Strategic Education Inc (STRA) 2010 Q4 法說會逐字稿

Good morning everyone, and welcome to Strayer Education, Inc.'s fourth quarter and full year 2010 earnings results conference call. This call is being recorded. Following today's call, we will offer the opportunity for questions and answers. At this time, for opening remarks and introductions, I would like to turn the call over to Strayer Education 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 Silberman, Chairman and Chief Executive Officer for Strayer Education, Karl McDonnell, President and Chief Operating Officer, and Mark Brown, Executive Vice President and Chief Financial Officer. For those of you that wish to listen to the conference via the Internet, please go to StrayerEducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in realtime, a replay will be available beginning today at 1.00 PM Eastern through Friday February 25. The replay is available at (800) 642-1687, conference ID 38456711. Following Strayer 's remarks, we will open the call for questions and answers.

I would like to remind everyone 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. 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 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 filings with the Securities and Exchange Commission. Copies of the filings and the full press these 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 may be new to Strayer. I'll then ask Mark to report on the detailed financial results for the fourth quarter and the full year of 2010. We already covered our enrollment results for the winter academic term on the call we had in January, so I'll just ask Karl to provide a brief update on the operating results. Finally, I'll provide an update on our growth strategy and the Company's earnings outlook for Q1 2011.

Strayer Education is an education service company that's primary asset is Strayer University, a 57,000-student, 87-campus, postsecondary education institution which offers master's, bachelor's and associate's degrees, in business administration, accounting, computer science, public administration, and education. Unlike traditional universities, Strayer 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 federal Title IV loans issued to our students. Our expenses at Strayer include the cost of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs.We serve students in 18 states through our physical campuses, as well as in all 50 states and over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Commission on Higher Education.Now, Mark, would you run them through the financials?

Sure.Revenues for the three months ended December 31, 2010 increased 17% to $172 million, compared to $147.2 million for the same period in 2009, due to increased enrollment and a 5% tuition increase, which commenced in January of 2010.Income from operations was $58.9 million, compared to $52.4 million for the same period in '09, an increase of 12%. Operating-income margin was 34.3%, compared to 35.6% in 2009.

Net income was $35.9 million, compared to $31.9 million for the same period in '09, an increase of 13%. Diluted earnings per share was $2.73, compared to $2.32 for the same period in '09, an increase of 18%. Diluted weighted average shares outstanding decreased to $13.156 million from $13.751 million for the same period in '09.

Revenues for the year ended December 31, 2010 increased 24% to $636.7 million, compared to $512 million for the prior year due to increased enrollment and a 5% tuition increase effective for 2010. Income from operations was $215.8 million, compared to $172.4 million for the same period in '09, an increase of 25%. Operating-income margin was 33.9%, compared to 33.7% in 2009.

Net income was $131.3 million, compared to $105.1 million in '09, an increase of 25%. Diluted earnings per share was $9.70, compared to $7.60 in '09, an increase of 28%. Diluted weighted average shares outstanding decreased to $13.535 million from $13.825 million in 2009.

At December 31, 2010, the Company had cash, cash equivalents, and marketable securities of $76.5 million, and no debt. The Company generated $162.8 million in cash from operating activities in 2010 compared to $141.8 million in 2009. The Company's cash flow from operations for the year ended December 31, 2009 was favorably affected by the timing of the tax benefit related to the vesting of restricted stock in the fourth quarter of 2008.

Capital expenditures in 2010 were $46 million, compared to $30.4 million in 2009. During the fourth quarter of 2010, the Company invested $42.3 million to repurchase approximately 296,000 shares of stock at an average price of $143 per share as part of a previously announced stock repurchase authorization. During the year ended December 31, 2010, the Company invested $115.5 million to repurchase approximately 687,000 shares of common stock at an average price of $168 per share. At December 31, 2010, the Company's remaining share-repurchase authorization was $107.7 million. The Company announced today that the Company's Board of Directors amended the share-purchase program to authorize the repurchase of up to an additional $100 million in value of the Company's common stock in 2011.

During the year ended December 31, 2010, the company paid regular quarterly dividends totaling $44.5 million. For the fourth quarter 2010, bad-debt expense as a percentage of revenues was 4.2%, compared to 4.3% for the same period in 2009. Days' sales outstanding, adjusted to exclude tuition receivables related to future quarters, was 13 days at the end the fourth quarter of 2010, compared to 14 days at the end of the fourth quarter of 2009. Rob?

Thanks, Mark. Karl, you want to just hit the highlights that we haven't covered already on operations?

Sure.Our final winter-term enrollment results were essentially unchanged from our announcement in January. Total enrollment increased 4%, our new-student enrollment decreased 20%, and continuing-student enrollment grew 10%. Our continuation rate declined roughly 100 basis points in the quarter.Enrollment at mature campuses decreased 3%, increased 61% at our new campuses, and our global online students increased 10%. Enrollments from corporate and institutional alliances increased 15%, and we added five new relationships, including relationships with Kroger and American Express.

During the quarter, we successfully opened three new campuses, one in Cincinnati, which is our second in the market, one in Dayton, Ohio, which is a new market, and one in Milwaukee, Wisconsin, which is both a new state and a new market. Today we also announced that we plan to open two new campuses for the spring academic term, including one in Indianapolis, which, again, is a new state and a new market, and another campus in Dallas, which represents our third campus in that market. In terms of student mix, approximately 70% of our students are enrolled in undergraduate degree programs, with business and accounting representing roughly two-thirds of that population.And graduate programs continue to comprise one-third of our overall student mix. Rob?

Thanks, Karl.Just going back to financials for a second, a couple of amplifying comments from my perspective. For the fourth quarter, both revenue and expenses were just about right on our forecast for the quarter. As Mark said, bad-debt expense at 4.2% was down slightly from the prior year.That led us to be slightly better than our operating margin forecast for the quarter. I think, Mark, we had said it was going to be down 150 to 200 basis points, and it was actually down 140.That's basically made up of the slightly better bad-debt performance.

Our EPS of $2.73 was $0.08 better than the midpoint of our forecast, but virtually all of that positive variance was the result of the accretive effect of our share repurchases during the quarter. Couple of key points on the full-year financial results.First, on the income statement, at this point in the year, Mark and I always like to go back and look at the overall income and cash-flow statements and just see how all the different levers are moving.You know, are they moving in concert?So for 2010, 19% enrollment growth led to 24% revenue growth, 20 basis points of margin expansion, which was slightly better than we would have forecast, and $9.70 per share earnings, up 25% from the prior year. So, on the income statement, the relationship between the enrollment growth, the revenue growth, the operating margin, and the EPS during the year were all consistent with or slightly better than the financial model that Mark and I had shared with you all back in October of 2009.

Second, on cash flow, again, as Mark mentioned, owners' distributable cash was up only slightly for the year, as compared to net income, which was up quite a bit.And that is based on the fact that we received a large one-time tax benefit in 2009 from stock -based compensation. If you normalize for that, the growth in operating cash flow is relatively consistent with the net income. And we had slightly higher-than-normal CapEx in 2010.

During the year, we generated $163 million in cash from operations.That is really a key metric that we look at here.And we received approximately $3 million in cash proceeds and tax benefits from stock-based compensation transactions during the year.Again, at the largest picture, we used that $166 million plus $64 million of cash that was on our balance sheet at the beginning of the year as follows.

We invested $46 million in CapEx to maintain and grow the university. We invested $115 million in the repurchase of our common shares, as Mark said, at an average price of about $168.And we returned $45 million to our owners in dividends, or roughly $3.25 per share during the year.

We continued in 2010 to be a pretty efficient generator of cash.But what I like to do at the end of the year is make sure that all those levers are moving in harmony, that there's not something going on in the model that's different from what we expected.In this case, that was certainly the case. They were in harmony.

Turning to an update on the growth strategy, many of you will remember that our strategy is based on five objectives. First is to maintain involvement in the Company's mature markets. Second, invest our human and financial capital in opening new campuses, particularly into new states and markets. Third, invest in and build our online curricula. Fourth, increase our corporate and institutional alliances.And the final objective is to effectively redeploy our owners' capital.

Karl already reported, really, on the first four objectives, so I don't think I need to add anything there.On the capital redeployment, we did announce this morning our regular quarterly dividend of $1 per share and also announced that we had repurchased almost 300,000 shares in the -- of our common stock in the fourth quarter. On the business outlook for the first quarter of 2010, based on the university's 4% enrollment growth for the winter term, combined with the expenses associated with the opening of new campuses, and the other investments we have in expanding and improving the university, we expect EPS in the quarter to be in the $2.65 to $2.67 range, and roughly 400 basis points of operating-margin compression during the quarter. And with that operator, we'd be pleased to answer any questions.

Thank you.

(Operator Instructions)

And our first question comes from Andrew Steineman with JPMorgan.

Hello, there. In the first quarter, the operating margin depression, could you go over the drivers to that?And could you also mention if there was a tuition increase January of this year?

Yes, Andrew, there was a tuition increase January 1, roughly 5%. The drivers for the most part are based on lower revenue. We have, with only 4% enrollment growth, 5% tuition increase, a lower revenue growth than we have in the past, we do have increased expenses associated with both the new campuses and the -- just a number of things that we do across the university, hiring faculty and things of that nature. And so, in thinking about the various expense categories, similar to what we had in the fourth quarter with lower enrollment, lower revenue, you're going to see a lot of that margin compression in the instructional and education line.You just have less students per class. We're not canceling very many classes and we just run them with fewer students. And then the other margin compression is shared pretty evenly across both general administrative and marketing and admissions line.

Right.Is there any stepped up spending on branding or anything like that?

No, it's pretty consistent with our normal pattern.

Okay.Thank you very much.

Thank you, Andrew

Our next question comes from Jeff Silber with BMO Capital Markets.

Thanks so much.On your last call, you'd given us different scenarios for the 2011 business outlook.I just wanted to make sure nothing's changed from that call.

Nothing at all.

Okay, great.Just drilling down a little bit into some of the enrollment numbers, and I asked this question last quarter, but I'm going to ask it again. I know your students have an option where they take class, whether it's in the classroom or online.But if you look at your mature campuses, we seem to be seeing a steeper decline year-over-year in your online students than your classroom students. Is there anything going on there that we should be aware of?

Well, one thing to bear in mind is, they're not separate students. There are choices that the student makes in that quarter. For instance, over a multi-year attendance at the university, the same student who's enrolled in a mature campus one quarter would be counted as a online student at that campus.And the next quarter, they decide to take classes in the classroom and would be counted as a classroom student. We sort of think about it similar to how you'd think about your bank. If you are a customer of the bank and you use your ATM or use the bank branch to access the bank, you haven't really changed your interaction with the bank, you have just changed the way you access it at that point in time.

We do have some students who live near a campus and are enrolled at that campus and are serviced by the campus, and take all of their classes for the entire career online. Not very many of those, but we have some. So, I don't get too granular with regard to this data. We provide it to you to get a sense of asset utilization.

I'm not sure that it's definitional in terms of the type of student that we attract or what that ongoing profile's going to look like, with the possible exception that I do think that there's more stickiness, there's more identification, more cohesion for a student who is in the classroom. And those students who access you completely online, you just have a little less interaction with, so in a period of uncertainty or a period of some questioning, that might be a less robust relationship. But I wouldn't read too much into that because, as I said, those numbers can bounce around quarter to quarter, and it's really access choice made by that student for that particular quarter.

All right, great.And just a couple quick numbers questions for Mar,What should we be modeling for 2011 for capital spending and tax rate.

For capital spending, we think it'll be in the range of 5% to 5.5% of revenue, and for tax rate, we're modeling 39.5%.

All right, great.Thanks so much.

Sure.

Our next question comes from the line of Bob Craig with Stifel Nicolaus.

Rob, I know it's not your custom, but given the rapid changes we're seeing in the marketplace, I was wondering if you might give us any read on inquiry levels?What we're trying to get at, really, is the environment for attracting students getting any worse?

We don't comment on activity during the quarter, Bob. The inquiry flow in the fourth quarter for the winter term was actually pretty healthy. But a lower percentage of them -- lower percentage of those prospective students decided to enroll for the winter term. And we'll let you know with regard to the spring enrollment once we have all that data.

Okay.Now you've also made this pretty clear on prior calls, but I thought I'd ask it again.Any change in thinking regarding making any adjustments to the cost structure relative to what's currently happening demand-wise?And I just liken you guys a bit to Capella, and Capella indicated some cuts the other day without any cuts to student-interfacing areas. Anything being contemplated there?

We're comfortable with the cost necessary to provide a great education, and we're comfortable with the variability in enrollment.And we like this business model.

Okay. Mark, a question for you. What were the new school losses in 2010?And what should they be in 2011, given the lower campus openings?

We haven't seen too much variability. Are you talking about a per-campus basis?

He's talking about the operating-income impact.

Trying to gauge the swing factor, really.

It's about $1 million a year per campus. And we have less of those in 2011.There's eight of them, so it's about $8 million to $10 million.

Okay. All right.Last one for me, and then I'll turn it over.Any more or less effort being spent here on program development? I think I noticed where you have in the spring several new programs coming on, couple in the master's area.

Yes.There isn't any real difference to that. I mean we're constantly looking at our programs.We have periodic reviews of our academic curricula. We're not a big developer of brand-new programs.For the most part, we're tweak existing programs to be both academically sound and as relevant as possibleSo no, there's nothing out of the ordinary there.

Great.Thanks, Rob.Turn it over.

Yes, thanks, Bob.

Our next question comes from Peter Appert with Piper Jaffray.

Thanks. Rob or Mark, can you remind me why the revenue per student number looks so robust in the second half of 2010?Is there any reason to think that it's something that would be sustainable in 2011?

I don't think it's any different in the second half than it was in the first half. It goes -- it's increasing roughly by the tuition.

Yes, maybe I'm doing my calculation wrong.But for the fourth quarter, for example, right, you're enrollments are up 12% going into the quarter.You're reporting 16%, 17% growth. So there's a little bit of an increment, I guess.

The increment is the 5% tuition increase, but that would have been the case with regard to each of the four quarters -- the three quarters earlier in the year.

Yes.It's actually slightly more than that, but I guess it's not enough to call attention to it. How about the trends in retention or persistence?Any color on that, and any reason to think that could change?

It was down slightly in enrollment for the winter.And it's something that we -- actually, much more than the new-student enrollment, it's something we focus on quite intensely. We have a number of things that go on with regard to making sure that we have the right students enrolled in the classroom.And then our academic offerings are both robust and productive to the students, that they stay enrolled.

We had said for a long time, Peter, that we were at a theoretical max. Going back a couple of years. Virtually, when you adjust for graduations and academic failure, it's almost 100%. So, that down 100 basis points was not of particular concern to me. If, going into the spring and summer, it was continually down by a larger number, then that would get our attention much quicker than the new-student enrollment.

Okay, that's great.Thanks.

Thank you, Peter.

Our next question comes from Sara Gubins with Bank of America.

Just first-quarter guidance as to many further share repurchases?

No. We never comment on or assume share repurchases as we provide guidance.

Okay.And then can you give us the ending share count at the end of the year?

Mark?Do you got that?

Yes, it was 13,316,822 shares.

Okay, thank you. Rob, before you do -- in previous calls, you talked about negative publicity potentially having an impact on a student's decision to enroll. I'm wondering if you have any sense of whether or not that's subsiding at this point?

Yes, Sara, I actually -- that's a comment that I think has been taken significantly out of context, and I actually appreciate the opportunity to clarify that. I think the most important thing to focus on is that the decision to enroll in a university for a working adult is a big, big decision to make. We've always felt it's not the sort of decision that's really meaningfully affected for the long-term by the level of marketing or the ability to convince the students. It's a decision that, done properly, really has to be made by the student. They have to convince themselves.And there's a lot of things that keep them from doing that.

I was asked the question on the last call as to what the potential sources were of those decisions being made, and I made the comment that there's been an awful lot of publicity about investor-funded education. That was characterized in a lot of accounts, and somehow we were blaming our enrollment on that. The thing I found most disturbing about that is, we're not blaming anything. We're happy for the enrollment that we have, and we accept the variability.

If it's not -- there's a lot of things that can affect the reason the student enrolls.And there's going to be wide variations. Over the long term, I want to emphasize that we are comfortable with that. There's been less publicity in the last couple of months, but partly that's just the holidays.For our purposes, the most important thing is making sure that we are doing a great job in the classroom and that we're defining the university in a way which is appropriate for the incoming students so that they know what it is they are signing up to and how challenging that process is. But there's really not anything different about that than it has been for the years that we've involved here.

Okay.Thank you.

Thank you, Sara.

Our next question comes from the line of Corey Greendale with First Analysis.

First I wanted to ask about, and I know you're talked already, Rob, about the margins and what drove that, but I was a little surprised to see that the marketing admissions expense was still down as a percent of revenue given the decelerating enrollment trends, and just what seemed liked escalating media rates across the board.So could you just provide any commentary on how it is that, that continues to decrease as a percent of revenue?

Yes, that's a good call, Corey.Mark and I had the same reaction, originally. You have to understand that we look at a general ledger with much more discrete line items and we aggregate them at the end of the quarter in that format, so every once in a while we do see something that looks out of the ordinary as well. It has to do with two things.One is our media costs have not gone up, but just on the basis of lower enrollment, we would have expected that line to have a little more pressure. What it has to do with is, is that there's a fair amount of variable costs associated with new students who are enrolled that show up in that marketing admissions line. A lot of material, catalogs, few books, things of that nature that we provide to new students and that we run through that line, so when there's a precipitous drop in new-student enrollment, there's costs that we don't incur because we don't have to send that material.And I think that is what caused that outcome.

Okay, so that would suggest if new-student trends persist, you could continue to get leverage on that line item.

I don't know.We hope the new-student trends don't exist, so I hadn't really thought about it that way, Corey. But we will have less dollars associated with providing material about the university to a new student who enrolls if we have less new students.That's correct.

Okay.And I had a question for Karl. I think you said that enrollment from corporate institutional partners was up 15%. Do you happen to have the number for new-student and continuing-student enrollment for that population?

No, Corey.We just have it in our total enrollment results, which, as you said, was 15% up.

Okay.Could you comment on whether new-student enrollment was positive in that category?

We don't break it out, whether it's new or continuing, and I wouldn't want to comment on it without the information anyway.

Okay.And then, just --

Corey, I think it's fair to assume that being down as much as we were on new students, I doubt as a category that corporate institutional customers were up. I'm sure they were down less than overall, because in general, again, the adhesion, the stickiness associated with having an influencer like an employer suggests that Strayer University is a place that an employee should want to go, is a helpful factor.

Okay. One last quick one.I know, I'm trying to triangulate on the question that Bob Craig was asking earlier. I know you don't comment on future trends, but could you comment on trends as Q4 progressed in terms of student inquiries, people indicating that they are interested in enrolling.Did that improve, deteriorate, or was it sideways as Q4 progressed?

I think on the call we had in January, I was asked that question, and I said that November was really bad and December got better. Okay.I appreciate the repetition then. Thanks, Rob. Yes, you bet, Corey.

Our next comes from the line of Bob Wetenhall with RBC Capital Markets.

Stock price is a lot lower than it was last year, I think from a high of $260. Any thoughts to accelerating the buyback program?

We don't discuss share repurchases until after they're done. As Mark pointed out, the board authorized an additional 100 million of repurchases at the last meeting.

I'm not really curious about next quarter.I'm just saying, as an operating strategy, if the confidence behind the story and the robustness of the business model. I'm just seeing if you think it makes sense to allocate more cash to returning cash to shareholders if the growth is slowing down.

Our view has always been that we should return to the cash to shareholders that we can't use within the business.We've done it that way for 10 years now. We have a dividend policy, and we have a share repurchase authorization, and the board gives Mark and I the authority to use that share repurchase authorization based on some fairly strict guidelines with regard to what we think intrinsic value. So, I would say that the strategy of returning capital to owners is consistent with what it's been for the last nine years.

Got it. Understood.And what would cause you to either increase or decrease the number of campuses that you would open this year?

I don't think anything will cause us to change it for this year, because there's some lead time associated with it, and we've already announced the aid for 2011. For 2012, what we normally have done is limited that rate of campus expansion only to the depth of our human capital, and basically our talent bench. That's how we govern for the risk of academic performance is by having great academicians who go out and open up these new campuses. In 2011, for the first time, we had another governing factor, and that is there was an enormous amount of uncertainty with regard to the regulatory structure. That uncertainly hasn't clarified itself yet, although I'm hopeful it will over the next couple of months. Then we make the decision with regard to 2012, which would happen in the third quarter of 2011, we'll look at both our human talent pool and the outside world inside then.

Got it.And just to your point about the regulatory environment being uncertain, some of your peers have said that they've modified their programs to comply with gainful employment, the drop version that was put out in June last year. Are you guys thinking about changing the program format in any way?

No. We've reviewed the draft version of the rules, and we've said several times that based on what we understand, we believe we would comply. So, until we actually see a final set of rules, we don't have any plans to change either our academic programs or how we offer them.

Makes sense, Rob.Thanks very much.

Thank you.

Our next question comes from the line of Ariel Sokol with UBS.

Thanks for the conference call.

No problem, Ariel.

Just a couple of questions.Going back, I think it was Jeff that asked about online versus (inaudible) students, just to complete the question.I don't think he was asking about the global online students, where there's a deceleration of growth.That doesn't necessarily fit into the context of what you were describing about. I was hoping that you could share your thoughts on the deceleration of growth over the last two quarters.

Are you asking about our global online students?

Yes, global online.

There's a deceleration of growth across the whole university, and it's actually been less in global online. But that's essentially what's happened. Less of the students in the last six months who have inquired -- potential students who have inquired about enrolling -- have decided to enroll. So I don't think it's specific with regard to the global online.

In general, we think the global online student is a harder student to serve, both academically and from a service perspective, which is why we're building the campus network.And yet the provision of online curricula provides enormous advantage, particularly to a working-adult student. So we've always had a model that's tried to capture the best of both platforms and leave it up to the student -- those students who live near campus -- to decide how they want to access and take the opportunity through the investment that we've made in online curricula for those students who contact us who don't live anywhere near one of our campuses.

Thanks a lot.Then, the next question, and I apologize, I don't know if you release this information before regarding the criminal justice programs. Students who are enrolled in those programs, I just want a comparison, what does that say about a year ago?

You were breaking up were breaking up, there, Ariel.I think you were asking about criminal justice. We opened that three years ago? Mark? Karl?

It was about two years ago.

Two years.It grew quite quickly in the first year.It went from 0% to 3% or 4% of our student population. I think it's pretty consistent with that now. I don't think there was a big move in that one way or the other over the last two quarters.

Thank you.

You bet.

Our next question comes from the line of Gary Bisbee with Barclays Capital.

I guess my first question.I wondered if you could give a little more color on the selling and promotion spend outlook. I understand the point about there's some materials cost that it starts -- [remaining] week would stay lower, come back, would come back.I think the sense here was you're sticking with your budget for the year no matter what new enrollment does. I guess, can you give a sense of what you've budgeted for?So would mid-teens growth in that expense line be in line with the budget, or would we expect some further deceleration?

I don't have that in front of me, but our overall business model was that if we had 13% enrollment growth, we'd have stable margins.It's roughly a 17%, 18% increase in expenses. My guess is that's roughly consistent on our marketing admissions line. It might be slightly less than that because we're opening only eight campuses. So the percent of new campuses -- a lot of what drives that line, Gary -- is the number of new campuses you have in a year because both the new markets that you're in require some advertising to build the brand, plus you're hiring a couple of admissions officers per campus.And that goes into that as well, so your rate of growth of new campuses will have a pretty big impact on that. But roughly mid-teens, I would say yes, that sounds about right.

Okay.

Gary, one other thing I would say -- I was impressed with the way that Apollo group broke out those lines in more detail.And I think we'll probably in 2011, breaking out what's essentially an advertising cost, which in our case, is 8%, 9% of our revenue. Maybe 10%, I don't remember exactly. It kind of varies.Depending on how many new markets you have, and then the salary cost of admission staff and some of these fulfillment costs and things like that, I think we'd be able to provide a little more clarity. We didn't do it on this one because we wanted to keep the year consistent so when we start the new year, Mark and I are going to be talking with our audit committee about breaking it out in more detail so you'll have that.

That would be great. A follow-on question.I was looking back at some of the commentary on your call in January, and Rob, you stated your belief that the industry is not overly competitive given a large addressable market.But I think we can't ignore the fact that basically every for-profit competitor who targets working adults, either online or campus, is really zeroing in on what they've called the quality type of student, community-college graduate doing bachelor-degree completion and graduate, and that's obviously the two areas that you have focus. So how do you think about -- if that's had an impact yet, what impact that could have?And at what point would you decide to really make some changes as to how you think about marketing strategy or whatnot, to deal with that changing environment?

Gary, we're never going to be an aggressive marketer. It's not in our strategy. I don't think it's consistent with your academic mission.I don't think culturally, it makes sense. I believe that there's a very large addressable market. I don't believe that two or three institutions that you all happen to cover is going to make a big dent on that given the size of the addressable market and the lack of capacity.And what I really truly believe is our larger competitive impact, which is the large body of traditional and not-for-profit universities that exist in all the markets that we try to operate.

So I'm afraid the answer to your question is never. We think that this model works. We think it works well.We're comfortable with the variability. We've got a very long-term view, and moving from the roughly 25% of the country that we currently operate in to the 100% of the country that we want to operate in for us is a really attractive proposition.

Okay. Thanks for the call.

Thank you, Gary.

Our next question comes from the line of Amy Junker with Robert W. Baird.

Thank you. Just a quick question on bed debt. I'm wondering your expectations for 2011 and how you expect that trend.Do you think you're going to be negatively impacted by the change and return to Title IV rules that are occurring?

No. I don't think we'll be negatively impacted by that.

We already handle it that way.

Yes.Our expectation's are to try to look for continuous improvements there. I'm not sure we're going to see dramatic movements.We're pleased with the progress we've made so far. So, that's kind of how we are thinking about it.

Okay great.Just a quick one on share repurchases. Have you or can you disclose whether you have done any share repurchases quarter to date?

We don't comment on quarter to date.

Okay.And one follow-up question on the business plan.I just wanted to follow up on a question that the business plan you outlined did not assume any share repurchases.Is that right, first of all? Then second, given the repurchases you did in the fourth quarter, is it safe to assume that, that EPS range will improve, given the amount of share purchases you've done?

Both of those are correct.

Okay, great.Thank you, guys.

Well, the share repurchases we did in the fourth quarter we did take into account in our January guidance that we'd given for the first quarter. So, one was correct, Amy, and the second one was not.

I got it. Yes, absolutely. Thank you.

Our next question comes from Trace Urdan with Signal Hill.

It looked like the pace of leverage at the educational services line slowed some. The flow-through margin on incremental revenue is about 57%.I had to go all the way to March of '03 to find a comparable number that's even below 65% of that line. Can you help me understand what's going on there?

I missed the first part of your question, Trace.I don't think you were connected.

I'm sorry.

But I think I can interpolate. Basically, our instructional education line is made up of the costs associated with running the campuses, running online, providing the academics. Probably the biggest impact on that is your student-to faculty ratio.And in a quarter in which you have lower student enrollment than you've had in the past, that student-to faculty ratio is going to go down.We tend not to cancel that many classes because we think it's inconvenient for the students that have signed up, so you're going to see margin pressure on that line. We would expect that, that would be even greater, frankly, in the first quarter, because we have a more severe drop-off in enrollment. If enrollment grows, you get positive leverage on that line because you're filling up those classrooms, but it's not infinite. We won't fill the classroom more than a fixed amount, then you end up having to put more -- as faculty comes on board, we base load our academic staff with our full-time faculty and then the increment's covered with adjuncts.

So just so I understand, by the second quarter, you should have been able to readjust to the enrollment level that you're looking at?Is that fair? There's a catch-up factor, here, right?

On a quarter-to-quarter basis we will, because our expectations for the next quarter's enrollment are somewhat affected by what we have in the current quarters, particularly with the continuing students. We don't tend to look at these line items until the end of the quarter in the breakdown that you have them.But just thinking rationally, what's going to happen is we've set up a class structure for our spring term, which was based on the students we have in the winter term plus whatever new students we may enroll.There may very well be less of an impact because we'll have a few less adjuncts, and in that circumstance, run a few less classes.But not that much.

To be honest, Trace, there's a certain service component to having enough classes scheduled regardless of your actual student population, because the students that you do have need those classes. It's the reason why with a new campus you have such a negative impact on your operating margins, because you are running a bunch of classes that might have two or three students in them as the campus fills up. So, I would not see that -- if we continue to have lower than previous enrollment growth, there will be pressure on the line.

Okay.Thank you.

You bet.

Our next question comes from Arvind Bhatia with Sterne Agee.

Thanks for taking my question.

Not at all.

The question that relates to the new campus trend, some of the ones you have opened last year, I'm just wondering if you can maybe speak to the ramp and enrollment trends there. Are they similar to your notional model for new campuses, or have they been affected somewhat by the market environment and the conditions of the other parts of the university? And my second question is, I know you're not giving guidance on the 2012 campus openings, but is it a fair assumption that you will try to populate these campuses around existing markets and get more leverage?Or did you generally have an idea if these are going to be newer markets, like Indianapolis and Milwaukee or some other new markets?

Arvind, I have to admit that question was long enough and complicated enough that I forgot the first part why you're asking the second part. Could you say that again?

The first part is really the new campus trends and how they performed.

Yes, how they performed. Yes.The new campuses in the last year have been consistent or slightly better than our notional model. What should be apparent in looking at these numbers, is that, for a long period of time, several years, our new campus openings have been significantly above that notional model. So I would say the class of 2010 -- the cohort of 2010 -- openings was -- performed maybe a little bit less strong than some of the campuses that we opened in '06, '07, '08, but still well above our notional investment model.And nothing about their performance would keep us from wanting to put more financial and human capital to work into opening new campuses if we had that human capital and we're comfortable with the regulatory outlook. Now that I've answered the first part, I forgot the second part. What was that?

A second question was really which markets? Even if you're not going to give us a number --

We always look to contiguous markets. We think that that's -- in expanding the university, it's the way that you incur the least amount of risk for academic quality if we can make the peer review and oversight process as simple as possible logistically. Between brand-new contiguous markets and adding existing markets, that's always a trade-off we make each year and frankly, we try to do a little bit of both. It has nothing to do with margin impact.It really has to do with do we have unmet demand in an existing market?

Like Karl mentioned, Dallas has been a great market for us, and we have students that are driving a very long way to get to one of our Dallas campuses.On a pure service standpoint, it makes sense to open a third campus that's closer to where they live, and yet we've got new markets that we're eager to get into -- Milwaukee, we mentioned Indianapolis. It's kind of a combination of the two.The first and most important decision is how many campuses are we prepared to do, then we figure out where to put them.

My last question, guys, the 2011 business model, the range of enrolment growth that you've given, negative 5% I think to 13% -- as you move forward, is there a plan to maybe narrow that range down to get visibility for the year?Or should we expect that to stay as sort of the guidance range for the year?

First off, Arvind, let me make this as clear as I can. That's not guidance. That gives you the mathematical levers to understand our model. We will give you each quarter exactly what our enrollment is, and then for that quarter, you'll be able to see what the impact of enrollment is on earnings. We never try and guess what our enrollment's going to be. We're building this university for the long-term, and we're happy with the variability that comes with enrollment. But one thing you'll be able to do as a financial analyst is every time we announce what our enrollment is, you should have one quarter's more visibility into what that year-end business model's going to look like.And if we announce enrollment which is sort of in between those numbers, we've given you the factors that allow you to interpolate it as well.

Great.Thank you, guys.

Thank you.

Our next question comes from Brandon Dobell with William Blair.

Hi guys good morning.

Good morning, Brandon. We saw you earlier in the queue.You're always showing up last.

Yes, I've got these fat fingers, and I keep hitting star two and star five.I just can't manage to make it work, I guess. A question on new-campus strategy. With the openings in Indianapolis and Milwaukee, how much of where you guys are choosing to open schools is being driven by where you see the inquiries for global online coming from? Or is it just not a factor?

It's not that much of a factor. Again, and to answer the last question.We look at where we currently operate, and with the exception of Salt Lake City, which we've talked about in the past, we incrementally move out to the nearest geography because that gives us the best opportunity to keep track of the academic oversight and make sure we're providing the classroom experience that we want to. We were in the East Coast, we were in the border states, Kentucky , Tennessee, so moving up into the industrial midwest was the next place to go, as well as moving towards the southwest with regard to Arkansas, Louisiana, Texas. So, we'll be looking to get new markets and new states approved on the literal of where we are now, and moving into those areas.Again, with the one exception was with Salt Lake City was we had so much investment there with our global online center and the corporate alliance partner that we had that it made sense to open a campus

Guys, more about -- more of a what-if kind of question --If you saw a significant uptick in interest, either enrolled students or inquiries from an area where you just didn't have any presence at all, maybe it's going to be the Pacific northwest, let's say, would that change how you thought about that as an opportunity because it would be jumping pretty far, or do you think it's just too far way to make that much of a difference? That it's just logistically too much of a challenge?

It would not change our strategy. There's a lot of inquiries and interest in all the places that we look at, so markets that we're not in don't seem to be that much difference. Certainly not a positive difference. But the really important part is lowering the risk of academic execution, and so we try and keep things close to home. We try and keep the interior lines of communication shorter.

Okay, and another kind of corporate tuition question.It doesn't appear that there's a whole lot of discounting going from you guys, and it doesn't appear that the corporate relationships are at a tuition level it is all that different from your regular listed tuition level.But I just want to make sure there's nothing else going on behind the scenes or on the surface that would distinguish how the corporate channel partners -- those students -- are coming in, or if you're seeing a need for whatever reason to discount more than you have in the past on particular programs?

No, there's not, Brandon. We do have modest discounts for large corporate partners, 5%, in some cases, as much as 10%.We've always had those. That does -- that potentially affects your revenue growth, but it tends to offset in operation margin because there is a large amount of cost that we don't have in dealing with students that are coming en masse from these institutions. The one large institution for which we have a very significant discount is the active-duty US military, where our tuition's been frozen since September 11, 2001.And that's now, with a 5% tuition increase over 10 years, it's probably, what, Karl, about half of what our tuition is everywhere else?

Yes.

Probably about 50% discount.

Final question, kind of a what- if, I guess. At what point does the board or you as a management team see variability or volatility in the start number and start to become less comfortable with the idea that you're okay with variability?Down 20% for one quarter is one thing, but down 20%, or down 10%, or down 15% for a series of quarters?

Does that start to stick in your craw as not just being temporary volatility but being something structural?Or what is your timeframe for starting to change your thought process around what variability means?

Let me see, Brandon, if I can elevate the question and make it more relevant, at least in the way we think about things.The real question is, does it make sense to invest financial and human capital in building a nationwide university?The actual rate of new-student growth in any given quarter or even in any given year is less relevant to the question than what's the value of your education?What's the need for education in the country?And at what price point can you cover your academic costs and provide a sufficient return on capital to attract the private investment necessary to do it?

We tend to look at those issues over a very long term. Like I said, we've been running this university ourselves for 10 years.It's been in existence for 100 years. We think the value of a well-run, academically sound nationwide university over the next 100 years is quite high. So, the kinds of questions you are asking, we would always look at in the context of that broadest possible investment decision.

That's helpful. Appreciate it. Thanks, guys.

Your next question comes from Suzanne Stein with Morgan Stanley.

Hi, it's actually Thomas Allen filling in for Suzi.Quickly, I believe you guys received your fiscal-2009, two-year cohort default rates earlier this week.Can you talk about them at all? And then also, some other companies have been talking about having issues with put loans.Can you talk about that at all?

We never comment on draft rates. We get those each year, and they're draft for a purpose, because they allow us to sit down with the department in a productive way and make sure that all the data is correct. But I can answer the second question, which is, we don't have any issue with regard to put loans.We've accounted for that and think about it with regard to managing our cohort default rate.

Okay, great.Thank you.

Thank you.

Our next question comes from Peter Wahlstrom with Morningstar.

Thanks for taking my question.

Not at all, Peter.

On the corporate side of your business, with the US economy arguably stabilizing and corporate profits recovering a bit, are you even more aggressively targeting these corporate relationships today? Have you seen some of your peers also more actively look to take some incremental share?And then, taking a step back, could you give us more of a 30,000-foot view, long-term view, of how you think about the segment of the market?Thanks.

The last part of the question is the most important, I think, we think it is -- when you're trying to build a university for working adults, as I said earlier, going back to school for a working adult is a very difficult decision to make. And the most effective way, the most lasting way, for the adult to make that decision is based on the input of influencers -- friends, family, employers. Employers are critically important. So, those corporate institutional partnerships have always been a very large structural part of how we think about building the university.

It is also, from our standpoint, an ongoing audit, if you will, for our board of trustees, President Stallard, all of our academics, as to how relevant and successful are our programs.Because if you're not meeting the needs of those students, then your flow of students who happen to be aggregated as employees of large companies is going to dry out. So, we like it as a -- both a supply of students -- as a means of catalyzing the decision the prospective students would make, and we like it as an ongoing verification in a real sense of our academic standards and output.It's always going to be a big part of what we do.

I think there are a number of institutions who see things the same way. Quite a few traditional institutions as well, and, we are happy with that. There's an awful lot of employees of large organizations that would benefit from getting either a bachelor's or master's degree, and I've never thought of this as a zero-sum game. And that really governs how we think about the relationships with these institutions.

Peter, did that answer your question?

Yes, thank you very much.

And at this time, I would like to turn the call over to Robert Silberman for any closing remarks.

Thank you, Javon.Thanks, everybody, for participating. We'll look forward to both our annual meeting in late April, and then an earnings call a couple days after that. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.You may all disconnect. Everyone, have a great day.