Strategic Education Inc (STRA) 2009 Q4 法說會逐字稿

Good morning, everyone. Welcome to Strayer Education Incorporated fourth quarter and full-year 2009 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. Ms. Udler, please go ahead.

Thank you.

With us today to discuss to the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education; Karl McDonnell, President and Chief Operating Officer; 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're unable to listen to the call in real time, a replay will be available beginning today at 1:00PM Eastern through Thursday, February 18th. The replay is available at (888) 203-1112, with the passcode 5846979.

Following Strayer's remarks, we will open the call for questions and answers. Please not that today's press release contains statements that are forward-looking, and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. The statements are based on the Company's current expectations, and are subject to a number of uncertainties and risks that the Company has identified in the press release, and that could cause the Company's actual results to differ materially. Further information about these and other relevant uncertainties may be found in the Company's Annual Report on Form 10-K, and its other filings with the Securities and Exchange Commission.

And now, I 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 with of both our Company and our business model for any listeners who are new to Strayer. Mark will report on the detailed financial results for the fourth quarter and full-year 2009, and then I will ask Karl to comment on the operational results in the fourth quarter and our enrollment statistics for the winter academic term. Finally, I will provide an update on our growth strategy, and the Company's earnings outlook for Q1 2010.

Strayer Education Inc. Is an education service company, whose primary asset is Strayer University; a 55,000-student, 74-campus, post-secondary education institution which offers Bachelor's, Master's and Associate's degrees in Business Administration, Accounting, Computer science, Public Administration and Education. Strayer students are working adults, who are returning to school to further their careers. Our revenue comes from tuition payments and associated fees. Approximately 70% of that 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 15 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 through the financials?

I would be glad to.

Revenues for the three months ended December 31, 2009, increased 29% to $147.2 million, compared to $114.3 million for the same period in 2008, due to increased enrollment and a 5% tuition increase which commenced in January of 2009. Income from operations was $52.4 million compared to $39.4 million for the same period in 2008, an increase of 33%. Operating income margin was 35.6% compared to 34.5% in 2008. Net income was $31.9 million compared to $24.2 million for the same period in 2008, an increase of 32%. Diluted earnings per share was $2.32 compared to $1.71 for the same period in 2008, an increase of 36%. Diluted weighted average shares outstanding decreased to 13,751,000 from 14,143,000 for the same period in 2008.

Revenues for the year ended December 31, 2009, increased 29% to $512 million, compared to $396.3 million for the same period in 2008, due to increased enrollment and a 5% tuition increase effective for 2009. Income from operations was $172.4 million compared to $126.9 million for the same period in 2008, an increase of 36%. Our operating income margin was 33.7% compared to 32% in 2008. Net income was $105.1 million compared to $80.8 million in 2008, an increase of 30%. Diluted earnings per share was $7.60 compared to $5.67 in 2008, an increase of 34%. Diluted weighed average shares outstanding decreased to 13,825,000 from 14,242,000 in 2008.

At December 31, 2009, the Company had cash and marketable securities of $116.5 million and no debt. The Company generated $141.8 million in cash from operating activities, compared to $88.6 million in 2008. Capital expenditures were $30.4 million compared to $20.7 million in 2008. During the year ended December 31, 2009, the Company invested $80 million to repurchase 452,000 shares of common stock at an average price of $177.34 per share. During the year ended 2009, the Company paid regular quarterly dividends of $31.6 million. For the fourth quarter of 2009, bad debt expense as a percentage of revenues was 4.3% compared to 3.8% for the same period in 2008. Day sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 14 days at the end of the fourth quarter of 2009, unchanged from 2008.

Rob?

Thanks, Mark. Karl, why don't you give the highlights of the operational results from the winter term enrollment?

Sure, I would be happy to.

In the winter term, our total student enrollment was up 21%. Our new student enrollment up 16%, and our continuing student enrollment was up 22%. Continuation rate for the quarter was up slightly, and our new student enrollment was slightly affected by the fact that our enrollment period was one week shorter than the prior year. In fact, it's likely that we may see a similar impact in the spring enrollment period, which we're enrolling now, due to severe weather in the Eastern part of the United States, where a large portion of our campuses are located, as well as our largest global online center. Enrollment at mature campuses grew 10%. This is primarily attributable to the fact that we have some newer campuses that are now being categorized as mature; and we also did, however, some of our truly oldest mature campuses growing in the mid-single digits. Global online students grew 39%, and we had good contributions coming from our second global operations center in Salt Lake City, which we expect will break even later this year.

We signed several new national account agreements, including agreements with both Lowe's and Carquest, and we also signed 13 new articulation agreements, including one statewide agreement in Rhode Island. During the quarter, we opened three new campuses, two in New Jersey and one in Little Rock, Arkansas, our first in the State of Arkansas. And this quarter we'll open four new campuses, two in Miami, one in New Orleans, which will be our first in the State of Louisiana, and one in Austin, which will be our first in the State of Texas. This comprises seven of our previously-announced 13 for 2010. Of the remaining six campuses, two will be in Dallas, Texas, two will be in Houston, Texas, and two will be in markets to be named later, although we expect them to also be in the Southeast.

And then lastly in terms of student mix, 70% of our undergraduate students are in business and accounting programs, roughly 20% are in information system programs, and notably 6% are in our new criminal justice program, which is only its fourth quarter of instruction. Graduate students comprise roughly 1/3 of our total student population, which is about the same level as it's been for the past few years. Rob?

New Orleans, what?

Who dat? Just in time for the parties.

Thanks, Mark and Karl.

Just a few amplifying comments on the financials from my perspective. For the fourth quarter, our revenue quarter of 29% was slightly above our forecast market.

Yes.

We had already sort of jacked up the forecast on the basis of the higher revenue per student. And when you break that down, again, as it's been most of the year, we had enrollment growth for the fall term of just under 22%, a 5% tuition increase, as Karl just mentioned, a relatively stable mix of graduate and undergraduate students, and then lower student dropouts versus the same quarter the prior year. That led to a full 700 basis points of revenue per student growth. This continues the pattern that we saw all year, with revenue per student growth being higher than the tuition increase, essentially caused by lower drops. So we're pleased by that.

On expenses, we were also just about right on budget for the quarter. The bad debt expense at 4.3% of revenue was up from the prior year's 3.8%, but down from the prior quarter's 4.5%. And as we described last quarter, I think, you know, we had reached a bit of a ceiling at the 4.5%, and we continue to get good collections from existing students, and so I think that our reserve policy against those receivables that come from students who have dropped out is sufficient now that we expect this to trend in this zone while the economy stays where it is. It's certainly not getting any worse.

Notwithstanding the operating losses we incurred in the fourth quarter from the 11 new campuses that we opened in 2009, we did achieve 110 basis points of operating margin expansion in the quarter, and that is mainly generated by the higher than modeled revenue.

A couple of key points on the full-year results, on the income statement, 23% average enrollment growth led to 29% revenue growth, 170 basis points of margin expansion and $7.60 per share of earnings; that's up 34% versus the prior year. The important thing for me in all of those statistics is that the relationship between our enrollment growth, our revenue growth, our operating margin and earnings per share during the year were all consistent with the financial model that Mark and I had developed, and that we laid out for you the year before; and that is what we like to see. We like to see those financial levers moving in concert with our operational levers, which gives us the level of confidence that we do -- that we understand the business and that it is working the way we expect it to.

Second, on cash flow, the owners' distributable cash flow was up 64% for the year, and that is quite a bit more than the 30% in net income. However, that distributable cash flow growth was significantly benefited by the timing of tax benefits associated with stock-based compensation; that has happened to us before in the past, where you end up with cash that is basically front-loaded into a prior year because you get the tax benefit in the year before you actually have the tax effect. Without the effect of those benefits, our distributable cash flow growth for 2009 would have been 38%, which is more in line with our net income, and that should reverse itself and balance itself out next year in terms of lower cash flow growth for 2010 over 2009. But if you trend-line between all three years, you end up with operating cash flow growth and distributable cash flow growth which is relatively consistent with our net income, which is what we like to see.

During the year, we generated $142 million in cash from operations, and also received approximately $9 million in cash proceeds and tax benefits from stock-based compensation transactions. We used that $151 million of owners' cash as follows. And I like to at the end of the year always reiterate this, so that owners see it the same way we do. We have $151 million that we started with; we invested $30 million in CapEx to maintain and grow Strayer University, which is always our highest return investment, almost always, certainly all the ones we have looked at. We invested $80 million in the repurchase of our common shares at an average price of $177. And as Mark mentioned, we returned $32 million in dividends to our owners in the year, roughly $2.30 per share. We continued in 2009 to be a very efficient generator of cash; and more importantly, as I said earlier, for me, all the operational and financial indices for the year moved the way Mark and I would expect as we grow the university. And for us, it's all about keeping that in balance, and making sure that all those indices are reflecting a balanced and stable management of the university.

Turning to a brief update on our growth strategy, many of you will remember that our strategy is based on five objectives. The first is to maintain enrollment in the Company's mature markets; second, invest our human and financial capital in opening new campuses, particularly in new states and markets; third, continue to build our online offerings; fourth, increase our corporate and institutional alliances; and the fifth, and final, objective is to effectively redeploy our owners' capital.

On our first four objectives, as Karl reported, we're off to a solid start for the year; I don't think there's much that needs to be added there. On capitol redeployment, we announced this morning our regular quarterly dividend of $0.75 per share, and also that we had repurchased approximately $10 million of our common stock during the fourth quarter of 2009 at an average price of $195 per share.

And finally on our business outlook for the first quarter of 2010, based on the university's 21% enrollment growth for the winter term, combined with the planned expenses and operating losses associated with our increased rate of new campus openings, as well as the continued buildout of the second online operations center, we expect earnings per share of $2.56 to $2.58 in the first quarter, and approximately 100 basis points of operating margin compression.

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

Actually, I should say, before we do that, you might have heard we had a little bit of snow in the D.C. area the last week or so. We've put in place our disaster recovery continuity of government plan, and decamped down to one of our Charlotte, North Carolina, campuses, where we had our Board meeting yesterday, and are doing this earnings call today. We do, however, want to get back to D.C., and we're going to try and do that right after that, and so maybe almost immediately on the road. We may not be able to answer questions that come up after the call quite as immediately as we normally do, because we'll be on cell phones. But we will get back to everybody today, and if do you have questions that don't get answered on the call, get ahold of Sonya and we'll get back to you. We probably should have gone to Palm Beach.

With that, Operator, we will be pleased to answer any questions.

(Operator Instructions)

We'll take the first question from Kevin Doherty from Banc of America/Merrill Lynch.

Thank you very much. Good luck shovelling out down there. First of all, on the EPS guidance for the first quarter, it came in a little light from where the Street was. You know, is this simply a function of looking at the four new campus rollouts? Or are there any other incremental investments that you're making, or many any other cost incomes that you were not seeing last year? I guess I'm just trying to reconcile with the margin expansion that you saw in the first quarter versus the margin compression you're looking for in the first quarter?

On a year-over-year basis, in the first quarter of last year we got significantly higher revenue growth, with some of the lower drops. We assume we're anniversarying that this year. And, you know, our model really just looks -- the answer to your question is there are no incremental or additional expenses. It's the timing of new campus openings; we're a little more front-heavy this year. It's not just the three in the quarter, it's the four for the next quarter which, in combination, is I think three more campuses than what we had in the first quarter last year, and that is really about it. We don't have any different view as to -- regards our full-year model. If we have this level of enrollment growth for the year, we would expect to have stable to slightly expanded operating margins for the full year.

Okay, and then maybe just drilling down on the [selling] and promotional line, again you showed good year-over-year improvement there in the fourth quarter, and we're certainly expecting some of the costs to ramp up, given the new campuses. But do you think you can get some leverage there? And maybe if you can just talk about any impact you're seeing from underlying media costs?

Our underlying media costs are quite stable, almost down. What happens is, our model is based at this point in our stage of growth at opening new markets, and we have a fairly set plan with regard to that. We spend about the same amount in each quarter and each market. When you first start off, we really don't have any students. So that is really the unrecovered expenditures that create margin compression, if you will. And we actually expect to have negative impacts on our marketing and admissions line as we open a lot of new campuses. That can be -- particularly new markets.

That can be offset by higher-than-expected revenue growth but, you know, we have modeled in what we think the revenue growth is going to be. And, you know, our view is that we would like to get into as many new markets as quickly as possible. Our only real limitation there is the supply we have of internal human capital, and we don't really pay too much attention or worry that much about it on a quarter-to-quarter or even year-over-year basis what that does to our marketing and admissions line as a percent of revenue. At the end of the day, that is a derivative. Our view is that we're getting very high returns on owners' capital in opening up new campuses, and part of those returns is taking into account the increased expenditures in building the brand in a brand-new market, and over time as you get more students, that tends to balance itself out.

Okay, that is fair. And then just my last one, maybe if you can just address the Department of Education's proposal on gainful employment, and maybe if there is any analysis you can share about how your programs would fare relative to the kind of 8% debt servicing to income threshold, and maybe also how they would fit into the 90% repayment exception as well? Thank you.

Sure. Well, I think my first comment is, I don't really have a lot of specific comments on the Department's proposals at this point, because they've had a lot of different proposals, and none of them have been either official or actionable at this point. So my general view is to give, you know, the Department the benefit of the doubt. And I've worked in Government myself before; I tend to think of people as rational and objective, and moving towards an outcome which is consistent with the policy prescriptions or the policy initiatives that they have.

So we have not spent a lot of time modeling based on the kind of whipsawing data that has come out of the various proposals. I do think that pricing is a key part of how you think about the business. And for me, what has always been attractive about this as a business is that we're able to put in place a tuition pricing which is a very solid part of a value chain for all of our stakeholders. Our tuition is consistent, or even a little bit below, what students could obtain to other -- or would have to pay at other educational institutions, and allows us to provide the significant investments necessary to provide the kind of educational outcomes which we think are important, and still be able to provide a return to capital.

And when we look at the general concepts that the Department was talking about, I don't have any concern about our pricing policy. I hesitate to make a specific comment until we see ultimately what the regulations are, but within the range that they've talked about, and at least has been reported to me, I don't see any impact on our tuition policy and am pleased by that. That is speaking as a CEO. As a citizen, I don't think that either price controls or command-and-control kinds of economic direction makes a whole lot of sense. But, again, as I said, I tend to give Government officials the benefit of the doubt until things are put in place that, you know, cause me to believe otherwise.

Okay. I appreciate the color. Thanks, Rob.

Thank you.

We'll take the next question from Andrew Steinerman with JPMorgan.

Hi there, Rob. When I think about what people are asking about here, first quarter guidance a tad lighter than what we were looking for on EPS and starts decelerated modesty, it reminds me a lot of the year-ago conversation, fourth quarter 2008, starts bounced around, expenses were front-end loaded, and as we know 2009 turned out to be a very normal, strong year for Strayer. Do you see the analogy that I'm talking about?

I don't really remember specifically fourth quarter 2008, but I have heard these questions a dozen times in the last ten years. I cannot be more direct than to say we have a long-term business model for -- which we think we have established to our own satisfaction is quite powerful and works, and we really don't pay a whole lot of attention to what happens quarter-to-quarter or, indeed, what people have modeled with regard to our business. That is your guys' responsibility, and I believe there's a pretty good division of labor. I don't feel like it's necessary for us to either explain or complain or do anything with regard to how you all are modeling that. I would not have known, frankly, that our forecast is below, Andrew, what you may or may not have had.

I think, as I said, the impact in terms of operating margin is -- the single largest impact we have is the timing of our new campus openings. It's a little more front-end loaded this year. As Karl mentioned, the new student growth, that is what it is. We feel that is a number which will be variable. It's really a lot less important to us than the continuation rate, which speaks to the satisfaction of students and how well we're educating. That number has bounced around between 10% and almost 30% routinely. And as Karl mentioned, I think the most significant impact we had this quarter was five less recruiting days. So beyond that, it's just not in our nature, or even what we spend a lot of time thinking, to try and explain this on a quarter-to-quarter basis. I think the operating model is working exactly the way we would expect it to.

What I wanted to reconfirm is for the full-year, what we said in October is if we have 20% enrollment growth, we would expect stable to slightly expanding operating margins, and that is exactly what we continue to expect. I see no change to that.

Right. And could you fill out the comment about Salt Lake; how much of a drag will it be in the first quarter?

It's five times, roughly, in size of a regular campus. And we're still -- we haven't gotten to break-even yet, so we're still -- we're still, you know, incurring several hundred thousand dollars of operating losses, close to a probably $1 million in the quarter on that.

And you like the way it's performing. This is all within your plan, right?

Absolutely.

Okay, thanks for the color. Appreciate it, Rob.

Our next question comes from Andrew Fones with UBS.

Yes, thank you. First on the operating results, I guess given you saw the new student starts in the period down a little bit, and you mentioned the snow may impact next quarter. Is there anything that you are seeing currently that would suggest that you wouldn't reach that 20% enrollment growth for the year, as you look out from here?

Andrew, we never ever forecast enrollment growth. Students will come when they come, and it's just not in our nature to try and push that. The new student enrollment was not down for the quarter, it was up 16%; that's a pretty healthy slug of new students and. So, again, if, on a -- comparing it to the previous quarter, it's just -- you know, that's nature of what we do. This is a variable business. New student enrollment is variable. We're entirely comfortable with that, and we don't really even opine on it on a quarter-to-quarter, basis because it's -- we don't want to think about our students as a factor of production ind our revenue generation; we are happy when they enroll.

I guess put differently, would it be safe to say that you're not seeing any kind of weakening in demand from students, and that you think the slower growth in the quarter and potentially next quarter would be entirely due to these one-time items?

The answer to your first question is no, we're not seeing any weakening in demand. These are relatively small numbers, bear in mind. New students in a winter term are nowhere near as large as they are in a fall term, and so a few hundred students, or less than 100 students, is a percent. So no, we are not seeing any weakening of demand from our standpoint. And the -- we'll see what the Spring term new student number is when we see it. Again, we don't forecast that, we don't try and measure ourselves against a specific number there; we tell you as soon as we know what it is.

Okay, thanks. And then jut to kind of follow-up on the gainful employment question, could you give us a sense of what the average debt load is for your graduating students? I don't know if you track that? Thanks.

We do track that, and most of our students come in with a lot of their credit earned already. I can tell you what the average lifetime revenue to us from a student is, which is about $25,000, and about 70% of that is Title IV. We don't know exactly what debt they may have brought in from other institutions for those students, but I would guess more of the average debt incurred in going to Strayer University is about $20,000 to $25,000, same story.

Thank you.

Thank you, Andrew.

Our next question comes from Ariel Sokul with Wedbush.

Hi, good morning. A question regarding enrollments. How do they typically trend throughout a term or a quarter? Are applications, are they more back-end loaded, or are people enrolling and applying evenly throughout the quarter?

Well, if you're talking about new students --

Yes.

-- I mean, we can only process really a set amount per day. For enrolling a new student, there are a number of steps and, you know, we can't really surge that capacity in any given day. I think the processing of those students does tend to be fairly standard through the quarter, and a number of students per day, Karl. In terms of the applications or actual inquiries, I would imagine those do tend to surge towards the end, but I am not really sure. How does it work?

You have to remember, we only have four starts per year, so each one of these enrollment periods is roughly about 12 weeks long, and it runs pretty evenly. We get a fairly consistent amount of applications and students in the first weeks of a term, and it sort of holds itself out through that 10 to 12-week enrollment period.

And as Rob said, the real determining factor is the amount of people that we have in one of these campuses, and that effectively sets a daily limit that you could adequately service. And so we don't try to push extra students through that, nor do I think we could if we wanted to; it's just a factor of fairly even processing of these admission requests that come in to us throughout the period of the enrollment cycle. So whenever we have a situation where we have fewer days, that would definitely have an impact.

So as it relates to the weather, is it fair to say then the leads might not necessarily be impacted as much as the operations of the business in processing the leads, and the applications?

I think that's right. We're still obviously getting inquiries, there are still students from around the United States that are interested in Strayer on days that we may be shut down due to a weather disruption. What happens is, our ability to follow-up those students has been disrupted, and when the campuses reopen, they will follow-up with those students at the first opportunity that they have. But clearly, there is some disruption that happens when the entire campus is shut down.

Okay, and they just going back to the question on gainful employment, I am just going to ask --

Before you do that, I would not overstate the weather in terms of the Spring term, because we is do have campuses from Charlotte, south through Florida and into Texas; we have a bunch of campuses that are open. We just had a fair number, and some of our bigger ones, that have, you know, been closed for almost a week now.

Okay. And so just going back to the question for gainful employment, I'll ask one of the series that others will; so would you feel comfortable sharing the default rates for students who graduate from your program?

The default rate for students who graduate is extremely low. Our cohort default for all students was, what, 6%?

6%, that was the two-year rate.

I would guess most of them are students who have dropped out.

Would you be willing to share a number?

Do either of you have that number?

I know that for our graduate student graduates, it's below 3% and it is in the 3% to 3.5% range for all graduates.

Okay, thank you.

There is your answer.

Cool.

Thanks.

Our next question comes from Gary Bisbee with Barclays Capital.

Hey, guys, good morning.

Hey, Gary.

Hey, I guess a question on the articulation agreement. I don't know if that is a stable amount with what you typically signed up in the past. I don't remember hearing that number; my suspicion is that it probably an acceleration, and if so, can you give us a sense, is the weak economy playing into it, or is it more just the geographic expansion gives you more opportunities to try to do deals with other traditional schools?

Yes, I am not sure it's that much of an acceleration. I think we tend to do -- it may be a little bit more. I would guess on a given year, we might have 15 to 20, so if we had 10-ish in the quarter, that is a bit of acceleration. I don't think it has much to do with the economy. It is definitely the geographic expansion, and then also our increased reputation. Each one of these that you do, that you do a good job with the graduates of the community college, the administrators at that community college talk to their buddies in the community college network, and our name just gets better known, and it is a little easier as you get farther afield.

Okay. And what is sort of the typical form that these agreements take? It's just that they -- you recognize the credits from the kids coming to these schools, and they help the kids understand that you're an option?

Well, they're not kids.

You called me on that last quarter. I'll try and remember that.

It's important, because it really goes to the heart of what our business model and our academic model.

Yes.

Community colleges have a lot of working adult students. And it is a great theater for us, because the students who graduate from -- the adult students who graduate from a community college have been through a filter that, frankly, weeds out those students who are either less serious or less capable of handling the academics. And so they progress through and succeed at Strayer University at a much higher rate. So we're really delighted to get those students.

The articulation agreements, you know, run in a number of forms, but the basic concept is if we're comfortable, and Middle States, our regional creditor, is comfortable with the academic content of the -- basically the general studies program, and the associate's-level degrees which are awarded by the community college, those will automatically be included for a full Baccalaureate at Strayer, and the student enters in essentially the junior year, the third year, and all of their credits transfer.

In some of them -- in some of these arrangements there is, you know, more or less aggressive communication or brand awareness that the community college itself does, you know, for Strayer University. In other cases, it gets as, you know, impactful as they have asked us to site -- some community colleges have asked us to site a physical presence on their campuses, and we have that in two locations. So, like our corporate alliances, it runs a spectrum of minimal sort of interaction to extreme interaction, but any way we look at it, we see it as a positive, because the nature of those students are so well-suited to fulfilling our academic mission, that it just works really well for us.

That makes a lot of sense. What is the motivation for the community college to sign -- sign up for these?

The biggest motivation is that they can -- in communicating with either the students they're trying to recruit for the associate's program or the ones that they have, that there is a ready-made way in which the students at relatively low cost can go and proceed in their education, and move towards the bachelor's degree.

Okay. And then one on the competitive situation. Is the obvious funding problems at the state schools having any impact on the one hand, and on the other, you know, we continue to hear Phoenix talking about -- it sounds like emulating some of the strategies that you've used so successfully over the last decade, and I wonder if you're seeing any sort of change, either online or just overall from them as a competitor?

Well, they're an able competitor, and they already have a nationwide scope, and I have a lot of respect for their management team. I wouldn't say that it's changed in any way the overall competitive situation. You know, there have always been a large number of educational institutions that are trying to reach working adult students. The good news from a business standpoint is that there are a lot more working adult students that need education than there are enterprises that are available to provide it. And, hence, our high interest in expanding Strayer University and investing our owners' capital in building out a nationwide footprint. So the -- I wouldn't say that there is any real change in the competitive landscape, and we find it a very comfortable place to operate.

Thanks a lot.

Thank you.

We'll move to Corey Greendale with First Analysis.

Hi, good morning.

Good morning, Corey.

Just a couple of quick ones. I know you don't want to overplay the weather question, but is there any revenue impact -- do you end up having to defer the way that you recognize revenue if classes are canceled?

No, because they have to -- I suppose if there was classes that were canceled so badly they couldn't finish the term, we would have an impact. But we're going to finish the winter term. And all -- I mean, it's a more important academic question than revenue, because under our Carnegie system, you got to get the 4.5 credit hours and over a 10-week -- 10-class term. And so -- whereas normally we only need once a week in situations where we have major weather disruptions and classes have had to be postponed, our academic deans and our professors are going to be scrambling to get -- to make up classes scheduled. But, Karl, I assume you've already had conversations with the deans on that, correct?

We have in [Dr. Stallard's] offices monitoring the fact that all these classes that will be required to be made up will in fact be made up before the end of the term.

Okay. And by the way, as you mentioned, the Carnegie issue, I assume you have had any conversations with Middle States about the letter that (inaudible) or any comment on their standards looking at credit hours?

We have a lot of conversations with Middle States about credit hours and about general academic issues. I don't have -- I haven't had any specific conversations with them about correspondence they have from the Department of Education, and I -- nor would I be likely comment on it if I had. But -- and it's suffice to say that Middle States is a mutual association. It's a group of universities. It includes Columbia and Princeton and Rutgers and State University of New York and University of Maryland.And so as a group of institutions, we, Strayer is a part of, set standards that allow universities to address the key issues of providing [discussion] academic content. And I'm quite comfortable the Middle States does a thorough job on that. And our -- we keep a relatively traditional academic calendar. We have, as Karl said, four terms a year, four starts a year that are actually 12-week or 11-week quarters because there is usually two weeks of vacation, and 10 classes that [need] within those 11 weeks. So I think that the way that we at Strayer University measure our credit hours and the way the Middle States thinks about it is able to withstand any scrutiny anybody has.

Great, thanks. One last quick one. Have you seen any more of your inquiries or student population coming from a younger population? Just wondering given the economy, if there is more -- maybe traditional, people straight of high school who would be looking to go more on online or closer to your model so they can live at home rather than living away to go to school.

We really haven't seen that. A lot of it is the way that we communicate. I mean, we describe ourselves as a university for working adults. And so I think we tend to have inquiries that itself selected to that. I mean, we do have a handful of younger students, but the vast majority are -- I mean, our average student age is over 35 or above. So we really haven't seen much of an impact to that. We haven't seen much of an impact of that.

Okay. And you're not planning on augmenting your message to maybe make it more directed to those students?

We have frankly as many students as we can pretty much handle at the working adult level. So --

Great, thanks. Good luck getting home.

Thank you, Corey.

Our next question comes from Kelly Flynn with Credit Suisse.

Thanks, a couple of questions. First of all, on the student debt per student, Rob, I think you said -- you see about $25,000 and kind of lifetime revenue pursue and then you estimate the average debt at $20,000 to $25,000, then you also said 70% Title 4 or so. Just want to clarify, the $20,000 to $25,000 average debt seems inconsistent with 25% lifetime revenue.

No, you're correct. I mean, it's probably 70-ish percent of that average. So maybe it's 18 to 20. Most of our students who are enrolled don't do a progression of how to pay for their education. And for many of them, the cheapest way is through the corporate reimbursements because they don't pay those back and it's free. And then they move from there and our administrations officers and our student business office managers help the students go through this progression, they then look to their qualification for Title 4 awards -- Title 4 loans. And so we may have some students that are doing both, both Title 4 and corporate reimbursements. But with 70-ish percent of our revenue coming from Title 4, I'm just trying to, on the cuff, come up with any answer to that previous question. But I think your analysis is correct. I think that if the lifetime revenue to us from a student is $23,000, $24,000 and probably the average debt load is around 70%, 80% of that.

Okay, great. And then, did you say anything about the draft CDRs for 2008 or could you?

I did not, and I'm not intending to. I mean, when the department gives us draft numbers as they have each year, we always consider those drafts and don't comment on them until they are final.

Okay, got it. And then another default rate question, I know you gave helpful color on the graduate default rate, but I think what I want to try to figure is if you guys would meet that -- 90% of grads in repayment hurdle the department has in its language for gainful employment? And one of the issues with that is that basically treats forbearances and deferrals differently. And they said you haven't done a lot of analysis on it. I respect that. I mean, can you help us out to try to understand what the impact might be if you adjust it for forbearances and deferrals?

I don't have that exact data, Kelly. My general sense is, we would be okay.

Okay. And got it. And then just one last one, sorry to come back to the weather, I just want to clarify since, as you indicated, I mean, the weather is really bad right now. Do you feel like what you've guided to for the quarter is fully reflective of this week's weather?

Again, Kelly, this week's weather has nothing to do with our earnings for the first quarter, because with this traditional academic calendar, all of the students that we can enroll for the winter term, we already know. The weather now has nothing to do with that. We don't have rolling starts. Our classes started I think January 10th or whatever it was. So the real issue with regard to the weather is how many students will be enrolled for the spring term. And we never comment on that because we don't what it's going to be. I mean, Karl's point is well taken. We've had campuses that have been shut down for a couple of days, but I'm not particularly concerned about that. And I -- we'll report our total student enrollment in May for the spring term, and I think it will take care of itself then.

Okay. Thank you very much.

Thank you, Kelly.

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

Thanks, good morning. If I can go back to community colleges, and I'm just curious if you have a sense of what percentage of your students come out of the community colleges and if you've seen any impact in terms of that pipeline just given the capacity and financial stresses that they have had because of the economy.

I have not seen any real impact. It's been growing rather steadily and continues to do so through the last two years. I think, Karl, it's about 20%, 25%?

Just over 20%.

Okay, great, that is helpful. Okay, great. That's helpful. And then with respect to your corporate alliances, you announced a couple more this quarter. You continue to ramp those up. Can you just share with us roughly how many of that is up to now? And I think last time we talked about this. You hadn't dropped any. So it seems like that should be continuing to grow.

We haven't dropped any. And my guess is it's well over 100, isn't it?

It is. It's about 120.

120. And that's still -- corporate is a percentage of revenue, corporate reimbursement, is that still 20%, 25% of revenue?

Is it right, Mark?

Yes. I mean, we know of 8% to 10% being ones that pass directly and the rest we estimate to be another 10% to 15%. No real change.

Okay. And then -- sorry, one last question. Just clarification on the weather issue talking about the quarter that -- or the numbers you just announced, if you had five fewer enrollment days and you have 12 weeks of enrollment assuming five days per week, that's roughly 8% impact. So is that how we should kind of think about the -- I'm just trying to quantify how the starts were potentially impacted by this one less week of enrollment, and does that make sense?

Yes, that is, Amy, because the other way to think about it is, as Karl said, there is really a fixed number of students that we can enroll on a day, because -- again, as you said, we are not -- we won't sort students through registration that haven't gone through all of the preliminary steps taking the diagnostic test, meeting with the deans, meeting with the academic counselors. And so when you lose that day, you lose it. And I think that's about right, because if it's a 12-week -- 13-week cycle and it's five days per week and you lose five, you lose one-thirteenth. So 7%, 8%. Yes, that's about right.

Okay, great. Thank you.

You bet.

We'll take our next question from Jeff Silber with BMO Capital Markets.

Thanks so much. I'm not going to ask about the weather. I'm not going to ask about gainful employment.

Okay, Jeff.

All right. Just some real quick questions. I may have missed some of it. Did you comment on persistence in the quarter?

We did. Our continuation rate was up slightly in the quarter. You can sort of see that because our continuing student growth was higher than our previous term's total student growth. So that always means the continuation rate is up.

And was there any meaningful difference between your campuses and online in that metric?

No, they were fairly consistent.

Okay, great. And what is your capital spending budget for this year? Mark?

Yes. 2010, we estimate spending somewhere in the 7% to 7.5% of revenue range. We are still a little bit higher than trend lines. We've got those major campus renovations, and we're still filling out the Salt Lake City. So it's right, yes

Okay, great. Very helpful. Thank you very much.

You bet.

We'll take the next question with Bob Craig from Stifel Nicolaus.

Good morning, guys. Sorry about the snow. You open up school in Cleveland, we send you our weather. That's the deal.

Yes.

Anyway, just a couple questions on criminal justice. I take it from your responses to prior questions, I think I know the answer here. But is the retention rate on those students the equivalent of other curricular areas? And are you attracting any different demographic to that program?

It's not a different demographic. It's the same age and socioeconomic status of people. We have done some studies to suggest that a fair number of these people are incremental and that they would not have enrolled in business or accounting or computer science programs. So we're pleased with that. And continuation rate was, I think consistent, wasn't it? I mean, it was â‚€œ

The continuation rate is consistent, but I wouldn't read too much into anything with regard to criminal justice, Bob, because it's brand new. We've only got a couple of quarters with that under our belt. And the learning outcomes, the student success, all of that really remains to be seen. So we are pleased with that, but keeping a very close eye on it.

What -- do they have a needle moving impact on starts at this juncture?

It definitely did, and it's close to 6% of our student population.

It would seem like it would.

Yes, clearly.

In your shareholder letter last year, you indicated that you thought that startup losses, total startup losses in '09 were approximately $16 million. Did it attract that expectation? And what is that predicted amount this year?

It did. It might have been slightly lower because we delayed some of the expenditures, some of the hiring at Salt Lake City. We really want to be careful with the staff that we were building there. That's put some of that hiring and some of those losses into this year. And we've added two more campuses and pushed a couple of million dollars of the Salt Lake City into this. So if we -- if it was supposed to be $16 million last year, let's say, it was $14.5 million, $15 million, then we were talking about $18 million or $19 million this year.

Okay, great. Thanks, guys.

Thank you.

And our next question comes from Brandon Dobell with William Blair.

A couple of quick ones. Any better thoughts on pricing strategy or anything or no change there?

It was announced that our tuition will increase 5% next year and I don't have any new thoughts on that at all. I'm quite confident with that pricing strategy and we tend to see that going forward.

Okay. Any sense of how you guys finished out 2009 in terms of the military contribution to either revenue or student population?

Relatively low.

1% to 2%, I think, of our student population, reasonably steady I think.

Okay. And then from a longer term perspective, if you look out over the horizon two to four years, anything that you guys are seeing in the market that you are in right now or that you anticipate being in, from the job market or middle market perspective, there was either -- tell that you need to have a different metric programs or that there is opportunities out there, as you thought about a year or two ago, you didn't think would be there, but because the economy is a little bit different now that there may be some other programmatic areas where you think maybe you got an opportunity to expand the brand a little bit?

Well, we're not really looking for that, Brandon. I mean, we're just very comfortable with a business matter with the demand characteristics we see around the programs that we have and the need for what we do. As we have discussed in the past, any new programs tend to be driven on the supply side for us by our academic function who feels like we can keep something well. The actual cost of developing new programs is just not that great a capital expenditure.So if our team comes to us and can convince us that they can really teach something well, and our marketing and strategic planning departments look at it and say, yes, there is no reason to believe that this is not an addressable market, we tend to go ahead and support that.

But it's not a sense of seeking out new markets because we are worried about that as an engine of growth. I mean, our strategy is based on geographically expanding Strayer University over the next years, if not decades, and completely fulfilling our opportunity to be the best working adult focused university with a nationwide footprint. And that's really -- that's a full plate right there. We're committed to that.

Great. Final question for you. If you're out talking to corporations these days, any change in the mentality for setting up new agreements with you from a tuition reimbursement perspective, or rethinking older ones to the upside or downside relative to how much the reimbursement is due for Strayer?

Well, I mean, we continue to add them. And we continue to expand the ones that we have. And so I don't really see a change. Navigating through this most recent downturn is it happened back in the 2002 timeframe, we tend to see corporations whose commitment to tuition reimbursement benefits is fairly solid. So we don't know any of our corporate alliance partners that have eliminated tuition reimbursement benefits or even reducing. The only one I can remember that was a reduction was the -- was the Wachovia-Wells merger and Wells had a small one, so they went down to Wells level. I think that's right. It might have been one or the other finance entities.

But as a general matter, we see it as a really important part of our -- not just our expansion strategy, but our means to reaching students, I mean, to share offering high quality, regionally accredited Bachelor's and Master's programs, they ought to be relevant to large employers. And those tuition reimbursement programs are as much as anything else confirmation to us that we are hitting the right mark with regard to employers.

Fair enough. Thanks a lot.

Thank you.

We will move to our next question from Bob Wetenhall with Royal Bank of Canada.

Hi, good morning.

Hey, Bob.

Hey. Just to follow up, you're reiterating your soft guidance to 930 to 950, correct?

Well, it's not guidance. We're reiterating that the business model we've put out is correct that if our enrollment growth in the year is 20%, then we would expect earnings in the 930 to 950 range. And that is definitely the case.

Sounds good. And just in terms of operating margin performance, you're expecting flattish or slightly positive over 2009?

If we have a 20% enrollment growth, correct.

You mean 2010?

Correct. Exactly.

Okay. And what's driving the increase for the continued improvement in continuation rates? And do you expect that to remain in place?

We can't have an infinitely improving continuation rate because you get to 100% obviously. And we've thought for a long period of time, well over a year, that we were bumping against practical limits because our continuation rate includes students who graduate, students who academically fail, and then you're left with those students who chose to dis-enroll. At over 80% on an annual basis, it's -- I think you sort of reach the theoretical limit. And we don't expect to see significant continued increases in continuation rate. But what we do expect and what we're certainly striving for is that it will at least -- it will be maintained at this high operational level because that will then signify to us that we are doing a good job in the classroom and our students are benefiting from the education.

Understood. And one final question, what percentage of your students are working adults?

About 99%.

99%. Great, guys, thank you very much. Thank you.

Our next question comes from Scott Schneeberger with Oppenheimer.

Thanks, good morning. With regard to the improvement quarter-over-quarter in bad debt and commentary in the call saying that you think that may have peaked out last quarter, is this a fact of you have the reserve right now and you feel comfortable going forward, or is there something more underlying like old receivables you're doing a better job of collecting, if you could just take us a little deeper there?

There is three parts of it. One is, yes, we do feel that having increased our algorithm last year, we're adequately reserved. Second, the recoveries are not getting better at this point of previously written off receivables. But throughout the last half of last year, our collections of current students was going up. That was being offset by taking increased reserves, but we've reached that level now. So we think that as long as our collections from existing students stay where they are or even continue to improve, we don't really need increased recoveries from our written-off students because we've got sufficient reserves. And that's why Mark and I feel like we're most likely seeing the ceiling on that.

Great, thanks. And then -- and just with regard to some of your more mature locations, it sounds like especially if you could handle the with snow, your capacity utilization is in good shape. Are you shifting around daytime/nighttime classes or are you not at that point yet, you still have plenty of room?

Well, again, the capacity utilization between daytime and nighttime really has not to do with our business model. It has to do with our business desires. It has to do with when the students want to take classes. Working adult students, for the most part, want to take them at night. So the vast majority of our classes are often in evening. If you walk through one of our campuses during the day, you tend to see relatively empty classrooms. Some of our most mature campuses based on the workforce in the area will have a smattering a couple of daytime classes for shift workers or stay-at-home moms or people who are not employed during the work day. But again that's not really capacity utilization. That's based on the demographic demand in the area. And we consider the facility is fully utilized if they are full every evening. And that's really when they are designed to be used.

Okay, thanks.

Thank you.

We will take our next question from Mark Marostica with Piper Jaffray.

Thanks. It's actually Mark Skitovich for Mark Marostica. I just had a quick one -- actually follow-up on (inaudible) student discussion. Could you just talk, Rob, a little bit about the trend line in 2010? Specifically what type of further efficiencies do you expect to see in managing drops? I think you mentioned that we started anniversary a bit on those improvements last year. So I'm just curious how that may impact the trend line in 2010.

Well, we really addressed that when we put out our model for 2010, which suggests that -- in a normalized situation, we have a 5% tuition increase. We would expect revenue per student to rise about 5%. We got higher than that last year. Previous years we've had lower than that when it was affected a shift towards more graduate students who take fewer classes. But our general view is, it ought to be about that. It ought to be somewhere between 4.5% and 5.5%. And that's what that business -- we put out in October suggests.

Okay, great. And then just if I could follow up on bad debt, just given the stable collections obviously that you're seeing there, is further improvement here -- I mean, is that mostly dependent on the economy or how much further improvement is in your control in terms of managing further improvement in bad debt?

Sure. Again, this goes directly to the question that was just asked. There is three components to it. Only the recovery of already written-off receivables is affected by improvement in the economy, and we're not even assuming that. As long as our collections rate -- collection rate of our existing students either stays stable or improves as it has been over the last several quarters, I would expect to see improvement in our bad debt expense as a percent of revenue regardless of what's going on in the economy.

Okay, fair enough. Thanks, Rob. Appreciate it.

Thank you.

We have no further questions in our queue. I'd like to turn the call back over to Mr. Silberman for any additional or closing remarks.

Thank you, Brandon. Thanks, everybody, for dialing in. And as I said at the outset, we'll get back to people as quickly as possible if you have follow-up questions. The best way to get hold of us is to get hold of Sonya. And if we have any luck, we'll be airborne in about an hour and back to D.C. But we'll definitely get back to everybody this afternoon.

Thanks very much.

That does conclude today's call, thank you for your participation.