decide that we're going to open is really a derivative of that analysis. So, we're never challenged during the year. We won't add more units than we can when we put that budget together.

If during the year we end up with slightly higher than trend line growth in enrollment what's basically happening is you're ending up filling up more of your existing classrooms, which also is how you end up with margin expansion in those circumstances relative to the model that Mark and I would have put together. And we kept the classrooms whether it's virtual or physical at a student to teacher ratio that we're comfortable we can maintain academic quality at.

So, we're by definition not feeling the strain, but that's because we structured our budget for 2008 in a way that we didn't put more physical capacity or virtual capacity in place then we felt like we could handle.

Rob, I know you mentioned you'd give more color on next year's opening program in the October timeframe. But any color on next year's openings from the standpoint of new versus existing markets?

I would expect, Bob, it's probably going to be similar to this year. It's probably relatively evenly mixed. It's just because we have high demand in both of those circumstances it's hard to turn down one for the other. So, I do feel like we're the bench strength that Karl McDonnell, our president, and Sondra Stallard, the President of the university have been working on, I think it's fairly healthy. I feel better about this now than I have in many quarters in the past. And so, I think that the concentration that we're doing right now, the attention that we're paying to the issue of developing human capital has put us, I think, in a pretty strong position.

And last one. Would you consider leapfrogging into a high growth potential market as opposed to the contiguous state expansion that you've been doing historically?

Well, the thing is that the contiguous expansion is really a means of managing the academic risk. We're pretty whetted to that. The other sort of aspect of that is I don't think you give up much because regardless of whether a particular community is growing quite fast or relatively stable, the number of working adults in that community that have a high school degree, have a job and don't have a college degree is almost always very high.

And so, we have campuses that have grown very successfully in communities that might be considered much slower population or economic growth. And so, it's just not that relevant to the decision process. To the degree it is relevant, it's overmatched by the commitment to the lowering the academic oversight risk. And the only circumstances that I could imagine leapfrogging would be one in which for some other reason we already have so much academic content or management in a market that it alleviates that risk.

Okay. Great. That's very helpful, Rob. Thanks.

Thank you, bob.

Our next question comes from Andrew Steinerman with JP Morgan.

Hi Rob and Mark.

Welcome, Andrew.

Thank you. You talked about the sales and marketing incentives (inaudible). I want to dive down underneath that and look at the advertising part. (Inaudible) more favorable ad rates (inaudible question - technical difficulties)?

Andrew, I had a hard time hearing that, but I think the question was is our selling and promotion being benefited by lower ad rates in the quarter? And I wouldn't say that. I mean, we have a fairly broad, geographic exposure. I think that advertising rates as a percentage of spend in the economy over the last five years over the last 10 years are going down particularly in some of the traditional media that we use. But I wouldn't point that out on a quarter to quarter basis as any different from the first or second quarter of this year.

Thanks. And just a follow up. Obviously, sales and promotion line percentage was up modestly this quarter. Do you have a similar assumption in your third quarter guidance?

It was up modestly compared to what, Andrew?

Year over year. The sales and promotion percentage year over year was up modestly in the second quarter. Is that also assumed to continue into the third?

I don't really know the answer to that, Mark. But in general, the area where we're most affected by investment in new markets is on the sales and promotion line and we do have a significant exposure to new markets in the latter half of the year. So, to the degree that we have upper pressure it would probably be in that line.

Sounds good. Thanks so much. Congratulations.

Thank you, Andrew.

Our next question comes from Kelly Flint with Credit Suisse.

Hi. A couple questions. First, related to the federal loan limit increases. Have you heard anything about or seen any indication that you'll have to reprocess students as a result of this and that could result in timing delays on receipt of Title IV funds? And then I have a second question after that.

No.

No? Okay. Thanks. And then just related to the macro environment. Rob, I know you're not a big proponent of the counter cyclicality theory, but I think there's a lot of concern out there that the credit environment broadly, not private loans, but just broad pressure on the consumer's credit profile, would hurt the consumer's ability to go to school. It appears from your numbers and some others as well that the opposite is happening. Could you shed any light on some of the theories that you've probably heard out there and also what you think generally might be going on relative to these things? Thanks.

Sure. Well, I'm not a proponent of the counter cyclicality theory with regard to Strayer University. I couldn't really comment on it with regard to some of the other programs beyond to say that in some cases, the way it's been explained to me I think it has maybe some relevance to those programs based on the students they're trying to attract.

I spent a lot of time this last quarter, frankly, just trying to gather anecdotal data to your question with regard to Strayer students. I talked to a lot of students and a lot of perspective students as to whether their access to any kind of credit was affecting their decision making. And the answer was uniformly no. The nature of the economic pressure on our students driving them back to school tends to be both independent of the short term macroeconomics cycle and not particularly affected by their access to sources of credit beyond their ability to access the credit necessary to support their payment mechanism, whether it's a government guaranteed Title IV loan or in those cases where the students are employed by some of our corporate alliance partners and they have tuition assistance benefits. Obviously, that's a key factor.

But the drive to go back to school is really created by the long term secular shift secular may be the wrong word, but the shift in the economy from a manufacturing base to a knowledge base which continuously raises the importance of education as a factor of production. And my view has always been that credit will flow to those parts of the economy that are increasing in importance and for which there is an ability to serve that credit. And that certainly has been the case with regard to the students that we're attracting.

Okay. What about gas prices? Anything you're hearing from the anecdotes about the impact of that? I know you have a lot of online, I recognize that, but the short term feelings about that and even just longer term if they were to remain higher? Do you have any theories on the impacts on that?

It's possible that if gas prices remain high or get higher than they are now that we could see more of our students opting to take online classes. That's been a pretty steady trend over the last few years anyway, and a lot of it, I think, may be age related. As you get more of the students in their late 20s or early 30s that are falling into our age group are individuals who may just be more comfortable and confident with online activities.

But on the physical side, remember, we deliberately build rather small units that are very close to where students either live or work. Our students aren't commuting a long way to get to one of our facilities. We don't have one central campus in a metropolitan area. So, the impact of high gas prices at least with regard to their own commuting would be mitigated by that.

And then the overall increase of gas prices or all aspects of inflation really roll into the first part of your question, which is that a situation where cost of living is going up it's actually probably going to drive more strength behind the motivation to go back to school at least for our target students because they're finding it more and more difficult to meet their ends meet without a college degree.

Okay. Great. Thanks a lot. That was really helpful.

Thank you, Kelly.

Our next question comes from Amy Junker with Robert Baird.

Good morning. Rob, just a quick question on the global online. You continue to do very well and I guess just thoughts from your perspective on what you think is driving that. Is it following up to Kelly's question do you think maybe partially related to gas prices? Is it the corporate relationships you think? What are your thoughts there?

Well, I think that the impact of gas prices would be more felt on our you'd see it more clearly on our campus base population taking more of their classes online. Those students who are attracting to global really don't have a choice with regard to us. So, if they decided to come to school with us they'll, by definition, have to be fully online because they live in markets where we don't have campuses yet.

I think the biggest impact over the last six months has been both the increase brand awareness and the success of our solely online students who are living far away from a Strayer facility and who are starting to communicate with other prospective students online. Just like in a metropolitan market in the online arena, in the virtual arena, our success of our students and faculty and their satisfaction with the program generates a favorable impression, which I think makes it easier to attract other students. And secondly as you said, we definitely benefited over the last six to nine months from several corporate relationships that have driven a lot of students our way and that we're serving through the global online.

Great, Rob, that's helpful. And just lastly, Mark, on the tax rate. Rob had said you should expect some upward pressure. What are you kind of assuming for the year?

Amy, we still think it will be in the neighborhood of 38%, but we're it depends on yields through the balance of the year. We think for modeling somewhere in between 38% and 38.5% would be sort of where we think we'll net out. We're trying to be up front on this because the last couple of years we've modeled at 38% and then we've come in at like 37.5% or something. I don't think it's going to be below 38% this year, just because if you look at the percentage of our income over the last couple of years that came from tax exempt securities, so it's not taxable, obviously.

This year we have less of that because we have lower cash balances. We bought back a lot of shares. The interest rate on those balances is lower and then Mark was actually invested last quarter for a long period of time in taxables. On an after tax basis that was the best security to be in, but it means your tax rate will be a little bit higher.

Sure, great. Thanks, guys.

Thank you, Amy.

Our next question comes from Trace Urdan with Signal Hill Capital.

Hey, guys.

Hi, Trace.

If you take us back and look at where your enrollment growth was this quarter and your revenue growth and even kind of what the earnings did, we've been moving steadily up to what is a pretty what I would maybe characterize as something at the high end of what you all like to talk about as a regular run rate. You have to go all the way back to 2004 as I see it to sort of see a quarter that had enrollment growth on a year over year basis that was as strong as what you're seeing in this quarter.

So, I guess I'm going to push you a little bit on this idea that there's nothing related to the economy that affects your business and it's all about academic quality. And just really ask you how do you think about the fact that these numbers are so strong this quarter and have been kind of trending upward to this level?

I guess the way I think about it is I'm pleased by it.

Well, yeah. Sure.

And I think it is more than anything else a reflection of the investment over the last two to three years we've made in new campus growth. So, we're in probably eight or 10 new markets over that time frame. So, you've got more capacity to attract students in a meaningful way.

And most importantly you wouldn't see it -- you certainly wouldn't see it on the retention rate and on the continuing student growth if you weren't doing a really good job in the classroom. And so, I do believe that that is the most important indicator. I forget who asked the question earlier, but with regard to the corporate reimbursements, I do not think that we're much of a counter cyclical player because we're internally hedged from that standpoint. In a situation where students or prospective students are more concerned about their economic viability then, yes, the incentive or the proclivity of the students to enroll might be slightly higher, but for our student base if they're not working they're not likely to be enrolled. And some 25% or so of the revenue comes from reimbursements from employers.

So, I would not suggest that any of our enrollment growth in the last couple of years has been benefited by the slowing economy. I think if anything there's a slight negative, but it's more than offset by the long term demand of the shift in the economy from a manufacturing base to a knowledge base.

Okay. So, given that then and kind of accepting that at face value is it fair to think that these sort of structural improvements or strengthenings in the business is something that's sustainable and we might be able to sort of see a slightly more elevated level of growth going forward?

Well, over the long term it will be dependent upon our rate of capital expansion. If we're able to continue to open new markets at a rate similar to what we've done in the last couple of years then I would suggest that our rate of enrollment growth is going to reflect that. It may not in any given quarter and there's certainly we're comfortable with volatility around that trend line, but it's not going to be markedly different from that.

And by the same token at the point at which we fully prosecuted this opportunity and we have a presence throughout the entire United States then this is decades from now probably but it's a point at which we expect that our rate of enrollment growth would moderate significantly. So, it's really nothing more complicated than that. So, it always comes back from our standpoint as to what is our capacity for developing human capital and our ability to expand the university at a rate commensurate with maintaining academic quality. And then the enrollment growth and revenue growth ought to track that fairly closely.

The only other point I'd make with regard to 2004 as well is that we're also benefiting this year from a higher revenue per student than Mark and I budgeted early in the year. We budgeted essentially the same metrics that we had last year, which were slightly negatively affected although less so than years before with regard to an increased percentage of our students being graduate students. We've talked about this several times in the past. The graduate students take less classes per term on average even though they pay more.

And so, if your mix is shifting towards graduate students your revenue growth per student will be moderated somewhat. That's been fairly flat the last couple of quarters and we've gotten, I think, Mark, what a full 5% on top of our revenue growth on top of our enrollment growth as revenue growth.

Right.

So, that's adding a little bit on the revenue growth as well.

Got it. Okay. Thanks.

Thank you, Trace.

Our next question comes from Gary Bisbee with Lehman brothers.

Hey, guys. Good morning.

Good morning, Gary.

A couple quick ones. I'll take one different tact on the questions on the economy here just to beat this one to death. I've been hearing from a few companies out there that maybe their business hasn't been countercyclical in terms of enrollment, but just due to people's job prospects not being as strong or feeling like their jobs are more at risk that more people are responding to the messages you put out there. Have you seen any change in leads you're receiving per advertising piece or however you think about that? Or is that really not been anything you're seeing?

I wouldn't say that anything in the last certainly the last three months was significantly different from the previous 12 months and probably going back even further. What happens is the proclivity of the prospective students who respond to our message tends to be increased with the amount of time we're in the market. And as our reputation and brand builds in that market it becomes easier and easier.

In a brand new market, it's somewhat challenging. If they've never heard of Strayer University, they don't have anything any students or alumni or faculty to compare that to. That's a fairly large decision to make under those circumstances. But we always get a few and then the satisfactory experience of those few kind of build on themselves and compound themselves.

So, if you adjust for the age of our markets, I would not say that the proclivity of inquiries or people who respond to any part of our marketing message was more or less than it has been over the last couple of years. And certainly, going back really the eight years that I've been here it's a fairly steady, predictable pattern for us.

Okay. Another question on the enrollment. I know the summer is your smallest absolute enrollment numbers, so the numbers tend to jump around a bit more. But anything you can point out in general that drove such strong year over year growth. It's the highest number we've seen in years. Are the new campuses doing better? Is it across the board? I don't know. Any color would be helpful.

Well, I think the most important as I mentioned was the continuation rates, the higher retention rate which drove very high continuing student growth. Our new student growth has been healthy all year and is, I think, a reflection of the really excellent job that our marketing team does, and really equally or more importantly the high level of service that our administrative and operational staff at the campus is providing.

And then finally, most importantly, the fact that we're in markets that we opened a year or two years ago where the reputation of our program is starting to really create a fair amount of positive reception. And then that really that's a virtuous cycle, Gary, that just kind of drives all parts of the business. It's easier to recruit faculty. It's the better faculty cause students to learn better and retain better and it just kind of feeds on itself.

Okay. And then just one cleanup question. The stock comp when you add it all up from the three lines it looks like it was down quite a bit sequentially. Is that number likely to stay at this lower level or was there some timing issue there?

We had some exercises of stock options in the quarter. It's really a decision of our Board and it's not something that we really try and predict too much beyond the fact that the Board's been pretty clear about that it's not a line that's going to get out of control on the upside. So, I don't know what else to tell you.

From our standpoint, it's a part of our compensation expense which I would not expect over time to be significantly higher than it is now. If it's lower over periods of time where we are after a level of exercises it's probably investments we're going to make going forward in retaining people. So, I wouldn't move it around too much in your model.

It seems to me it's sort of a formulaic calculation, right? You issue options and then their expense over the life of the options and unless you issued less, I'm not sure that it would have dropped as much. Suffice it to say what you're saying is the numbers shouldn't change a whole lot from the recent trend. If this way a bit different maybe it was an anomaly.

Correct. I think that's fair.

You are correct because once you exercise an option by definition it's already vested so it's already been fully expensed.

Okay. All right. Thank you.

Our next question comes from Brandon Dobell with William Blair.

Thanks. Guys, if you looked at the online population both global and as well as wholly or even part time online students, maybe some color on what kinds of programs they're taking. Where do you see them? I'm kind of curious to understand how much leverage you get from the on ground campuses to the online students especially ones that are wholly online. And if you're seeing the global online population coming from areas especially recently areas where you didn't see them maybe six months or 12 months ago.

Well, in the global it's fairly spread across the United States and somewhat around the world. The areas that we draw from the global is continually strengthened. As we open a new market, for instance, we're going to open Fort Lauderdale, Florida. I don't know. We probably had a few dozen students in Fort Lauderdale who were part of our global online. They will be administratively managed by our Fort Lauderdale campuses once they're open, so it will come out of that base.

Within the campus footprints they're the same students. It's really a question of whether the student in any given quarter wants to take an online course or wants to take a classroom course. So, those we report these numbers so you get a sense of facility utilization, asset utilization. But the same student within the campus based population can be reported as an online student or a campus based student three different times 10 times during their career. It's their decision.

With regard to what classes they take, whether they're global or out of area online or campus based students taking online classes, it tends to be fairly reflective of the broad cross section of classes that all the students take. More of our students take business administration or accounting than anything else and I think that's certainly true with regard to the online classes.

All of our students have to take a fairly high percentage of liberal arts types of courses to fulfill the requirements for the degree and all of those are offered online and in the classroom. So, I would guess that that's fairly well represented. And then our computer science programs are heavily represented both in the classroom and online. And then you've got the three graduate programs. So, I don't think that we could draw any distinction between our online curricula and the campus based curricula in terms of relative usage.

And as a matter of fact we're trying to set it up that way. We want it to be completely opaque to the student and have no impact on the student's decision making process beyond their own preferences as to which courses they take when.

Okay. If you were to compare the relative contribution of corporate alliances or I guess corporate alliance or matriculation in community colleges to new student growth this quarter or last quarter or the previous quarter, any major deltas in what those contributions were from those particular drivers for new students?

Well, last quarter for the spring term we had a very large driver from corporate alliances. It was pretty healthy this quarter, but it wasn't as high as last quarter. Community colleges I would guess has been strong really both times. It's increasing in strength. Again, there's going to be volatility around that basic trend line and we try not to get too excited about it one way or the other.

Right. Let's say if you looked at a trend line would it be fair to say that the contributions to new student growth from community colleges or corporate alliances or just your own organic marketing efforts how do those three contributions trend over the next couple of years? Do you see one category getting materially larger as important for your business or is it they're going to all maintain the same relative strength?

I really don't know, Brandon. From our standpoint they're all really important. We're going to focus on all three of them. I just don't have any way of predicting which one would get more or less important. And we're certainly not using that in any factor in terms of how we manage the business.

Okay. And then final question. As you look out the next several quarters, any major changes in the timing of graduations or frequency that we should be aware of as it relates to how we look at persistence?

No. Brandon, just on that last question, I guess the one point that I should say is that of those three categories of students I would say that academically, which is ultimately the most important, we are somewhat partial to community college graduates, just because we found that coming in with that Associate's Degree they tend to do better in the classroom. And so, we're certainly pushing that quite hard at our campus level. But I wouldn't say for the exclusion of any other source of new students from that standpoint.

Okay. Thanks, guys.

Thank you, Brandon.

Our next question comes from Kevin Doherty with Banc of America Securities.

Thanks. Just to follow up on one of those questions. You talked about the growth last quarter in corporate alliances. How much of that might stem from employers in new markets versus existing markets that obviously become more comfortable with your graduates over time? Just kind of curious how much of a benefit you get from corporate alliances when you do move into new markets?

If it's an existing corporate alliance, it's a huge benefit because there's an employer in a new market that knows us and it's actually one of the places where in a brand new market we probably do best. There's some familiarity that the employee or the prospective student has with the university.

With regard to our existing markets that's obviously very important. And in terms of our global online what happens is we end up I don't know of any corporate alliance that we have which is solely served by our global organization. Generally what happens is we'll get a large national account that has some overlap of our campus footprint and because of the success of that they push it out to their facilities for which there's no overlap or footprint and then we serve that to our global online.

Okay. And then kind of switching gears back to some questions around the marketing spending. Could you maybe just remind us what's the incremental spending when you do go into some of those new markets? I know there was some questions kind of about the growth of the S&P at least being somewhat above your revenue for the first time in several quarters. Was there any kind of meaningful maybe up front spending for some of the new markets that you talked about that you're going to be heading into?

Yes. Last year at this time for the summer term we didn't open any new campuses or markets. This year we're effectively opening if you count Lauderdale, Savannah, Jacksonville, Palm Beach. There's four of them. And there is a significant up front spend. You lose money in a new campus because for the first year you've got all of your expenditures including advertising and marketing promotion. And that total expenditure when you net out the small amount of revenue that you get generally creates about a $1 million loss for that year per market or per campus.

So, you can take those four new markets that we're operating this year versus last year and kind of mathematically prove to yourself that the overall investment in brand building is fairly stable or actually down a little bit outside of those new markets.

Okay. And another thing is marketing decisions. There's some autonomy down at the regional level, but overall what's kind of the medium mix for your spending on a company wide basis?

Well, the mix at the local level there's a lot of autonomy. The amount of spend there isn't a whole lot of autonomy. It varies across markets, but we tend to have a fairly heavy presence in traditional media whether it's TV, radio, newspaper as well as direct media whether it's direct mail or Internet presence, outdoor activities. It's a fairly broad cross section of trying to get the name of the university out early on in the life of the university in the market in a favorable way.

Thanks, Rob.

Thank you.

(Operator instructions). Our next question comes from Cory Greendale with First Analysis.

Hi. Good morning, guys. I'll keep it quick. I just have one follow up question. Rob, you were talking about the way you use global online corporate partners. We saw a couple of stories over the course of the quarter about a partnership that Strayer has with Verizon where you're teaching on site in Salt Lake City. Is that a model that you think first of all, is that a [one off] with Verizon and secondly, is that a model that you see expanding to other corporate partners?

We do have other partners, Cory, where we provide on site instruction. I don't think we have one as big or as remote to our current operations as Verizon Wireless. In addition to Salt Lake City, we actually have several other facilities around the country where we do the same thing and it's an important way of method of our reaching students. Verizon Wireless has been one of our long and very supportive corporate partners. We've for several years had a large number of our students their employees come as students.

They came to us a couple years ago and asked us if we would consider providing that on site instruction at many of their facilities and we were delighted to support it. In those cases, we have both on site instruction and then it just sort of naturally flows and you end up with a lot of global online because the students there end up wanting to take more courses then we're providing at their particular site. And so they sort of naturally flow into our global online organization.

But we're quite pleased with that and we think it is a great model for us. It's not so much whether it's online or in the classroom. For us, any time a large employer recommends us as a university of choice we just think that's a positive event.

Great. Thanks. I see we're bumping up against an hour, so I'll follow up with you offline.

That's fine, Cory.

And there are no further questions at this time.

Thank you, Lisa and thanks everybody for participating. We look forward to talking to you in October.

That concludes today's teleconference. Thank you for your participation. Have a good day.