Strategic Education Inc (STRA) 2010 Q3 法說會逐字稿

Good morning everyone and welcome to Strayer Education Incorporated's third quart 2010 earnings 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 current call over to Strayer Education Senior Vice President of Corporate Communications, Ms. Sonya Udler.

Thank you, operator. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education; Karl McDonnell, President and Chief Executive Officer; and Mark Brown, Executive Vice President and Chief Financial Officer.

For those of you that wish to listen to 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, 1 PM Eastern Time through Friday, November 5. The replay is available at 888-203-1112, pass code 3416702. Following Strayer's remarks, we will open the call for questions and answers.

I would like to remind everybody that today's press release contains, and certain information on this call may contain, statements that are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. These statements are based on the Company's current expectations and are subject to a number of uncertain it is and risks that the Company has identified in the paragraph on forward-looking statements at the end of its 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. Copies of these filings and the full press release are available online and upon request from the Company's Corporate Communications department.

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 third quarter financial results, and Karl to comment on our third quarter operational results, including our enrollment results for the fall academic term. Finally I'd like to provide an update on our growth strategy, discuss the Company's earnings outlook for both Q-4 and full year 2010 ,and share our thoughts on Strayer's business model and our investment plans for 2011.

Strayer Education is an education service company whose primary asset is Strayer University, a 60,000 student, 87 campus post-secondary education institution founded in 1892, which offers bachelors, masters and association degrees in business administration, accounting, computer science, public administration and education. Unlike traditional universities, Strayer's students are working adults who are returning to school to further their careers.

Our revenue comes from tuition payments and associated fees. Approximately 75% of that revenue comes to us from federally insured Title IV loans. Our expenses include the costs of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs. Strayer 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 September 30, 2010, increased 29% to $147.6 million compared to $114.4 million for the same period in 2009, due to increased enrollment and a 5% tuition increase, which commenced in January of this year. Income from operations was $38.2 million, compared to $27.3 million for the same period in 2009, an increase of 40%. Operating income margin was 25.9%, compared to 23.8% for the same period in 2009.

Net income was $23.3 million, compared to $16.7 million for the same period in 2009, an increase of 40%. Diluted earnings per share was $1.72, compared to $1.21 for the same period in 2009, an increase of 42%. Diluted weighted average shares outstanding decreased to 13,557,000 from 13,780,000 for the same period in 2009.

Revenues for the nine months ended September 30, 2010, increased 27% to $464.8 million compared to $364.8 million for the same period in 2009, due to increased enrollment and a 5% tuition increase, which commenced in January of this year. Income from operations was $156.9 million, compared to $120 million for the same period in 2009, an increase of 31%. Operating income margin was 33.8%, compared to 32.9% for the same period in 2009.

Net income was $95.4 million, compared to $73.2 million for the same period in 2009, an increase of 30%. Diluted earnings per share was $6.98, compared to $5.29 for the same period in 2009, an increase of 32%. Diluted weighted average shares outstanding decreased to 13,663,000 from 13,850,000 for the same period in 2009.

At September 30, 2010, we had cash, cash equivalents and marketable securities of $124.8 million and no debt. We generated $141.4 million from operating activities in the first nine months of 2010, compared to $89.8 million during the same period in 2009. Our cash flow from operating activities in the third quarter 2010 was favorably impacted by $34 million of tuition proceeds related to the fall term that normally would have been received in the fourth quarter. These funds were received in the third quarter as a result of a September 30 deadline imposed by private lenders exiting the Title IV loan business. On a full year basis, we expect our operating cash flow growth to be in the mid-teens.

Capital expenditures were $32.1 million for the nine months ended September 30, 2010, compared to $22.1 million for the same period in 2009. During the three months ended September 30, 2010, we invested $51.2 million to repurchase approximately 296,000 shares of stock at an average price of $173.33 as part of a previously announced stock repurchase authorization. During the nine months ended September 30, 2010, we had invested $73.2 million for share repurchases and paid regular quarterly dividends of $31.2 million, or $0.75 per share quarterly.

For the third quarter 2010 bad debt expense as a percentage of revenues was 4.2%, compared to 4.5% for 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 third quarter of 2010, compared to 15 days at the end of the third quarter 2009. Rob?

Thanks, Mark. Karl, how about hitting the operating results and maybe a few comments on the fall term enrollment?

Sure. First with respect to the fall term enrollment, we had total enrollment growth of 12%, which breaks down as a 2% decline in new student enrollment and a 17% increase in continuing students. Our continuation rate from the summer term to the fall term declined about 400 basis points.

Regarding a couple of other important elements in enrollment, we did have 20% growth in enrollments from our corporate and institutional alliances, and we also added eight new relationships during the quarter, including new agreements with Sprint and Adecco USA, which one of the largest recruiting and staffing firms in the United States.

Community college enrollments grew 19%, and we added another five new articulation agreements during the quarter. And we now have nearly 200 such agreements with two-year colleges in the United States.

Regarding new campuses, as we announced last quarter, we did successfully open four new campuses for the fall academic term; two in Houston and one in Plano and one in Columbus, Georgia. Houston and Columbus are both new markets for us. Earlier today we announced our plans to open eight new campuses in 2011. Three of the eight will open for the winter academic term. Two of them will be in Ohio, with our third campus in Cincinnati, and our first in Dayton, Ohio, which is another new market for us. And the third campus will be in Milwaukee, which of course represents both a new market and a new state.

Lastly in terms of student mix, approximately 70% of our students are enrolled in undergraduate degree programs, with business and accounting comprising roughly two-thirds of that population, and graduate students continue to make up roughly one-third of our overall student population. Rob?

Thanks, Karl. Just a few comments on the third quarter financials. We exceeded the midpoint of our EPS forecasts by $0.03 per share. About $0.01 of that was caused by lower share count from share repurchases in the quarter. We were fairly active in the quarter. So Mark was just about right on target for EPS. Our revenue growth of 29% on 22% enrollment growth for the summer term was slightly higher than forecast, and that generated the other $0.02 of upside. Our operating margin increased 200 basis points, which was right on Mark's forecast.

On distributable cash flow, for the first nine months of the year -- and distributable cash flow again is cash from operations minus all required CapEx to either maintain or grow business, so it's that cash which is available to return to our owners or in whatever the most value-enhancing way is. That cash flow was up 60% for the first nine months of the year on 30% net income growth, which is well ahead of the model. However, as Mark pointed out, that cash flow growth is somewhat inflated by the inclusion of the $34 million of the fall term tuition receivables. That will reverse out in the fourth quarter. And so I just want to make sure everybody is focused on that.

On our business outlook for the fourth quarter of 2010, based on the University's enrollment growth for the fall term offset partly by increased expenses associated with new campus openings, we estimate our fourth quarter EPS will be in the $2.64 to $2.66 range, with approximately 150 to 200 basis points of operating margin compression versus the prior year.

Now, turning to a brief update on our growth strategies, many of you will remember that the strategy is based on five objectives. First is to maintain enrollment in the Company's mature markets. Second is to open new campuses, particularly in new states. Third is invest in our online curricula. Fourth, increase our corporate and institutional alliances. And the final objective is to effectively redeploy our owner's capital. In terms of a third quarter update on these growth strategies, Karl I think covered the first four objectives pretty well, and Mark covered the fifth. So I don't feel I need to add anything here.

Since we now have visibility into our fourth quarter earnings, however, I'd like to take the opportunity to give a full year 2010 forecast, and compare that forecast to the business model that Mark and I set out last year at this time, in order to really test the integrity of that business model. And then describe our investment plans and our business model for 2011.

If you remember back to one year ago, when Mark and I provided Strayer's business model for 2010, we said that if the University achieved a 20% increase in student enrollment, we would expect a 24% to 25% increase in the Company's revenues, roughly stable operating margins versus 2009, and earnings per share in the $9.30 to $9.50 there are range.

We now know we achieved approximately 19% student enrollment growth for full year 2010, which we project will lead to a little less than a 25% increase in revenues, approximately 20 basis points of operating margin expansion, and full year 2010 earnings per share in the $9.63 to the $9.65 range. So while our enrollment growth was just slightly below that 20% benchmark which would drive stable margins, we believe our revenue growth will be slightly higher than the business model would have forecast. And we also believe that that will lead to a $0.20 to $0.25 increase in full year EPS above the indicated range given that enrollment. And again, that's mainly due to lower share count. We've been a fairly active repurchaser of shares this year.

Turning to our 2011 business model and investment plan, we announced today that Strayer University intends to open eight new campuses next year, as Karl mentioned. In 2011 we intend to expand our footprint in the Midwest. Subject to final regulatory approvals we would like to open campuses in three new states for us; Indiana, Illinois and Wisconsin. We also intend to make further investments through the year with campuses in Ohio and Texas.

Now, I should note that in the past we've always said that our new campus opening plan was limited solely by our internal development of human capital, the deans and administrators necessary to ensure the quality of the academics at each location. This year I would have to admit that is not the case. We have the human capital to open more than eight campuses next year, and we certainly have the financial capital and the market opportunity. But given the uncertainty surrounding both the regulatory and political environment that we're operating in, we think it prudent to dial that investment plan back slightly and go with eight campuses for next year.

Strayer University also announced today it will implement a tuition price increase of approximately 5% effective January 1, 2011. Our Board of Trustees has approved that. Now, taking into account that tuition increase and the expansion plans that I just outlined, and again setting this model, which we really do for the purpose of allowing visibility into how the business operates. It is not intended to be a forecast of enrollment or revenue or anything else, but we want you to know -- we want you to seat same thing that Mark and Karl and I see in terms of how much we're going to spend next year and then what various amounts of enrollment or revenue will do in terms of the bottom line.

So Mark and I believe that if the University achieves 13% enrollment growth in 2011, we would expect an annual revenue increase of 17% to 18%, roughly stable operating margins even with the eight campus openings, and diluted earnings per share in the $11.30 and -- to $11.50 range. And like every year, I point out that if the enrollment growth is higher, we would expect both the revenue to be higher, there to be operating margins expansion, and to deliver EPS that would be above this indicated range. And obviously if it's lower the reverse is true as well. This is really an attempt to give people visibility into the levers of how our business works.

I'd now like to turn back to the fifth leg of our value creation strategy, the capital redeployment. When the Board and I looked recently at our cash balances; where they're likely to end up this year and where more importantly these cash balances are likely to grow in 2011, and taking into account our investment plan, somewhat limited as I said by a certain amount of regulatory and political uncertainty, we decided to take the following actions.

First we're increasing our annual common dividend by 33% to $4 per share for the year. And second, we have increased our share repurchase authority to $150 million. I think it's important to point out that even with the uncertainty in the regulatory and political environment, which I alluded to earlier, the Board and I remain convinced that our business model allows us to fully fund an organic growth strategy of patiently and deliberately building a nationwide university to serve working adults and still make periodic returns of capital to our shareholders. What we as a management team and a Board do really each quarter is weigh all uses of cash to determine the most value-enhancing after-tax return on our owners' capital, and this capital plan for next year reflects that.

And with that, Brendan, we'd be pleased to answer any questions. And ladies and gentlemen, we'll stay as long as there are questions. I understand that there's quite a bit of curiosity as to how our operations are being affected, and we're delighted to answer all those questions.

Thank you. (Operator Instructions). we'll take our first question from Sara Gubins with Bank of America.

Hi, thanks, good morning. Could you talk first about why persistence was down so much from the summer to the fall?

Sure. I mean, there's a couple things. Number one is -- I mean, I've said for the last eight quarters that I thought that our continuation rate was as high as it could get. And it -- what we were hoping to do was keep it at that level, but was expecting it to come down some over time. I would not have expected it to have come down as abruptly as it did relative to the fall. Nor frankly would I have expected our new student enrollment to have been as -- so much lower than it had been in the previous quarter. And in the case of the new student enrollment, we've always said we think that is variable, and we're comfortable with that variability. We're less comfortable with variability on the continuing side, because that's really I think more of a reflection how we're doing with regard to students.

But in both cases given the abruptness of it and the timing of it, my view is that there's been just an enormous amount of negative publicity associated with the concept of for-profit education. And that's had somewhat of an impact. Impossible really to, I think, parse out and assign it mathematical certainty, but it's certainly consistent with what we saw and with conversations that we did have at our campus staff. And I think that's part of dealing with the environment that we're operating right now.

Okay. And the business outlook for 2011, is it fair to say that you're assuming that you would return to growth in new starts under that outlook?

We never comment on future enrollment, Sara. I mean, it's our intent is to build a nationwide university, and our belief is that over time the campuses that we open fill up. They fill at various rates, different rates. It's affected by things that do happen in the outside world. But in no circumstances do we ever sit down and try and project what enrollment is going to be, because we don't want to be in a position where we're setting either for ourselves or externally a sense of targets that we feel is important to meet. We're much more process-focused than outcome-focused with regard to that.

Okay. And then could you talk a bit about what you're planning to do to try to improve student retention? Are there action being taken at the campus level?

I'm not sure that retention movement from one quarter to another is really an issue that you either focus on to improve or -- I mean, we're always focused on trying to improve the quality of our academics. And also to be in a position where the students who are enrolled have the benefit -- have the ability to benefit from the education, and therefore are more likely to succeed and then go from quarter to quarter. But we don't get too excited around large increases on a one-quarter basis, and we really don't focus in too closely on decreases on a one-quarter basis.

I do think that there was a large amount of questioning of the concept of for-profit education, really starting in July. And that certainly appeared to have some effect. I don't think over the long-term that's really a question that's going to be -- that we're going to have to deal with permanently. I mean, we're quite comfortable that way we're running our University and the benefits that we provide to our students have enduring value. So you just ride out the punches from that standpoint.

Okay. And then lack quick question. Your outlook doesn't include any share repurchases, does it? Either in the fourth quarter or 2011?

That's correct, Sara.

Okay. Thank you very much.

Thank you.

We'll take our next question from Corey Greendale with First Analysis.

Hi. Good morning.

Good morning, Corey.

Just picking up on those themes, what -- can you just get a little more specific on what is the data that you've seen that leads you to believe it adverse publicity is the issue? And is there anything you can do as Strayer to try to offset that perception?

Well, there's limited things you can do as Strayer with regard to news accounts and congressional hearings and things that really are dealing with other institutions. And frankly, I'm not sure it's all that important or necessary or even helpful. There's a little bit of "me thinks she doth protest too much" in spending too much time worrying about this. We're involved in a very uncertain political and regulatory environment. It will stabilize itself. I don't know exactly how, and I don't know exactly when, but it will. And in the meantime if you focus on providing first rate education and adding real value to students and -- that will settle out. And so we're just -- I'm not that focused on offsetting what is obviously an avalanche of negative publicity at any one point in time. I think that you build your reputation over time, patiently and deliberately, and that's going to be what in the long run is most important.

And in terms of the data, would you point to -- what in your business process suggests that publicity would be the issue that you're facing?

Well, I mean, you don't see a -- I mean, it's just a basic regression analysis, Corey. If you look at what's happened and what's happened on a common basis across other entities and what was coincident in time, then -- and you take out the things that are different among institutions, that's really the common impact. It's a little bit of common sense, frankly. You don't have that many institutions having very similar results, and in many cases -- I mean, and they all have different business models, so that not everybody could have done the same thing wrong or differently at the same time. It just doesn't work that way. I think logic suggests it's really the only thing that is common and is dispositive.

Okay. And on the decision to open eight new campuses, first of all could you just confirm that that's entirely a decision that you and the Board have made as opposed to seeing slower approvals from states or from Middle States? And secondly when you talk about uncertainty in the environment, are you talking about -- could you just reconfirm that you continue to believe that Strayer will be able to meet debt to income requirements if the gainful employment proposal goes through exactly as it's been drafted?

Well, let me take that in reverse order, because there's a lot there. I don't have any new information with regard to the calculations of debt to income or gainful employment. So, yes, I do remain confidence based on the information that's available to me.

The decision to open eight campuses was not limited by state or regulatory or Middle States' approval. We have the opportunity, we have areas where we could have opened more campuses. It's a bit of a shame, frankly. But it is what it is. And the eight was deemed by the Board of Trustees, the Board of Directors and myself as a prudent reaction.

And we just don't really think about this as a land grab. We'll have the opportunity to once things settle out to move forward and open up in areas where we're not opening up this year what we could have. It just from our standpoint seems like -- we don't know how much time and how much effort is going to be necessary to fully analyze and comply with the new regulations when they're finalized. And so we've decided just to make it a little easy on ourselves.

Okay, I'll turn it over. Thanks, Rob.

Thank you, Corey.

We'll take our next question from Trace Urden with Signal Hill.

Hey, thanks, Rob. So, I -- again we're beating this horse to death, but I just want to be sure that I understand. So you're not seeing any change, for example, in the pricing of leads, either what it's costing your folks to advertise in local markets because of maybe political advertising or what it's costing for any of your activities in the Internet? You're not seeing any material change there that's contributing to this slowdown in enrollment?

No. No. And we knew there was going to be an election this year, so our marketing budget anticipated dollars would have to be spent to compete with candidates that are trying to get their message out. I just don't think of the business that tactically, Trace. I mean, other people may be better at it. But I don't think that's how students make decisions. Certainly not the students that we're looking for. So I don't believe that has much of an impact.

No, I just meant that whether you had pulled back from any of your marketing activities because of the relative expense associated with them.

Not at all.

Okay. And then just a small point on the model, because you're not increasing the number of new campus openings next year, shouldn't that point to some ability to gain additional leverage since your start-up costs will be flat year-over-year rather than increasing?

It does. It has. It does. And it's implicit in the model, which is why you only need 13% enrollment growth to achieve stable margins.

Okay. Thank you.

Thanks, trace.

Our next question comes from Gary Bisbee with Barclays Capital.

Hi, guys, good morning.

Good morning, Gary.

The 2011 plan doesn't really make any mention of the pending regulatory changes. And I guess just ignoring gainful employment, what are you expecting in terms of administrative burden for dealing with and tracking all the new rules you'll have to comply with? And I guess specifically also incentive comp. It looks like the Safe Harbors were eliminated. Do you expect to have any type of real incremental costs or changes you'll have to do to comply with that?

No, Gary, on the incentive comp, no, we've never had incentive comp. We've never used the Safe Harbors. So that's the one area of the regulation that I feel probably most comfortable with. With regard to the rest of it, I mean, we just saw literally 10 minutes before we started this call what the department put out. I think it would be prudent for us to really have a chance to dig in and study it.

But the point I made in the last call, which is that if the material which the department has just released is consistent, identical to what they put out in drafts, there wasn't a whole lot of impact or cost that I was foreseeing with regard to these, these 13 out of the 14. We really need to get in and see what they've -- because I mean, I saw some summaries apparently the department released to people yesterday information that wasn't released to us that allowed people to put some summaries together that suggested at least on one of two of the entities -- one or two of the items it's going to require fairly detailed analysis on our part to really answer your question completely. But that's frankly part of the uncertainty. We just don't know.

Okay. Yes, you got to love the press getting it before the actual schools. Seems a little strange to me. But at any rate -- I guess, what are you hearing from the alliance partners? Is this negative publicity -- has there been any sort of infection in terms of how they're thinking about the service that you're delivering to them and their employees?

Well, only -- I'll let Karl answer that correctly, because he's closer to it. Before I do that let me just say I think the alliance partners with the antidote to the negative publicity. Because the negative publicity is going to affect people at the margin who don't know much about the University when they're first looking at it. And alliance partner, that's where you hit that built in gravitas of the employers saying this the place where we think you ought to go. It has a big impact. But, Karl, you've met with some of them recently. Go ahead.

Yes. First, Gary, I mean, as I said in my comments, the enrollment from our corporate and institutional alliances grew 20%, which of course was 800 basis points more than our total enrollment growth. And that was reflected not only by the fact that we had new relationships contributing to students, but also that our existing relationships grew. In fact, most of them did. And as Rob just said, I have had a chance to visit with the senior management teams of some of our larger relationships just over the last few weeks. And honestly I have not heard any concerns on their part about anything that they're hearing, and continued support for the relationships that we have.

Are you willing to give us any sense as to what type of mix of your enrollment comes from that channel and from the community college? I heard that that was an upper teen growth as well. Students coming from outside of those two channels must have been down significantly more. But are those -- is that like a third or something? How shall we think about that?

I think that's mathematically right, but I don't -- and we know that it's what, like 15%, 20% from the corporate channel. I don't know about the community college.

The community colleges are in the 20% to 25% range for students.

So we're up on maybe 40%, we're down on the other 60%. I think that's mathematically correct.

Okay. And then I appreciate you don't run the business to hit a certain start target, but can you give us any sense around how you get to that 13% in the model? Were just plug in a number there, or is that based on a build up of the new campuses you're opening, maturing at that 150 kids -- I always say kids -- students a year? How do you get to that number?

That number is a derivative of -- it's a mathematical backwards calculation of what enrollment you need to have stable margins given what we know, which is how much we're going to spend. The variable costs with students; once we put in place our basic investment plan for the next year, which is how many new campuses that we're going to build, how many full time faculty we're going to hire; the variable cost is the adjunct faculty. And that's why every individual student above or below that number doesn't -- it is not 100% to the bottom line but it's relatively high.

So it's not intended in any way to be a forecast. It's just to give you a sense of that's the benchmark. If we're at that number, we'll have stable margins, because we're not going to spend a lot more. And if we're above that number we're going to get margin expansion and more earnings per share. And if we're below it we're going to get less. I mean, we've been doing it this way for probably eight or nine years. so it's -- and our ability to predict, based on our investment plan and our cost structure for the next year, how revenue growth is going to affect our bottom line is pretty good, pretty solid. That's really all that's intended to do.

Okay. Thanks. And just one last question. The selling and promotional expense in absolute dollar terms grew a lot faster than it's been trending. I would assume that competing with the politicians probably was part of that. But as you look at that plan for next year, how much are you baking in? Are you assuming that there'll be some moderation of the efficiency of your spend? Or is it likely to be even more --

We spend about the same amount per market per year. It's just not that tactical. What you're probably looking at is we had a number of new markets in the fourth quarter relative to previous year, and that would have moved that number. But where are -- it is a patient and deliberate brand-building exercise. And what you see as leverage is just over time having more students in a market where you're spending the same amount of money. And so when you stop opening new markets, you're going to see what you describe as leverage, and the more new markets that you open, you have less of that.

Okay. Thanks a lot.

Thank you, Gary.

We'll take our next question from Amy Junker with Robert W Baird.

Good morning. Thank you.

Good morning, Amy.

Can you talk a little bit about if there -- if you've seen any indication students are less willing to take on debt given the prolonged economic downturn, if that's playing a role at all? Are you hearing that from any of your enrollment advisors?

Well, Karl is shake his head. He talks to them more often than I do. I just think it's unlikely, Amy, that that as an impact on enrollment could happen that swiftly at exactly the same point in time for everybody and also at the same point of time that all this publicity happened. It just doesn't logically sound -- you would see -- you would ease into that more, I would think. But I mean, Karl, have you heard that at all?

No. I mean, relative to Rob's comments about just the overall environment, clearly we've heard that from prospective students. But we have not really heard anything on an unwillingness to on student loan debt.

Okay, great. And was there any consideration given at all to increasing the tuition less than your usually 5% growth, given again the challenging macro environment and the fact that wages are not going up as much in that environment? Did you think through that at all or consider that at all?

Well, the Board of Trustees looks at our tuition pricing policy every year, obviously, and spends a lot of time thinking about it. The -- our basic view is the -- our tuition is priced at a level which we think is commensurate with its value. It's certainly commensurate with the other opportunities that individuals have to go to state schools for -- which is sort of what we benchmark ourselves against -- at a bachelor or masters level. And we want it to be sufficient to allow us to make the investments in academic quality that we're focused on making.

The stagnation of earnings power overall throughout the economy because of recession/tepid growth really is frankly provides in many ways more pricing power, because when you look at it, it's disproportionately geared to individuals who don't have college degrees. The cap between the earnings of a college degree -- and the employment level differential between people with a college degree versus a high school degree is widening the longer the period of the downturn. So if anything, I think that there's more inherent pricing power.

Our sense is that best way to harness that pricing power in a way that creates value for all the stakeholders of the institution, most importantly the students, is to have a predictable set tuition increase which they can rely on. And so we really look at that every year, but we're pretty comfortable that 5%, given our current tuition levels, was the right amount.

Great. And then last question, and I'll turn it over. But one question we get from investors frequently is about the percentage of students that you enroll who qualify for Pell grants, and that's certainly increased over the last several years. I'm curious if you could attribute that to anything. Is that a function of just given the weak economy and the unemployment rate going up that you just have more people kind of coming to you looking to come back to school, and you would expect that trend to reverse? Or is there something else happening there?

It is definitely a function of the fact that as the economy weakens there's more people who have less earnings and then qualify. I think also didn't last year the government increase -- or decrease the level at which you qualify for Pell grants?

Right.

So you've got more people that at a static level would be falling into that category, and then you lowered the level, so there was clearly more people. And then the final point was that in the last couple years we've had a fair amount of investment in the Midwest -- in the industrial Midwest where I think you have even a more difficult environment in terms of earnings. And so all of those probably combine the -- to generate that increased number of students who are Pell eligible, but we don't really try to focus one way or another on that. We take who comes to us as long as they're academically prepared.

Perfect. Thanks. And we look forward to having you guys open up your campus in Milwaukee. Thanks.

I'm expecting some very close due diligence, Amy. So thank you.

Absolutely. Thanks.

We'll take our next question from Kelly Flynn with Credit Suisse.

Thanks. My question relates to state authorization. I know these rules just came out. You haven't had much of a chance to review them, but I think you might be able to answer this. I think one of the changes was that on the state authorization front they're specifying that you need authorization in all the states were online programs have students, not just the state where kind of the institution is based. So given that, I was wondering if you could just tell us how many students do you have -- or rather, how many states do you have students in, and then of those states how many do you have explicit approval in? And then is that approval going to suffice? Or it seems like they've changed what the definition of approval is. Do you have to now jump through more hoops to get that approval again? Thanks.

Thank you, Kelly. Let me take that in a bit of a reverse order, but also to just echo what you said, which is it does look different to us. And that's based on a five-minute review prior to this call. So I am unlikely to be able to provide any real context or insight into it at this point. Beyond, the one thing I asked Karl to do, which he was able to do, was quickly look at how many students do we have in our global online who currently reside in states that we don't have campus operations, and so therefore we don't have specific state approvals. And I think he said it was about --

2,300.

2,300, so -- out of 60,000. And we'll obviously analyze the regulation, and then, depending on what it requires, we'll put our nose to the grind stone and comply. That's about really all I can say at this point having not had the opportunity to review it in-depth prior to this call.

Okay. That's fair. And then another doozy of an issue is this repayment rate. I mean, I know you said you didn't have a lot of new information. But you did have some pretty specific comments on this a couple months back on your call, so do you have any updated perspective on that 25%? I mean, whether you think it's just wrong, or at this point are you not willing to really comment?

Well, I'm willing to comment. We don't have any new information. We shared with you fully all the information and calculations and assumptions we used. We've had ongoing discussions with the department. They haven't released any data to us that would make it easier to analyze the discrepancy. To their credit or in their defense, they said publicly that data they released was not to be relied on. It was illustrative in nature and wouldn't be used for regulatory purposes. But beyond that we just don't have anything further to add.

Okay. Fair enough. Thanks a lot.

Thank you, Kelly.

We'll take our next question from Suzi Stein with Morgan Stanley Smith Barney. Suzanne Stein: Hi. I just wanted to clarify. In the beginning of the call did you say that Title IV usage is now at 75%?

In terms of cash, I think on the 90/10 calculation it's slightly higher than that.

Less than 80%.

Between 75% and 80%. In terms of the percentage of our students it's about 75%. Is that right, Mark?

yes, that makes sense.

Okay. So that's higher than -- I think on previous call you've recently said that number is about 70%, and I'm just wondering is that because of the increased use of Pell grants, or is there something else going on there?

I don't think it's that different.

I don't think we observe any kind of material change.

No. If I said approximately 70%, it's been 70% to 75%.

Okay. All right. And then just a question. If you get some clarity on the regulatory environment say in early 2011, is it possible that you could then reaccelerate campus openings? How much time do you need to plan in advance for that?

It's unlikely that, no matter how clear this gets early in the year, that we would do more than eight next year. It really -- to do this well and to minimize the risk that you end up with locations where you don't have appropriate academic leadership and faculty, you really need more than a 12-month planning cycle. So if we get clarity on the situation early in 2011, I think it will certainly affect our investment plan for 2012. But it's unlikely to change anything with regard to 2011.

Okay. And then could you just give up an update on how the operation center in Salt Lake City is doing relative to expectations?

Sure. Karl, why don't you talk about that?

It continues to essentially be right on the investment plan that we had set out. You'll recall that when we made the investment we said that we expected it to perform essentially with the equivalency of five campuses, roughly 5,000 students in five years. It's slightly ahead of that pace. And we continue to make investments there with continuing -- ramping up of hiring people, which is basically according to the plan that we initially laid out. And the overall performance has been fine.

Okay. Thank you.

Thank you.

We'll take our next question from Ariel Sokol with UBS.

Good morning.

Good morning, Ariel.

A couple of questions. The first one, a repayment question, but not about the DOE, but rather on compliance. It seems to me that Strayer is being penalized for having performing interest-only loans, and so what's the ability to either one, modify existing interest-only loans to pay down $1 of principal, or two, prevent the origination of new interest-only loans in the future?

Well, the answer to all of those is I just don't know. I don't know how many of our consolidated -- students who have consolidated loans are using interest only. I mean, I can only surmise based on backward calculating from the data the Department has made available. And I'm not sure under the regulations what if any authorities the University is going to have to determine how the students borrow. It's what makes it a fairly pernicious kind of regulation.

But, again, this is part of what I hope will be clarified over the next couple of months. And the Department certainly appears to have recognized that there's great complexity to this and wants to get the answer right. So I don't really have any further comment. We have to wait to see what they do and more importantly how it will be implemented. What data will be available to the universities, to the institutions in order to make adjustments to comply, and then frankly what authorities the universities will have to deal with how students or alumni decide that they want to borrow.

That's very, very helpful. Then I guess the next question, it seems like the only question I get about the Company is about Strayer's relationship with General Revenue Corporation. So I guess my question is, how long has this relationship existed? How do you compensate them for default management purposes? And is it a flat fee or are there incentives in place?

That's GRC?

Yes, you've only had that for like six months, right?

Yes. We entered into a contract with them at the end of 2009.

So do you have the answer to his question?

Yes. We basically pay them a fixed fee for every student that leaves Strayer, Ariel. That's the nature of the relationship.

And was there ever -- did you ever have default management services with another company prior to this one over the past couple of years?

We did with a small company in Florida called Peak.

Okay. And maybe the same question, how long did that relationship exist and how did you compensate them for default management purposes, and was there a flat or --

Yes, it's the same. It was forever student that leaves the program we pay them a fixed fee per student. And that relationship with Peak actually predates Rob's and my time with Strayer.

Okay.

If that's the only question that you're getting, aerial, you should probably talk to some different investors.

Yes, yes. Maybe.

(Operator Instructions). We will move now to Jeff Silber with BMO Capital Markets.

Thanks so much. I'm sorry to go back to the decline in new student enrollments, but I just wanted to confirm something. Some of the other companies have, I guess, raised the admission standards or put an assessment test. Has the University done anything different over the past quarter or so than it's been doing in the past on that regard?

We haven't done anything different over the last quarter, and we've had an assessment test for three years.

Okay, great. Just wanted to confirm that. And drilling down into the components of enrollment, if I look at the mature campuses, we saw a decline in online students, but classroom students still continued to grow, albeit at a slower rate. Is there anything in particular that's going on to boost the components of the mature campus class?

It's a process that the student undertakes. The student decides how many of their classes they want to take online and how many they want to take in the classroom. We've always felt that trying to manage that or control that as a separate business entity or even a source of revenue just didn't make sense. We want to be totally indifferent, because we want the students to make the choices that make the most sense for them. They're more likely to be successful academically if they're picking learning methods that are more suitable to their own capabilities and learning styles. So we really don't do a whole lot of parsing of this. We provide the data to you because we collect it in order to make sure that we have capacity in both venues, that we're investing enough in both classrooms -- physical classrooms and online faculty to be able to serve that. But beyond that I don't really have anything.

So nothing you're aware of regarding certain programs being taken or the demand for certain programs online declining at a faster rate than in the classroom?

No.

Okay, great. Thanks a lot.

Yes.

We'll move next to Peter Appert with Piper Jaffray.

Rob, you've already addressed this to some extent, but I'm wondering on the issue of flexible in cost structure in the context of decelerating enrollment. I was hoping you'd just give us more color in the context of a view that maybe enrollment growth is going to be more volatile on a going-forward basis, given macro and PR considerations. So the question is, are you proactively looking at ways to manage the costs more aggressively?

No. We're quite comfortable with the business investment profile of engaging in these costs and building the University. And we're much less concerned about the quarter to quarter impact on profitability. And so our view is that in a period of increased enrollment volatility we'll have increased volatility in earnings. That's just the nature of it. We're much more interested in what this University looks like when we build it out, and we don't really have a focus on a cost control to match demand. We're much more focused on our investment profile to build a first-rate university.

Okay. Fair enough. Then strictly in terms of enrollment counselor staffing, I'm assuming that the operating metrics must be changing a little bit in terms of conversion rates and needing to spend more time with students. So the question is, number one is that correct? And number two, does that suggest that perhaps you need to step up enrollment counselor hiring to just get to the level (inaudible -- multiple speakers) enrollment level --

Yes, we -- Peter, we don't have enrollment counselors. We have admissions officers. And we don't really think of it as a factor of production or process flow in that way. We're just not as tactical as maybe other people are. Ultimately what's going to drive having students who are successful is students who have found the University for the right reasons and have enrolled based on their own self motivation. And we're quite comfortable with -- we've got a staff of between two and five admissions officers per campus. And that has generally been enough to handle the demand of inquiries. I don't see us changing that going forward.

Okay. Fair enough. Thank you.

Thank you, Peter.

We'll move next now to Bob Wetenhall with RBC.

Good morning,.

Good morning, Bob.

I was curious. You said new student enrollment went negative 2%. And I just wanted to understand from a strategic perspective, if that continues to trend negative, how will you count act it? And do you think there might be a possibility that you guys start spending substantially more on marketing spend going forward? That's the first part of the question. And just in the general environment, do you feel from what you're seeing that there's intensified competition for qualified students, or do you feel like it's the same old as it's been in the past?

Let me take it in reverse order, because it's -- I can only remember the second one. I'll have to ask you to repeat first one.

Sure. No problem.

No, we don't see increased competition. We don't think of student flow as competition, frankly. I think what you were asking -- repeat the first part of the question, Bob?

You had mentioned that new student enrollment went negative 2% --

Oh, yes, I remember. Yes, yes, I got it. It was what strategically are we going to do to offset that. Nothing. We've said our student enrollment is variable. And it will be variable. And it can be variable over a relatively long period of time. I've always felt that our student population, our enrollment and its growth, will generally track the rate at which we make capital investments to expand the University. Because we've got 100 plus years of track record of how these campuses operate. And trying to counteract or offset or whatever term you want to use to meet some specified revenue target just means that you're dealing with students as factors of your own revenue production and not as students. And we just don't do that. So we're comfortable with the variability. We're comfortable with the volatility. And we hope that our shareholders are also.

On -- and in terms of looking at outcomes, retention did slit a lot. And I'm just curious, you previously stated on the record like, hey, we can't do any better on retention. Are you surprised by the slip? And is it a concern going forward? Or do you just think that's part of the natural volatility of the University?

I don't think all 400 basis points are part of the natural volatility. I think in some measure that's affected by the same environment and negative publicity that new students were. But I don't really know exactly how much that is. And that's obviously something that we'll spend a lot of time on. We'll focus much more seriously on that, frankly, because our issue there is just to make sure that there's not anything going on with regard to an existing student that has to do with the quality of the academics in our classroom. They're obviously less likely to be motivated by outside world, but they're not immune to it. And so it's an area of focus for us.

That's helpful. Thank you. And just one question. Could you just -- or maybe for Mark, if you could just highlight why the $34 million came in on the cash flow statement this quarter? Early?

Sure. Sure, Bob. As you know, the private lenders are existing the Title IV loan business. And we had a number of students who were still packaged from using the private lenders rather than directly from the government. So it was just clearing out the remaining loans that were under the -- were from private lenders. And the private lenders themselves had set a September 30 deadline to fund those loans. So that really explains the timing of that $34 million, which normally would have been received in the fourth quarter instead of the third.

Is that kind of the switch from self to federal direct?

Exactly.

Correct.

Got it, guys. Thanks very much.

Thank you, Bob.

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

Hi. Good morning.

Hey, Andrew.

Good morning. When I look at the EPS guidance for the fourth quarter, it suggests margins will be down year-over-year at the midpoint after margins were up so nicely in the third. Could you just give us a change of how that dynamic plays out in the fourth quarter? What's the drivers there?

Less revenue, Andrew. Same expenses, less revenue.

Okay. Thank you so much.

You bet.

Our next question comes from Brandon Dobell with William Blair & Company.

Not quite sure how to follow that one up, but I am a little put off here. Rob, let's say for whatever reason or for a number of reasons to get clarity on gainful employment in the first part of the year, and it comes out worse. Would you consider opening less than eight campuses? Is there something reason that you think that eight is the right number regardless of what the regulatory and policy environment looks like or are there things that you're concerned about that would say we need to hold back on any new locations?

No. I'm fairly certain, Andrew, assuming we get final regulatory approval, which I this in one of the states we're still waiting on, that we would do eight. I mean, the incremental capital is not that much. I mean, it's not immaterial. It's millions of dollars. But it's over the long run it is not enough that you would -- I would not do it. And eight felt like the right number because, well, in its simplest form these were in many cases commitments we already had to states and communities for the first half of the year. I mean, they basically -- we had already told them we were going to do it, and they were expecting it. So things getting worse in gainful employment is unlikely to change that.

All right. Fair enough. In past calls and past years when asked about competition your reply generally has been we don't consider what anybody else is doing. Does the regulatory and policy environment and everybody's comments that trying to migrate up the student quality curve, those kinds of things, does that change how you guys think about what you should look at relative to what other programs are doing, other institutions are doing? Do you feel you've got to change any messaging or act any differently based on what everybody thinks is now a smaller addressable market, because now everybody is going after the same student?

It doesn't make it a smaller addressable market. The market stays the same. What you're describing is there more players in that market and therefore that changes the dynamic. My view, Brandon, is that size of that market, the size of the demand for working adults who don't have a college degree and are capable of earning one is so enormous relative to the supply that the relative focus of other institutions just isn't going to move that needle that much. So no, I don't anticipate doing anything differently on that.

We don't ignore our competition. We certainly spend a lot of time, particularly on the academic side, focusing on what other universities do and trying to learn from that. But it just doesn't really change our marketing message that much. Really at all. It's immaterial in my judgment as to the likelihood of us getting the kinds of students that we want to get.

And final question. Given the persistent trends in the quarter, I wonder if you could comment on your I guess near-term, call it next two three-quarters, expectations for what that bad debt might look like? Is the economy still an issue? Did the persistent behavior change how you think about the capital involved with that debt for bad students?

Yes. If you had a sustained period of lower continuation rates and then ultimately higher dropouts because students were not completing the programs, then that could have a negative impact on bad debt. We certainly didn't see that this quarter. And -- I mean, we'll obviously manage it quite closely. But -- yes, theoretically what you're suggesting is an accurate outcome. I don't anticipate that would be the case. And our view is that, particularly as you focus on enrolling those students who are most likely to be success, your continuation rate can bounce around a little bit, but it's still at a very high rate. So I don't think it's going to have a meaningful impact on bad debt at this point.

Okay. Thanks a lot.

Thank you, Brandon. Our next question comes from Jerry Herman with Stifel Nicolaus.

Hi, guys. Good morning, everybody.

Hey, Jerry.

Rob, just wanted to explore the start numbers again if we can. Can you indicate if you guys spent the budget in the third quarter? And maybe any additional color on the channels, the productivity of the channels, and maybe some general commentary regarding inquiry volume and conversion rates?

We did spend our full budget. I think comments on productivity of channels are relatively nonproductive. I just -- we're just not as tactical as that, Jerry, and other people might be better at it, but the idea that a television -- a student who sees a television ad is more or less likely than one who hears a radio ad or finds you on the Internet and that's going to have a meaningful impact on the kinds of students that we want, who will enroll in Strayer with the requisite determination and commitment to complete, I just never for the last ten years felt like that was a really valid area to spend a lot of time on.

What we know from talking to our students, and particularly those of our students who are successful and they graduate, is that however they first learned about the University, that their decision to enroll is based almost always on a conversation and communication they have with an existing student, an alumnus or faculty member, or employer. So the rest of that stuff is just brand building. That's all it's there for. As I say, other people may be much more successful and competent at it than we are, but our relative channels, we don't even manage essentially. We let our local media -- what do you call those guys, Karl?

Regional marketing directors.

Regional marketing managers or directors make those decisions market by market. And we're happy with the results.

So you guys are pretty confident that something external really went on here in this quarter? And the reason I ask that question is, I don't recall you guys ever positioning your model in volume for the following year above what the fall quarter was, just because it's such an important piece of the annuity for the following year. With the conversion rates already near high-end, doesn't the model have to assume that market comes back in some way?

Well, we position -- we're not positioning the model as an enrollment model, Jerry. What we're telling you is we're going to spend to our investments in both expanding the University through new campuses and our academic initiatives such that, if we have 13% enrollment growth, we'll have stable margins. If we have less than that, we'll have margin compression, and if we have more than that, we'll have margin expansion. It's really just a mathematical formula. The -- and I just -- I can't tell you -- the market coming back or not coming back, it really didn't go into that thinking at all. And I don't know frankly what that outcome will be.

I do think that for the purposes of garnering either political support for an objective that politicians wanted or political support to enhance the likelihood that regulation would be approved or individual who had their own incentive financially through their own share positions, there was an awful lot of questioning starting in July as to the efficacy of investor-owned education. At the time I thought it was unfortunate and a problem. And I submitted an op-ed piece to the Washington Post that was published. We talked about it publicly that if there are shortcomings with regard to educational institutions -- and there certainly are -- it's not a factor of their source of capital. But that wasn't really the way the political bodies have looked at this over the last three or four months, and that will have an impact.

But I don't believe it's the kind of thing that is permanent, and I also don't think it's the kind of thing that you want to engage just too intensively in, because I don't want it to distract us from the core mission that over the long-term could hurt our value. And that is our focus on academic outcomes. And so that's really where all that shakes out from my standpoint.

Great. Thanks, guys. I appreciate the insights.

Yeah. Thank you, Jerry.

And we'll take our final question from Kelly Flynn with Credit Suisse.

Thanks. A followup to the last one, actually. Just on this concept of the bad press, if you will, being kind of a temporary, as you say, dispositive driver, are you seeing any evidence, I guess as you've been observing business trends or just talking to your folks over the last weeks and few months, that it may be turning around? And I know you're term-based so you might not know, but is there any intelligence that you're gleaning on that front?

Yes. We don't really -- we are term-based so we wouldn't know this early. And we don't really comment on enrollment trends intraquarter. And for me to say that I believe it to be temporary, I don't know how -- what the periodicity of that temporary is. I think once there is no longer an incentive because either you have a regulation which is finalized or alternatively you have a different political structure in the congress -- or you have the same one -- that will settle itself out over the next three or four months, I believe. And then we'll see.

But it's hard for me to look at the last four months, Kelly, and look at the consistency of results and the abruptness of the impact and not draw conclusion that that's an awful lot of questioning of the validity of a certain educational model. And these aren't impulse purchases. Deciding to go back to school, particularly as an adult, is a big, big decision. So in my judgment that's really what's going on, but we'll see.

Okay. Thanks a lot.

Thank you, Kelly.

And that concludes our question-and-answer session. Now I would like to turn the call back over to Mr. Silberman for any additional or closing remarks.

Thank you, Brendan. And thanks all of you for participating. And we look forward to talking to you again next quarter. Thank you.

That does conclude today's call. Thank you all for your participation.