Strategic Education Inc (STRA) 2010 Q1 法說會逐字稿

Good morning, everyone and welcome to the Strayer Education, Incorporated first-quarter 2010 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.

With us today to discuss 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 are unable to listen to the call in real time, a replay will be available beginning today at 1:00 PM Eastern Time through Wednesday, May 5th. The replay is available at 888-203-1112, passcode 3688654. Following Strayer's remarks we will open the call for questions and answers.

Please note that today's press release contains statements that are forward looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. The statements are based on the Company's current expectations and are subject to a number of uncertainties and risks that the Company has identified in the press release and that could cause the Company's actual results to differ materially. Further information about these and other relevant uncertainties may be found in the Company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission.

And now I'd like to turn the call over to Rob. Rob, please go ahead.

Thank you, Sonya, and good morning, ladies and gentlemen. As is our custom I'd like to begin this morning with a brief overview of both our Company and our business model for any listeners who are new to Strayer. I'll then ask Mark to report on our first-quarter financial results and Karl to comment on both our operational results and our enrollment statistics for the spring academic term. Finally I'll provide an update on our growth strategy and the Company's earnings outlook for Q2.

Strayer Education, Inc. is an education service company who is primary asset is Strayer University, a 55,000 student, 78 campus post-secondary education institution founded in 1892, which offers bachelors, masters and associates degrees in business administration, accounting, computer science, public administration and education. Unlike traditional universities, Strayer students are working adults who are returning to college and graduate school to improve their lives. Our revenue comes from tuition payments and associated fees. Approximately 70% of that revenue comes to us from federally-insured Title 4 loans issued to our students. Our expenses at Strayer Education include the costs of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We serve students in 15 states through physical campuses, as well as in all 50 states and over 30 foreign countries through our online courses. Strayer Universities are 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 March 31, 2010 increased 27% to $157.9 million compared to $124.5 million for the same period in 2009, principally due to increased enrollment and a 5% tuition increase, which commenced in January of 2010. Income from operations was $59.9 million compared to $47.6 million for the same period in 2009, an increase of 26%. Operating income margin was 38% compared to 38.2% for the same period in 2009. Net income was $36.4 million compared to $29.1 million for the same period in 2009, an increase of 25%. Diluted earnings per share was $2.65 compared to $2.07 for the same period in 2009, an increase of 28%. Diluted weighted average shares outstanding decreased to 13.729 million from 14.002 million for the same period in 2009. At March 31, 2010, the Company had cash, cash equivalents and marketable securities of $144 million and no debt. The company generated $63.1 million from operating activities in the first quarter of 2010 compared to $47.1 million during the same period in 2009. Capital expenditures were $12.2 million for the three months ended March 31, 2010 compared to $6.6 million for the same period in 2009.

During the three months ended March 31, 2010, the Company invested $15 million to repurchase approximately 67,000 shares of its common stock at an average price of $224 per share as part of a previously-announced common stock repurchase authorization. The Company's remaining authorization for common stock repurchases was $75 million at March 31, 2010. During the three months ended March 31, 2010, the Company paid a regular quarterly common stock dividend of $10.5 million which is $0.75 per share. For the first quarter of 2010, bad debt expense as a percentage of revenues was 3.2%, which remained unchanged from the same period in 2009. Day sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 13 days at the end of the first quarter of 2010 compared to 15 days at the end of the first quarter of 2009.

Rob?

Thanks, Mark. Karl, why don't you hit the highlights from the operational results and maybe talk a little bit about the spring term enrollment.

Sure. First with respect to our enrollment statistics, our spring term total enrollment grew 22%, new student enrollment increased 16% and our continuing student enrollment grew 23%. Our continuation rate for the quarter was up approximately 150-basis points. During our call on the last quarter, we announced we expected some disruption from the winter storms in the eastern part of the United States and that, in fact, was the case, roughly one-third of our campuses lost a full week of their enrollment period. Enrollment at our mature captions grew 11%. Again, this is primarily driven by the maturation of some of our newer campuses now being categorized as mature, although our Northern Virginia and DC area campuses continue to perform well, with total enrollment growth in the high single digits. Global online students increased 34% and our Salt Lake City global operation center remains on track to breakeven later this year, most likely in the fourth quarter.

During the quarter we opened four new campuses for the spring academic term; one in Austin, Texas, one in New Orleans, Louisiana, and two in Miami. With the two new in Miami, we now have six campuses in the South Florida market. We also announced two new campuses for the summer academic term; a campus in Dallas Texas and one in Jackson, Mississippi. Including these two summer campuses we have now opened nine of the previously-announced 13 for 2010. During the quarter we signed five new national account agreements and six new articulation agreements with community colleges. In terms of student mix, no real changes. 70% of our undergraduate students are enrolled in business and accounting programs, roughly 20% in information system programs and graduate students continue to comprise roughly 30% of our total student mix.

Lastly, we are very pleased to announce we have appointed Dr. Michael Plater as Strayer University's new Provost and Chief Academic Officer effective March 1st. Dr. Plater holds a bachelors degree from Harvard University, an MBA from the Wharton School and a Ph.D. from the College of William and Mary. He has held faculty and administrative positions at Brown University and the University of Florida and most recently the Dean of the College of Arts and Sciences at North Carolina A&T University. So we welcome Dr. Plater and look forward to his contributions to the University.

Rob?

Thanks, Karl. Just one comment on the financials from my perspective. For the first quarter at $2.65 a share, we actually earned $0.08 more than the midpoint of our forecasts of just 90 days ago, which is admittedly a little wider variance than Mark and I normally have. Almost all that positive variance was caused by lower-than-expected bad debt expense. Mark and I had forecast bad debt to come in around 4% of revenue -- we thought, Mark -- versus the 3.2% that we reported. Our current quarter tuition collection in the winter term was just about right on our target. What was up significantly from our forecast was our recovery of previously written off accounts. That improvement in bad debt expense of 3.2% of revenue is what caused us to only have about 20-basis points of operating margin compression in the first quarter versus the100-basis points that Mark and I had forecast and it also led to about $0.06 of the $0.08 of the EPS outperformance. The other $0.02 was caused by slightly-higher revenue per student, nothing significant. There are drops where just about in line, we just had a little more fee income and things of that nature.

Operating cash flow was up 34% in the quarter and owners distributable cash flow was up around 25% on 25% net income growth. We do, however, expect to see last year's cash flow timing benefit reserve itself in the second quarter of this year. Mark, that's when we will have the tax payments on a comparative basis. As we said last October, we expect mid-teens cash flow growth for the full year of 2010, which will be comping against the high 60s percent that we had in 2009, which was affected by that timing benefit of the tax payments.

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. The second is to invest our human and financial capital on opening new campuses, particularly in new states and markets. Third, continue to build our online offerings and included in that is investments in the technology and course content to make it -- make the online offerings every bit as robust as our campus-based ones. Fourth, increase our corporate and institutional alliances. And the fifth and final objective is to effectively redeploy our owners' capital. On the first four objectives, as Karl reported, I think we are off to a very solid start for the year. I don't think there's much I need to add there. On capital redeployment, we announced this morning our regular quarterly dividend of $0.75 per share and also that we had repurchased approximately $15 million of our common stock during the first quarter of 2010 at an average price of about $224 per share.

And finally on the business outlook for the second quarter of 2010, based on the university's 22% enrollment growth for the spring term, offset by planned expenses and operating losses associated with our new campus openings, we expect earnings per share of $2.54 to $2.56 in the second quarter and approximately 50-basis points of operating margin increase versus the prior year.

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

Thank you. (Operator instructions) . Our first question comes from Ariel Sokul with Wedbush.

Hi, good morning, everybody.

Good morning, Ariel.

Well, congratulations, obviously. Just had a question regarding persistence trends. I was a little surprised about how strong it was in the quarter and maybe if you could speak about any internal processes that occurred, or alternatively if you think once again are we closer to peak persistence?

Well, I've said we are closer for the last six or eight quarters, so I'm afraid my credibility's being shaken a little bit, but mathematically we just can't get much higher than this. Our failure rate in the quarter -- academic failure rate was above 10%, as well, so we are getting just about everyone we can, but Karl, why don't you talk to some of the programs and processes we have?

Sure. We across the board are just doing a better job at helping students who are serious about their educational aspirations to get into the right classroom so this is a combination of some very strong admissions processes, strong performance by our faculty in the classroom delivering the courses, good academic advising, so it's a combination of both academic efforts, as well as strong emissions processes that are driving the continuation rate higher.

The one thing I would add on the admissions processes, as well, is that when Karl's referring to strong processes it's really strong communications to the incoming students as to what's required of them and then having students self-select out who are unlikely to be able to comply with the academy demands. So it -- but it -- when it's in balance it tends to work quite well.

Great, and then just one other question regarding new starts. So the Company was impacted, obviously, by weather and do those people, do they kind of roll through into the next term or are they kind of lost as potential new enrolled students at Strayer?

It doesn't really roll through. As we try to explain last quarter, there's only a set number of students that -- it really goes to the answer to your previous question. There's a very detailed process for getting a student enrolled and it takes both time and effort on the part of our internal staff. We don't really have the capability to surge our staff beyond what we've already set up at the beginning of the quarter because there's a fair amount of training and selection that goes into that. So when you lose a processing day, you basically lose it. Now, whether that student then comes in the next day or the day after that and you're really just pushing other students out at the back end, that's probably the case. In other words, the individual student may come the next week but it doesn't increase your ability to process more students and enroll them for the current quarter. And so on a net basis you lose them. It happens occasionally when we have bad weather or things like that, but in the long run it tends to balance itself out.

Great, thanks for your time.

Thank you, Ariel.

Next we will go to Sara Gubins with Banc of America.

Hi. Thank you, good morning. I'm sorry if I missed this but for bad debt for the second quarter and the rest of the year do you think the gains that you got are sustainable or would you expect to see it trend up? And I mean on a year-over-year basis as opposed to a sequential basis.

Right. I thought last quarter that we had sort of broken the back on this with a couple of things, not the least of which was starting Q2 of last year we started to essentially reserve a larger amount against our uncollectibles -- uncollected tuition because we were seeing the collection of previously written-off accounts going down, which we believe was associated with the softening economy. By the end of the year we had started to see that stabilize a little bit and I actually do think that we should be able to operate close to how we were operating last year. So on a year-over-year basis, not a whole lot of deterioration. I think, Mark, we forecast forward about 4% for the whole year, right?

Right. We said in the 4% to 4.5% range. I guess with this improvement we will probably be at the lower end of that.

Yes, I would think so and last year I think we were at about 4% the full year, right? So yes, I think on a year-over-year basis, Sara, that, again barring a terrible double-dip recession that really affected the ability of students to -- or pre -- these aren't students actually, these are people who have dropped out, to pay tuition to a school they've already dropped out of, I don't expect it to get much worse.

Okay. On new student growth, given that you were hurt by the storms in the first quarter do you think we could actually see accelerating new student growth in terms of the year-over-year growth rates?

We never comment on the future growth rates of new students, Sara. It'll be what it is. We're opening a lot of new campuses and demand for what we are providing seems quite high. We do have the same number of recruiting days for our spring term -- or I'm sorry, for our summer term this year as we had last year so there's -- again, assuming there's no weather breakdown it'll -- we would look forward to a strong enrollment.

Okay. And then just last question on the regulatory front. I'm wondering if you've gotten any more involved in the regulatory discussion that's happening right now and if you could share your views on it. And specifically I don't know if you've seen an article this morning, but apparently there was a speech given by the Department that compared for profits to Wall Street and mentioned specific for profit institutions, I believe including Strayer, for getting a lot of federal financial aid and I'm curious to get your reaction to that?

Well, the answer to your first question is when I've been asked by the Department for my input I've happily given it to them. The comment on the second part of your question is I think it's still very much in influx. It's hard for me to comment on a regulation that's been sent over to the Office of Management and Budget that I haven't seen so I'm not sure it makes a whole lot of sense to offer anything up on that. I was aware of the speech yesterday. One thing I would say is that the Department, Sara, is a building. There was an individual who gave the speech and so I don't know that it necessarily can be ascribed to either the Department's or the President's positions, but certainly we've been operating as a university for over 100 years. We've got a very significant track record of educating students. We're a bit of an open book with regard to that. You can come to our graduation ceremonies, you can see what we are providing. I expect that we'll be operating for another 100 years after this set of discussions goes on.

So it's nothing at this point that really changes my view of the fact that it's a heavily regulated industry, you are operating what is perceived to be a public good and you have to be focused as and institution on meeting the demand of that public good, which in our case is providing first-rate academics and a lot of the noise that goes on in the background I think is not as relevant to the long-term effect that we are trying to accomplish and that we'll obviously pay close attention to whatever the Department comes out with as an official regulation and be quite confident of our ability to comply with it.

Okay, thank you.

Thank you, Sara.

Next we;ll take a question from Jerry Herman with Stifel Nicolaus.

Thanks, good morning, everybody. Hi, guys.

Hey, Jerry.

Rob, last quarter you were helpful with this with regard to sort of framing the impact of the calendar and I was hoping you'd do the same for the weather. You indicated you had lost at a week 2ith about a third of your campuses. Those are generally more mature campuses so I'm assuming that it's something greater than one-twelfth and one-third thereof? And also what sort of impact on productivity was there in the online service center?

Well, the Washington, D.C. based center was shut down for that week and I'm not sure I could follow the math as quickly as you did that, Jerry. Karl, did you -- was it one-third of our campuses --

Well, one --

One-third of our campuses for one week out of the 12-week term --

Right.

-- whatever that works out to.

Yes, and I would just say that it wasn't completely our mature campuses. We've got new campuses up in New Jersey and Delaware and the Philadelphia area, as well as some newer ones down in Savannah and the range of the impact from the storms really hit the entire East Coast, not just the mature areas of Virginia and North Carolina.

Okay, all right. And then the online service center was -- I'm assuming boost that up a bit, as well, because it's not really a campus per se, correct?

You mean boost up the impact of the --

Yes, correct, I'm sorry. Yes, boost up the impact.

Yes, I think that's correct.

Okay, gair. And then, Rob, with regard to outcomes, I know last year in your letter you talked about 60% grad rates, can you update us on that? And this year in your letter you talked about salary increases from $30,000 to $50,000. That seems to be a relatively new metric and is that an effort that you focused more on to actually quantify that value proposition?

It's not new information at all, Jerry. We've been talking about it for over ten years so it was more along the lines -- at least with regard to this year's letter to shareholders, to suggest that as we think about running this University, we believe there does have to be a value proposition to working at all the students, that students avenue their age and stage in life are not in school because their parents want them to be there or they're trying to find dates or they're playing sports. I mean, they have a very specific demand for achieving the educational outcomes and again, that track record and that history of that I thought was important for our shareholders to see.

It also really spoke to how we think about setting tuition, that we believe that our education has to be an appropriate economic value to the student and that really governs how we think about tuition because the short-term demand is clearly there and what I was really trying to communicate is that tuition can be a lot higher but that doesn't make sense in the long term because you want it to be in some sort of balance with what the students are accruing from the education. And that's evidenced by our cohort default rates and all the other financial metrics that are pretty easy to look underneath and see how the organization's doing. So it wasn't -- I wasn't intending for it to be a new communication and we certainly talked about it and it's been sort of public data for a long period of time. I just felt like it made sense in the letter to shareholders this year.

And grad rate?

Oh, and grad rate, yes. Again, the -- you're looking six, seven, eight years back so you're looking at graduation rates, you're driving -- looking way back in the rearview mirror. So what we talked about this year and what was in my letter to shareholders was results from 2002, which is frankly long before a lot of the real improvements and focuses that we've brought to the academic area have been put into place. But again, you're -- you've got an open access university. I think it's really critically important that you don't focus on any one individual indices when you're looking at these types of institutions. It's very easy to make your graduation rate go as high as you want. That doesn't necessarily say that you're improving the value proposition to your students. As a matter of fact, in an open access university I would argue that it's more likely that you're devaluing it by eliminating any sort of academic rigor.

-And so what I was trying again to communicate was the idea that we've got three overlapping priorities as a university. We want to be an open access university, we want to have rigorous academic standards and we want to have as high as possible student success because in the long run that's what's going to build our reputation and the intangible value to our students and our graduates. And so all three of those have to work in concert and as an internal oversight and audit function if we see any of them get out of balance with the other two, given what we think is sort of a common sense approach to what we are trying to accomplish, we tend to crack down on it pretty quickly. But as Karl mentioned, over the last couple of years our continuation rates have increased significantly and ultimately if you're doing that, then at the end of that pipeline you have an increase in your graduation rate, as well. Again, as long as you are maintaining the level of academic rigor, that should over the long run improve both the reputation of the university and the value that's accrued by its students and graduates.

Great, thanks very much. I'll turn it over.

Thanks, Jerry.

Our next question will go to Corey Greendale with First Analysis.

Hi, good morning.

Morning, Corey.

I'd had a couple of questions about your long-term expansion plans just -- first of all since you keep adding states now I thought it would be helpful to revisit where you think ultimately that number goes and not the number of states but the number of campuses, how many campuses you think you have when you are a nationwide university and some sense of current thoughts on just a range of how long it may take to get there?

Well, the number of states is 50. The number of campuses we've just never disclosed because we never -- we honestly have not sat down and plotted that out. There's whole parts of the country that we haven't broken down from a market analysis standpoint to figure out exactly how many campuses would fit in it. I do think that we're roughly in a quarter of the metropolitan areas in the country, maybe 30%, but in many of those metropolitan areas we're rather new to them so there's a number of campuses left that we -- we'll want to invest in to fill out our offerings in those areas. And in materials of time, again, I just don't have a good feel for that, Corey, because it's going to be entirely dependent on our ability to source and grow our internal human capital.

Until Karl and Sondra Stallard and I see the supply of academic professionals that we have to open up new units in the following year we don't know how many we are going to open and since it's hard to -- you can't project out ten, 15 years if you don't know how many you're going to open in the next year. So it's -- it will be controlled as a rate of growth by our ability to source human capital and we'll try and do as many as we can.

Okay. And I know that when you open in a new state, you need state regulatory approval but can you remind me, to open a new campus do you also need approval from Middle States and from the Department of Ed?

Yes.

For each individual new campus even if you're already operating in that state?

Well, in some states we may have had a blanket approval to open a number of campuses so you're operating under that approval in some circumstances but, yes, any individual unit that's opened, any university unit, any campus has to have been approved at some point by both the state, Middle States Commission and the Department of Education.

Okay, and just one more question. I'm hoping you might be able to -- this is quick back-of-the-envelope math so I'm hoping you might be able to work through this. So for the first two quarters of the year new student growth was 16%. If we assume that persistence stays about flat from here, does new student growth need to accelerate from that level to maintain overall enrollment growth above 20%?

Well, there's an inference in your question that we're trying to maintain a level of enrollment growth --

Yes, I don't mean to imply that.

-- which is not how we operate. I think as a matter of mathematics you're correct but I'm doing that on the fly listening to you so I wouldn't rely on my mathematics on that.

Okay, I didn't mean to imply that, it was more just a question about the model. I appreciate it, thank you.

Yes.

Gary Bisbee with Barclays Capital has our next question.

Hey, guys, good morning.

Hey, Gary.

One of the data points you gave stood out at me just relative to what some of your long-term goals have been and that's that the group of old campuses in DC and Northern Virginia actually had high single-digit growth. Just going back five years the goal was to keep all the mature schools flat so I guess what's the range of growth? I think when you took over these schools were shrinking and what's changed?

Well, what's changed, and I think in its simplest terms, is that we are, we hope, getting better and better each year at figuring out how to best serve a working adult student, and that is an ongoing, gradual, incremental organic process that we hope is never going to end. Now, the enrollment growth that we have seen over the last six or eight quarters in these fully-mature markets, number one is a little bit cyclical because a couple of years ago they probably were flat or slightly shrinking and it can go up and down within a range of single digits. We do have a new program in criminal justice, which potentially could have drawn in a couple of percentage points, but we're just not that focused on it, Gary, because we do expect it over time to be relatively stable and the growth to come from opening up new markets. We're happy to serve those students when they do come to us but as a matter of either academic or business management it's not a real priority of ours.

And can you give us any sense? Are the people who are taking -- is the proportion of people at campuses versus online different than other markets or have you seen the campus stay flat but for some reason you're getting more interest because of the online offering or is it really just too tough to tell what's really driving it?

Well the -- we include both the students who are taking online classes who are enrolled through one of those campuses and the ones who are taking classes physically in the classroom in those numbers, so that growth number includes both. And we had a big increase in students taking online classes in the early part of the last decade as we rolled them out for the first time. But the percentage of students taking online classes in our physical campuses has remained rather steady for the last four or five years and so I don't think that the performance in the last six to eight quarters is meaningfully impacted by that. I think it's partly cyclical, I think it's partly just overall improvements in our academic content and delivery mechanisms and I think it's marginally impacted by a couple of new programs.

Okay. On G&A, especially since bad debt was flat year over year, it looked like it picked up a bit versus the recent -- with the trend line event. Anything in particular going on there?

We had a -- just a variety of small one-time things, Mark, you had some accounting and legal and --

Yes, it was just a handful of things, Gary, including travel expenses, some relocation as we're staffing up some of our new campuses, as Rob mentioned some professional service items.

It's not something that we're projecting going forward as either a percent of revenue or percent growth so --

nd I guess CapEx was also a bit higher than what the recent trend line is, I assume that's sort of the front loading and the new school openings. Anything else that may have changed there?

No. Well, it hasn't changed since October. We said in October we expect 7% to 8% of revenue as CapEx this year. It's a pretty big CapEx year with campuses, with the completion of the build out of the Salt Lake City online facility. We actually are consolidating all of our corporate offices in the D.C. area into one building so we're actually building and fitting out a corporate headquarters out near Dalles Airport. And then we've got a number of investments in technology updates in our classrooms, some student administration technology, things of that nature so it is going to be a larger year than normal. I expect that in 2011 that CapEx will trend back down to 5% to 6% of revenue.

Okay, and then just one cleanup one. I didn't see in the press release, although I might have missed it, the breakout that you've historically given a stock comp by expense lines. Did I miss that or you've decided not to give that?

Go ahead, Mark. (LAUGHTER)

Well, we decided to pull it out, Gary. It is in the 10-Q, we just figured -- we introduced it when the FAS 123(R) rules came out and we just figured it wasn't as much of interest anymore and so -- but we figure -- it's in the 10-Q if you need it and we could provide it to you separately, as well. It was the release of the new year and we said we've been carrying this ungainly box at the bottom of our -- we like it as clean as possible financial statements is really what it came down to.

Given that a lot of us break it out I was hoping it wasn't an indication that it was going up and you didn't want to show it or something.

Oh, no.

I'll look for it now.

If there was any change we would tell you.

It's in the Q.

Yes. (inaudible)

You're right. All right, thanks a lot.

It's going down as a percent of revenue so much that it becomes less and less relevant also, that's one reason why we just thought it didn't need to be on the face of the statement but it's in the Q and we -- if you can't find it, let us know.

Yes, thanks.

We'll now go to Robert W. Baird's Amy Junker.

Hi, good morning, thank you. If I could get a clarification, hopefully, you made comments that cash flow is going to grow in the mid-teens and I just wanted to clarify, is that cash flow from operations or free cash flow given your comments that CapEx is going to be a bit higher?

I think it's both, isn't it?

Yes. On a full-year basis we actually expect cash from operations to be higher than mid-teens but then with the higher CapEx, Amy, distributable cash flow should be in the mid-teens.

Perfect., thank you. And just a question on timing with opening new campuses. Rob, if you sign a lease in a new state does that mean you've already received all of the state approvals to operate or how does the timing of that typically work?

It depends on the state because in some states they won't consider you for an approval until you actually have evidence of a physical location and in other cases it's reversed. So there's no hard and fast rule, it's just part of the balance that we keep going forward.

Okay. So you could potentially sign a lease and then you might not actually physically enter that state with new students for a year or more potentially?

Well, it's unlikely we'd sign a lease -- well, I guess the answer to your question is yes, there have been circumstances where we've done that, where we've needed to have evidence and then a year, 18 months before we actually went in.

Okay. And then last question, you had mentioned you signed five new account agreements, can you share at all any examples of the types of companies or who you're signing those with and kind of where we are now in terms of number of agreements?

Karl.

Sure. Probably the predominant one from the last quarter was the FBI National Academy of Training. The others were sort of smaller, midsized companies and Amy, we'd be happy to get you the list after the call.

Okay. Still, though in the range of kind of 130 plus, is that still a ballpark number?

It is, it is.

Okay. Great, I'll pass it over. Thanks, guys.

Yes. And when we say that we're having discussions with the FBI, it's that we are teaching them. They are not asking us questions so --

Great, thanks.

Yes.

Next we have Jeff Silber with BMO Capital Markets.

Thanks so much. I apologize I got on a bit late. Did you comment at all about media costs and the advertising market?

We did not so it's a new question.

All right good.

It was pretty in line, I would say. We've got a number of new markets this year so it's up slightly like a percent or two just based on the fact that we are in so many new markets but the actual cost per market has been fairly stable.

In terms of cost per lead for online leads are you seeing any changes there?

No.

All right, great. And I hate to nitpick but I got a quick question on some of your enrollment numbers. If I look at the online students component of the mature campuses it looked like growth slowed a little bit compared to prior quarters. Is there anything specifically going on there? Is this some of the weather impact? Are we seeing it impacted in that line item?

I honestly, Jeff, hadn't looked at that number and I hon -- we just -- I don't know. Those numbers are going to bounce around and I'm not suggesting that you shouldn't look at them closely, I'm just telling you that it's not one that caught our attention.

Okay, fair enough. Thanks so much.

Yes.

Next we have Kelly Flynn with Credit Suisse.

Thanks. Just going back to Jerry's question on completion rates. He referenced the shareholder letter but can you just tell us what your completion rates are and how you calculate that?

Well, I don't ever use the term completion rate so I'm not sure what you're just talking about. What we do is track our continuation rate for our enrolled students; (.e., are they in -- students who are enrolled this quarter do they sign up for courses the next quarter and then ultimately we track our graduation rate, which with we look at it in a bunch of different ways. We look at on a per -- a yearly cohort basis, we do it on a program basis, we break it down between -- and look at it based on the students' amount of credit they brought in at the bachelor's level before they enrolled. And so we slice it and dice it a lot of different ways. I think what he was referring to is, is that in general if you take the grossest averages and over the period of time that we've been running the university, say the last ten years, that those cohorts that enrolled in 2001 and 2002 graduated on average around 60% rate.

Okay. And is that starting at the beginning? Do you start counting that after first class or are there any caveats to that?

That starts when they enroll.

Okay.

And that's what I say, is that -- it's interesting -- we have the same issue with regard to cohort default rates. Over half of our defaulting students never earn a single credit from Strayer, which means they enroll, they either academically fail or quit after the first term and then that's it, they're gone. And so whereas our, you know, our reported cohort default rate for the last cohort was, what, 2007, was 6%, if you take out those students who never earned a credit from us, it goes down to about 2.2 % and if you look at the students who actually graduated, it's around 2%. And so same thing with regard to graduation. If you take out those students who come to us with zero college credit, that graduation rate shoots up to about 70% or 80% right away. So it's just a -- it's really in an open-access university a matter of managing the inflow of students, being as clear and up front and honest as you can with a student as to what the academic requirements are and hopefully attracting those students who have the highest likelihood of success and the most wherewithal in terms of commitment and determination to, as a working adult, perform in the classroom.

Okay, great, and then a different question on margins. Last quarter although I know you don't give guidance you were pretty helpful with helping us understand what investments you may be making as the year progresses and what impact that might have on operating margins. You've made some comments in your prepared remarks but are there any investment timing issues that we should keep in mind as we model operating margins for the rest of the year?

No. We've already had the impact of that. The guidance that we gave for the -- sort of the business model we gave at the end of last year was that if we achieve 20% enrollment growth, roughly 25% revenue growth, we would expect to have stable operating margins, and if our enrollment growth and/or revenue growth exceeds those bogeys we would expect margin expansion and indeed that's what we expect to see in the second quarter because we are at 22% enrollment growth and even though we're st -- we're in the first half of the year and front ended with a lot of operating losses from campuses we still expect to have about 50-basis points of margin expansion.

Great. And then final question, have you seen any slowdown in how long it takes to get approved for new campuses by either the Department of Ed or states just given the regulatory back drop?

No. The departments or at least some members of the department's regulatory focus really hasn't been too much on the approval of existing units. Their focus has been in the negotiated rule making in other areas. But the answer to your question is no, we haven't.

Okay, thanks a lot.

Thank you, Kelly.

Next we will go to JPMorgan's Andrew Steinerman.

Hey, Rob. On the 50-basis points of operating margin expansion expected in the second quarter, which lines do you think that will come from?

Mark.

I don't know, Andrew. We just -- we don't really look at these lines. We have a much more detailed chart of accounts that gets -- you flip a switch at the end of a quarter and it flows into these different categories so we just don't plan it that way. In general, over time, what we expect is margin expansion in the marketing and admissions line and some in the G&A line. Our instructional and educational lines we don't expect a whole lot of margin expansion because we're adding faculty and technology and classrooms as we add students.

Okay. And trends, do you think on revenue per student into the second quarter?

Well, we're already assuming that we get the full tuition increase and then some. It's -- we're going -- we're anniversarying very high revenue per student growth last year so I think if you take the 5% tuition increase and add it onto the enrollment growth you're going to be pretty close.

Perfect. Thank you.

Thanks, Andrew.

Next we have Robert Wetenhall with RBC Capital Markets.

Hi, good morning, nice quarter.

Thank you, Robert.

Just curious, I know 90% or 95% of your student body is working adults and I'm just wondering what's the degree of counter cyclicality historically in enrollment trends?

There really hasn't been one. It balances itself out. Basically what happens, at least in my experience, is that in a shrinking economy you have students who are -- prospective students who are more concerned about their economic security and that's a major driver of working adults going back to school but on the other hand those students who are indeed out of work are unlikely to enroll because they don't have the wherewithal or the time. And so over the ten years that we've been here, there really hasn't been any correlation with the economic cycle or employment and our enrollment growth has been almost entirely correlated over time with our rate of capital expansion, the rate at which we grow the University by adding campuses.

And you attribute that really to the type of student you're bringing in in contrast maybe to some of your peers and the type of programs you're offering? Would that be a fair assessment?

Yes, it would.

And just on a 30,000-feet high question, do you think the DOE's focused now strictly on gainful employment? Seems like their tone has shifted from interacting in a constructive fashion with the for profit operators, do you sense any kind of material change towards -- a hostility or something of that nature?

Well, as I said, it's a regulated industry and there's a lot of different regulators. There's a lot of different people within the Department of Education and over time I do think that the quality of programs and the quality of the academic provision that goes to the students and the success of the students and the graduates really is going to inform, you know, all of these discussions. I'm not sure it makes a whole lot of sense to characterize, at least on my part, individual players' objectives or their intellectual biases. I -- having worked in government, I know it's a big place, there's a lot that goes on and I always address these types of issues giving people the benefit of the doubt. And at the end of the day what drives an executive branch is the President's policies. And so ultimately, the Department of Education's position will have to be consistent with the President's policies and that I am quite sanguine about.

Given the fact you guys have a very top of group graduation rate, excellent student outcomes, do you think policy -- some of the policy that might be put forward with gainful employment is more of a blunt instrument and doesn't really recognize, at least yet, the fact that there are some very good operators in the space?

Well, I said on the last call that I don't expect that the regulations, at least as they had been made public as part of the negotiated rulemaking, were going to meaningfully affect Strayer University so as a CEO I'm -- and as a steward of a university I'm not particularly concerned about them. I also said on the last call as a citizen I don't think price controls are a great idea. I don't think it's the right public policy but there's really two separate issues.

Got it. That's real helpful, Rob, thank you very much.

Thank you.

(Operator instructions. For our next question we will go to Scott Schneeberger from Oppenheimer.

Good morning, this is actually [Jim Genakeros] in for Scott. Question on if you're seeing any notable change in trend in the proportion of your new students that are accessing Title four funds over the last quarter or two?

No, not over a quarter or two. Once we started expanding outside of the Washington, D.C. area, the percentage of our students that are accessing Title four loans has gone from like 60% to 70% as we moved into newer markets where we didn't have as many corporate institutional alliances but it's remained around the low 70% over the last couple of years, so no meaningful increase over the last two quarters.

Okay. And any recent particular strength in demand in one program or another that's helping drive enrollment growth?

No, Karl, I would say it's been pretty evenly spread, wouldn't it?

Yes, there's not been any meaningful changes from a program standpoint, no.

Okay. And one last question -- I'm sorry if I should know this -- but the collection efforts on recovering bad debt, is that in-house efforts or is there a third-party involved?

It's --

Yes, both. Go ahead, Mark.

Yes, it's both. We -- it's initially an in-house effort and then after a period of time passes where the student or former student are nonresponsive, then we will turn it over to third-party collection agents.

The most effective way that you deal with it is at the front end is with your enrollment practices, and -- but the increase we saw at the end of last year in bad debt really, from our standpoint, was almost entirely associated with the deteriorating economy, which then hurt the recovery of previously written-off accounts and that does seem to be turning back around now.

Okay. But given the timing of the bad debt that -- well, you're recovering older debt and so that's implying that maybe the efficacy -- improved efficacy of the third party or --?

I don't think that it's entirely the improved efficacy of a third party. It just wouldn't have that big of an impact. The deterioration a year ago, I wouldn't ascribe to inefficiency on the part of the third party. It I think it really was -- it was the one area of the economy where I thought we were -- one area of the business where I thought we were negatively impacted by the shrinking economy and through a variety of ways I think we stabilized that.

Fair enough, thank you.

You bet.

With no further questions I'll now turn the call back over to Mr. Silberman.

Thank you, Karen, and thanks, everyone, for participating. We'll look forward to talking to you again in July with our second-quarter release. Thank you.

Once again that does conclude our conference for today. Thank you again for your participation.