Strategic Education Inc (STRA) 2008 Q4 法說會逐字稿

Good morning, everyone, and welcome to Strayer Education Incorporated fourth quarter full-year 2008 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, Ms. Sonya Udler.

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 www.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 Time through Tuesday, February 17. The replay is available at 888-203-1112. Following The replay is available at 888-20-3111, pass code 4098443. 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 risks and uncertainties 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. Now, I would like to turn the call over to Rob. Rob, please go

Thank you, Sonya. Good morning, ladies and gentlemen. As is our custom, I would like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. I'll then ask Mark to report on the detailed financial results for the fourth quarter and the full year of 2008, after which all comment on our enrollment results for the 2009 winter academic term. I'd like to provide an update on our growth strategies and finally end up with the Company's earnings outlook for Q1, 2009.

Strayer Education Inc. is an education service company whose primary asset is Strayer University, a 115-year-old, 45,000 student, 64-campus post secondary education institution which offers Associates, Bachelor's and Master's 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. Approximately 70% of our revenue comes to us from Federally insured Title IV loans issued 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 serve students in 15 states through physical campuses as well as in all 50 states and over 30 foreign countries through our on-line courses. Strayer University is accredited by the Middle States Association of Colleges and Schools. Mark, you want to run through the financials?

Revenues for the three months ended December 31, 2008 increased 28% to $114.3 million compared to $89.1 million for the same period in '07, due to increased enrollment and a 5% tuition increase which commenced in January of '08. Income from operations was $39.4 million compared to $29.2 million for the same period in '07, an increase of 35%. Operating income margin was 34.5% compared to 32.8% in '07. Net income was $24.2 million compared to $19.5 million for the same period in '07, an increase of 24%. Diluted earnings per share was $1.71 compared to $1.34 for the same period in '07, an increase of 28%. Diluted weighted average shares outstanding decreased to 14, 143,000 from 14,536,000 for the same period in '07.

Revenues for the year ended December 31, 2008 increased 25% to $396.3 million compared to $318 million for the same period in '07, due to increased enrollment and a 5% tuition increase for 2008. Income from operations was $126.9 million compared to $97.6 million for the same period in '07, an increase of 30%. Operating income margin was 32% compared to 30.7% in 2007. Net income was $80.8 million compared to $64.9 million in 2007, an increase of 24%. Diluted earnings per share was $5.67 compared to $4.47 in '07, an increase of 27%. Diluted weighted average shares outstanding decreased to 14, 242,000 from 14,517,000 in '07.

At December 31, 2008, the company had cash, cash equivalents and marketable securities of $107 million and no debt. The company reported cash from operating activities of $88.6 million in 2008 compared to $80.8 million in 2007. However, the company's reported cash from operations for the year ended December 31, 2008 was negatively affected by the timing of the vesting of restricted stock in the fourth quarter of 2008. That negative timing effect related to a $13 million tax benefit will reverse itself in the first quarter of 2009. Capital expenditures in 2008 were $20.7 million compared to $14.9 million in 2007.

During the 4th quarter of '08 the company invested $29.9 million to repurchase 138,100 shares of stock at an average price of $216.21 per share as part of a previously announced stock repurchase authorization. During the year ended December 31, 2008, the Company invested $109.1 million to repurchase approximately 603,400 of common stock at an average price of $180.86 per share. During the year ended December 31, 2008, the company paid regular quarterly dividends of $23.1 million and a special dividend of $28.9 million. The company also received $10.6 million upon the exercise of stock options. For the fourth quarter of 2008, bad debt expense as a percentage of revenues was 3.8%, compared to 3.6% for the same period in '07.

Day sales outstanding adjusted to exclude tuition receivables related to future quarters was 14 days at the end of the 4th quarter of '08 compared to 12 days at the end of the fourth quarter of '07. Rob?

Thanks, Mark. Just a few amplifying comments on the financials from my perspective. For the fourth quarter, our revenue growth of 28% was right on our model. We previously had reported enrollment growth for the Fall term of just under 24%, and our 5% tuition increase, along with the relatively stable mix of graduate and undergraduate students in the quarter versus the same quarter the previous year, led to an additional 450 basis points of revenue growth. So that was almost exactly where Mark and I predicted.

On the expenses, we were also just about right on budget for a quarter. Bad debt expense was up slightly at 3.8%. But the kind of key thing was, notwithstanding the operating losses that we incurred in opening nine new campuses in 2008, we did achieve about 170 basis points of margin expansion in the quarter. That was, as we discussed in October, based on the very high enrollment growth and revenue growth which fell to the bottom line in the fourth quarter.

Now, as Mark did predict, we ended up with significantly lower yields on our cash holdings versus the prior year, which led to lower investment income and a higher effective tax rate. And that is something I am going to come back to and talk about in the first quarter of '09 as well. A couple of points on the full year results.

First, on the income statement in 2008. Again, 20% average enrollment growth led to 25% revenue growth, 140 basis points in margin expansion, $5.67 per share of earnings, which is up 27% versus the previous year. What I take from all of that is the relationship between our enrollment growth, our revenue growth, our operating margin and new campus openings and ultimately our earnings per share during the year, were all consistent with the financial model that Mark and I have developed and that we've communicated with you all over the last several years, so everything basically was right down the glide slope on that.

On cash flow, owners distributable cash was up 23% for the year, roughly equal to the 24% increase in net income, again we calculate owners distributable cash as the after-tax cash generated from the operations of the business, minus all the investment dollars necessary to both maintain the business and grow it. And we would like that to be roughly equal to our net income. During the year, as Mark mentioned, we generated actually $101million in cash from operations after you adjust for the timing issue you described.

We also received approximately the $16 million in cash proceeds and tax benefits from stock-based compensation transactions. So basically, the pool we had was $117 million. We also used during the year, about $64 million of cash on our balance sheet at the end of 2007. And we invested all that money as follows. We invested $20 million in CapEx to maintain and grow Strayer University. We invested $109 million, as Mark said, for the year in repurchasing common shares and we returned $52 million to our owners in dividends, roughly $3.50 a share between the common and the special dividend. We continued in 2008 to be both a fairly efficient generator and user of cash. But more importantly again, all the operational and financial indices for the year moved in relative harmony with where we would expect them to, given the levers that we control.

Turning to the winter term enrollment results. We had a pretty strong quarter. Total university enrollment increased 22% on a year-over-year basis. I noticed that one the analysts, I am sure innocently and inadvertently, had that number at 20%. However, I assure you it was 22%, it's in the release. That's up from 16% for the same quarter last year. Our strong fall enrollment clearly helped us in the winter quarter. Our continuing student enrollments were up a little over 23%. Our new student growth was up 20% versus the prior year.

With regard to student mix, business administration, accounting, economics, degree seekers, sort of our core subject matter areas, make up about 70% of our student body for the winter term, with computer science degree candidates at about 20% of the total student population. The graduate population in all areas is relatively stable at about 30% of the student mix in the quarter.

Turning to an update on the growth strategy. Just real quickly, many of you remember that our strategy is based on five objectives. The first is to maintain enrollment in the the Company's mature markets. Second is to accelerate rate of growth of new campuses, particularly into new states. Third is to invest in and build up our on-line offerings. Fourth, increase our corporate and institutional alliances. And the final objective is to effectively redeploy our owners capital either within or out of the business.

On our first objective for winter term, we were pretty well ahead of target on our mature campuses, I think as far as we've been ever, showing 10% growth. With regard to new campus activity for the winter term, we opened one campus each in two new markets for us, Augusta, Georgia and Huntsville, Alabama. We also announced our intention to open three campuses in our spring academic term. These will all be in new markets. They include Allentown, Pennsylvania, Charleston, West Virginia, and Salt Lake City, Utah. In the global on-line unit, a pretty healthy quarter again. The growth rate was 47%.

On capital redeployment we announced this morning our regular quarterly dividend of $0.50 per share and also announced we had repurchased approximately $30 million of our common stock during the fourth quarter of 2008. So we very rigorously continue to look at that fifth leg of our strategy and make sure we're doing it efficiently.

On the business outlook for the first quarter of 2009, the University's 22% enrollment growth for the winter term will almost completely offset the increased expenses associated with the openings of our new campuses and the opening of our second on-line operation center. So we actually expect roughly flat operating margins in the first quarter, and with that 22% enrollment growth, we would expect 25% to 26% revenue in operating income growth.

We do, however, expect again in the first quarter Significantly lower investment income versus the prior year. That is really for two reasons. One, yields are down about 300 basis points, like 75%. And we also had a gain on a sale of a financial asset in the first quarter of last year which was about $800,000 in terms of the gain when we rolled out of the short-term bond fund. And again, that comparison will be rather stark. What that does is since our actual incremental tax rate of the operating income is about 39.5%, it won't be offset by as much tax exempt investment income and and so, again, we expect to see our tax rate up significantly on a year-over-year basis. Probably a couple of hundred basis points there as well. So that will drive EPS in the quarter in the sort of $1.96 to $1.98 range and I suspect, again, as long as we are matching sort of the first half of last year before the interest rates came down, we're going to have that impact both on investment income and tax rates.

With that, operator, we would be pleased to answer any questions. However, since we were unfairly accused of cutting off Brandon Dobell before he could ask a question on last quarter's call. I think it's more likely, Mark, he just couldn't use the touch tone pad on his phone. And we would like the first question, Operator, to go to Mr. Dobell if he's listening.

(Operator Instructions) For our first question we will go to Brandon Dobell with William Blair.

There's nothing like being called out, Rob. Really appreciate that. That's great.

You are welcome.

I am not sure if it is bad fingers last time. But I have been called a lot worse. We'll just go with that. First off, I will throw you the obvious softball which is corporate reimbursement and two parts there. One, have you seen any impact on just the number of companies you are dealing with on kind of an ongoing basis. And second, if there is any impact are you seeing that flow through into how students are reacting to it? Are they changing their behavior with you in terms of more or less courses, pulling out, does it impact your retention, those kinds of things.

Well, in the quarter for our winter term enrollment, we had a higher rate of growth among our corporate alliance partners than we did overall. That rate, I forget exactly what it was, I think it was like 24% or 25% versus 22% enrollment growth. So we certainly haven't seen any negative impact in totality. We have more alliance partners. We haven't had any partners who said they want to limit or pull out of the program. I know it's a topic of great concern and focus, and all I can tell you is that it is going fine for us. It is going great for us.

I do know of one partner who was involved with a merger. They had a -- prior to the merger had a tuition reimbursement amount per student which was well in excess of the IRS limit. I think it was like $8,000 per year. The entity they merged with was at the IRS limit, which I think is about $5,500. And that one entity, as it rationalized, lowered its tuition coverage. But that is literally the only specific impact I am aware of. And in terms of the overall support of the grown of the University, it couldn't be better.

Do you think this is an issue for students or is it an issue for us right now?

It isn't an issue for our students, Brandon. I would never presuppose to judge the question you are asking. I can just answer it. It is not an issue for our students.

That is fair. As you look at the sources of your students though, you talked about the corporate alliances from a community college perspective. How are the conversations going with the people that you talk to on the academic side? What you expect, just given all of the things we have heard about about the burgeoning community college enrollments, would you expect to see a long tail on that matriculation opportunity for you? Or is difficult to tell right now because it's so early in this whole unemployment process?

I think it's a long tail for us. Even without regard to the current economic situation. We think our alliances with the community colleges is just a really important part of our growth strategy and more importantly, academically than operationally or financially, the students that come to us graduating from community colleges just have a higher rate of academic success and so we are excited about those relationships. My conversations with community college representatives over the last three months have suggested they are somewhat concerned about funding. And they are clearly seeing an increase in enrollment.

And so, if they have an increase in enrollment and pressure on the funding side due to state and tax receipts, they get caught in a squeeze play there and we're trying to be as helpful as we can in the circumstances. But we are pretty excited about that. That is a really valuable part of our business. Again, mainly because of the strength it gives us on academic performance.

Now as you look across the different types of students, either by degree or by program, any changes in the number of courses that students are taking or their behavior around how quickly they expect to press through a degree?

The answer is no. You would see that in our revenue numbers, because if they are taking less courses you would get less revenue growth on top of your enrollment growth. And that's what I was talking about with regard to both the fourth quarter and the full year, all of those indices were right down the glide slope path we would have predicted.

Final question. As you look out on the lease rolls you have on the campus locations, any significant changes in terms of how you view the rent expense? I know commercial real estates are under a lot of pressure, so do you see opportunities to lower your cost base with those locations or does it not make too much of a difference?

There is certainly the opportunity. Although our lease costs are such a small percentage of our expense anyway, I don't think it has a really meaningful impact on the bottom line. One thing I think is a legitimate issue that we have been talking about internally is is that our model is not to own real estate.

However, if there aren't a lot of developers, people around who have access to credit, and who can provide the product that we need where we need it. It is certainly, if the relative returns on real estate investments go up for us because we have capital and no one else does, we would certainly look at that. Mainly from the standpoint of making sure we have the physical product that we needed where we needed it. But right now, we haven't seen that. That is sort of long-term planning around very negative scenarios with regard to the economy. But as of now, it has actually been quite healthy for us.

So we shouldn't expect the campuses that you plan to open in the next 12 months to change from a lease model to an own model. It is more of a longer term opportunity for you?

Yes.

Thanks a lot, and I look forward to being last in the queue next time.

You're welcome, Brandon.

For the next question we go to Kevin Doherty with Banc of America.

Just a question on the on-line operation center. Just want to see if you can talk a little more about the timing of the investment there. I know you gave some guidance on the margins for 1Q, but how should we think about the investment maybe from 1Q to 2Q as we think about the margin trajectory going forward?

It has some impact in Q1. It will have a lot of negative impact in Q2 and it will have -- that's probably the peak in terms of negative impact. If we are enrolling students for our summer term. It is not clear we will be able to do that. We will know later on in the year. But we may have some revenue for Q3 which will ameliorate a little bit of the losses and then we would expect it to trail off in Q4 and then, hopefully, break even in 2010.

Okay. And how do we think, I guess, about the returns of that new center. I know there is going to be a campus out there as well. But just in terms of how you will utilize that increased capacity for the global on-line versus the existing center you have right now.

It will be additive. And so, we think about returns. I think we talked about it in the last call. Mark and I sort of see this as the equivalent of five campuses and we expect it to operate like our campuses. So if we get a 70% unlevered return on opening a campus, that's ultimately what we would expect to see on this unit as well. But it will be 70% of a five times larger investment.

Presumably, there will be a different ramp up than what you'd have opening on-ground campus then?

Not too significantly, actually. The ramp that we have on both the campuses and the -- that we have in an on-line operation center is really dictated by the rate at which we can provide the academic personnel to support the expansion, to make sure we have reasonable class sizes and adequate student learning outcomes. It is not really constrained by the demand side. And that's never been an issue for us. And so, I actually do expect it to have a similar ramp rate as we do an existing campus.

Our existing global operations center which serves about 5,000 students, we started it about eight years ago. And that's kind of five times the campus size and has ramped about about the rate that we would expect a campus to ramp.

Okay. That's fair. Just thinking about some of the margin leverage in the core business. Where do you stand in terms of your professor staffing levels and some of the other support staff and should we expect any accelerated hiring to support the enrollment base.

You should expect accelerated hiring, but that's baked into the model that we laid out for the year. And so, it is nothing, there is no change to what we talked about in October.

But I guess if enrollments have come in a little better than expected, there shouldn't really be any incremental hiring now?

No, because when the enrollment comes in -- a few percentage points of variation up or down we just absorb within our classes. It has to be markedly above that in order for us to have to go back to the well and hire a lot more faculty and deans. And so, within the normal variation, I don't see that as having a big impact on our hiring expense.

Okay. I will jump back in the queue. Thanks, guys.

For our next question we go to Gary Bisbee with Barclays Capital.

A couple of questions. It seems to me over the last couple of quarters and the ones opening for the spring, you've been going into a bit smaller markets and less doubling up on more campuses in the larger markets. Is there anything we should read into that or is that just the way it goes and you probably have on your drawing board some other larger markets in the next few quarters.

There is nothing to read into it. It is just the way it goes, as you put it. Although, I did say in October that a higher percentage of our investment this year, our new campuses, will be in brand new markets for us. Now, some of those brand new markets in the latter half of the year are likely to be in big metropolitan areas. We have a lot of untapped opportunity in front of us and we take advantage of that. It tends to be sort of a surge in one direction and then a little bit of a surge in another. A couple of years ago we did a lot of doubling up in big markets. This year there is very little of that.

We will sit down and plan 2010 and in four or five months, then we'll just look at a little bit of a squeaky wheel kind of analysis of where do we really need to put these -- The scarce resource is not the financial capital, we've got plenty of that. It is the human capital to staff these facilities.

Do you see any different performance, the much bigger markets versus the smaller ones, or does the model hold pretty similar, all things considered.

No, the amplitude is certainly - there is different performance. But it can be -- There are other things that affect the difference beyond just the size of the market that can completely offset the size of the market. All other things being equal, a third or fourth or fifth campus in a large market is going to perform slightly better than a brand new campus in a brand new market.

But we've certainly had brand new campus campuses and brand new markets that have out-performed any of our previous openings. If you get the right combination of dean and director and faculty there. So it really doesn't go a lot into the strategic planning as to where we decide to put these units. And all of the results are within, as I said, a variation or an amplitude that Mark and I are quite comfortable with. It doesn't change our view as to how many of these we'll try and open.

And just on, it seems like the state schools, we are seeing more and more documented evidence that they are having a real hard time with funding. Do you change how you market your, trying to compete with the part-time programs at some the larger state schools in some of your markets based on the economy, or is it pretty much doing what you have always done. And I know you've been gaining shares and keep doing it. I'm wondering if there is opportunities is basically the question.

The short answer is no. We don't change on the basis of that. Our marketing is really based on trying to slowly build a brand and academic reputation in a market, and it is less affected by shorter term and transitory phenomena like this.

More importantly, we want to be a supportive and integrated part of the educational community of any market we are in. So we don't try and go in and talk about taking market share or competitive marketing from that standpoint. There is an awful lot of students out there, Gary. Demand has not ever been the issue for us. It is just not the kind of thing we really focus on.

Okay. It seems like some of your competitors who have got pricing similar to yours in the lower end relative to a lot of the other for- profits out there have gotten a real good benefit from the loan limit increases last summer, having reduced what were small, but in this economy, important funding gaps that students had away from the Government loans.

Has that had a big impact on your Bachelor Degree completion programs or I am trying to decide if growth has accelerated a little bit the last couple of quarters, if that might be part of the formula. Or if you don't really think that's been a big contributor. Because it seems to me you don't get a huge benefit from the economy, but maybe that is a significant thing that has happened.

I don't think that is particularly significant. And we didn't have much of a gap before the increase. So it wouldn't have had as much of an impact on us. The other thing we have been quite adamant about is we wouldn't use an increase in funding to affect our tuition policy. We're not going to increase our tuition to basically sop that up. And it just seems like a bad business strategy to me. Our tuition is based on what we think is the value proposition to the student. And more credit available to the student doesn't change that value proposition. So we would never take advantage of that. Suck more profit out of the individual student.

I think that over the last couple of quarters, maybe going back six quarters or so, there is really a couple of things going on. One is we are in the midst of a very aggressive capital expansion strategy. We are opening a lot of new campuses. We are also getting a significant benefit in that our brand in some of our mature markets is really starting to have some impact. And as I mentioned, our 10% growth in our mature markets. That includes markets now like Raleigh and Charlotte and Norfolk, Virginia, and even Atlanta and Philadelphia. Whereas before a couple of years ago, our only mature market was Washington D.C. where we were already at sort of peak efficiency.

So you are seeing that brand really build in some of these markets and that is clearly helping us in terms of our performance. And finally, I don't think we are counter-cyclical. I don't think that we get any structural long-term benefit from the economy being down. But it certainly doesn't hurt us. And there may be a touch of -- what does help us is what drives the working adult to go back to school is the sense of economic insecurity and there has clearly been a lot of that over the last 12 to 18 months, and that has not -- it certainly hasn't hurt. And so all of that together I think is responsible for pretty efficient performance over the last 18 months.

Just one last one. You are not seeing any real big trend in terms of an increase in withdrawals based on people not wanting to take on a lot?

Not only am I not seeing a trend, I am not seeing it at all. It is not happening. It's not evident in our results.

Glad to hear it. Thanks.

We go next to Andrew Fones with UBS.

I was looking at the year-over-year growth trend in your revenue, which is obviously we have seen some acceleration here this year versus instructional costs which have remained kind of fairly steady and yuou're now seeing about -- over the last two quarters you've seen about an 800 basis point differential there. Is there anything you would point to that you think has driven that difference, I guess, looking back over the last few years, it being a much narrower differential and perhaps said in another way. Is there anything you think that is limiting your gross profit to a high 68% level? Thanks.

Let me take it in reverse order. I do think there is a limit on where our operating margins will go. If we stopped opening new units it would go up significantly. And much of the operating margin is related to the losses associated with new units. If we weren't doing that, you could calculate it, it would go up five hundred, six hundred basis points. But above that, we think there is a cost to providing high quality education and we certainly do not think of these organizations as sort of infinite margin expansion machines. It is not like you are selling software. I don't know exactly where the number is. If you are not in a growth mode, somewhere in the high 30's, low 40's. And that's where -- When we stop growing that's where it will rise to and then settle out.

The first part of the question with regard to the last couple of quarters on the I&E line is that we have had faster than expected growth in a lot of the new campuses that we opened last year, 2008 and in 2007. And what that means is normally in a brand new campus we might have a a bunch of classes that have two or three people in them and one professor which is just the nature of sort of slowly building the brand in that market. If the performance is quicker than that and you have more students, that's where you will see that margin expansion. Or a better way to put it, that's where you will see less of a margin contraction. And as the rest of our business grows, that has that positive impact. So, it is something we have noticed, we're keeping a careful eye on, it's not associated with anything that can go on forever. But it is a nice little benefit at least in the short term if you are really focused on kind of the short term results.

Okay. Thanks. Then on G&A, obviously, in terms of year-over-year growth we saw a significant step-up there. Was there anything kind of one-time in nature you would point to in terms of G&A spending in the fourth quarter. Obviously, we know that you are ramping up the new service center. Is that where some of that spending is going, was that part of the cause, as you could think about that. Thanks.

The new on-line operation center will actually kind of spread through all three categories. Probably the biggest impact on increase in G&A is something that I hope is one-time, but I don't know, and that is the increase in bad debt. Bad debt is up about 20 basis points and it was up some 20-some basis points the quarter before. But that's something we are trying to manage very carefully.

Okay. Thanks.

Thank you, Andrew.

We go next to Suzi Stein with Morgan Stanley.

Just following up on the bad debt issue. What are you doing to bring down the bad debt. I know in the past you have always said there is kind of some ideal level of bad debt. What would you say at this point in time would be a better level for you of bad debt?

Well, an ideal level would be zero, obviously, which we could do easily. The way this business works, in most cases you are paid before you have to provide the service. So if you are unwilling to extend any kind of trade credit, if you will, if you are unwilling to let a student enroll if 100% of their tuition isn't paid at the start of the quarter, you could easily make bad debt zero. Our view has been because we have four academic starts per year, we like to give our campus directors and deans some authority to essentially extend some forbearance or credit because for whatever reason the student hasn't completed their Title IV application, they don't have an evidence of corporate alliance partnership, if they are a self-payer they just don't have the capital available.

At some minor level we give this authority to our campus leadership to go ahead and enroll the student so they don't have to wait three and a half months until the next term starts. Our focus on the bad debt expense is really less of a financial concern. Because you could probably run this business at a much higher level of bad debt and still be more profitable, because your revenue growth that is associated with that would be far in excess to the bad debt extense that you bring in and it would all fall to the bottom line.

The reason we don't do that is that we find there is a very high correlation among our students between those students who are not performing academically and those who don't pay. And one way to try to control for academic quality in an open access university is to work around an indice like the bad debt expense. The actual number is less important to Mark and Karl and I and Dr. Stoddard, our President, than the rate of change. Any time we see bad debt expense growing at a significantly faster rate than our revenue or our enrollment, that leads me to have a cultural concern. Are we trying too hard -- are we getting the students who may not belong in the classroom and trying too hard to get them in there. And that's when we tend to pull those authorities away from the campus leadership and it always gets under control. Because it is easy to solve to zero.

But we try and not do it that drastically because we think it would be a disservice to students who deserve the opportunity for credit and those of our campus leadership teams that do a good job with it. So we tend to manage it on a case by case basis. Keep very careful tract of its rate of change. And this rate of change was not concerning to me. There has been a couple of times in the past where it has been a much higher and more abrupt rate of change relative to the revenue growth and in those cases we talked about, we've gone in and just pulled those authorities away completely. And then it always comes back down. We are not doing that right now. We think the management criteria that we have in place is sufficient. We will watch it closely and we're not ignorant of potential impact of the economy on this indice. But for now, I would say we are fairly comfortable with it.

Just a follow up on the corporate partners. I know you won't comment specifically on what you are seeing with individual partners, but if you took them and put them, let's say, into two groups, the one group that is experiencing difficulty because of the economy and announcing layoffs, and then the other group. Are you seeing any change in behavior of, you know, in terms of enrollments for the ones that are announcing layoffs?

No, we have a number that have announced significant layoffs that we have increased student population from.

Okay. And what has been the behavior of students let's say laid off, that are receiving corporate reimbursement? How is that handled? And if you could put a percentage on the number that you know, staying versus the number dropping. What would that be?

Honestly, Suzi, the number is not large enough. I don't know of any. Do you know of any, Mark? I think, practically the answer would be that if they are interested in continuing their education and the corporation didn't extend benefits, they would have access to the Title IV funds. But we don't have very many. Literally, I don't know of any.

Great. Thank you.

Thank you, Suzi.

We go next to Mark Marostica with Piper Jaffrey.

Thank you. The first question I have is in regards to your second global on-line operation center. And I wonder if you could help us characterize the transition risk as you move to having two of these centers. Are there any risks that you are concerned about as you open the new center?

Well, all of our expansion entails risk, and it is less risk associated with the business operations of either the campuses or the center because those are pretty easy to control, and more risk associated with the academic oversight. Since our on-line -- the students that this campus or this unit will be serving are by definition already disaggregated, they are already all over the world. We absorb that risk with our on-line academic oversight. And so, I don't see it as either significant or different from any of the expansion risks we have entailed with anything we are doing.

Fair enough. Rob, in the past you have given some commentary around student retention or persistence in the quarter, can you give us the metrics for this winter term?

Yes, it was basically flat. We had about a 23% enrollment growth in the fall term, a little over, about 23.5%, and our continuing student population was up about 23.5%. So, we have reached a very high level of efficiency with regard to retention and I forget the exact number in the quarter, I think like 82% or something. And that is inclusive of graduations and academic failures and things that happen to people in life. So, I don't expect that to be significantly higher. What we want to do is keep it at this level and then make sure that the students we bring in as new students progress through the program and graduate.

Your mix of business, accounting and economic students has stayed relatively flattish over the last several quarters and you know, trying to line that up with commentary from one of the other publicly traded peers in the group, that business was a little bit softer than this company had expected or compared to some the other areas. I am curious, as you look at the winter start did you see any unusual trends around the mix of students business, accounting, econ versus computer science?

No.

Okay. Last question. Favorite topic of the day, corporate tuition reimbursement. Can you give us an idea of what percentage of your students actually tap into corporate tuition reimbursement? I know it is the 25% of revenue. But in terms of the number of students.

I think it's probably pretty close to that. We have two different categories. We have a specific program of corporate partners who we track quite closely. And then we have other students who, we don't have a specific alliance partnership with, but their employer provides tuition benefits and you know, those numbers have been sort of in the high teens to low 20's for as long as we have been here, Mark, haven't they. So, I would guess the revenue is 20%, to 25% -- excuse me, the student population is around 20% also.

Okay. Great. I will turn it over.

You bet. Thank you, Mark.

For our next question, we go to Jerry Herman with Stifel Nicolaus.

I want to follow up on Mark's question. I won't allow it, Jerry, he already asked that one.

How many partners do you actually have at this point, corporate partner?.

We probably have over 100 that we are tracking individually. But my guess is the number of companies that our students are employed at who provide tuition reimbursement is significantly higher than that.

Great.

I am sorry, Jerry, I should correct that. That 100 number includes government agencies as well. I would have to go back and look at how many are private sector companies.

Great. I know you don't update your model during the course of the year, but you guys are running above the model with regard to enrollment. I wonder if you could just comment if there is any other components of the model that are varying, either positively or negatively. I guess one that comes to mind is just your yield on cash. But is there anything, i.e., ramp up costs, that is falling either favorably or unfavorably relative to the model?

No. And actually, yield on cash we don't think about as part of our operating financial model. That is a separate discussion that the Board, Mark and I have with regard to what we do with our owner's capital which is generated by the business. The only sort of impact which that has, which I guess has an impact on the model, is our effective tax rate. Because if we had no tax exempt income, our tax rate would be 39.5%. And so to the degree that those yields go down, then taxes that we pay -- the taxes that we pay on the income from operations are always the same. The amount that shows up as an effective tax rate on the income statement is related to the amount of our assets that we hold, the financial assets and tax exempt securities and what the yields are.

But other than that, you think it's pretty much in line?

Yes.

And then, a question about programs. The new criminal justice program which we see is about to be rolled out. What sort of campus penetration will that have initially. Will it be at all campuses or will it be --

I can't answer that right now, Jerry. We are still waiting on, I believe some state approvals, I think, and we can get back to you on this. We have around half the states already approved. And so, I have not heard from our academic staff which campuses and which states they want to roll it out in at which time. We would hope that by the end of the year it is just about everywhere, and I would expect it would be in a large number of areas by the mid-point of the year.

Okay. That is great. I will turn it over.

Thanks, Jerry.

For our next question we go to Andrew Steinerman with J.P. Morgan.

Hi, Rob, I know you sort of answered this question by saying no favorable, unfavorable things happening relative to the original model. But I just wanted to ask the question in one different way. Because I am getting the question about kind of the expenses for the year. You know, my interpretation of what you just said is that there has been no change in your plans for total expenses through the year.

And you never told us really about the timing of investments. And while the first quarter indication that you said is a little more heavily invested than I had, to me, that is just kind of the company's decision of timing investment opposed to increased investment intentions for the year. Is that fair?

Yes, that is exactly accurate. And I want to clarify your opening comment which is there is no substantial benefit except for the higher enrollment. We said in October that our operating margins would be flat given this level of investment if we had 20% enrollment growth. The first term we are already 200 points above that. That is a benefit.

And just to clarify in the first quarter where you are saying operating margins could be flat with the level of investment that we have. Would that be across all three lines, because the expense lines, I know, campus openings affect gross margin, structural costs, NG&A or maybe because of the great -- kind of the great progress you're seeing on gross margins that gross margins could still be up despite all the investments.

I honestly don't know the answer to that. Well, we haven't broken that kind of planning down to that line. We know how many faculty we have hired for the winter term, so we know what that expense is. But I haven't looked at it that way yet so I can't answer the question.

Well, maybe look backwards at the fourth quarter. And when you think about everything that is driving the great gross margins in the fourth quarter. Is there anything in the fourth quarter that you would say doesn't sort of have relevance moving forward?

No.

Okay.

It is basically the same business. The other way to say that is had we had 20% enrollment growth for the winter term, we would have expected some margin compression given the investments we're making in the first half of the year. The 22% is kind of moving us up to a point where we think it will be relatively flat.

Thanks for the clarifications.

We go next to Kelly Flynn with Credit Suisse.

Hi. Just revisiting an issue about the economy. I heard and recognized what you said about your business and not being cyclical -- counter-cyclical. Are there any metrics that are being negatively impacted by the weak economy and in answering that, can you clarify how much of the bad debt increase you think did have to do with the weak economy, if any?

And the second part, Rob, I want to pick your brain on your views with respect to a prolonged deep recession and whether or not you would change your perspective on how the economy impacts your business if that ends up to be how it plays out. Thanks.

Sure. On the first one, there really isn't any of our line items, with the exception of yield on investments, where the weak economy has negatively affected us. Within bad debt, I don't think it has right now much of an impact. The only thing, Mark, we have the small tail that is recoveries of previously written off accounts. Which I would imagine you know, someone who hadn't paid us and it's gone past 180 days. And you know, the account has been turned over to someone else. In the past we might get a smidgen of that back as they recovered. And I would guess in a really weak economy, the likelihood of an ex-student paying that back would go down to zero. But I mean, that is basis points on a bad debt. Maybe the whole thing is $100,000 or something. Because we basically write everything off at the end of 180 days.

Nothing that I am looking at right now in our business that I would say has been negatively impacted. One could argue that there is a slightly higher propensity to enroll among some students because of the economic insecurity. Maybe a slight positive. Again, I wouldn't hang my hat on that either. With regard to the second part of your question. I mean,. I think it's fair to plan around a prolonged deep recession. That's certainly what we are doing. I do not expect that to have an impact on the execution of our business model. I think the one thing that is fairly well established and agreed upon both by professional economists and by the students I talk to is that the best way to protect yourself in economic insecurity is by increasing your education and you know, within sort of a predictable range of unemployment in a long deep recession, as long as you are not in great social unrest in the streets.

I think that the size of the market that we are trying to address is so large, and the capacity to address it is limited, that I don't expect it to have any real change. And we talked about this with our board last quarter. As we look out five and 10 years, if you take a very negative scenario as to what will happen in the economy, we don't change a thing with how we are investing and what we expect it to do.

Thank you very much.

For our next question we go to Corey Greendale with First Analysis.

Hey, you are here.

Not quite boring enough apparently. I had a couple of questions for you. Have you seen any shift in the number of classes students are taking other than any little insignificant shifts between graduate and undergraduate?

No.

And a question I had is also about the timing of investments. I think what I am hearing, if you could just confirm this, is that assuming that enrollment grows around 20% for the year, you would expect flattish margins Q1, maybe down in Q2, back to more like flat in Q3 then up in Q4 to offset Q2 to get to flat for the year. Does that sound about right?

Yes. We haven't modeled that out, but that certainly sounds logical. And again, Corey, just on your first question as someone else had asked that. Again, you will see it immediately. Because if our students are taking less classes, our revenue growth above our enrollment growth will come down. So, as long as we are getting 400 -- 350 to 450 basis points of revenue growth above our enrollment growth, you can be sure that the students are taking the same number of classes.

Then the next question, could you comment on the new campuses, the Augusta and Huntsville campuses, how those openings went relative to the '08 new campus openings.

They went well.

And did you happen to know the two campuses that anniversaried into the mature campus comp, I think it was the Philadelphia campus and the Delaware campus. Do you happen to know if those were exceptionally large campuses?

They are not. None of them are exceptionally large. And we don't comment on the individual campus populations but those two were sort of on track. And it is if they are four years old, you'd expect them to be 400 to 500 student campuses.

The reason I'm asking and I am sure you don't look at it this way, but we'll kind of cut that any possible way, but if you look historically, there is a pretty consistent pattern of number of students at new campuses going from the fall term to the winter term and it is usually up more than it was this time. And it was just up, maybe 100 students and I am wondering, if anything -- I'm trying to figure out why that would be. relative to past years when usually it's been up more like a thousand students.

I don't know the answer to that, Corey. I am not even sure I understand the question, to be honest. But we did not have anything that was significant in terms of how the campuses aged and moved from category to category. The fact that our mature campuses grew at such a significant rate over the prior year I thought it was one of the more impactful parts of the quarter from our standpoint.

And the last question I had, specific to Strayer's value proposition as opposed to education overall. Do you collect or get any data on -- if you look at your corporate partners where they'd had layoffs on whether your graduates who are at those partners are less likely to have been laid off or any way of measuring they are getting value out the degree they have achieved.

We haven't collected that, but I am fairly certain if you looked that data what you are going to find is it is not statistically relevant. Because people are being off not on the basis of what their academic degree is. It's going to be where they are in the company. And so, I would be surprised if there was any sort of correlation there.

You are right. They might have actually moved up in the company because of their degree so there might be some second degree correlation.

Well, but by moving up doesn't necessarily mean that you are not susceptible to layoffs.

Gotcha.

Next question comes from Gordon Lasik with Robert W. Baird.

I just wanted to close a loop on the new campus openings for the rest the year. All of your openings up to this point, the five that you opened are new markets, can you tell me how many of the remaining six you expect to be new versus existing markets and then how that will be spread throughout the remainder of the year?

Most will be in new. And it will be fairly evenly between the summer and fall term.

Just one final question. You know, obviously enrollments have been very strong currently. But I am wondering are you seeing any initial signs of a slowdown given that you target working adults and if some of those people are being laid off, are they more likely to drop out? Or anything you can comment regarding that?

The answer is no, we haven't seen any leading indicators. No, I can't comment on it. It's not anything we are seeing in our business.

We go next to Trace Urdan with Signal Hill.

Yes, I'm in the Brandon Dobell spot today maybe.

No, you got called on. Brandon said he never got called on.

Just a couple of small things. The on-line enrollment center, is it fair to think of that activity, you know, sort of equivalent with the five new campuses driving increased enrollments in out-of-area on-line or is that not the case?

No, that is the case. It is fair to put it that way.

All right. I thought maybe that was an obvious question but I just couldn't be sure. So we would expect to see that activity expand.

Correct.

Fair enough. And then in the splitting hairs category, so 25% of revenue coming from corporate reimbursement programs, can you give us a sense of how much of that revenue is actually coming from partner organizations relative to non-partner corporate reimbursement dollars.

Maybe 10% from partners. Yes. So, roughly half. Little bit less than half from partners. Mark is saying around 10%.

I get that you are right on top of the partner relationships. Do you feel equally confident about the nonpartner situation and that you have got sufficient insight into what is going on there?

I mean, you have never have sufficient insight, obviously, but we are certainly quite close to the situation. It is a little harder at a disaggregated student level as opposed to the company level. What I keep coming back on this issue, Trace. The underlying issue is what is going to happen to the value proposition to the student and what does that mean for our ability to expand the university. Because our tuition rates are well below the Title IV limits, and our overall percentage of our revenue is well below the dangerous level with regard to 9010 oversight, my feeling has been and my confidence has been that were there to be a problem I would expect to see it manifested less reduced student enrollment and more in a shift in our revenue source toward Title IV. We haven't seen that. And we are watching it quite closely obviously.

And you have to get to sort of a third or fourth level set of hypotheticals to even you know, have there be an issue to look at in our case. And you know, where Mark and I and our board and our management team are focused right now, it is not an issue. And it's not one that's affecting remotely our focus on the business and our investment planning. You will see it. You will hear it from us If we ever do see it. And given the transparency of this business, it will result in either lower enrollments or more Title IV revenue. I think almost certainly, the latter. But it is not there now.

Okay. Thank you.

You bet.

We go next to Ethan Steinberg with Friess Associates.

Hi, guys, I am just a little confused or curious. Can you guys quantify a little bit more what the impact is from the higher tax rate in Q1 to the EPS guidance and also the lower investment income.

If you look on the income statements, I think we had over $2 million in investment income in Q1 of '08. Of which about $800,000 was the gain on the -- when we transitioned out of the short term bond fund. And it is pretty easy to model. We keep about $100 million to $150 million in cash on our balance sheet. And at this point last year we were getting 5% tax exempt and now we're getting about 1% tax exempt.

Okay.

That will translate into an effective tax rate increase of probably a couple hundred basis points. We were down at 37, some low number. We think we will be north of 39.

Does that tax rate stay higher for the rest of the year?

It depends on investment income. It's an effective tax rate. The rate we pay on the operating income is the same no matter what, about 39.5% The effective tax rate on our total income depends on what percentage of the total income comes from tax exempt interest income.

It is probably somewhere around a $0.10?

I don't know. You would have to go back and recalculate. If you had last year's investment income and last year's tax rate, maybe a little less.

Thanks.

For the next question, we go to Todd Young with Morningstar.

Hey, guys, how are you doing. I just want to ask, with the new campuses that you are opening up later on in the rest of the year that are in new territories. And I was wondering how the talent searches for management and personnel to come into those areas.

There are two separate issues. On the management, on the leadership, the talent search is already done because we do it internally. And we will take existing leadership teams and move them to the new area. That is one the ways we control for quality. We rely on those leadership teams to go into the area and source the entry level personnel, whether it is admissions officers or adjunct professors or things of that nature. And for the ones we have opened already this year, it is gone quite well.

We are very pleased and the markets we are looking at in the latter half of the year, they all have very ample supplies of both academic personnel and administrative or business personnel that we'll be able to draw on. So I think we are in pretty good shape there.

Are you seeing an increase in potential candidates given layoffs across the economy as well, have you seen a better pool?

Yes. Clearly.

One last question. With the schools you have opened up recently, h ave you typically been seeing about that 150 increase per campus per year or has that been slightly higher recently or slightly lower , at least on the newer campuses that you have right

On the most recent campuses in the last couple of years, it has been higher. Now, it remains to be seen whether it just means you're getting those students earlier and the campus still stop tops out about 1000 students, or if the actual annual rate of increase is higher.

Thank you.

We have no further questions on the roster. Mr. Silberman, I will turn the call over to you for any closing remarks.

Thank you, Operator. And thanks, everybody, for listening. We look forward to talking to you again after our next earnings release which I believe is in late April. Thanks very much.

Ladies and gentlemen, this does conclude the Strayer Education, Incorporated fourth quarter Full year earnings result conference call. We appreciate your participation and you may disconnect at this time.