Strategic Education Inc (STRA) 2009 Q2 法說會逐字稿

Good morning, everyone, and welcome to Strayer Education, Inc.'s second quarter earnings results conference call. This call is being recorded. Following today's call, we will offer the opportunity for questions and answers. At this time for opening remarks and introductions, I would like to turn the call over to Strayer Education's Senior Vice President of Corporate Communications, Ms. Sonya 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 Tuesday August 4th. The replay is available at 888-203-1112, pass code 3969514. Again, following Strayer's remarks, we will open the call for questions and answers.

Please note that today's press release contains statements that are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. The statements are based on the Company's current expectations and are subject to a number of uncertainties and risks that the Company has identified in the press release and that could cause the Company's actual results to differ materially. Further information about these and other relevant uncertainties may be found in the Company's annual report on Form 10-K and its other filings with the Securities & Exchange Commission. And now, I would like to turn the call over to Rob. Rob, please go ahead.

Thank you, Sonya. And good morning, ladies and gentlemen. I hope you all enjoyed that musical interlude as much as Mark and I did. 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 second quarter, after which I will comment on our enrollment results for the summer academic term, provide an update on our growth strategies, and finally, end up with the Company's earnings outlook for Q3, 2009.

Strayer Education, Inc. is an education service company whose primary asset is Strayer University, a 46,000 student, 67 campus, post secondary education institution, which offers undergraduate and graduate 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 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 cost. We serve students in 16 states through physical campuses as well as 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 them through the financials?

Sure. Revenues for the three months ended June 30th, 2009, increased 29%, to $125.9 million, compared to $97.9 million for the same period in 2008 due to increased enrollment and a 5% tuition increase which commenced in January of this year. Income from operations was $45.1 million, compared to $33.6 million for the same period in 2008, an increase of 34%. Operating income margin was 35.8%, compared to 34.3% for the same period in 2008. Net income was $27.5 million, compared to $21.3 million for the same period in 2008, an increase of 29%. Diluted earnings per share was $2, compared to $1.50 for the same period in 2008, an increase of 33%. Diluted weighted average shares outstanding decreased to 13,771,000, from 14,248,000 for the same period in 2008. Revenues for the six months ended June 30th, 2009, increased 28% to $250.4 million, compared to $195 million for the same period in 2008 due to increased enrollment and the 5% tuition increase which commenced in January of this year.

Income from operations was $92.7 million, compared to $69.2 million for the same period in 2008, an increase of 34%. Operating income margin was 37%, compared to 35.5% for the same period in 2008. Net income was $56.6 million, compared to $44.8 million for the same period in 2008, an increase of 26%. Diluted earnings per share was $4.07 compared to $3.14 for the same period in 2008, an increase of 30%. Diluted weighted average shares outstanding decreased to 13,886,000 from 14,294,000 for the same period in 2008. At June 30th, 2009, the Company had cash and cash equivalents and marketable securities of $90.4 million, and no debt. The Company generated $72 million from operating activities in the first six months of 2009, compared to $43.5 million during the same period in 2008.

Capital expenditures were $13 million for the six months ended June 30th, 2009, compared to $10 million for the same period in 2008. During the three months ended June 30th, 2009, the Company invested $5.1 million to repurchase 27,800 shares of stock at an average price of $181.95 as part of a previously announced stock repurchase authorization. The Company's remaining authorization for stock repurchases was $5 million at June 30th, 2009, having invested approximately $65.1 million during the six months ended June 30th, 2009 for this purpose. During the six month's ended June 30th, 2009, the Company paid regular quarterly dividends of $14.1 million.

For the second quarter of 2009, bad debt expense as a percentage of revenues was 4.2% compared to 2.8% for the same period in 2008. Days sales outstanding adjusted to exclude tuition receivable related to future quarters was 15 days at the end of second quarter 2009, compared to 12 days at the end of the second quarter of 2008. Rob?

Thanks, Mark, just a couple of amplifying comments on the financials from my perspective. For the second quarter we earned $0.04 more than the midpoint of the forecast that we gave you 90 days ago. That positive variance was caused by approximately $0.06 of higher than expected revenue offset by roughly $0.02 of higher bad debt expense.

Just to go through that in a little more detail, on the revenue side we continue to experience increasing revenue per student growth, mostly caused by lower student withdrawals during the quarter. Our Q2 revenue growth of 29% was a full 700 basis points higher than our 22% enrollment growth for the spring term, and that's with only a 5% tuition price increase. Now, after Q1's revenue outperformance, Mark and I had ratcheted up our Q2 revenue forecast to try to take in to account this trend, but even after that, we were only expecting around 27% revenue growth. The extra 2% revenue growth was worth about $0.06 of earnings per share.

On the expenses, everything was right about on target, with the exception of bad debt, which came in around 40 basis points higher than our internal forecast. Our 2009 spring term tuition collections actually improved versus last year. But as I mentioned on our last earnings call, during this economic downturn, we're experiencing lower collection rates on tuition receivables related to prior quarters. To put this in simpler terms, a higher percentage of our currently enrolled students are paying their tuition bills, but it's getting harder to collect the tuition which is owed to us from those students who have previously dropped out of the university, so we are adjusting our reserve calculations accordingly. The additional 40 basis points of bad debt expense above what we had forecast shaved about $0.02 from that Q2 EPS forecast. So net-net the positive $0.04, plus 6, minus 2.

Moving to cash, our owner's distributable cash flow increased really well, over 100% for the quarter, and roughly 75% year to date. This compares to an increase in net income of 30% for the quarter and 27% year to date. Even after funding our major campus and online expansion in the first half of 2009, we generated $59 million of owner's distributable cash flow in the first six months of the year, which exceeds our $57 million of reported net income for the same period. So we continue to be a fairly healthy generator of cash, which is the metric that Mark and I probably pay the most attention to, anyway on the financial side.

Turning to the summer term enrollment results. Total university enrollment increased 24% on a year-over-year basis. New students increased 28%, and continuing student enrollment increased a little over 23%. Student retention was up almost 100 basis points on our continuing students in the quarter.

With regard to student mix, business administration, accounting, and economics degree seekers continue to make up about 70% of our student body for our summer academic term. Computer science degree candidates are below 20% of the total student population mix. The graduate population is just under 30% of the student mix for the summer term, so fairly stable across all of those, vis-a-vis last quarter and last year. We did successfully start instruction in our new criminal justice bachelor's degree at several campuses during the spring term, the one we just completed, and we're expanding that program for the summer term.

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

On our first objective for the summer term, we were fairly well ahead of target at our mature campuses. We showed 12% growth, which I believe, Mark, is the highest that we have had in the eight years. Anticipating the question which I know one of you is going to ask, if you just strip out the campuses that are actually over 10 years old, so the most mature, the rate of growth at that's campuses was actually 7%. All across the age group of those campuses we saw pretty healthy growth from the student population for the summer term.

With regard to new-campus activity for the summer term, we opened one campus each in two new markets for us, Cincinnati, and Columbus, Ohio. We also announced this morning our intention to complete our planned 2009 campus opening schedule with four campuses for the fall term that will actually open during Q3 to enroll students for the fall academic term. These include a second campus in the Cincinnati market, one each -- a new campus each in the Cleveland and Akron, Ohio markets, and a new campus in Miami, Florida, which will be our first in that market. Actually Cleveland, Akron, and Miami will all be new markets for us in the fall term.

In the global online unit, our growth rate for the spring term was 43%. We were helped by a pretty healthy start at our second global online operation center in Salt Lake City, Utah.

On institutional alliances, during the quarter we added articulation agreements with three community college systems in Ohio and one in upstate New York. As I mentioned in the past, we consider community colleges important partners in our educational mission. We really don't view them to as competitors, and so we're delighted by President's Obama's intention to increase funding and support for the community college systems in this country. We think that's a net benefit for everybody.

We also added during the quarter, one additional corporate partner, Gulfstream Aerospace Corporation. Our total student enrollment from corporate alliance partners increased by 29% for the summer term.

On capital redeployment, we announced this morning our regular quarterly dividend of $0.50 per share, and as Mark mentioned that we had taken advantage of market conditions to repurchase roughly $5 million of our common stock during the second quarter of 2009. On our business outlook for the third quarter, the higher revenue associated with the university's 22% enrollment growth for the summer term will clearly more than offset the increased expenses from the openings of our new campuses and our second online center. So we do expect 125 to 150 basis points of operating margin expansion in the quarter, which should drive third quarter EPS to the $1.14 to $1.16 range. And with that, Dana, we would be pleased to answer any questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator instructions). We'll take our first question from Andrew Fones with UBS . Mr. Fones, your line is open. We'll go to Suzanne Stein with Morgan

Hi, thank you. This is [Christina Cologne] for [Susie] Stein. My question relates to bad debt expense, and you mentioned before that it comes out relating to decisions that with made at the campus level on whether to enroll students that aren't fully packaged yet. And you were previously comfortable with that structure, but given that you just came in a little bit above target in terms of that expense, I'm wondering if you are considering any changes internally to how those decisions are made.

Yes, before I answer that, Christina, I just wanted to clarify one thing. Mark pointed out to me I said 22% enrollment growth for the summer term. It was actually 24%. Which would have caused revenue growth be even further above enrollment growth.

On the bad debt expense, no, we're not considering, at this point, operational changes. I mean, we always try to be as careful as we can in terms of the decisions that are made at the campus level to enroll students. But as I mentioned, the nature of this increase in bad debt expense really has less to do with the students that we're enrolling, in other words the percent of our students who are paying their tuition in this quarter was actually better than it was in the previous year. The problem has been collecting tuition from students who have dropped out, which is getting increasingly difficult over the last nine to 12 months. And again, since the financial impact of the bad debt expense really isn't as significant, or as important to us -- you could run this business with a much higher level of bad debt expense and have higher revenue and net income growth. It's been more of concern to us as a proxy for good decision making at the campus, and as long as the percentage of our students who are enrolled who day do pay their full tuition is not increasing, then I'm less concerned about the academic and operational impacts of this.

Thank you.

We'll go next to Andrew Steinerman with JPMorgan.

Hi there. Could you talk about just in general investments in the second half of the year, versus investments in the first half of the year?

Well, most of our campus and the expansion of the online center would have been, I think, Mark, done in the first half of the year. I guess the other four campuses will be in the third quarter --

Third quarter, right.

Right. And then we have maintenance activities at existing campuses. I don't know, do you have a sense as to the CapEx flow during the year? Are we sort of halfway through it?

I think we'll probably see a pickup towards the end of the year just in terms of timing.

Right.

And also it will depend on what our compass plan is for 2010. Because the ones that we opened for the winter term of 2010, Andrew, will we'll be funding in the fourth quarter of 2009.

Right. And could you just review the total investment in your second online campus? Was as expected, lower than expected? How did it look relative to budget on the spend side?

On the capital side it was probably a little bit lower than expected. We got pretty good pricing on construction materials, things of that nature. On the impact on operating income, it will certainly be at least as good as what we had modeled if not a little bit better, just because we had a pretty strong start there. I know that our operating staff would like to increase the headcount at that facility maybe even a little bit faster because of the success, so we might balance that out a little bit. A lot of it will depend on our confidence and the ability of the people that we can hire. But I would say it is probably going to be pretty close, if not slightly better, than what Mark and I had laid out, which would be roughly a $5 million drag on operating income through the year.

Okay. Thank you very much.

Thank you, Andrew.

We'll go next to Kevin Doherty with Bank of America Merrill Lynch.

Thanks, guys. Just a followup on the earlier questions on bad debt expense. How long might we expect some of that elevated bad debt to persist until some of those older receivables are charged off? I guess at least the type of year-over-year increase we can expect at least over the next few quarters?

I think that -- I'm not so sure about the year-over-year increase as it is more the absolute amount. I would expect over the next couple of quarters that the absolute amount would be in this range. It will have less of a year-over-year increase in the latter half of the year, because I think our bad debt was elevated in the second half of 2008 versus the first half of 2008.

Right.

But, and it also is not just the issue of charging off already delinquent tuition receivables. It's going forward in the future. If we keep our same operational standards with regard to enrolling students, will the impact of the economy cause, in the future, a lower collection of previously written off receivables -- or previously written off or unpaid tuition receivables for dropped out students as we go forward? And that we don't have a whole lot of visibility in to, but, again, it's not -- that's a financial metric we can manage. It's not the core metric, which is important to us, which is bad debt as a potential proxy for bad decision making, frankly just trying a little too hard to put students in a seat.

Okay. And then you showed some good leverage this quarter in selling and promotional. Can you talk a little bit more about what drove that? And then, there's just some timing around the new campuses. We were expecting probably a little more of incremental bump up from the online center.

Well, it's what it always is. We end up spending approximately what we expect to spend with regard to brand building and advertising. I don't think we underspent what our forecast was, but we ended up with more revenue, so additional revenue on the same amount of expense causes more leverage.

And then as we think about next quarter when you bring those new four campuses online, could we expect any leverage in that line item, year-over-year?

Well, the more new markets that we bring on, the more advertising expense that we have with relatively little revenue associated with it. I don't know what it will do for the Company as a whole. The start of those four campuses has a negative impact. That may be overwhelmed by positive impacts elsewhere in the system. I don't really have a good feel for that right now.

Okay. And just the last one, I know in the release you mentioned talking about your plans for campus expansion next quarter, but can you just give any indication what may be the mix of going in to new geographies versus existing markets?

Well, as I mentioned for the last half of this year, it's all new markets. The four that we -- the two that we did for the summer term and Cincinnati and Columbus was a brand new market. Actually, I take that back. We have one additional Cincinnati campus out of the remaining four. The other three will be in brand new markets, Akron, Cleveland, and Miami, Florida, and we really haven't made decisions about 2010 yet. We'll let you that on the October release.

Okay. Thanks, guys.

Thank you.

And we'll go next to Ariel Sokol with Wedbush.

Hi, just a quick question with respect to the post 9/11 GI bill that goes live next week. Are you anticipating material benefit from this new veteran's program. And, just out of curiosity, what percent of your students either come from the military or are military veterans?

Let me take that in reverse order, Ariel. The actual active duty military duty is probably about 3%. Maybe a little bit less. I'm not 100% sure on veterans. I suspect it is clearly more than 3%. It's added that we have a lot of students who I think have served in the military. It's kind of a core demographic for us. It's a working adult that's interested in self-improvement and in education. I do think the GI bill will be helpful to us. We're happy to have support -- financial support in serving a demographic that we think is very important to our university.

Thank you.

You bet.

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

Rob, just to finish up on that point, are you guys devoting special marketing resources against the GI bill in the upcoming quarter?

No, I don't believe we are, Trace. We have a small part of our marketing budget that goes to specific military media, but I don't anticipate that -- it's so small anyway relative to our overall mix that it's not really material, and I don't think it's going out very much.

Okay. The next thing I wanted to ask about, and I apologize because I always gravitate back to this area, but in thinking about the global online center, you guys talk about it like it's sort of a mega campus, but in reality it's really a very deep pool of opportunity that you could presumably devote more resources to if you chose to, and grow maybe at an even faster rate than the rate you are growing, so I wonder if you could just sort of address how you are thinking about the global online business strategically? You made some reference here to the fact that maybe enrollment counselors, and adding enrollment counselors was a constraining factor. Is that the right way to think about that, or how do you think about how fast to grow global online.

It's not really different from how we think about expanding the university as a whole, Trace. The issue, I believe, in any sort of human services business is the individual provision of that service, in our case a relationship between a professor and a student. A teaching relationship is made more difficult to keep at a high level of quality the faster the rate of expansion. It's just the nature of managing a business like this. So we try and control the rate of growth, whether it's in terms of campus expansions or the global online, to a rate at which we're comfortable with that we can maintain that level of quality. We have the same opportunity, frankly, in terms of expanding our campus network faster, that you describe in terms of expanding the global online. In both cases what we're doing is trying to manage the process around a high level of confidence with regard to our expansion of human capital, our -- the hiring and training, and mentoring of both administrative staff and faculty so as to be able to serve a larger and larger population base. And we really don't think of the online any differently from the campuses with regard to that constraint. The online provides certain complications, so we believe it's a little harder to serve that purely online student well. We're quite confident we can do it, but it takes a little more effort, but in terms on our focus on what the right rate of growth is, we don't see the two academic methods as being different.

Okay. Thanks, Rob.

You get, Trace.

And we'll go next to Kelly Flynn with Credit Suisse.

Thanks. Back to the bad debt issue, I just want to understand a little more clearly. When you talk about the dropouts, am I correct to assume that there's really no bad debt associated normally with graduates? It's mostly if someone drops out and it there is kind of a timing issue with Title IV? Is that the right way to think about it, and therefore, asking you about bad debt experience for graduates isn't relevant?

Correct. A student will not -- we won't graduate a student who hasn't paid their tuition bill. So that is correct, Kelly.

Okay. And then as you think about the ramifications of this bad debt issue, can we extrapolate at all to your default rates when we think about the graduates? Is there -- I know they are likely to go up overall because of the weak economy? But can you tell us anything new there? Are you incrementally more concerned that the default rate may go up more than you had previously expected? Or how do you think about that?

Well, the -- it will have an impact on cohort default rates, but you can't have a cohort default, which is associated with a graduated student, so there's two different issues there. A student who graduated and has -- we have been paid in entirety through the Title IV program. They then -- they have to repay the loan in order to not fall in to a cohort default. They -- the fact that they graduated is certainly helpful, I would believe, in terms of their ability to be able to pay the loan, but it's not dispositive. In the same way that bad debt expense with regard to our own balance sheet is purely associated with students who haven't graduated. The other way to say this Kelly, is we don't lend to our students. We're not in the student lending business. So it is purely a timing issue with regard to the, as you put it, packaging of Title IV loans. Although in some cases these are students who are not Title IV payers, they are self payers, and we have entered in to some sort of promissory note over a 30- to 90-day period to get them enrolled. Which is why we tend to think about it as a proxy for -- if the number of those students that were enrolling for whom payment is not received at the end of the first term, is rising at a significant rate, then we're concerned about that cultural implication.

On the cohort default rate, it will clearly be affected by a downturn in the economy. My focus on that, and we talked about this with our board of trustees and Board of Directors, is really more along the lines of how are we doing as university relative to other universities. We are -- have been among the lowest cohort default rates of any universities in the country, and I would expect to stay in that ratio, even if overall cohort default rates are going up. I don't think that an increase in cohort default rate associated with a downturn in the economy really changes the value proposition to the students. Even in a shrinking economy, or a downturn in the economy, it's pretty empirically clear you are better off with a college degree than without one. All in it's really just a question of managing this relative to your position vis-a-vis other universities, and to make sure that your students have -- are graduating with the learning outcomes and academic achievement necessary to advance their own careers and be in a position to pay back loans.

Okay, great. Finally with respect to state grants, are you seeing any move there? I have heard some from some other players that some states, including Ohio, have pulled back on that. Is that a needle mover for you?

I don't think we have a lot of revenue that comes in as state grants, Mark. Do you know?

Most of it would be in, for example, the state of Pennsylvania, and we're so new in Ohio that I don't think any negative impacts from that if --

Has Pennsylvania ratcheted down?

No.

No, okay. I think the answer is no, Kelly.

Okay. Thanks a lot. Appreciate it.

We'll go next to Gary Bisbee with Barclays Capital.

Hi, guys. Good morning. Just following up on Trace's question on the online center, you made a comment like that is driving growth. And maybe this is just semantics, but I understand it essentially allows you to handle more leads. So have you stepped up marketing out of the markets where you have compasses, and is that what is happening there, or is it just something about the environment today that you are, getting better response rates to the marketing that you have got out in the market, and so that new facility is handling an overflow of leads that maybe you weren't handling in the past?

I think actually the better way to think about it is because we set our brand-building budget around supporting, for the most part, our brand-building in specific geographic areas, associated with our campuses, and when you are on the internet, you are going to get a lot of interest from places where you don't have campuses anyway. I think we better way to think about it is we probably last year and the year before had inquiries that came from areas where we didn't have campuses, that we weren't serving, and so we needed to increase that administrative staff. As I mentioned, I think over the couple of quarters ago when we talked about this, we could have easily just added those personnel at our Washington, D.C. location, but we decided for the purpose of diversifying and redundancy, and also some time zone management, because more and more of these inquiries were coming from the West Coast of the US, to build a separate center, which involved its own costs, but gave us a little more redundancy, gave us access to a different hiring market, and gave us a location where we could be talking to people in the evening when they wanted to be talked to, and it wasn't midnight here on the East Coast time.

That all makes sense. So I guess then the question is are you increasing the amount of marketing or -- that you are doing either on the web or in markets where you don't have campuses to take advantage of that, or is that just sort of the natural outgrowth of demand overall growing for the business?

It's mainly the natural outgrowth, Gary. We're increasing our marketing budget, but we would have done that anyway to support the additional locations that we operate in. We get a lot of -- we do a lot of advertising on the internet to support the markets that we open that we operate campuses in as well. So it is more the latter.

Okay. And then can you give us -- a couple of years ago you launched a couple of new sort of specialized graduate programs. Can you just give us an update since you launched those? How large of percentage of enrollment have they become, and some sense of what the growth path there looked like?

They grew to -- they are 5%?

Yes.

Between 5% and 10%?

Yes.

They are fairly large now. The education master's, the public administration master's has done quite well. Health services administration in isolated areas has done better than others, but I would say in total those three are at least 5% of our student population, if not more. And that growth rate is over about a four-year period. I don't have it mathematically in front of me. It's obviously quite high when you start because it's going from a base of zero. But we're pretty excited about criminal justice. It's had as strong of start in the first quarter as those graduate programs had in theirs as well. So we think we can do a good job at that.

Obviously that is what I was trying to get at. Is there any sense that undergraduate program relative to graduate would react differently, or given how you are thinking about rolling this out across your campus network, would that be a reasonable couple-of-year target for this program, too?

Yes, I don't have a reason to think it would react differently or the same. We just don't have the data on that. The one thing about bachelor programs is students tend to take more classes at the bachelor level than at the graduate level. So we may end up with higher seat count per student associated with those than we did the graduate programs, but the rate of growth, I don't -- we're really not in the business of trying to project that. We think that, like our business and economics and computer science, and accounting, that if we've got the right faculty, if we're doing a good job on the curricula, if we're teaching well, there is a high demand for education, and it is probably going to do pretty well.

That's great. Thanks.

Thank you.

We'll go next to Jeff Silber with BMO Capital Markets.

Thanks so much. In your prepared remarks, you talked about your persistence going up I think it was 100 basis points year over year. That's a pretty strong increase. If we can get a little bit more color on what drove that and what you expect going forward. Thanks.

Well, our retention rate is very high. Our continuation rate, the rate at which students who neither academically fail or have graduated, enroll for the next quarter is -- it's about as high as I think it is going to get with a working adult population, because you do have things happen to adults, and we actually had a relatively high academic failure rate this quarter as well. One of the higher ones that we'd had. So at the plus 80%, we don't expect it to get a whole lot higher than that, Jeff. As a matter of fact, the -- in the last couple of quarters, it sort of stabilized out. This was a big jump. Partly that is seasonal. We continue to make progress in getting adults to go to school in the summer, and so we can get a little bit of uptick on that. But on an annual basis, we would like to maintain these continuation rates at their high level, and hopefully have that translate into higher and higher graduation rates. And then ultimately, if the university is running the way it's supposed to, we'll get a rate of in-coming students, of new students. With a stable continuation rate, that increase in student population will just run through over the two- to three-year average life of a student here at Strayer, and result in that percentage increase in graduation rates as well.

All right. Thanks. You just mentioned the higher failure rate this past quarter. Did you see that across the landscape? Did you see it more at your new campuses as opposed to your mature campuses? Any insight would be great.

I really don't -- do you know, Mark?

No.

I honestly saw it as an aggregated number. I'll have to dive in to that, Jeff, and we can get back to you.

Just curious on that, and just one more follow-up. In terms of -- if you look over the past year or so in terms of the new campuses that you have been opening up, have you seen any major difference between your first-time campuses at a new location, or your add-ons at existing locations, and some of the acceptance in the market place?

It is always easier with an add on. You have some brand identity, which is very important, I think, in an academic setting. I don't know of a circumstance where it hasn't been slightly easier with the second and third or forth campus in a market than the first one.

But in terms of the reception at new locations? Any insights or any issues?

Well, it's been fairly strong so far. We have single-campus markets that -- obviously it was brand new when we opened that campus there, and they have grown at as fast a rate as any of our third or forth campuses in an existing market. But in answering your first question, empirically or logically, it is a little easier in brand building with a second or third campus in a market than it is in the first one.

Okay. Makes sense. Thanks so much.

Thank you, Jeff.

We'll into next to Amy Junker with Robert W. Baird.

Good morning. Thanks. Rob, can you give us an update on how you think enrollment and retention has been impacted by your decision to require underprepared students to take, I guess you are calling them developmental courses. I suspect it's helping retention. But I'm wondering if it is having any negative effect on enrollment? Obviously the growth is very good, but wondering if it could have potentially been better?

You know, Amy, I really don't know how to answer that. Logically, you would say that there are some students that, if you require them to take a high school-level course, that they may go someplace else, but on the other hand, as you correctly point out, our rate of new-student growth over the last 18 months has been well above our expectations, and higher than it has ever been in the past, so I -- if it's a negative impact, we're happy to suffer it, because it's clearly -- I can't tie it directly to the increase in retention, although logically it has an impact, but it is clearly helping the academic atmosphere, the quality of the classroom experience. I hear that from my faculty all the time. It is the single thing we have done that has been most well received and supported by our faculty, and ultimately, that is a constituency that we have to be quite concerned about.

That's helpful. And, Mark, just a followup on CapEx spending I know you said it was going to ramp up in the back half of the year. I think previously you had said 8% of revenues, but given revenues are coming in higher than expected, is that still a good number, or would you expect it to be maybe closer to 7% or something?

Yes, I think what we had said is somewhere between 7% and 8%. I would guess it would be at the lower end of that range.

Great. Thank you.

We'll go next to Bob Wetenhall of Royal Bank of Canada.

Hey, great quarter, guys.

Thanks, Bob.

Your 125 to 150 basis points in operating margin expansion, is that going to be evenly split between a decline in instructional and educational support and selling and promotion?

Do you know?

Well, it was this quarter, but I am not sure we'd expect that on a go-forward basis. We'd actually hoped to get some leverage on G&A on a go-forward basis. We didn't this quarter because of bad debt expense.

One reason it's a little difficult to answer, Bob, is that Mark and I look at a much more detailed chart of accounts. And I don't really see it in the format that you see it until we've looked at the close and put the press release together. We don't really think about those three categories as important determiners, and so for us those dollars can shift between the categories that you see based on decisions that we're making that we probably wouldn't see until the end of the quarter, to be honest.

Understood, is your bad debt expense running through G&A?

Yes.

Yes.

That you clearly can count on. It is generally logical, G&A is those overhead expenses, and we run bad debt through that. It's Mark's and my, and the headquarter's cost, and then some overhead cost at the campuses. Instructional and educational is the cost of the professors and the curriculum development and the lease cost of the buildings, and marketing and admissions is that side.

Got you. On your bad debt expense, are you reserving about 20%? Because just on Robert's earlier comments about bridging students from a funding standpoint, i.e., you are not in the business of student lending, but you will provide funds if a student needs to go in for a quarter and comes up short of tuition, is the reserve you are setting aside for collectibility around 20%?

Let me clarify that question because we aren't funding students for a quarter. What we allow students to do is -- because we only have four starts per year, is if the campus dean has established that this is going to be a good student, serious student, and the campus director has not to their staff been able to finalize the payment mechanism, we will allow the student to enroll. But we expect the student to finalize that payment mechanism, whether it's paying themselves, a corporate alliance partner, or a Title IV loan, immediately. The point I was making is, at the end of the quarter, if for some reason that hasn't happened, they won't be allowed to enroll for the next quarter, so we never have this receivable going past that point. The amount that we reserve -- it's seasonal -- it depends, because it's based on what we preserve our collection rates are going to be. It was over 20% for this last quarter.

Okay. I'm just referencing the fact that DSO went up to 15 days.

Right.

On that basis, because I understand you have to strip out your expected payments from corporate alliance partners, but it is above 20%, or is that close?

Yes, it runs between 20 and -- well, it generally runs between 20% and 25%. It has been as low as high teens in the past. We cranked it up in this last quarter. It is over 20%.

Great. And one final question, any expectation of increasing the authorization for incremental share repurchases during the back half of the year.

Well, we always do that as part of our budget process with our Board of Directors in October. So I would expect to see an increase that would take place in October.

So you are likely to reset the basket to $50 million, $100 million? Any guess?

We're likely to reset it to whatever amount the Board of Directors and I feel is truly extra to our needs over the next year, and then that gives Mark and I an ability to either use it when the market gives us the opportunity, or if the market didn't because the stock price was trending towards our view of intrinsic value, we would figure out other ways to return it to owners.

Fair enough. Thanks very much.

Thank you.

(Operator instructions). We'll go next to Todd Young with Morningstar.

Hey, everyone, how are you doing?

Hey, Todd.

I wanted to ask about your comment, you mentioned that the campuses that are over 10 years have seen 7% growth, and I was wondering how you think about those that typically cap out around the 1,000 mark. Are you increasing the size? Is there any extra expenditures or costs to expand those facilities? And on that note is there maybe potential growth opportunities in areas that you thought you were capped out in the past?

Well, several of our campuses are well above 1,000 students. That's more of an average. Particularly in denser population areas, we have campuses that are quite a bit above that. The interesting thing for us in this quarter is that we had higher-than-normal rates of growth at a number of those campuses that are over 10 years that have generally been flat in the past, and most of the growth of the mature campus group has come from the younger year four to eight. We're delighted by that. It doesn't really require a whole lot of additional expenditure. It's pretty easy to get more classroom space if we need it. Many of these students are actually taking classes on line, so you might not need physical space. And President [Stallard], and our academic deans keep a fairly ready supply of faculty that can be called up and asked to teach a course if they weren't scheduled to teach, particularly for a summer term. So it's certainly manageable. In terms of growth opportunity, it's not -- it hasn't been core to how we think about expanding the university. We have sensed that there's a stable equilibrium. When you get to a certain size, you are enrolling a lot of new students, but you are graduating a lot of students, and that tends to balance out. Obviously, over the last couple of years, maybe partially impacted by some of these new programs we have put in place, we are doing a little bit better than that. But long term, our strategy is to focus on building out the university geographically, getting to a nationwide footprint, continuing to invest in the online. And we would be delighted to have these campuses get to that mature level and just stay healthy, stable educators of adults in those markets. Anything above that is, frankly, gravy.

Okay. Great. And one last quick one with the new corporate partnership that you added, how does that number compare to the past quarters in the number of new corporate partnerships you have added.

It is kind of sporadic. Sometimes we'll have none for several quarters. Sometimes we'll have two or three in a quarter. There's no real pace to that. Those go at kind of their own organic development, and as we get bigger and more well-known, I would have to say it's a little bit easier. But there's no real pattern, quarter-to-quarter.

Okay. Thanks so much.

Thank you, Tom.

We'll take our next question from Brandon Dobell with William Blair.

Thanks. Going back to the mature campus line of questioning, if you look at that group of schools, let's say the ones that are four to eight or the ones to that are over 10, what does the breadth of performance look like? You referenced 7%. Is that an average of 2 and 20, or is it more like 5 and 8?

It's more that latter, Brandon, because they are already pretty big. We're not going to get 20% enrollment growth in a campus that had 1500 students. We wouldn't allow that. It's not the kind of the you can do and have a high level of confidence in your ability to execute.

Okay. Even with the potential for enrolling online students. I guess I'm trying to get that dynamic between true capacity growth versus adding on additional faculty. How much does, let's call it extra online growth, stress a mature campus versus extra ground growth?

Well, if the student who is enrolling is going to take all of their classes their entire career online, there is clearly less stress on the academic side of the campus. For those students who enroll at a campus who take all of their classes online, still have faculty advising, tutoring if necessary, academic advising functions that are physically available at the campus, so we have to scale those as well.

Let's say you are faced with a quarter or two where a lot of extra people showed up unexpectedly, and you felt you were really starting to stress the organization, how do you manage that -- I wouldn't call it turning away students, but there is a structural level at which you are probably uncomfortable with the number of students. How do you manage that with the students that really start school?

You do that through your regional and campus leadership teams, and just make -- you let them know that if the individual intake of students is above what their academic partner, their campus dean, their regional dean is expecting and capable of handling, then you do -- "turn away" is a harsh term, but you just make it clear that the circumstances is such that you don't want to try that hard to get that next student.

Okay. That's fair. And then turning a little bit to new state expansions, any change in the politics of applying for entrance in to a new state, or do you see new states taking a different view of the for-profit companies? Just from a broader policy perspective, obviously, just want to get your sense of what the level of acceptance might be going forward?

We really haven't run in to any state where the concept of being for profit was automatically a negative. It raises a level of healthy skepticism, and we have to establish that we're a real university, and that we'll fund this university for the purpose of ensuring high academic outcomes, but we have never had a situation where a state just said because you are a for-profit entity, we're not interested. Our own case, it's getting easier because we're more well known. So we go to a state now, and that state licensing body, that board of education, whatever it is, has got a dozen or so other states they can call and get feedback. So it's a little bit easier than the first few times we did this where we were basically a very small local player, and there wasn't lot of track record for incremental states that we were talking to, to go back and talk to our state licensors. Now, there's much more of that, and it just makes -- it lubricates that process, makes it a little easier. As long as we are doing a good job, obviously. And that's why we tend to focus on the academic achievement, and the reputational value of what we're doing, because it makes easier to achieve our operational objective of getting a nation wide footprint.

And final question, in relation to that, would you expect any changes in terms of how your accrediting body looks at either new programs, new locations, new concentrations. Is there any sense that the current environment is causing them to change how they look at the schools within their purview?

Well, ours is middle states, and we are very actively engaged with them at all times. It's very important relationship. It couldn't get any more intense than it is. So --

Got you.

No, I don't anticipate anything -- any big change with that.

Okay. Great. Thanks a lot.

Thank you.

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

Thanks. Good morning, everybody. Question about the community colleges or the feeder system. Could you maybe quantify the number of articulation agreements you have right now, and what percentage of students might be coming from that system as a feeder, and maybe even compare it to what it might have been when you first got there?

Well, it's over 100 now, and I'm sure it was just a couple when I first got here, because we really only operated in Maryland and Virginia. And it's a significant part of our student population. It was like 25%.

Yes, I think so. I think that's right.

It's probably a quarter of our students come to us either with an associate's degree and through -- from one of these community colleges. It may even be more actually. I will have to get the exact data and get it to you, Jerry. But it's very important part of our educational mission, because we tend to be -- we don't really do a lot of associate's degrees, we tend to be focused on the degree completion. And we very much like the idea that for -- in an open-access working adult focused university, one way in which you can limit the number of unprepared learners is to get a lot of them having already graduated from a community college, where they have established both the intellectual capacity and perseverance to go back to school and be successful.

Great. And the topic of the day, of course, bad debt. Is there anything in the students that are dropping or not paying the AR that gives you any ability to reasonably manage that process, i.e., is there something in their profile or their geography? Have you asked the campus management to change behavior? And then as a general question, have you raised your level of acceptability on bad debt? It's running at historic highs. Have you rethought that and now willing to accept a higher level?

Well, let me take those in order. There's not a lot we have to ask, frankly of the campuses. They know -- we have been through this drill probably three times in the last eight years. They know exactly how we feel about it, and so I'm quite certain that they are being more careful than ever, given the visibility of this. I have never had a fixed level of acceptability for bad debt for financial purposes, and I have tried to make that clear. For me, the issue of bad debt and where it's got my attention is where it has been associated with enrollment practices that, my concern is, are not in tune with how we want to operate the university, trying to put too hard to put unprepared students in the seats. What I tried to make clear on this call is, is that my comfort level, if that's the word, with the financial impact of this bad debt, is such -- is there because academically none of the data I have looked at has suggested that we're making bad decisions, or worse decisions than we were making in the past, with regard to enrollment of students. That's the area where, for me, it can be uncomfortable and where we in the past have cracked down. We'll manage the financial cost of lower collections on existing receivables as long as the number of students who are creating those receivables are not increasing significantly as a percentage of our total student population.

Great. Thanks, guys.

Thank you, Jerry.

We'll go next to Mike Marostica from Piper Jaffray.

Hi. It's actually Mark [Skitovich] from [Rosica]. Just a follow-on to that last question. I think you mentioned collection trends in general over the last 9 to 12 months have been poor and given the change in the bad debt, I'm assuming you saw an acceleration in that this quarter, just curious if that is the case? And can you talk about how drop rates trended through the quarter, and how you see that heading in to Q3?

Yes. Again, let me clarify it, because there's a misconception in your question. The performance of our existing students in the classroom, is higher. We had higher collections of our spring term receivables than we did the year before.

Right.

What has deteriorated are the aged receivables for those students who would have dropped out in either the winter or the fall. And we have seen that over the last nine months or so that those have trended down, which is why we've increased our reserve allocation from that standpoint. So our drops were actually better in the quarter, and that, again, was a source of the higher revenue performance, and I suspect also helped to the higher retention rate and higher continuation rate. So it's a little bit complicated. There's a couple of different moving parts here. It's important to keep track of them accurately in terms of seeing what the impact on the organization as a whole is.

Great. And I'm assuming, just given the magnitude of the increase, and you are correct, I was speaking to the aged receivables. Is it safe to assume that you have a good handle on just how significant the acceleration is or could be, and related to that, what is the top end of bad debt that you are comfortable managing the business at in this environment?

Well, it can't be worse than 100%, right? I mean, in other words if -- you know exactly at the end of the quarter who hadn't paid you and what that receivable amount is. So if you get nothing else going forward, it can't get worse than that. And again, we're comfortable managing financially a deterioration in receivable collections as long as it doesn't impact the quality of the classroom experience, and it's not related to the problem I have tried to characterize before, which we have suffered in the past once or twice, where we found that individual campuses or regions were just enrolling students that shouldn't have been enrolled. That was not the case this time, so it's not of particular concern to me. And I -- practically, as long as we continue to improve on our current quarter collections, it would be hard for it to get much above 5%.

Okay. Great. Thanks, Rob.

Thank you.

And we'll take our next question from Andrew Fones with UBS.

Thanks, sorry I missed the prior announcement there.

Not at all, Andrew. We're glad we found you.

Yes. Thank you. Thanks for coming back to me. I wanted to ask if you could give me the approximate sense of the number of students that are in your new global center now, please?

We don't comment on the individual units or campuses, but it's just handful. We just started with only a few people on the administrative side, so it's far less than our current unit in D.C. But it was a strong start, and we would expect that over a five- to eight-year period, it would certainly get as large as your D.C. unit, which is I think 3,000 or 4,000 students.

Right. 4,000 students.

Okay. And just in terms of how you think about managing the two centers, are you going to look to put new students enrolling maybe on the West Coast, and maybe the Midwest into the new center, and new students on the East Coast in to the old center, or how will you think about that?

Well, I mean, our operational staff will look at what is the right way to optimize that. I don't -- I really don't have an answer right now, Andrew, but the other point is, is that these are service centers, and it's not really that relevant. We're going to serve the student wherever it is easiest for them. We don't think of these as separate business units that we have to measure their performance and make sure that one is growing or that both are growing. Overall, whatever works best for the student is how we're going to serve them. And we'll add the headcount either in D.C. or in Salt Lake City based on wherever those operational decisions come out.

Okay. Just one final one on the topic, but as you are now able to offer a greater number of hours where you are servicing the students on the West Coast, do you see that giving you an advantage in that market in attracting students? And have you thought about the potential impact on growth there?

It certainly in an advantage in servicing the students. We were already attracting them. We already had the inquiries. But in terms of the ability of servicing them and having it be a great academic experience, more importantly a great administrative experience, which can lead to, or certainly can detract from an academic experience if id doesn't go well. I think it will be an improvement for us. We wouldn't have done it if we didn't think it was going to help us grow. So yes, I think it is an advantage.

Okay. Thanks. And one on the topic of the day, the bad debt expense. I think 4.2% in Q2, you said it shouldn't go -- or sorry -- it's unlikely to go above 5% as far as you can tell. But what are you assuming in terms of the guidance you gave in Q3 for where that can reach? Thanks.

We have been pretty conservative and assumed it would be between 4% and 5%.

Okay. Thank you.

You bet, Andrew.

And with no further questions in the queue, I'll turn the conference back over to Mr. Robert Silberman, for any additional or closing remarks.

Thank you, Dana, and thank all of you for participating. Look forward to talking to you in the weeks to come, and we'll be back in October with our next year's plan as well. Thank you.

That does conclude today's presentation. We thank you for your participation.