Strategic Education Inc (STRA) 2010 Q2 法說會逐字稿

Good day, everyone. Strayer Education, second quarter 2010 earnings results conference. Just as a reminder, today's call is being recorded. Following today's presentation 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, operator. With us today to discuss the results are Robert Silverman, 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.

00 p.m. Eastern, through Wednesday, August 4. The replay is available at (888)203-1112, passcode 4187238. Following Strayer's remarks, we will open the call for questions and answers. Please note that today's press release contains statements that are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act.

The statements are based on the Company's current expectations and are subject to a number of uncertainties and risks that the Company has identified in the press release and that could cause the Company's actual results to differ materially. Further information about these and other relevant uncertainties may be found in the Company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission. Now I would like to turn the call over to Rob. Rob, please go ahead.

Thank you, Sonya. And good morning ladies and gentlemen.

As is our custom, I would like to begin this morning with a brief overview of both our Company and our business model for any listeners who are new to Strayer. I will then ask Mark to report on our second quarter financial results and Karl to comment on our second quarter operational results as well as our enrollment statistics for the summer academic term. Finally, I would like to provide an update on our growth strategy, the Company's earnings outlooks for Q3 2010, and some thoughts on the Department of Education's recently published notice of proposed rule making.

Strayer Education Inc. is an education service Company whose primary asset is Strayer University, a 55,000 student, 80 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 University 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 IV loans issued to our students. Our expenses at Strayer Education, include the cost of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs. We serve students in 15 states through physical campuses, as well as in all 50 states and over 30 foreign countries through our online courses. Stayer University is accredited by the middle states commission on higher education. Now Mark, you want to run through the financials?

Sure. Revenues for the three months ended June 30, 2010, increased 26% to $159.3 million compared to $125.9 million for the same period in '09. Due to increased enrollment and a 5% tuition increase, which commenced at the beginning of this year. Income from operations was $58.7 million, compared to $45.1 million for the same period in '09, an increase of 30%. Operating income margin was 36.8% compared to 35.8% for the same period in '09. Net income was $35.7 million, compared to $27.5 million for the same period in '09. An increase of 30%. Diluted earnings per share was $2.60, compared to $2.00 for the same period in '09, an increase of 30%. Diluted weighted average shares outstanding decreased to 13.704 million from 13.771 million for the same period in '09.

Revenues for the 6 months ended June 30, 2010 , increased 27%, to $317.2 million, compared to $250.4 million for the same period in '09. Due to increased enrollment and a 5% tuition increase which commenced in January of this year. Income from operations was $118.6 million, compared to $92.7 million for the same period in '09, an increase of 28%. Operating income margin was 37.4%, compared to 37% for the same period in '09. Net income was $72 million, compared to $56.6 million for the same period in '09, an increase of 27%. Diluted earnings per share was $5.25, compared to $4.07 for the same period in '09, an increase of 29%. Diluted weighted average shares outstanding decreased to 13.716 million from 13.886 million for the same period in '09. At June 30, 2010, the Company had cash, cash equivalents and marketable securities of $141 million and no debt.

The Company generated $87.9 million from operating activities in the first six months of 2010, compared to $71.9 million during the same period of '09. Capital expenditures were $22.6 million for the six months ended June 30, 2010, compared to $13 million for the same period in '09. During the three months ended June 30, 2010, the Company used $7 million to repurchase 29,200 shares of stock at an average price of $239.77, as part of a previously announced stock repurchase authorization. The Company's remaining authorization for stock repurchases was $68 million at June 30, 2010, having invested approximately $22 million during the same period June 30, 2010, for this purpose.

During the six months ended June 30, 2010, the Company paid regular quarterly dividends of $20.9 million, or $0.75 per share for each of the quarterly dividends. For the second quarter 2010 bad debt expense as a percentage of revenues was 3.6% compared to 4.2% for the same period in '09. Days sales outstanding adjusted to exclude tuition receivable related to future quarters was 12 days at the end of the second quarter of 2010, compared to 15 days at the end of second quarter of 2009.

Thanks, Mark. Karl, why don't you hit the highlights on the operational side and also walk people through the enrollment results for the summer term?

Sure. Total enrollment for the summer academic term increased 23%. Our new student enrollment increased 17% and our continuing student enrollment grew 24%. Our continuation rate for the quarter increased 170 basis points. Enrollment at mature campuses grew 12%, and our global online students increased 31%.

Our global operation center in Salt Lake City broke even for the second quarter and we expect that it will break even on a full-year basis in the fourth quarter. During the quarter, we opened two new campuses for the summer academic term. One in Dallas, Texas, and one in Jackson, Mississippi. And we also announced today four new campuses for the fall academic term, two in Houston, one in Dallas and one in Columbus, Georgia.

Including these four campuses, we have completed our planned 13 for 2010, and we will announce our plans regarding new campuses for 2011 in our October earnings release. Also, during the quarter we signed seven new national account agreements, including agreements with Nestle USA, ADP and USAA. We also signed 10 new articulation agreements with community colleges including a statewide agreement with the Louisiana Community and Technical College System, which covers 50 colleges with more than 64,000 students.

Nationally we now have over 170 articulation agreements in 33 states, covering more than 4 million community college students. Lastly, in terms of student mix, we have seen no really 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. Rob?

Thanks, Karl. Just one comment on the financials from my perspective going back to Mark's report. For the second quarter at $2.60, we earned $0.05 more than the midpoint for our forecast for 90 days ago. Similar to last quarter, that positive variance was almost entirely caused by lower than expected bad debt expense. Our other revenue and expense lines were just about on target.

Mark and I have forecast bad debt to be flat with last year with about 4.2% of revenue and as he reported we actually achieved 3.6%. Now both our current tuition collections and our recovery of previously written off accounts were significantly better than both our forecast and the prior year. The improvement in bad debt expense to 3.6% of revenue led to a little over 100 basis points of operating margin expansion in the second quarter, versus the 50 basis points that Mark and I had forecast, and that also, as I said, led to the $0.05 BPS outperformance. As discussed in April, operating cash flow in the second quarter was flat with last year, as last year's cash flow timing benefit from the tax benefits of the restricted stock vesting reversed itself in this quarter, so now we are back to even from that standpoint. As Mark touched on with our better working capital management, we now expect distributable cash flow growth for the full year will be in the low 20% range versus the mid teens that we originally forecast last October.

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 off range. Fourth, increase our corporate and institutional alliances. And the fifth, and final objective is to effectively redeploy our owner's capital. I think Karl really covered the update on our first four objectives. I don't think there is much that needs to be added there. On capital redeployment, as Mark said, we did announce our regular quarterly dividend of $0.75 a share and also that we had repurchased approximately $7 million of our common stock during the second quarter of 2010 at an average price of about $240 a share.

On our earnings outlook for the third quarter of 2010 based on the University's 23% enrollment growth for the summer academic term, offset by planned expenses and operating losses associated with the new campus openings. We expect earnings per share in the range of $1.68 to $1.70 in the second quarter(Sic-see press release) and that would entail approximately 200 basis points of operating margin increase versus the prior year.

Finally, I would like to make just a few comments on last week's Department of Education notice of propose posed rule making. After a couple of days of studying the proposed regulation, our view has not changed from our last quarterly call. First, we have always known that we operate in a highly regulated and scrutinized sector and we welcome that scrutiny. Second, the Federal Government along with state and accrediting authorities has a legitimate and indeed necessary role to play to enure that institutions which operate enterprises with Federal support in the public good achieve the proper balance among all their stakeholders. In our case these stakeholders include our students, our alumni, our faculty, our fellow academic institutions and accrediting bodies, the employers of our alumni, the communities in which we operate, our employees and our shareholders.

And, finally, while this proposed regulation seems overly complex to us, and it appears at least over the last couple days that the Department of Education itself may not currently have all the data it needs to implement it properly. Our preliminary internal analysis, using the extensive data we have collected on our students and alumni over the last 10 years, indicates that under this proposed legislation that all our programs would comfortably pass both the 45% loan repayment test and the debt to income ratio tests. Placing all of our programs in the Department's highest category of full Title IV eligibility with no required debt warning disclosures.

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

(Operator Instructions). And we'll go first with to Andrew Sterman of JP Morgan.

Hello there. Thank you for jumping right in to gain full employment. I wanted to know if you felt you had enough data on things like deferment and forbearance to make an accurate assessment of what you are repayment rate is or are you so above the 45 on all your programs that it may not be so accurate but it doesn't matter because you have a lot of cushion?

It is a little bit of both, Andrew. We have good data on forbearance of loans that is are not consolidated. We have, over the last several months actually gone back 15 year in the NSLDS, the database the department has to keep track of our loan performance.

When a loan becomes more consolidated, it becomes more difficult to see the exact status of deferment or forbearance, but in order to make the calculation in terms of the affect on us from the regulation, we just decided to make the most conservative assumptions we could about the loans that have been consolidated. Recognizing after the loan is consolidated, you actually have a lower monthly payment. We decided for the sake of conservatism to sort of ignore that. And with that, we are far above the 45% test in each of the programs, I just have very little concern about that.

Perfect. A word on persistence. Obviously, I noticed continuing student enrollment is higher than total enrollment. So, it makes me think of persistence. Can you just talk about trends and student persistence.

Karl, why don't you comment on that?

Sure. I think Andrew, that there are two annual drivers in the increased continuation rate for us. One is just the affect of on going effort to make the classroom experience as good as possible. That speaks to all the efforts we have under way on curriculum review and faculty development, combined with continued emphasis on admissions. We place a great deal of emphasis on the quality of student that is entering Strayer University. Our view is that our continuation rate reflects the fact we have got on quality student enrollments through the admissions process combined with an academic experience that is continuing to get better.

Right. But I really meant the question from a quantitative standpoint, how is persistence trending now?

Well, as I said, it was up 170 basis points for the quarter. As we said before, depending on the quarter, our continuation rate is anywhere from the low to mid 80%. And when you factor out academic failures in students -- failures in students who graduate, you sort of get to a theoretical boundary of somewhere to the low to mid-80s. We said in the past, we think we are sort of hit that threshold, but in any given quarter, there is a little room as some of the other numbers move around, the academic failure rate and the students that graduate.

Plus, for the summer term you have a little phenomenon of decounterization, more students who will go to school in the summer who hadn't in the past.

True, yes.

Perfect. Thank you so much.

You bet, Andrew.

From Bank of America, we move next to Sarah Evans.

Hello. Thanks. Good morning. Another gain full employment question. When you are looking at income-debt service to income ratio. How did you get that data and can you share information what your salaries or income look like for your graduates?

Sure. We collect every year extensive survey data on alumni. We have for at least 10 years I have been here. And it's a fairly strong response rate. I am told it is more than statistically significant, about 25%. In our most recent survey for -- for the class of 2009, our average under graduate salary is a little over $60,000, a Bachelor's awarded salary. And it is little higher at the Master's level.

Okay. Great. And then, how many of your students -- or what percentage of your students are going from Bachelor's Degrees into Master's Degrees?

You mean in Strayer University?

Yes. And I guess I am wondering did you factor that in the announcements of the amount of debt they would take on because they would carry the debt load into the Master's program?

Yes. We don't have that many as far as I know. We calculated the debt repayment individually in terms of the Bachelor's Degree or Master's Degree. So we have a median debt load per graduate at the Bachelor's level and a median debt level for the graduate at the Master's level. If the individual happened to be both Bachelor's and Master's degree they would have been counted for both categories.

Okay. And the debt that they would have brought in from their Bachelor's Degree would be counted in the ratio of the Master's degree debt?

No, it would have been counted for the ratio of the degree of debt they earn at the Bachelor's level. It is done by program.

Okay. My understanding was that debt from -- as long as it was within the same institution would carry from one degree to the next. So if they graduated with Bachelor's Degree debt and went on to a Master's Degree program you would bring that debt with them. Is that incorrect?

Your understanding is inaccurate.

Okay. That is good to know. Thank you.

(Inaudible) [Signa] Hill has our next question. Please go ahead.

Thanks. Rob, I wanted to ask about Criminal Justice and whether - I heard you loud and clear that all your programs were free and clear. But I'm wonder if you have enough data on Criminal Justice with respect to payment and salary to kind of comfortably make that determination with respect to those graduates specifically?

Well, we don't have that many graduates in Criminal Justice. It is a relatively new program. The graduates we do have are performing consistent with the Bachelors level median and averages. And I think that really speaks to one of the fallacies of this regulation, which is the idea that in a broad-based university that offers university-level degrees at the Bachelor's and Master's level, the actual major, if you will, or the actual subject matter focus is that relevant in the long run with regard to the earnings potential.

We have always believed that for a regionally accredited university with a strong liberal arts/general education component, that what the student chooses to major in is not that relevant in the long run to the long run success and earnings potential. That certainly bears itself out as we look at our graduates. But the answer to your question is, we don't have as much data on Criminal Justice as we do to other programs. We obviously will be collecting more of that as that program progresses. But for the graduates we do have, it is right in this center line of our medians.

If I could ask a follow-up, is there a lower incidence of tuition reimbursement for-- your Criminal Justice students?

I don't know the answer to that. Do you Karl?

It is a little less than what is normal. I know in a fair number of those students, I just know anecdotally from speaking at campuses, the existing law enforcement officers who I know in some of our markets do have tuition reimbursement from their municipal governments but I don't have the exact data trace.

That is helpful. Thank you.

We will hear next from Amy Junker from Robert W. Baird.

Hello. Thanks. I will not ask a question on gainful employment. I had couple ones, Rob, about first corporate accounts. As you open up campuses in new markets, obviously that follows the amount that market research that you do. Do you work with corporate partners or community colleges in advance of opening your campus to ensure that you can be enrolling students right away or are you typically in the market before you begin adding local corporate and community college related relationships?

On the community colleges, those relationships in many cases predate the opening, not so much to facilitate the enrollment of new students right off the bat. But because part of our process of being approved in new states is to reach out to the academic institutions in those states, and let them know how much we can help them. In many cases those community colleges are a big part of that. At the corporate level, we have national accounts that may have local activities in a new market, we don't really start the outreach to local businesses until we are basically up and running in the community.

Great. If I can just ask one other. On kind of self selection, a key part of your retention has been communicating the requirements to incoming students and having students self select out. Have you made any specific internal operational challenges to improve that, or have you noticed, has that been any more challenging in this environment? And do you have any way of sort of tracking your success and helping enroll, kind of, the better prepared students up front?

There has been no real changes from a administrative or operational component, Amy. It is an on going effort to make sure that all our admission officers are adequately trained in what the specific requirements are. For example, the college level professor efficiency in English and math, the fact that we add science requirement. What we do, actually, is before the start of class, remember that we only have four starts as year -- so we are enrolling students for 10 to 12 weeks by quarter, we will start to reach out to all the new students who have enrolled for that academic term, then we ask them very basic questions.

We ask them, for example, have you purchased your textbooks, have you participated in academic advising, have you attended new student orientation? If we get too many no's to those very basic questions which we believe are very solid red flags around how committed or determined a student is. We will drop the students from enrollment and ask them to reapply just to verify they are as committed as we thought they were when they actually enrolled in the first place. We do that in each quarter. Really what, we are looking for Amy, is two things. We're looking for a level of preparedness academically and a level of commitment and determination. And we find if you don't have both of those, you will not have a have good outcome with respect to those students.

Great. That's helpful. Thank you.

Thanks.

From Credit Suisse, we will hear from Kelly Flynn.

Thanks. I have questions about the competitive environment, as Amy kind of eluded to, you are seeing other players talk more about shifting more toward Bachelor's Degrees and if you will, kind of moving the market broadly. Are you seeing any changes in the competitive landscape in your key markets? And specifically any changes in marketing add rates and overall student acquisition cost. Thanks.

Well, let me take that in reverse order. We spend same amount, roughly per year, per market. So our acquisition cost, as you put it, go down over time as you get more students in a market. And that pattern is holding. There is nothing really significant about that.

We are not a really big advertiser, so I don't think I am the best person to comment on national advertising rates or media costs. In general, media costs over the last 10 years have been going down, as media is [disintermediateuated] by the internet. In terms of the competitive landscape, I wouldn't say I have seen any change, Kelly. There are a lot of opportunities for students to choose from going back to school. But the fact of the matter is, there isn't enough of them, and the demand for education is increasing as we continue to shift away from a manufacturing base and toward a knowledge-based economy. So, it is actually kind of a rare circumstance among businesses I have been associated with. The competitive landscape, in terms of other providers of educational services factors very little into our decision making in terms of how we run this university.

Great. Can I follow-up with a regulatory question? I think you have been pretty consistent for the past several quarters in your comments, but is there anything that you have seen in the MPRM, the broad MPRM, not just is gainful employment one, or in just a broader environment, including the rate at which campuses are approved or anything related to that, that would give you pause as it relates to long term growth rate, anything you think could change your business?

No.

All right. Thanks a lot.

You are welcome.

And Gary Bisbee, of Barclay Capital has the next question. Please go ahead, sir.

Hey, guys. Good morning.

Hello Gary.

On the last point, do you think any change in -- or different -- in terms of the interaction is going in terms of timing to get approval for new states and campus openings? It sounds like the department wants to get a little more involved with new programs but anything that could slow down in your ability to open the number of schools you want to?

Well, we haven't seen any slow down in the rates in which states approve us. There has always been a wide variability in terms of the arbitrating body, the deciding body in the state. Sometimes it is politically appointed. Sometimes-- In some states it happen to be the board of governors of a particular state university and they act a little differently. And no. We have a number of states we opened this year, a number we will announce in October that we've opened for next year.

I think over time I would say it has gotten slightly easier for us just as our reputation has grown. The thing about any regulator, more than anything else, they don't want to be embarrassed. If you can bring a level of confidence to their review and understanding of your institution, it gets easier. When we first started, we weren't really known outside of Washington, DC, so there was a bit of an education process.

Now, we have been successful in other communities, so that start to build on itself. I guess the only other point I would make in regard to Kelly's question is, I don't see anything at all that is going on that is going to affect our plans to go to a nationwide university. I don't think it is a particularly healthy or helpful debate. I have been somewhat disappointed by some of the rhetoric and the way in which the capital structure of the university has been use by some people to suggest that is indicative of its academic outcome. I do not believe that.

Thanks. On average, how successful are the articulation agreements for the community colleges? I mean, is it safe to say a significant portion of the people entering Bachelors are degree completers who have a full two years?

Gary, about over a third of our under graduate students are coming to us from articulation agreements. We are work with community colleges to increase that number each quarter.

Okay. So, just generically thinking about it, it is reasonable to assume the average kid comes into a Bachelor's Degree would do 2 to 2.5 years of credit with you in.

These aren't kids, these are working adults, remember. And that's accurate. Yes. People comes from the community colleges, transferring in a Associate's Degree, they would be with us for a couple of years.

But, overall, including the 0.66% that don't come from those agreements, would 2.5 years be a reasonable number, or is it much different than that?

No, I think that is average. I think it is. I think it is about 10 quarters, right? Academic quarters, so, yes, I think that is right.

Okay. Thanks. Last question. The movement in a couple years time to the three-year cohort default rate. A lot of companies have talked about the numbers released last fall aren't very accurate, because the schools weren't sort of working their default management in the third year. Do you think you could have or would have had an material impact on that number if you had been doing so? In other words, the forward-looking numbers, when you are actually working on it, likely to be somewhat less of an increase than you saw in the numbers you gave us last fall?

We shifted, about a year ago, Gary, a way from really focusing on two or three year cohort default rates more toward lifetime. I think that is a more relevant indication of the success of the programs. I haven't really focused that much on the three-year rate and what, if anything, could be done in terms of default management.

In general, the best default management is the care and communication that you have with your incoming students, and as Karl mentioned, the quality of the academics in the classroom. Some amount of any short term default measurement will be based on the economic environment that you are taking the measurement in. I don't get to worked up one way or the other about that. But, in terms of what we could have done with regard to three-year rates, I really haven't focused on that, to be honest.

Okay. Just another way to think about that is, with the government loans going direct, I have heard from a bunch of companies they expect somewhat less aggressive servicing of the loans. Are you planning to implement any additional default management or servicing capabilities yourself?

No. No. And actually, I would expect that the department is aware of the fact that with the requirement to service those loans, they are going to be held responsible for that performance, and I would frankly be surprised if they miss badly on that.

Okay. Thank you.

You bet, Gary.

(Operator Instructions). We will go next to Bob Wetenhall of RBC.

Hey, good morning.

Good morning Bob.

Do you guys have bad debt forecast for the full year?

What do we have for the first half of the year, Mark?

In the neighborhood of 4%. For the first half of the year.

Maybe 3.6 to 4.2 a quarter.

Maybe a little less than 4.

I would say the high 3's, maybe 4.

So you guys are pretty comfortable that these trends are going to continue?

Yes. We are pretty comfortable. I think we sort of broke the back of that problem, and that is definitely trending in the right direction.

That is a nice benefit. Just moving on to your $1.68 to $1.78 guidance for the next quarter, does that kind of assume that the improvement or the decline in instruction and education support costs is a percent of revenues that is likely to continue, as well?

We don't really think about margins that way, Bob. We are spending what we expected to spend in educational areas and we opened new campuses and hired new professors. So there is an increase in raw dollars there and in a lot of campuses we don't have very many students, so that causes margin pressure. But overall for the University, we had a fairly healthy enrollment for the summer term, so we will have a little more revenue in what is necessary to keep stable margins, and therefore we will have margin expansion.

Got it. It seems like you got a lot of sales leverage of the bottom predicated on strong enrollment growth. I am just curious is there is something that would disrupt that?

We don't really think about it as sales leverage. Our admission staff aren't really salesmen. We have fixed costs-- semi-fixed cost in terms of our faculty, admissions officers, administrative staff and facility costs. That is why we tell you in October of the preceding year what we think the model will look like. We know what the costs are going to be, whatever the enrollment is then dictates in terms of revenue whether we have margin expansion or stable margins or contraction. In this case we had a couple of percentage points higher enrollment growth in the first half of the year than what was necessary to have stable margins, so we will have a little margin expansion.

Excellent. And just one final question. I think you said you spend $7 million in share repurchases during the quarter. Would it be okay to expect that as kind of a normalized rate going forward on a quarterly basis?

We never comment on capital redeployment before it happens.

Fair enough. Thanks very much.

You are welcome.

And next to Jeff Silber from BMO Capital Markets.

I wanted to focus on the enrollment numbers for classroom students in mature campuses. It was up 20% year-over-year. I think that is the fastest growth in that metric we've seen or at least as far back as we have data. Was it that more schools went into the mature campus bucket or is it specific locations? Any color would be great.

We only have one school, one university, so they are individual campuses.

Sorry.

That is okay. We did have a number of relatively young, mature campuses go into that bucket, as you put it. But actually, I had the same reaction you did when I saw the numbers. So we dived down into that. The reality is, in our campuses that were either more than 10 years old or had more than a thousand students, we had double-digit overall growth. That is a lot higher than has been in the past. In those mature campuses, we tend to have a higher percentage of students taking classroom classes than online. I think that drove the number that you are describing.

Did it have anything to do with adding the Criminal Justice program?

I don't believe so, because Criminal Justice curriculums are available online, as well.

Great. Thank you so much.

You're welcome.

And [Inoble] of William Blair has the next question.

Thanks guys. Going back to the bad debt versus enrollment, kind of dynamic there. Maybe some color on how much of the improvement has been driven by collections on students who have been out of university for a while versus expectations of incoming students or higher quality, or you expect fewer, second quarter drops? Is there anything else going on that has been a bigger driver?

It is all of that. But, just, mathematically, financially, you can't make up that much on the ones who have already dropped out. We got most of that benefit, really, last quarter. This quarter, it was just stronger collections from our incoming students -- existing students. Lower drops, stronger collections.

Thanks. Has the job markets or the continuing lack of a job market, I guess, has that changed at all what cities or states you think make the most sense, or it doesn't really matter given the low unemployment rate for college educated people?

Well, it doesn't matter because the strategy is to always open the market that is closest because it is easier to keep track of. The determining factor for us, we believe, will be execution in the classroom. That is harder to keep track of the farther away you are.

You can look at that the map we are at currently and feel confident the communities on the literal of that is going to be where we move into next. The worsening economy or the continued bad economy, particularly in some of our market in the upper midwest, Cleveland, Akron, areas like that we can see some variation there.

We can see a slightly higher level of unemployed opportunities, student that is are truly shifting their professional career, they are moving out of manufacturing and hopefully into more managerial, service based jobs, but we are relatively new in those markets, also, so I don't have enough data to compare it to what it looked like four or five years ago. We are sensitive to that, but it doesn't really change our view that those are markets that would benefit from having a Strayer University campus and that our University would benefit from serving in those markets.

I shouldn't probably ask how the LeBron decision changed your viewpoint?

No, but I understand they had really great sponsorship on that show.

Let's move on. If there were some legislative proposals thrown out there like perhaps a loss share provision, either with a default rate hurdle or that one, or a maybe are reversion on 9010, back to 8515. Maybe some color on your thoughts and the efficacy or the utility on those kinds of proposals or anything you see that says that might be a good thing for proprietary sector versus something that could be a really damaging proposal?

In general I think the regulatory structure needs to change the focus on regulating universities as universities, and the capital structure shouldn't be the determining factor there. Because of that, I think the 9010 is a curious way of overseeing the quality of these institutions. I am not as opposed to loss sharing at certain default levels, particularly if it is applied across the whole educational community. And it is done judiciously and appropriately, I think that can be a way in which the government stewardship of the tax payer funds in supporting education could be leveraged and improved, but obviously a lot of that depends on the details of how it is presented and thought through.

Final question for you. Given how you kind of listed out the relevant stakeholders in the prepared remarks in the policy environment, kind of a weird question, but are there any disadvantages, versus advantages, to being a publicly traded company, regardless of the current environment versus where it was two years ago, where it might be two years from now.

Given the stakeholders you have, it seems shareholders are almost the last on the list -- not because they are not useful or helpful. But people most important to you, university regulators, students, I am trying to figure out the benefit of the structure you have as being a public traded company, or something else for compensation for the employees, things like that, that would override the other stakeholder opportunities.

First off, if you go back to my letter to shareholders last year, I tried to address this issue. I think you can meet the demands of all the stakeholders of an enterprise like that in a way which is very beneficial to shareholders. And we recognize our obligation as managers of the enterprise to do that. The shareholders provide the capital, and if they don't receive a return on that capital, they obviously can put it someplace else. That would not be significantly different, whether you were held publicly or privately.

Whoever your shareholders are, you have the obligation to insure that you are using the capital they give to you in a way which is efficient and helpful. So, again, I don't really think have is a philosophical distinction between being public or private with regard to the relative priority of stakeholders. You operate in a situation like this, the enterprise really for our students, for our faculty, building our academic reputation, on behalf of our owners. It is a totally inextricable relationship. That would be the case whether you were privately held, publicly held or publicly traded.

Good. Appreciate it.

You are welcome.

Now, we have Craig, of Stifel Nicolaus Craig, of Stifel Nicolaus Craig, of Stifel Nicolaus . Craig, of Stifel Nicolaus Now from Robert Craig, of Stifel

(Inaudible) after the [Cleveland] commentary. Good morning guys.

Good morning.

A follow-up on a question from Amy earlier. Have you noticed any changes on the percentage of students required to take your developmental courses or any changes in the past rates of students taking those course in the.

There is geographic bias to that. That is a perfect example of the focus on academic outcomes in our ability to improve really in a pretty quick cycle time. We have a broad effort at institutional assessment where we pull the outcomes across the whole university of all the courses. The developmental courses are key to us. We recognize those as really the building blocks for under prepared students.

We have been able in the last couple of quarters, to determine a couple of areas where our outcome in the developmental English and math hadn't be as high as we would like them to be. We had drilled down and required increased oversight and rigor in those areas. You get paradoxical impact on that.

What you end up is with a higher failure rate in a the developmental course, and a much higher success rate for those students who pass the developmental course and enroll in the college level, the 100 level, the university level courses. So, that is part and parcel of what we do every everyday, every quarter is constantly balancing the academic out comes in these various courses and how it will really help us improve the quality institution as a whole and the learning outcomes of the students who attend.

Rob can you see Strayer moving into greater selectivity over time, being a more selective institution. I know you mentioned last quarter you wanted to remain in an open enrollment, but could that change over time.

It is not open enrollment, it is open access. We're not an open enrollment institution. You have to have a high school degree, you have to have a number of other attributes that show us you are prepare today be a student. Most importantly, if you don't transfer college level credit in English and math, you are not allowed to enroll in our University level courses until you pass the diagnostic test or as you pointed out pass the developmental English and math tests.

I think you can be an open access university that maintains high academic standards and real academic rigor and still creates real high levels of student achievement as long as you keep all three of those in academic balance. No, I do not intend to be a more selective or not an open access university, but I do think the university -- and I think the trustees of the University feel very strongly about this -- as an open access university have real academic standards and real academic rigor and do the best we can in terms of identifying those students who, they just really don't belong for one reason or another, and help them find other institutions.

Rob, I know over the last couple of years 40% of new schools have been in existing schools roughly and the balance of new states. Should that compensation change materially next year?

I really don't know, Bob. We haven't planned that out yet.

And last question. The Criminal Justice in the total percentage of students, is the assistance rate the same as what you have been seeing elsewhere?

I think sit 5% of all students. Karl, do you have the continuation rates for--?

It is on par with our other under graduate programs.

Great, great. Thanks guys.

Kelly Flynn of Credit Suisse has a follow-up question.

Thanks. Two quick ones. Some, the price increase. You said 5% in the press release in January.

Can you talk about your plans for next year and whether or not you think that is a kind of sustainable rate given everything that we have talked about the with regulatory environment. Then, also, the lifetime CVR's which you mentioned, I was wondering if you would be willing to give us a sense of kind of where that stands or broadly how we should think about that relative to the two and three year CVR's. Thanks.

Sure. On the tuition increase our board of trustees has already approved a 5% increase for next year. Our intent is to continue to increase our tuition at 5% a year, because we believe that the value of education is increasing at least that amount. Specifically with regard to your question, there is more than enough head room. Assuming this regulation is adopted as written there is more than enough head room for a very long period of time for that. What was the second part of your question, Kelly?

It was the lifetime cohort?

Exactly. We talked about this publicly. We can only go back at this point 15 years, because that is all the data we can get from the department. But it is roughly on a dollar basis, slightly below 5%, and on a student basis, or on a loan basis, I think it was 8% or 9%, Mark. Is that correct? Somewhere between 8% and 9%.

Great. Thank you very much.

Thank you, Kelly.

It appears we have no further questions at this time. I would like to turn the call back over to Mr. Silverman for closing remarks.

Thank you maam. And thank you all for participating we look forward to talking to you again next quarter. Thanks.

That concludes today's conference. We thank you all for joining us.