Strategic Education Inc (STRA) 2009 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Strayer Education Inc. third-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, Mrs. Sonya Udler. Ms. Udler, please go ahead.

Good morning. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education, and Mark Brown, Executive Vice President and Chief Financial Officer. For those of you that wish to listen to the conference via the Internet, please go to strayereducation.com where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1 p.m. Eastern through Thursday, November 5. The replay is available at 888-203-1112, pass code 1914628.

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 and Exchange Commission.

Now I would like to turn the call over to Rob. Rob, please go ahead.

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 will then ask Mark to report on the detailed financial results for the third quarter. After which I will comment on our enrollment results for the fall academic term, provide an update on our growth strategies, and discuss the Company's earnings outlook for both Q4 and full-year 2009. Finally, Mark and I would like to share our thoughts on Strayer's business model and our investment plans for 2010.

Strayer Education Inc. is an education service company whose primary asset is Strayer University -- a 54,000-student, 70-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's 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. Our expenses include the costs of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs.

We currently operate campuses in 15 states in the eastern half of the United States as well as throughout the world over the Internet. We serve students in all 50 states and over 30 foreign countries with our online courses. Strayer University is accredited by the Middle States Commission on Higher Education.

Now, Mark, do you want to run them through the financials?

Sure. Revenues for the three months ended September 30, 2009, increased 31% to $114.4 million compared to $87 million for the same period in '08 due to increased enrollment and a 5% tuition increase which commenced in January of this year. Income from operations was $27.3 million compared to $18.3 million for the same period in '08, an increase of 49%.

Operating income margin was 23.8% compared to 21% for the same period in '08. Net income was $16.7 million compared to $11.8 million for the same period in '08, an increase of 42%. Diluted earnings per share was $1.21 compared to $0.83 for the same period in '08, an increase of 46%. Diluted weighted average shares outstanding decreased to $13.78 million from $14.24 million for the same period in '08.

Revenues for the nine months ended September 30, 2009, increased 29% to $364.8 million compared to $282 million for the same period in '08 due to increased enrollment and a 5% tuition increase which commenced in January of this year.

Income from operations was $120 million compared to $87.4 million for the same period in '08, an increase of 37%. Operating income margin was 32.9% compared to 31% for the same period in '08. Net income was $73.2 million compared to $56.6 million for the same period in '08, an increase of 29%.

Diluted earnings per share was $5.29 compared to $3.97 for the same period in '08, an increase of 33%. Diluted weighted average shares outstanding decreased to 13.85 million from 14.275 million for the same period in '08.

At September 30, 2009, the Company had cash, cash equivalents, and marketable securities of $93.4 million and no debt. The Company generated $89.8 million from operating activities in the first nine months of '09 compared to $63 million during the same period of '08.

Capital expenditures were $22.1 million for the nine months ended September 30, 2009, compared to $15.3 million for the same period in '08.

During the three months ended September 30, 2009, the Company invested $5 million to repurchase 24,528 shares of stock at an average price of $202.13 as part of a previously announced stock repurchase authorization. During the nine months ended September 30, 2009, the Company had invested $70.1 million for share repurchases. Also during the first nine months of '09 the company paid regular quarterly dividends of $21.1 million.

For the third quarter 2009 bad debt expense as a percentage of revenues was 4.5% compared to 3.7% for the same period in '08. Days sales outstanding adjusted to exclude tuition receivable related to future quarters was 15 days at the end of the third quarter of '09 compared to 13 days at the end of the same quarter of '08. Rob?

Thanks, Mark. Just a couple of comments on the third-quarter financials before we get into a more detailed discussion on the operating results and on the budget for next year.

In the third quarter we exceeded the midpoint of our EPS forecast by $0.06 per share. That was almost entirely caused by higher-than-expected revenue. This is a pattern we have had through the year where our revenue per student growth has been more than Mark and I were expecting.

The revenue growth in the third quarter at 31.5% was about 150 basis points more than Mark and I had thought it would be three months ago when we were forecasting based on our announced enrollment growth of 24% for the summer term. That additional revenue growth was caused, as it has been for the last couple of quarters -- this has been a trend this year -- by lower student drops intra-quarter as well as some higher ancillary fees.

However, on expenses Mark was right about on target for his forecast for the quarter. That higher revenue lead to operating margin expansion of 280 points, which again was quite above our forecast. We thought we were going to do about 150 basis points better, Mark?

Right. That is right.

On distributable cash flow, for the first nine months of the year we are up 43% on 29% net income growth, which is well ahead of our model. However, that cash flow growth is somewhat inflated by the timing of tax benefits associated with stock-based compensation. If you back out those tax benefits, the free cash flow growth is more in line with our net income growth which is what we would expect.

Turning to defaults from enrollment results. Total university enrollment increased 22% on a year-over-year basis. New student enrollments were up 20%; continuing student enrollments were up 23%.

Now with regard to student mix, pretty down the middle here. The business administration and accounting and economics degree seekers continue to make up about 70% of our student body for the fall term. Computer science degree candidates 15%, roughly 15%. The stand-alone graduate programs are at 7% of our student population.

About the only new news here is that interestingly the new undergraduate criminal justice program is already at 5% and we just started that in the spring term, Mark?

I think that is right.

So it's just a couple of terms old.

Our total graduate student population was stable in the fall term versus the previous year at just under 30% of the student mix. So if you think about the university as a whole, roughly 70% of students are undergraduate, 30% graduate.

Turning to an update on the growth strategy. Many of you will remember that it's based on five objectives. The first is to maintain enrollment in the Company's mature markets. Second, accelerate the rate of growth of new campuses, particularly into new states. Third, invest in our online curricula. Fourth, increase our corporate and institutional alliances. The final objective is effectively redeploying the surplus owner's capital that we generate.

So just going through that over the last quarter. On the first objective, for our fall term we were well ahead of target at our mature campuses. As I said, we reported 11% growth. If you strip out just those campuses that are over 10 years old that we would expect truly stable enrollment in, they actually grew about 4% in the quarter.

With regard to new campus activity, we had a very busy third quarter. We open four new campuses for the fall term, three of which were in new markets for us. Those four campuses included one each in the Cleveland and Akron, Ohio, markets, so sort of greater Cleveland and North Ohio has two campuses for us now. We opened a second campus in the Cincinnati, Ohio, market. That is not a new market for us, although it's only a quarter or two old. We put the first campus in Cincinnati I think just one term ago. And then we opened our first campus in the Miami, Florida market.

We had pretty strong openings at all four of those campuses. We are encouraged by those markets and we look forward to continued operations there.

We also announced today that Strayer University has been approved to operate in four new states. A bit of a Southwest bent moving south and west from our current operations into Mississippi, Arkansas, Louisiana, and Texas. We also announced that we are going to open three new campuses for the winter 2010 term, one each in Lawrenceville and New Brunswick, New Jersey, and then our first campus in Arkansas, one in Little Rock. All of those will be new markets for us.

Turning to the third leg of the growth strategy, the online curricula. Our global online unit supported by that second online operations center in Salt Lake City generated a growth rate of 43%. On capital redeployment, in addition to paying our common dividend of $0.50 per share during the quarter as Mark mentioned, we were also able to basically use up the remainder of our outstanding share repurchase authorization to repurchase $5 million worth of our common stock at an average price of $202.

Mark, I think year-to-date you mentioned that we have purchased $70 million and that average price was about $175 a share if I remember correctly.

Correct.

On the business outlook for the fourth quarter, based on our strong enrollment growth for the fall term offset partly by increased expenses associated with our new campus openings and taking into account, hopefully at this point, the increased revenue per student growth we have experienced during the year, we estimate that our fourth-quarter EPS will be in the $2.28 to $2.30 range with approximately 50 to 100 basis points of operating margin expansion versus last year.

Now with clear visibility into our fourth quarter, this is the time of the year in which we are actually in position to provide actual guidance on our full-year earnings, full-year 2009. And I would like at this point to go back and compare ourselves to what we said a year ago and just reground all of ourselves on how this model works.

So if you remember back a year ago when Mark and I provided Strayer's business model for 2009 we said that if the university achieved a 20% increase in student enrollment, we would expect a 23% to 24% increase in the Company's revenues. We thought that would generate roughly stable operating margins versus last year -- versus the previous year, 2008, and earnings per share in the $6.90 to $7.00 range.

So we now basically have the year in the books, at least with regard to enrollment. We actually achieved 22.5% enrollment, a little bit higher, 22.6% enrollment growth for the full year of 2009 which we project will lead to a 29% increase in revenues. Again, taking into account this increased revenue per student growth that we saw during the year. That is going to lead to approximately 150 basis points of operating margin expansion and full-year 2009 earnings per share in the $7.56 to the $7.58 range.

So to make the financial model clear to all of us and to think about these puts and takes, the additional 2.5% increase in enrollment growth over our 20% benchmark led to an additional 5% of revenue growth. More than we would have expected, but that 5% of revenue growth did track almost exactly with our financial model generating about $0.50 per share of additional earnings or roughly $0.10 per share of incremental earnings for each 1% of incremental revenue growth.

Now turning to 2010. It's again at this point of the year where we have designed our investment plan for next year. We have cleared it with our Board of Trustees and our Board of Directors, and we are positioned to share it with our owners as well.

We announced today that Strayer University intends to open 13 new campuses next year. We expect that most of the 13 new campuses will be in new markets for us, indeed many will be in those four news states that we announced this morning. We also announced today that the university will implement a tuition price increase of 5% effective January 1, 2010. When you take into account that tuition increase, the increased investment associated with the expansion plans that I just outlined, Mark and I believe that if the university achieves 20% enrollment growth in 2010 again we would expect an annual revenue increase of around 24%, roughly stable operating margins even with the additional operating losses of the new campuses, and diluted earnings per share in the $9.30 to the $9.50 range.

I suspect that the effective incremental enrollment, or more specifically incremental revenue above or below those benchmarks, will have the same relative impact on earnings that we experienced this year.

I would now like to turn back to the fifth leg of the value creation strategy, our capital redeployment, because again as I had mentioned we used up last quarter our share repurchase authorization. This is the point where the Board and I -- when we have both our results for this year, we have approved our budget for next year -- we look at our cash balances and where they are likely to end up at the end of the year, and more importantly where we expect those cash balances to grow if we execute on our plan for 2010, and we as a Board decided to take the following actions.

First, we are increasing the annual common dividend by 50% to $3 per share. Second, we have increased our share repurchase authority back up to $100 million. I think it's fair to say the Board and I remain convinced that this business model allows the luxury of fully funding this aggressive organic growth strategy and still make a periodic return of capital to our shareholders.

As a management team and a Board we will continue to weigh all uses of cash to determine the most value enhancing after-tax return on our owners' capital. We manage it for you and so we take that very seriously, and we feel like this is the right capital redeployment strategy to generate those returns.

With that, Dana, we would be pleased to answer any questions.

(Operator Instructions) Sara Gubins, Bank of America-Merrill Lynch.

Thanks, good morning. First question, could you talk about the expected contribution from new campuses relative to the 20% enrollment outlook in 2010?

It won't be very much. When we open a new campus that first year we just get a handful of students. We are quite patient in terms of how we think about these campus growths, so I would guess in total it's not more than a percent, if that.

Yes, a percent or two.

Yes. So as I said there will be just a handful of students at each of them. Particularly the ones that we open at the back end of the year will not have very much impact at all.

Okay. And then you mentioned ancillary revenue as having been a help during the year. Could you just talk about what that is?

Sure. There is a variety of things -- we have graduation fees, we have withdrawal fees when people withdraw. Some of those are contra revenue items. Scholarships, we have a military scholarship and --. Anything else off the top of your head, Mark?

Corporate discounts.

Yes, corporate discounts. So if those are lower than we expect that creates a little more revenue per student. I would say the intra-quarter drops are the larger issue for us.

Okay. And then last question is probably the question of the week, but can you talk a bit about your revenue recognition policy, how you do refunds for students? And just walk through maybe in a little bit more detail what the contra accounts for revenue are?

Sure. Well, I will try and, Mark, you interrupt if I am getting this wrong.

Probably the best way to start is to recognize that we have a relatively simple structure because our academic terms -- we only have four academic terms a year. It's kind of a traditional university structure. Each of those academic terms are almost exactly aligned with our financial quarters. To put it even more specifically, each of those academic terms both start and end within a financial quarter so it makes the revenue recognition relatively simple from that standpoint.

The balance sheet entry when a student enrolls is -- we book a liability, which is the unearned tuition; it's deferred revenue. And then we book an asset, which is either cash if they paid upfront or an account receivable. Right, Mark?

That is right. Yes.

Most of those accounts receivable are drawn down in the first couple of weeks in terms of a title IV draw downs, but that is the entry.

And then on the income statement we recognize that revenue ratably through the quarter with the exception if a student withdraws, depending on when they do withdraw we have a schedule which is in our catalog as to what refunds that are due the student. And it's basically once the student gets through the midterm or six weeks into the quarter, if they withdraw after that they still owe us 100% of the tuition.

Then if a student is a Title IV borrower we have a separate obligation in terms of returning to the lender under a separate schedule which the Department of Education publishes any refunds that are due to the lender or in the case of a direct loan student due to the government. And we obviously comply with that.

Our revenue is recognized on a basis of our university refund schedule and to the degree that we have had to return funds to either a lender or the government under the Title IV and there are still dollars owed to us under our refund policy, then we have a receivable from the student. I get that right?

Yes.

Okay.

And are you making estimates throughout the quarter about the refunds that you will need to make or do you true it up at the end of the quarter?

Well, we make them when we have to make them.

Yes, we just report the actual amount at the end of the quarter.

We don't have to estimate because we know exactly what we have to pay. And then since the quarter is over -- the academic quarter is over before the end of the financial quarter when we report it's quite straightforward.

Okay, great. Good, thanks a lot. I will turn it over.

Andrew Fones, UBS.

Yes, thanks. I had a couple of follow-ups on the revenue recognition if you don't mind. First, I guess I just wanted to make sure whether or not you have received any type of inquiry from the SEC regarding (inaudible). I am sure you are aware that one of your competitors did receive an inquiry recently.

I did hear that. No, we have not received any.

Okay. And then in terms of the -- you mentioned if the funds have to be returned, the Title IV funds have to be returned but there may still be some money owed to you, whether or not you have had any collection issues on that regarding that accounts receivable?

Well, we have had collection issues which is the source of increased bad debt expense. Whether a receivable from a student is generated through -- if the student is paying through Title IV or just hasn't paid themselves, basically all of our bad debt expense derives from students who withdraw during the quarter. In this economic environment over the last year we have found it harder to collect, and that has run through our increased bad debt expense.

As I mentioned last quarter, and again this is true this quarter, the number of those students as a percent of our total continues to go down. So from an academic quality standpoint I am actually quite pleased with what we are doing there and I see the more difficult collectibility of those receivables as just a function of the economy and a cost we are quite prepared to bear.

Okay. I guess as you think about the difficulty collecting those, does it give you any concerns about the collect ability of the revenues such that you would consider not recognizing that as revenue or netting it out of your revenue until the funds are received?

Well, the difficulty of collecting it is reflected in the higher reserve that we are taking, which is why our bad debt expense is up. So we are -- it already runs through our income statement.

Okay. And then just if I could, in terms of negotiated rulemaking is there anything you are looking at there that you think could be a potential positive or negative?

Well, I think you would have to look at that whole process within the context of the fact that we are a heavily regulated industry. There is nothing specific that I have seen in what they have described as topics which either gives me excitement or pause.

I think all of the issues are well within the scope of what the government ought to look at in terms of protecting the government's balance sheet with regard to the issuance of Title IV loans. And in general I think that most of those rules are geared towards -- the rules that exist and the ones they are looking at are geared towards making sure that when you are operating an enterprise in the public good that the enterprise is managed, the governing structure of the enterprise is focused on achieving that public good, particularly if you are relying on some government support through a government guaranteed loans and that everybody within the organization understands that.

I think as long as the enterprises are run in that way I don't think there is a whole lot of downside that can come out of these discussions. So we have a pretty sane view about it.

Okay, thanks. And then perhaps just one final one. Obviously you had more than just (inaudible) openings running through CapEx this year with the new technology center opening. Could you give us a sense of where CapEx may fall 2010? Thanks.

Well, we still have a fair amount of buildout to do in the second online center. Along with the 13 campuses and a constant investment in updating our technology at all times, I think it's rather similar, isn't it, Mark?

Yes, it will be consistent with what we invested in 2009. So, Andrew, we think it will be in the 7% to 8% of our revenue, sort of in that range.

But we have a bit of a bulge in these last two years with several existing campus renovations. I would think that in 2011 it trends back down to -- I think historically we have been about 5 (multiple speakers).

Yes, in the 5.5% to 6% range.

So I would say 2010 is probably similar to 2009; 2011 is likely to be similar to 2008.

Right.

Great, thank you.

Amy Junker, Robert W. Baird.

Good morning. Thanks. Can you talk a little bit about the ramp up in the new campuses, the cost I just want to make sure I am thinking about this the right way.

When you open a new campus, let's say the four campuses you are planning to open or that you opened and started enrolling for the fall. Was the bulk of those losses, does that occur in the quarter just before you start enrolling students?

The quarter just before and then the quarter of. I think Mark has a slide on this. If you go to our website and look under the Investor Day that we did back in 2007, Mark had a notional slide that showed that. But if memory serves it's highest in the actual quarter that you opened it. It's pretty high the quarter right before and then it starts to go down as your enrollment grows.

Okay, great. That is perfect. And to follow up on Sara's question, I guess, about what the contribution from campuses opening for 2010. I understand that the 13 probably won't have that big of a driver, but how should we think about the impact of either the 11 you opened in 2009? How much of that is really contributing do you think to the enrollment for 2010 or is it more the 2008 campuses you opened up? How much before that really is a meaningful contributor to enrollment?

Once you get through that first 12 months you are adding about 100 to 150 new students per year per campus, so that does start to get meaningful. And when we have a bow wave of campuses that have been opened a year or two, three, four years ago those are the ones that are growing at the highest rate and providing the highest percentage increase impact.

And so the way I kind of think about this, and correct me if I am wrong, but the 11 you opened up in '09, the 13 in 2010, will continue to drive that growth for the next several years at least?

Correct. Absolutely, correct. Another thing just to clarify, Amy, is that Sara asked her question with regard to the contribution impact for enrollment. The contribution impact for earnings is negative for the 13 in the first year. It's minimal, it's breakeven in the second year, and you start to get some earnings impact in the third and fourth year. The contribution impact in terms of enrollment growth precedes that a little bit.

Great. And then last clarification from me. In your business plan, if I recall from the past, the 20% enrollment that you kind of put out there that is not necessarily an expectation of what you think you are going to do, that is what would be required in order to get to flat margins? Is that the right way to think about that?

Exactly right. You are exactly right.

Okay. So it could be higher or it could be lower, you don't know. But that is kind of the threshold you need to meet in order to get breakeven margins?

Exactly right, Amy. We never presume to predict enrollment. Students will come when they come. But in terms of analyzing the business from a financial standpoint we like having a stake in the sand that allows us -- or a stake in the ground that allows us to measure ourselves what the financial impact would be above or below that in terms of distributable cash and earning. And so we provide that to you all as well.

Okay. Because I guess I just wanted to make sure and understand that it's not as if -- you have been trending above those levels recently. It's not as if you are seeing something that is indicating necessarily a slowdown. That was just a threshold?

That is the threshold and you see what we see. We provide it to you when we get it. We try not to get too far ahead of ourselves.

Great. Thanks, guys.

Ariel Sokol, Wedbush Securities.

Good morning. In the past you have talked about bad debt expense as a percent of revenue, as a good proxy for decision-making on campus. So how would how would you characterize the decision making on campuses this quarter? Was it in line and what assumptions are you making regarding your 2010 business plan?

I am quite pleased with the decision making on campus this quarter. As I mentioned just previously, the bad debt expense is a proxy but it may not be the most accurate proxy in a period of declining economic activity.

The more important proxy is what is the number of students who are generating bad debt expense, i.e., what are the number of students as a percentage of our whole who are enrolled who for whatever reason were not adequately prepared. They weren't adequately communicated with; they are dissatisfied. They drop out sometime in that first term and then we are forced to collect a receivable from them for a product that they are not getting. So it's just a bad deal all around.

Since that number was smaller in this last quarter, our summer academic term, as a percentage of our total students than it was the year before I am quite pleased with that decision making. As I mentioned, the added cost that runs through our income statement of the lack or the lower collectability of any consumer credit from that standpoint is just something that we are comfortable with. And we are glad to incur that price from that standpoint.

So from our standpoint it went quite well this last quarter.

And your other question was what we were anticipating. Yes, for next year -- first off you have a bit of, again, a bow wave that runs through because you get a couple of quarters of expense associated with an uncollected receivable that is never collected at the end of the current quarter because we don't write it off until 180 days after that.

With that and with no more assumption but that the economy is not going to get better and it's not going to get worse, our guess is, as we said last quarter, it's probably going to be in the 4% to 5% range next year.

Thank you.

Andrew Steinerman, JPMorgan.

If you could just jump into gross margin trends, (inaudible) versus instructional costs as a percentage of revenues and kind of why it did what it did in the quarter. And what would be your view into the fourth quarter on the gross margin line?

You are asking about our revenue minus our instructional and educational expense?

As a percentage of revenues, yes, that is gross margin.

Well, every 20 students we have two add an adjunct faculty member to teach a class because our full-time faculty at these levels of enrollment are always fully engaged at the start of the quarter. There is costs associated with that. There is also additional costs that we are constantly making or investments that we are constantly making with regard to particularly our online technology.

And so our view is that the instruction and educational expense as a percentage of revenue is going to be relatively stable. We don't expect to see a whole lot of additional margin out of that. We think that is the guts of what we do and we want that to be fully funded.

There is a little bit of play. If every single incremental class had one student in it and you take that out across 70 campuses and hundreds of online sections, you have got another 19 students you could put in and then you would have some expansion there. But it's not going to be meaningful and it's not something that we really look to see.

On the other hand, our marketing and admissions costs and our G&A costs where we bear a lot of the losses associated with new campuses, as the university grows we do expect that those will shrink as a percent of revenue. And that is generally what we see.

Super. That is very helpful. I am going to ask a question, Rob, that also you will probably say that we don't control this one. But what stood out to me as pretty interesting is that on-campus enrollment growth grew faster than online enrollment, 23 versus 21, for the first time in a real while. And so is there anything going on of why students at Strayer might be taking more on ground classes than they have in the past?

We noticed that also, Andrew, and dug into it in the last couple of weeks. There is a couple of things going on. One is you will see that change, and you can see it in the numbers that we reported, is concentrated in our new campuses. I believe the answer there is that over the last couple of years, since our self-study three years ago and then our reaffirmation two years ago, we have invested significantly more in full-time faculty at a brand-new campus.

It increases the operating losses at those brand-new campuses, but we felt like because of all of the ancillary duties that we put on full-time faculty in terms of advising and tutoring and some of the developmental education side that we needed that full-time faculty on the campus. What that did is it made it more of a choice for a brand-new student at a brand-new campus, whereas in the past economically it only made sense to have just a few full-time faculty and a few classes scheduled at a brand-new campus.

The news student, if they wanted to take other courses in the course catalog, had to take them online. Now over this last year we are seeing more and more choice that is available to the students. The students are able to make that choice based on their own desire.

And, frankly, we also advise students, certain types of students, that they are better off starting in the classroom, migrating to an online class a little later on in their process if we feel like they have got issues in terms of bringing -- certainly if they are in the developmental courses, developmental math and English to get them up to the college level. And also some of our more complicated entry-level courses, whether statistics or finance or things of that nature.

So the investment in the full-time faculty at the campus I think has probably driven a lot of that. Other parts of it I really don't have an explanation for. And as you said correctly in your question, we don't really try and control it one way or another. We are watching to see how students want to take classes and making sure that we have enough inventory of faculty to deal with that.

Right, that makes perfect sense. Thank you.

Jeff Silber, BMO Capital Markets.

Thanks so much. I just wanted to focus on the new state entrants for next year. Correct me if I am wrong but four new states, is that a record for you guys?

Yes, we have never done it before (multiple speakers)

And I know you can't predict the timing of this but that is on top of, I think, three this past year. Is it something that you are doing? Are you being more aggressive on the new state openings, are you finding states more receptive? If you could you comment on that, that would be great.

Sure. I wouldn't say that we are finding them any more or less receptive because we have never really had significant challenges from that standpoint. But we have invested more both through our university president's office and through our legal and regulatory staff to spending a little more time at this over the last couple of years, which I think is the result you see in terms of more new states being opened.

I also think that as our reputation grows it's a little easier for us. It has never been that difficult, but if five years ago we had gone down to Texas I don't think anybody would have heard of us. We have had operations in Tennessee now for six years. The people in Arkansas knew exactly who we were because of that. So as our national reputation grows as well as our local reputation I just think it makes it a little bit easier.

Okay, great. Then on the business model, I know you typically talk about a 5% tuition increase each year. Are you finding any pushback on that, given where the price points are, given what is going on in the economy?

No.

Okay. Let me just sneak another one in then.

Yes, go ahead.

That was quick. Just on persistence, I don't know if you commented on that. If you can give us some color what is going on there, that would be great.

Sure, it's relatively stable. It is at a very high rate. We are not going to get a whole lot more in improvement on this because, again, on an open access university we measure this in growth. So out of -- subtracted from our continuation numbers are students who graduate, students who academically fail. And then with working adults, life happens to few of them as well.

So we are up into the mid 80s now, and I just don't think that it is going to get much higher than that. In this last quarter, it was down slightly. Part of that, again, is based on the timing of graduations. We did actually have a slightly higher academic failure rate in this order than we had the year before, but it is relatively stable.

All right, great. Thanks so much.

Kelly Flynn, Credit Suisse.

Thanks. A couple questions. First on the business model, I'm wondering why the higher bad debt isn't changing your margin assumptions on the business model. I guess all else equal, normally 20% enrollment growth coming with flat year-over-year margins; you have now got higher bad debt. What is the offset to that or how do you think about that?

There is a lot that flows into that model. We are doing 13 campuses, but we are not opening a second online center. So there is a little less margin drag from that. Hopefully, that second online center will reach breakeven by the end of the year so it will have less of a drag. There is a lot of moving parts to it, Kelly. I wouldn't identify any specific one as being dispositive there.

Okay, great. Then on the revenue per student, can you just go over the puts and takes, if you will, that result in revenue per student targets being just slightly less than the price increase? You mentioned ancillary. What are the other factors that add and take away on that front that get you to slightly less than 5% next year?

Well, the most important one is class count per student, and that for us depends a lot on the mix between graduate and undergraduate students. Graduate students, although we charge them more per class, they take significantly less classes per term than undergraduate students.

So over the last five or six years, we have continued to see our graduate student population increase slightly faster than our undergraduate population. We don't have any reason to think that it's going to change. We don't have any reason to believe it is going to continue, but just for ease of modeling we assume that and that drives a slightly lower class per student per year, which is probably the biggest impact on our revenue growth.

I also -- we have had a tremendous year all year long in terms of doing better on intra-quarter drops in the previous year. It can't get a lot better than it is, so we don't have any reason to model in that continued improvement. So when you levelize that, that also gets you back down to a price increase that is slightly below -- or a revenue per student increase slightly below our price increase.

Okay, great. Could I throw in one more about the campus add? How do you think generally about how long you can grow 20% a year without having to significantly increase the number of campuses you are adding? I guess sort of law of large numbers type question.

We don't really think about that, Kelly, honestly. We think about what is our human capital capacity to open new campuses, because the return on invested financial capital in opening a new campus is so high. We will do as many as we can in a year and if that caused enrollment growth to be very, very high in one year and lower in the next year that is fine by us.

Now we don't really start with an assumed amount of enrollment or revenue growth that we are trying to achieve. We start with how can we build the university in the most effective and responsible way, and that starts with human capital. And that is what derives our campus opening strategy.

Okay, appreciate it. Thank you.

Mark Marostica, Piper Jaffray.

Good morning. It's actually marked [Mark Skitovich] for Marostica. I just had a couple quick questions. Was hoping you could provide some additional granularity on what is implied in your business model EPS. You had mentioned relatively stable gross margins. Just hoping you can comment on S&P and G&A spending levels as well as the tax rate for FY '10.

Well, we said relatively stable operating margins, not gross margins. Our tax rate, Mark, is 39.5%.

Yes, we think it will be 39.5%, which is pretty consistent with where we think we will net out this year.

And beyond that we don't give a whole lot more granularity with regard to EPS. We give you the model so you can see it.

Right. I think there was an earlier question on gross margins for the quarter and if I am not mistaken you had indicated that you thought going forward we would see a similar trend there. Is that accurate? On a year-over-year basis?

Well, the earlier question was with regard to a term we don't use, frankly, this gross margin, but I assume that he was focusing in on the instructional and education line. What I was trying to illuminate there is that there is going to be less variability in that line over time just because as the university grows -- we are not selling software.

We have to hire faculty consistent with our growth of the university, because if your students per faculty number starts to go down or starts to go it has been pretty well established that your academic quality suffers. So we are not going to let that happen.

The other costs will run through our income statement as a percent of revenue based on where we are in the average age of the campus, because that is really what is affecting those operating margins. So I was not presuming to make a comment with regard specifically to next year.

But just in general our instructional and education line there isn't a lot of leverage in that because we are going to continue to invest in that. And as we grow or when we stop opening new units, both the marketing and admissions and the G&A line should decrease as a percent of revenue.

Okay, fair enough. And then just one final question on openings next year. What proportion will be in the new markets versus existing? And then how will the funding be allocated on a quarterly basis next year?

What do you mean? When you ask funding you are talking about at what rate will we open the units?

Yes.

We haven't finalized that. We are going to open three in the winter so we know that much. The other of 10 I would guess is probably to be spread pretty evenly across the year, but it sort of depends on both the timing of real estate and more importantly the timing of human capital. But I would think for planning purposes relatively even.

And I forgot the first part of the question. New markets, yes. Most of them will be in new markets. We have a lot of new markets opened with those four states and I would imagine the lion's share will be in new markets.

Okay, great. Thanks.

Trace Urdan, Signal Hill.

Thanks. Good morning. Rob, the 5% price increase strikes me as maybe even aggressive in the context of what is going on in the economy, what is going on in the employment market. How do you think about that? Where does that number come from? And do you think that maybe you are eating into the value proposition a little bit in being that consistent at a time when everything else is kind of soft right now?

Well, the amount of the price increase in and of itself wouldn't be either aggressive or eating into value without an analysis of where the baseline costs are. If you were charging $1 per class, you could have a very high price increase, obviously, and have no impact on that.

We are quite comparable that the value proposition for our students, given our price point, is very healthy. And that the sort of increase in education as a factor of production in the economy generates real pricing power, which as we have said in the past we think the most efficient and effective way to capture that both for the enterprise and for the students is through a predictable 5% increase.

So when we sat down this year looked at our tuition, looked at the value that our education creates for students, looked at the demand for what we do, looked at the increase in costs which we expect to incur in terms of attracting the finest faculty and the best facilities, and 5% feels like a pretty good balance. So luckily there is a good division of labor. We get to decide that and you get to opine on it.

All right, fair enough. I will let it alone there. Any increased attention or scrutiny or questioning from any of the corporate sponsors that help your students out with their tuition? Are they more interested in this benefit that they are providing to students than they have been in the past?

It has been very strong all year to the great surprise of a number of commentators, but not much of a surprise to us because we had conversations last year with these people. What we have found is even in a depressed economic environment and decreased number of jobs that companies want to continue to invest in human capital in their own organizations. And that the tuition reimbursement benefit is a relatively low cost way of increasing the productivity of their workforce and more importantly decreasing the turn, decreasing the turnover.

And so we have had a tremendous surge of interest, both from our existing corporate clients -- and by the way, we have a large number of governmental entities that are in our institutional alliance program for which there hasn't been reduced employment as well. But even on the corporate side it has been a very strong year and a year in which we have added a number of new partners that we hadn't had in the past.

And so the answer to your question is, no, there hasn't been any pushback at all on that, either in terms of their support or in terms of tuition pricing. My experience has been their bigger focus is on the size of your discount which you are prepared to provide relative to your actual tuition, and they have been a little bit less focused on the price increase or the overall tuition.

We do participate in many of these programs where if an alliance partner sends us enough students we will give them a 5% or a 10% discount.

Then the one that has the biggest impact for us, obviously, is the military where as I have mentioned we have frozen our tuition to active duty military since September 11, 2001. So it equates to a relatively high discount right now.

Okay. And I am going to take a crack, and this is really maybe for Mark, going back to Andrew Fones's question. I think there was a little disconnect between what he was asking and answering and it's because there has been a topic yesterday in particular I think broadly. And that is this idea that is there any way to handle differently from an accounting perspective the phenomenon of students who come in and quickly leave, and perhaps generate a receivable but one that we all know will never get collected because maybe they attended one class or something of that sort?

Is there any way to deal with that other than just to run them through the income statement, discount -- have a receivable that you discount and ultimately write off? I think that is one of the things that this inquiry at Apollo kind of prompted broadly in the investosphere yesterday?

Well, I will let Mark answer in terms of the accounting principles but in terms of our own practice, which is consistent with the accounting principle, is if the student never shows up there is zero revenue that is recognized.

Yes. It's not the student who never shows up, but it's the student who shows up a very little bit and then decides it's not for them and leaves. But is disinclined to ever pay a bill that they might legitimately owe?

Well, there is no accounting rule or principle that tells you how much to reserve against that receivable. The management of the Company that signs the financial statements has to make its best estimate as to what that reserve should be which effectively discounts that receivable from the beginning. But Mark --?

Yes, I think that is right, Rob. This is revenue that we technically have earned, but we apply pretty rigorous analysis when it comes time to estimating our bad debt that takes that into account.

I think the criticism or the discussion is not that it isn't being handled properly, but that it generates a certain amount of fluff in the income statement because we all know that this is sort of revenue that will never amount to anything. So is there a basis to say listen we are not going to recognize any revenue from a student until they have completed X number of classes? I think that is the topic.

I would tell you the answer for those of us who have to sign financial statements that recognizing the revenue under a schedule which is dictated by your own refund policy is pretty straightforward. There is not a whole lot of discretion that you have in that.

What eliminates what you call fluff in the income statement is taking an adequate reserve against it immediately. And if you are doing that then your bad debt expense will reflect the fact that you have students who are no longer enrolled and your revenue is where it is.

But you think about it from the standpoint of the cost to the university, when that student enrolls you have incurred the cost. You have hired the faculty member, you have built the facility, you have developed the curricula, and there is real accounting reality behind the requirement to record revenue there.

And you don't know that that student is not going to pay you when you book that revenue and that is why we estimate how much we don't think we are ultimately going to collect. So this is one where I think, Trace, the accounting principles are pretty straightforward so I wouldn't get too far a field based on a question as to what the appropriate way to do it is. If you are running your business under the rubric of those principles, then you should be fine.

Okay. Thanks for taking the time with that one.

Corey Greendale, First Analysis.

Good morning. I had a couple of regulatory related questions and one question about your 2010 model. Rob, you already opined on the negotiated rule making but I had a more specific question about it. You probably haven't had a chance to see, but yesterday the department published an issue paper kind of framing how they want the teams to look at the topics.

One of the questions they are asking the negotiators to consider is whether there should be some mandated relationship between tuition levels and the expected earnings that someone would get coming out of a given program and whether programs should lose eligibility for Title IV if that relationship is out of whack. You already talked about pricing, so I would imagine you would say that wouldn't concern you. But given that you have a lot more data about the economic benefits of your degrees than we do, can you just talk a little bit about whether any sort of regulation like that would be of concern to you?

Well, as a citizen I would tell you that it would be a concern to me as public policy because I would find it a bit intrusive. But you are correct in surmising that based on our view as to the value of what a Strayer University education is to the students who are enrolled, I don't have any particular concern in terms of the application of that as a principal with regard to us if it went through.

But there is a long ways to go between where we are now in terms of a negotiated rulemaking and actual regulations. I heard somebody say yesterday that in interpreting this that Congress passes a law and then you have the negotiated rulemaking and that generates regulation.

It's not exactly correct. There is a lot of different ways under administrative procedures for a federal regulation to be promulgated. It doesn't have to be negotiated rulemaking. The department -- any of the departments on their own can just set the rules, publish in the Federal Register, or go through a comment period, and have them ultimately be adopted.

So I would not be particularly concerned above a general concern with regard to the public policy implications of mandated pricing with regard to one issue paper that came out in a negotiated rulemaking. And I would have no concern, even under that principle, with regard to Strayer.

Okay, that is helpful. My other I guess pseudo-regulatory question, one ancillary topic that has come up with that other company's SEC question and also the House hearing recently is how one measures attendance in online classes. Could you just quickly give us the summary of how you determine that someone has attended a class that is solely online?

Sure. It's actually a little bit easier -- well, I mean, it's equally easy in a classroom. I teach courses and one of our requirements is to physically take an attendance which is submitted. In online the individual has their own password-verified identity which then once the student registers or logs on for each class for the 4.5 hour class you have an electronic record of that. Plus, even better you have a record of all their interactions as well, so it's even easier to verify from an online perspective.

If it's an asynchronous class do they have to be in the system for a certain amount of time or complete an assignment or how do you measure it?

Both.

Okay, both. And the other question I had about your 2010 model, I know you said that you are not going to assume there is a continuation in improvement in the intra-quarter drops that you have been seeing this year. But if the economy improves, do you think there is some kind of risk to the model in that could move the other direction?

No, I really don't think our model is that affected by the economy, Corey. We have gotten those questions for a couple of years and our performance I think bears out that over time, particularly the effectiveness of our academics, our reputation, and brand in a market as it grows, has a much larger impact on both the willingness of students to originally enroll and then their desire to stay enrolled as they go through the program. So I don't see that as an impact.

Great. I appreciate the time. Thanks.

Gary Bisbee, Barclays Capital.

Good morning. I will follow up on that one and just try and -- I appreciate that geographic expansion is the primary driver of your growth. But if we look at total enrollment in mature campuses divided by mature campuses and the same thing for the new, it does look like over the last 18 months you have had at least a moderate -- it seems like mid-single-digit -- sort of lived in a number of kids per campus.

Now maybe that is just the numbers going that way and maybe it is that there has been somewhat of a benefit. I guess the question is as you manage the business do you even care about that? So would you try to -- if you have had some benefit and maybe over the next 18 months it starts to get tougher, would you start to manage differently or is that just not an important way to think about the business in your mind?

First off, we don't have kids. They are adults. And, second, the answer to your question is, no, it's not important to how we manage the business.

We have tried to be quite clear that our objective is to build a nationwide university and that in doing so to do it in a way that protects the reputation and the academic brand for all of our existing students and alumni. And that that takes a certain amount of time and effort. The growth of the university will vary around that trend line. So it's just not even something we remotely think about.

I guess the last point I would make is the inference in the question is that this higher than trend line, if you will, growth over the last 18 months is related to the slower economy. If you just look empirically back at the last period in which we had a higher-than-trend line growth from that standpoint it was in 2004 and early 2005 when the economy was roaring. So there is just not a set of data with regard to our students that I think could bring one to have that conclusion.

But the more important answer to your question is to the degree there was it wouldn't change anything with how we are doing things.

Okay. And then just going back to the quarter I guess one question, is there anything in particular you would point out in the selling and promotional expense which dropped quite a bit as a percent of revenue? Or is that just timing of openings and how your marketing budget works, etc., etc.?

Well, it's most -- the biggest part of it, because we spent everything we intended to spend, was the increased revenue. The increased revenue per student applied against the dollars we had already intended to spend on marketing and admissions creates leverage in that line.

Okay. And then what are you seeing in terms of media price trends? There is mounting evidence, in my opinion, that the cost had probably bottomed last quarter or this quarter and we are going to see sequential growth in television, billboard, especially the traditional media, and even some online properties I think have seen sort of less bad results this quarter that would indicate costs are going to go higher.

Are you seeing any of that and would you think about changing mix if that occurred? Or is it a much more important in your decision to stick with the mix that has worked for you even if that is going to lead to more rapid growth in costs? Thanks a lot.

Sure. We have a very talented marketing team that spends a lot of time thinking about this. The overall dollars that we spend are set by myself and Mark and Karl McDonnell, our Chief Operating Officer, but it's executed at a local level through Lysa Hlavinka's organization and [Dave Freeman], our Head of Marketing. We encourage them to change the mix each quarter anyway just to continue to experiment with what is the most effective way to build our brand.

But, ultimately, again the amount of dollars we spend is relatively constant. We have probably spent the same amount each year in a given market for as many years as we have been in that market. The mix of media decisions are driven much more by at the local level what is going to get the brand out, what is going to generate that name recognition. Because ultimately our belief is the marketing mix and the marketing decisions aren't going to drive the growth of the Company.

What is going to happen is that -- what happens inside the classroom is going to really be the value creator because that is what -- it's the students getting educated. And then from just a pure revenue standpoint, the continuing students are much more valuable to us. And it's their success and the success of our alumni and our faculty, which is ultimately going to be the determining factor in a brand-new student deciding whether to enroll.

So I don't believe that if indeed advertising costs have bottomed and are going to start increasing that that is what you have a meaningful impact on us. I also would say I am not sure I have seen that. At least once a quarter we sit down in detail with our marketing team and go region by region, and that is not anything I have heard at this point. But then we don't do a lot of national advertising. We are not in markets that might be more susceptible to those kinds of changes quicker in the cycle.

Okay, thanks a lot.

Scott Schneeberger, Oppenheimer.

Thanks, good morning. You had mentioned earlier on dropouts you sounded pretty pleased with what you saw in this term and you mentioned that it was improved year-over-year. I don't believe you give actual numbers on that front, but could you speak to sequentially and what you have seen in the terms between now and last year of what the trend has been?

Well, it has been pretty strong all year. We have now had three quarters this year. I don't remember the winter term, I think it was positive. The spring term was definitely positive and the summer term was positive. So all-in we have been quite pleased.

Okay, thanks. I was curious, you mentioned that failure rates increased very recently. Any insight to that? Just curious by the mention of it.

No real insight. We are an open access university and we take in students who have been out of the classroom for a long period of time. But at the same time we have what we hope is a very rigorous set of academic standards and we encourage our faculty to hold students to those standards.

So when a student academically fails that will certainly affect your continuation rate because it's not necessarily the case that they are failed out of the university with one failure. But I forget the exact statistic, but at some number of failures in an academic year they are forced to withdraw as well.

Plus the fact that as a working adult if you are not succeeding in the classroom you are unlikely to stay enrolled anyway. I mean you don't like to be told that you are not very good at what you do. So it's part of the metric that goes into the continuation rate and it's also one of those contra indicators that paradoxically you want it to be there. If you had no academic failure you would have a hard time convincing yourself that you have got a real academic institution with an open access admissions policy.

Okay. Thanks. One more on a separate subject if I could. Criminal justice ramping up very aggressively, as you mentioned at the top of the call. Could you speak briefly to consideration for new programs and how soup to nuts how thinking about it starts and comes to fruition? And maybe a time frame. Thanks.

We don't have a big new program development. It's not really a core part of our strategy. We are pulled into it both in terms of demand and also if we have faculty who we feel confident can teach in those areas. So any of our new programs over the last 10 years -- well, there has really been four. There is the three new graduate degrees that we did about five years ago and now this one undergraduate criminal justice degree.

Those have all been in sort of professional management sciences that are closely related to what Strayer University has done for over 100 years. Any new program development in the future would be based on that as well, but we don't have a lot on the drawing board. It's not a key part of what our value creation strategy is for our owners.

We think that Strayer University has done a great job teaching business administration and management sciences for over 100 years. And that is really the best way to continue to compound value for us.

Thanks very much.

Brandon Dobell, William Blair.

Good morning, thanks. Rob, if you take a look at the pace of criminal justice rollouts and expansion or just the enrollments, has it been kind of in line with your expectations, better than expectations? And are you seeing any disproportionate ground versus online enrollment trends?

I don't know the answer to the last one. Do you know, Mark?

No, I don't.

I would say it's better than my expectations and I had relatively modest expectations to the initial rollout anyway. So it has definitely been better.

I would assume it's offered at every campus now. Would it be your plan to immediately roll it out with the new campuses next year as well?

It would be our plan to roll it out and I believe it's everywhere. There may be one or two states that we don't have regulatory approval in, but it's virtually everywhere.

Okay, fair enough. And back to one of the previous questions around the reserve rate on bad debt. Any sense of either where that reserve rate is and is it different for different kinds of programs or students, for example, and have you guys made any changes that are material in the past 12, 18 months or so?

Well, it's not different by subject matter area. We have made some change, not so much in policy, but in impact. Because as we mentioned last quarter and the quarter before, Mark and I have increased the reserve we take relative to our original algorithm because of our concern that in a weaker economy you have a less likely collection of those receivables.

Okay. Any sense of the usual industry range that we hear out there of 35 to 50? Is that the right kind of range for you guys as well or is that much different from what you see with your students?

It depends on the aging of the receivables. But ultimately, yes, that feels like it's -- yes. And Mark is nodding his head. That is consistent.

Okay, fair enough. And then given the current environment I am sure there is plenty of teachers who are interested in joining your faculty. How do you think about teacher compensation or moves to full-time faculty or away from full-time faculty, more towards adjunct? Just those teacher dynamics would be great. Thanks.

Well, for our faculty it's somewhat dictated both by our culture and our practice, and partly by our accreditation which requires a very high concentration of full-time faculty. We have -- just from an accrediting standpoint I think it's roughly one full-time faculty per 80 full-time equivalent students.

We have managed that down to close to 50, one full-time faculty to 50 students. And the full-time faculty member is going to teach 12 courses per year and a student that is taking somewhere between six and eight courses per year. So you can kind of calculate that gets us to our 18 to 20 students per faculty member.

Our adjunct faculty gives us the opportunity to surge in a given quarter the enrollment without increasing the student per faculty ratio and also gives us a pool of academic professionals that we can pick from in terms of filling full-time faculty.

All of our full-time faculty positions are filled from people who have taught for us as adjuncts for probably four or five years. So we have a good sense as to their teaching capability, their eagerness and their aptitude towards teaching adult students, and how well they are going to fit within a Strayer University culture.

So we will continue to manage that going forward with a heavy concentration on full-time faculty. Somewhere between a quarter and half of our classes in any given quarter are taught by full-time faculty depending on the term, and then supplementing that with adjuncts. Both to fill out the class schedule and also to give us an opportunity to review professors to see if they are capable of being both full-time faculty and, ultimately, hopefully associate campus deans and campus deans because that is what is going to control our rate of university expansion.

Okay, great. Thanks, guys. Appreciate it.

Jerry Herman, Stifel Nicolaus.

Sorry, I know it's getting late. I will keep it one. Question about the online service center.

Rob, can you maybe frame what contribution that made and maybe in terms of the number of enrollment reps that are there? What I am getting to is I sense that that is a slightly more flexible form of capacity and I just want to try and understand how much you have absorbed at this point or used at this point.

It is more flexible, and ultimately when it's fully built out we would expect it -- we said it's sort of five times a campus. A normal campus will have five or six admissions officers. I think in terms of admissions officers it's a slightly higher ratio. Our existing online facility has 60 or 65 admissions officer so it would be somewhere in that mode when it's full, but we are nowhere near there now. I don't know exactly the number but it's a handful or so.

Okay, great.

No comments on Ohio?

Yes, tell your landlord to fix the lights at the campus. Two of the letters are out.

I appreciate the heads up.

Okay.

Bob Wetenhall, Royal Bank of Canada.

Good quarter. Really fast, two quick questions. Is the rise in bad debt offsetting your favorable sales leverage on the G&A line?

Well, bad debt expense runs through G&A. I don't really think about it that way but I think mathematically, yes. We have increased expenses associated with the increased revenue that is related to bad debt and that is the where it goes, the G&A line.

I am just asking that because it looks like you did really well in your S&P line due to the higher revenue base. So I assumed you would get a comparable benefit in your G&A.

Yes, I think that is probably a fair assumption.

Okay. One quick one as well. Your sales are up 31% and that reflects 5% tuition increase and a 22% enrollment growth. What is the delta from? That is just the ancillary revenue?

It was 24% enrollment growth. But the delta is it's less the ancillary fees and more in the lower intra-quarter drops so that your net revenue at the end of the quarter ends up higher per student.

Okay, that is it specifically. I got it. Thanks a lot.

Todd Young, MorningStar.

Good morning, everyone. I just want to ask, we have seen a big ramp up in the number of openings per year. I was wondering if that is maybe a function of the economy we have today and the availability of talent and how we should think about that going forward.

It's not an impact -- it's not impacted by the economy today. It is impacted by the availability of human capital. But our human capital today to staff campus openings are individuals who have worked with us for four or five years, so there is a long lead time. There is a long pipeline.

The increased rate of campus openings and the increased number of campus openings is purely the result of the hard work that Karl McDonnell, our Chief Operating Officer; Dr. Stallard, our University President; and the academic staff are doing in terms of right now putting programs in place which will allow over the next two, three, four years a growth and development of human capital sufficient to open new units. We focus a lot on that because in the end it will -- next to the performance of our existing classrooms will have the largest impact on the value creation for our owners.

Okay. So going forward, I am not trying to peg you to any kind of long-term guidance or anything like that. But there is not reason to think that that should drop back to the eight or nine campuses you had opened in the previous year averages or anything like that?

We never comment on what it's going to be like in the future. Whatever it is it's going to be based on our human capital development, but we are not point to put it at risk. The number of units we open is far less important than making sure everyone that we do open is a very effective part of Strayer University.

Our downside risk is graduating or enrolling one student in a university where we don't have adequate academic oversight and we don't have first-rate faculty. So it's as simple as that.

All right, fair enough. Thank you so much.

Suzanne Stein, Morgan Stanley.

This is Cristina Colon for Susie Stein. Thanks for taking this question. Last quarter it was really helpful that you gave us an update on your corporate alliances. I was hoping maybe you could tell us whether in this quarter you added any new partners or what the growth was in the population of students that are from alliance partners.

We did add a couple but I, honestly, forget who they were. We can get those out. It was roughly -- the growth from the corporate partners was roughly in line with our enrollment growth. I think last quarter it was quite a bit above, but it tends to be lumpy.

I do know that one of our corporate partners, Verizon Wireless, we have opened a number of additional on-site facilities with them. And so that has driven a large increase from that particular one. But it's pretty much in line with the whole year.

Okay, thanks. And one last topic on the regulatory front is I was wondering if you could give us a little bit of detail on how you look at protecting yourself against enrolling students that have high school diplomas that are from diploma mills or high schools that are not credible. Just going into negotiated rulemaking how you could show whether you are adequately hedged against that.

Well, we have a very effective registrar's office and the adequacy of the high school education is a big part of what that registrars office does. We are constantly updating that with any high schools that we feel are not legitimate.

I would tell you that is by far not the biggest problem. The biggest problem in running a university, particularly one for working adults at the undergraduate level, is students who graduated from first-rate high schools but don't have either the math or English competency to succeed at the college level. And that is where over the last couple of years we have developed this mandatory diagnostic test which we provide.

For a student who doesn't score high enough on that test, although we allow them to enroll at Strayer University we don't allow them to take college-level classes. We direct them into what is essentially a high school refresher course in math and English, because we have found that is the single biggest determinant of their success at the college level is their cognitive skills in both math and English regardless of what they are studying.

So I am not at all concerned about fraudulent high schools. We don't have any of those. I am concerned about great high schools but who aren't doing a good enough job teaching math and English. Or enrolling a student in their mid-30s that hasn't been in a classroom for 15 years and whose skill level in that area is just not enough to achieve at the college level.

Great, thank you.

Kelly Flynn, Credit Suisse.

Thanks, I will take it off-line. Brandon kind of asked my question, thanks.

And with no further questions in the queue I would like to turn it back over for any additional or closing remarks.

Sorry that we have gone on this long, but we are happy to answer any questions. Look forward to talking to you again in February. Thanks a lot.

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