Strategic Education Inc (STRA) 2012 Q3 法說會逐字稿

Good morning, everyone, and welcome Strayer Education, Incorporated third-quarter 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.

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 real-time, a replay will be available beginning today at 1 PM Eastern time through Friday, November 23. The replay is available at 855-859-2056, conference ID 39822150.

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 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.

Now I would like to turn the call over to Rob. Rob, please go ahead.

Thank you, Sonya, and good morning, ladies and gentlemen. As is our custom, I would like to begin this morning with a brief overview of both our Company and our business model for any listeners who are new to Strayer. Mark will then report on our third quarter financial results, followed by Karl commenting on our third quarter operation results, including our student enrollment for the fall academic term. Finally, I would like to provide an update on our strategy, discussed the Company's earnings outlook for both Q4 and full-year 2012 and share our thoughts on Strayer's business model for 2013.

Strayer Education is an education service company whose primary asset is Strayer University, a 50,000-student, 100-campus post-secondary education institution founded in 1892 which offers bachelor's, master's and associate 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 federally issued Title IV loans. Our expenses include the costs of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies cost. Strayer University is accredited by the Middle States Commission on higher education. Mark?

Revenues for the three months ended September 30, 2012 decreased 9% to $124.3 million compared to $135.9 million for the same period in 2011, principally due to lower enrollments. Income from operations was $7.8 million compared to $24.4 million for the same period in 2011, a decrease of 68%. Operating income margin was 6.3% compared to 18% for the same period in 2011.

Net income was $4.1 million compared to $13.9 million for the same period in 2011, a decrease of 71%. Diluted earnings per share was $0.36 compared to $1.20 for the same period in 2011, a decrease of 70%. Diluted weighted average shares outstanding decreased 1% to 11,487,000 shares from 11,647,000 shares for the same period in 2011.

Revenues for the nine months ended September 30, 2012 decreased 11% to $420 million compared to $471.6 million for the same period in 2011 principally due to lower average enrollments.

Income from operations was $84.9 million compared to $133.8 million for the same period in 2011, a decrease of 37%. Operating income margin was 20.2% compared to 28.4% for the same period in 2011. Net income was $49.3 million compared to $79.4 million for the same period in 2011, a decrease of 38%.

Diluted earnings per share was $4.29 compared to $6.58 for the same period in 2011, a decrease of 35%. Diluted weighted average shares outstanding decreased 5% to 11,482,000 from 12,055,000 for the same period in 2011.

At September 30, 2012, the Company had cash and cash equivalents of $45.6 million. The Company generated $57.2 million from operating activities in the first nine months of 2012 compared to $122.7 million during the same period in 2011.

Capital expenditures were $18.2 million for the nine months ended September 30, 2012, compared to $24.9 million for the same period in 2011. At September 30, 2012, the Company had $77.5 million outstanding under its term loan and $25 million outstanding under its revolving credit facility. During the nine months ended September 30, 2012 the Company paid regular quarterly dividends of $35.6 million or the equivalent of $1 per share for each of the quarterly dividends.

For the third quarter of 2012, bad debt expense as a percentage of revenues was 4.2% compared to 3.8% for the same period in 2011. Days sales outstanding was 18 days at the end of the third quarter of 2012 compared to 14 days at the end of the third quarter of 2011. Rob?

Thanks, Mark. Karl?

Okay, first I'd like to comment on our fall enrollment results. Our new students increased 4% versus the prior year and our continuing students decreased 7%. Our continuation rate for the fall term increased 30 basis points.

Total students were 51,727 students, which represents a decrease of 5% versus the prior year. The fall term represents our third consecutive quarter of new student growth and a 5% decline in total students is an improvement from being down 12% in the first quarter and 7% in the second quarter.

Also, we announced one new campus for our fall academic term, which we are now teaching in San Antonio, Texas, which is a new market for us. Subject to final approvals, the remaining three campuses for 2012 will open for the winter academic term and will be located in Houston, Texas, which would be our third campus in that market; and then one each in St. Louis, Missouri and Kansas City, Missouri, two new markets as well as a new state.

We did sign four new national account agreements during the quarter as well as two new community college articulation agreements. And then, lastly, no real changes in our student mix. Graduate students continue to comprise just over 30% of all students and business and accounting make up roughly two-thirds of the remaining undergraduate student population. Rob?

Thanks, Karl. Just going back to Mark's comments for a second, just a couple on the financials from my perspective -- on the income statement, the $0.05 of EPS outperformance versus the forecast was caused by both slightly higher revenue and slightly lower expense than we were expecting, nothing really significant there. The revenue was impacted by a lower number of student drops in the quarter, which obviously also helped our continuation rate, as Karl mentioned, and the expenses by lower charges for bad debt.

On distributable cash flow for the first nine months of the year were down 60% versus a 38% decrease in net income. That variance is mostly based on changes in working capital caused by the new tuition payment terms from the Veterans Administration which we have discussed before.

On our business outlook for the fourth quarter of 2012, based on the university's enrollment for the fall term, we estimate our fourth-quarter EPS will be in the $1.43 to $1.45 range with operating margin in the 19% to 20% range.

Turning to a brief update on our strategy, many of you will remember that it's based on five objectives. The first is to maintain enrollment in the Company's mature markets; second, open new campuses, particularly in new states; third, invest in our online curricula; forth, increase our corporate and institutional alliances; and the final objective is to effectively manage our owners' financial capital. In terms of a third quarter update on these objectives, Karl has already covered the first four, so I don't really need to add anything there.

However, since we now have visibility into our fourth-quarter earnings, I want to take this opportunity, as we do each year at this time, to give an actual full-year 2012 forecast and then describe our business model, our investment profile for 2013. We now know that during 2012 we experienced an approximate 8% decrease in total student enrollment for the full year, which we project will lead to a 10% decrease in revenues. The reason that we know what our full-year student enrollment is, is because we have only have four academic quarters. We have already started the fall term, so we are capable of forecasting out at this point. That 10% decrease in revenues, we believe, will lead to an operating margin of approximately 20% and full year 2012 earnings per share in the $5.73 to $5.75 range.

Turning to our 2013 business model, the Company announced today that Strayer University will implement a 3% tuition increase effective January 2013 but is assuming roughly flat revenue per student in 2013 due to the university's continued mix shift towards graduate and corporate-sponsored students as well as continued targeted use of scholarships. The Company also announced today that it expects Strayer University's expenses to grow 1% to 2% in 2013, reflecting the annualization of operating costs at the eight new campuses that we opened during 2012, but that no additional campuses are currently planned for 2013. Therefore, the Company expects that the 2012 revenue level -- again, we don't ever forecast revenue or enrollment, but just to give some clarity to the model -- if we reach the 2012 revenue level, the anticipated 2013 expenses would lead to a 19% to 20% operating margin in 2013 and EPS in the $5.40 to $5.60 range.

Now, in order to provide more clarity, Mark's and my view is that each 1% increase or decrease in revenue from 2012 levels in 2013 would have an approximately 50-basis-point positive -- or, indeed, negative, if it was a decrease -- impact on operating margin, and that would translate into approximately $0.20 per share of positive or negative impact on book earnings. This is so that you all have the same clarity and visibility that Mark and I have in terms of the operating leverage in our business and what the impact of increases or decreases in revenue might be.

This model assumes an effective tax rate of 39.5% and 11.5 million diluted shares outstanding.

Finally, capital management -- we announced this morning that we have taken advantage of favorable credit markets to amend our existing credit facility. Our amended facility provides better amortization, extended term, better pricing, more favorable covenants and an additional $50 million of liquidity. We also announced this morning our quarterly dividend for Q4 2012 but additionally announced that our Board of Directors does not currently intend to pay a regular quarterly dividend in 2013. The Board did, however, increase our share repurchase authority to $120 million. And of course, we as a management team and a Board will continue to weigh all uses of cash to determine the most value-enhancing after-tax return on our owners' capital.

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

(Operator instructions) Jeff Volshteyn, JP Morgan.

In the past, you have given us the underlying enrollment assumptions in your business model for the base case. Could you go over the start and average numbers that would go into the zero growth scenario?

I'm not sure, Jeff, that we have done that in the past. Last quarter -- or last year, we provided what we hoped would indicate what increases or decreases in new students might do for total students, but we never forecast enrollment or revenue. It's just, I think, an inopportune thing to do when you're running a university. You don't want to think about your students as factors of your financial production. The students will come when they come. We have clearly, in the last two years, had a diminished student enrollment than we had in the past. We are very pleased to have, as Karl said, over the last three quarters new student growth. But the new students are not growing as quickly as they shrunk the year before, and so it is taking a little while to pull our total student enrollment and our total revenue up.

So we don't really forecast or certainly don't try and guide towards any particular student enrollment. What we have tried to do is suggest that if the revenue is flat, and since we think it will be flat revenue per student, then that would assume that the students are flat, then this would be the result on our operating model. And then, as we said, each 1% increase or decrease has an approximate 50-basis-point margin and $0.20 on EPS. Again, to give you all an opportunity to put the outer bounds of your models in place and be reasonably consistent with how Mark and I think about the business.

Okay, and then on the campuses in 2013, you are not opening any. Could you share with us some of the thinking behind it? Is that competition, is it capital? Why no new campuses?

Well, we've opened 100 campuses over the last decade. We've opened 40 of them in the last four years, and we are roughly halfway through our announced strategy of building a nationwide university. There is, I think, a significant amount of short-term uncertainty in the economy and in general with regard to the structure that we operate in. We would like to see a little bit of that clarified. We are not ruling out opening new campuses in 2013; we just don't have any specifically planned in the first half of the year. We want to wait and see how things develop a little bit. We are not particularly worried about a land grab, about people getting the markets ahead of us. And we tend to be a patient and deliberate management team as we think about these.

So there's really nothing more to it than that. Because we don't have anything specifically planned, we wanted to provide our operating model based on the expenses that we now know. If anything changes over the next 12 months, we will certainly update you.

That's helpful, thank you.

Bob Craig, Stifel Nicolaus.

Rob, I think I know the answer to this, but let me ask the devil's advocate question anyway. Why increase tuition at all in 2013, given the environment we are in? Why not hold pricing flat?

Well, we have increases in our costs. Our professors and administrators are going to get some modest salary increases. We think that a modest increase in tuition is consistent with a value chain, an enhancement in value that goes to our students. And as I said, we are really expecting flat revenue per student, so in many cases I think the actual impact on students will be essentially the same as a no real increase in tuition. But this seems to us to be the most prudent and thoughtful way to think about our tuition pricing structure.

Okay, I know you said this could vary by term, but did you guys cut back on scholarships in the winter term? It would appear so on the website, but maybe it's unclear.

Karl?

Bob, we adjust our scholarships throughout the year and the types of scholarships that we we're offering in the winner are consistent with what we did in the fall. We have changed the value of some of those so that we could try to reach more students, but the underlying type is the same.

Okay, last one for me and I will turn it over -- it would appear as though the dividend may be channeled into additional repo. Is that a good way of thinking about it, or you will just determine that when the time comes?

We never comment on share repurchases until after they happen, Bob.

Okay, I tried. Thanks, Rob.

Paul Ginocchio, Deutsche Bank.

Just two quick ones -- what percentage of your new enrollment took advantage of one of the three scholarships you offered this quarter versus maybe the comparable last quarter? Second, how did Jack Welch Management Institute add to your new enrollment growth in this quarter?

Well, let me take the latter question and then I will defer to Karl on the first one. It certainly helped. The Jack Welch Management Institute has been a tremendous success from my standpoint. I think we doubled the number of new students that we had on a quarter-over-quarter or a year-over-year basis. I would guess that, with a couple hundred, it's about, I don't know, it probably adds a point or so to our new student growth. But we tend to think of the value it's creating and the different business line that it gets us into as a more value, frankly, then just the specific new students that come in. Both the quality of academic content that we are developing there and the opportunity to translate some of that into non-credit-bearing corporate training types of programs, I think, is pretty exciting for us.

I actually forget the first question, but I knew I wanted you to answer it, so go ahead.

Yes, the percent of new students who received a scholarship for the fall term was roughly 30% of our new student cohort. And that is consistent with what it has been throughout the year.

Thank you very much.

Sara Gubins, Bank of America.

Could you give us some more details around the new student growth of 4%, so what growth looked like from students who are coming in through corporate relationships and community colleges, as opposed to the students who are unaffiliated?

I think we are still struggling a little bit on the unaffiliated students. The economy really hasn't improved for those students. As I mentioned in my letter to shareholders last February, real unemployment -- not the headline unemployment, but actual people who are no longer working and therefore can't really afford to go to Strayer University -- is still very, very high for that target segment. And so, like the last couple of quarters, we continue to see very good growth in our graduate and in our affiliated students, students affiliated with one of our partners, and relatively flat on our unaffiliated undergraduate.

Okay. I think last year the national accounts were up about 11%. Do you have the numbers behind that for this term?

Do you have that, Karl?

I believe new students for national accounts most recently were up 15%.

Okay, and then could you remind us how much it costs to open a new school? I'm trying to understand how much you are alleviating on the cost side in 2013 by not opening new campuses.

Well, notionally, for a full year, it would be probably $1 million to $2 million in expense, say $1.5 million. It obviously depends when in the year you open it. We will have some expenses in 2013 associated with the fact that almost all of our campuses in 2012 were back-end loaded. So those will roll through the utilization costs I was describing.

If we opened a new campus in 2013 in January, which we won't do, we can't do; we are not in a position to do that. It's potential that we could open some later in the year, but just for analysis purposes, you'd add, say, I don't know, $1.5 million of expense and a couple hundred thousand dollars of revenue for the full year.

Okay, thank you.

Gary Bisbee, Barclays.

I guess on the corporate alliances, this has been a strategy, Rob, of yours for 10 years, or -- is it going on 11? (multiple speakers) 12, okay, all right. But everyone else in the industry is talking about this, and it seems a real key for a lot of your competitors trying to find ways to deal with 90-10 and other issues. Have you seen, when you reach out to the -- and I know most of them aren't exclusive, but have you seen the competitiveness drive any change in the way these alliances look, or just make it more -- obviously, you are going well there -- but make it more difficult to continue to do that? Or, is it pretty much going as it has always gone in terms of how you approach it and how it's working for your business?

Well, I would say it is going as it has always gone, and I would not say that the there is any specific increase in difficulty or competitiveness in terms of talking to potential partners, and the numbers kind of speak for themselves. I would say that I think it is a good thing for the sector as a whole to be focusing on strategies that end up with students who are more likely to be successful. These are academic institutions first and foremost, before they are businesses. They can look good as businesses for the short term, but if they are not providing academic outcomes to students that are prepared, they won't look that way for the long-term.

So we are happy to have what you would consider to be potential increased competitive pressure in return for having a more responsible, more effective, more academically oriented sector.

And what are you doing specifically outside of continuing to focus on this channel to try to attract more of these students who are prepared and likely to be successful? Are there any other major changes you have been doing over the last year or so?

No. It's consistent with the strategy that we have had in place for, as you have noticed, 12 years. Probably the biggest single thing with regard to potential corporate partners was our entering into partnership with Jack Welch and purchasing the Institute last year. It gives us a platform that I think supplements and augments Strayer University's outreach in this area and obviously aligns us with one of the great thinkers in management science. And so that has really, I think, been a very successful enterprise for us.

Other than that, we want to offer great academics in a logistically convenient manner so that it is possible for students who are working at large institutions to be able to access our education. And having the [imprimatur] of their employer saying that this is a good thing for them to do is obviously quite helpful.

And a bunch of years ago, having the expanding campus network was important, that you offered both campus and online. Is that something that still strikes you as important to either the employer or their employees? Is that a competitive advantage versus a lot of these online-only companies who are increasingly targeting this same group?

Well, I wouldn't think about it or describe it, Gary, in terms of a competitive advantage vis-a-vis others. What I would say is that we clearly believe that having a physical campus network supplementing a very robust and high-quality online offering gives you the best combination of assets and channels so as to be able to reach the most numbers of students and/or organizations with the highest level of academic performance. And we are firmly committed to that. We intend to build a nationwide university. There's nothing about that that has changed. We think that it makes sense because, if you allow the student to choose the learning mode in which they are most successful, you just by logic are going to get a higher percentage of students who are successful as opposed to channeling them into a learning mode that works for you, for whatever your business purpose is.

We believe in online education. We think that it can be a very effective way of both transmitting academics and, more importantly, assuring learning outcomes. But we also believe that having the physical campus network is a necessary and valuable supplement to that.

And then just one last one -- presumably, both at the senior level and then also within your field operations, there has been a lot of hours and time spent on the new campus strategy. How are you going to refocus your time on the folks who have been working on opening new campuses, given the plan to not do so in the near term?

Well, we are not not going to open campuses permanently. So we have assets in place that are designed to be able to support our doing that. We also have a program by which campuses that we have opened in the last 12 years are rolling off their leases or need to be expanded, and I think we've got a least half a dozen of those this year, Mark, where we have to go to expanded buildings. And so those teams will stay in place and work on that.

Probably the bigger part of the issue is the human capital development. And I think this will give Karl and this organization -- this isn't the reason we do it, but it's an ancillary positive byproduct -- a little more time to develop and build up that strength so that at the point at which it makes sense to us from a macroeconomic and use of capital standpoint, we will have even better strength on our human capital side.

Okay, thank you, that makes sense.

Corey Greendale, First Analysis.

Rob, I just wanted to go back to the new campus thinking for a moment. I know you pointed to sources of near-term uncertainty. I think from an investor perspective, there are quite a few sources of near-term uncertainties, so I was hoping you might elaborate on specifically what it is that you're looking at that would be an indicator that it does make sense to start opening new campuses again.

Well, it's a nuanced decision, Corey. I'm not sure that I could point to any specific flagstone that is a green light or a red light. There is macroeconomic uncertainty. We've got the fiscal cliff coming up. We've got a whole set of issues associated with what the impact on tax policy is going to be on our economy, and we have stubbornly high unemployment in one of our target markets. We have developments and events upcoming over the next six months which I'm hopeful will improve all of these areas and provide more clarity, but it will be a considered judgment on the part of our management team and our Board which is also going to look at other uses of capital.

What is the most value-creating after-tax return on our owners' capital? And that will feed into a timing. It doesn't really change the ultimate strategy. As I mentioned before, 100 campuses is a nice milestone, but it's probably not even halfway to where we need to be to build a nationwide network, and that's still on our drawing board.

Okay, and then I know you won't comment on future uses of free cash, but I was hoping you might be able to elaborate on the Board's thinking in deciding not to pay the dividend in 2013.

Well, we look at all of the different options that you have and think about tax policy, which affects returns and then, obviously, looking at the things that weigh into our decision as to whether or not to repurchase shares and try and reach a prudent decision. In this case, our Board's view was that the use of capital would probably be more advantageous to our owners in areas other than paying a dividend.

Okay, and could you just update our thinking -- your thinking, rather -- on acquisitions as a use of cash?

Well, acquisitions have always been a possible use of cash. I'd have to say, over the last 12 years, the only one I did was a couple million dollars with Jack to buy his Institute. So I don't think anybody could accuse us of being prolific buyers. But if things came up, we would certainly look at them. We do that quite often.

And just one more quick one -- I think you did some things this past year to help on the cost side, like renegotiating some leases. Can you just talk about what the opportunity there might be in 2013?

We think we have a pretty tight expense profile for 2013. And as we have said in the past, we are thinking about building a nationwide university that's going to exist for decades, if not centuries. So we are much more concerned about what our cost structure is in terms of how it builds that University versus tweaking it each quarter to meet a certain profitability or financial outcome.

I think over the last year -- there is an inherent amount of cost savings that comes from variable cost, and our student population has gone down. We have gone from about 60,000 students to 50,000 students. So we've gotten some savings associated with that. We're always trying to be as efficient as possible, particularly with corporate overhead types of costs. But, I think we have done everything that we do need to prepare ourselves for 2013, which is why we have laid out this business model that we have. Going forward, I think any changes would most likely be associated with actual variable increases or decreases in costs associated with student enrollment.

Great, thank you.

Kelly Flynn, Credit Suisse.

On revenue per student, can you talk about what your fourth-quarter guidance assumes for revenue per student decline year-over-year? Should it be similar to the Q3 or should it moderate?

Sure, Kelly. I think we said it was 1% to 2% for the full year, and we were below that earlier in the year, so my guess is it will be close to 2% in the fourth quarter.

Okay, thanks. For next year, obviously you are talking about flat RPS, but I think your price increase 3% is the same as it was in 2012. So what are the moderating factors, so to speak, that would lead it to improve from being down to being flat?

Well, our mix shift towards graduate students is slowing. As Karl said, the last couple of quarters, we have been relatively flat on that. So when we start to anniversary that, we would expect our classes per student count to go up, and then just the tactical use of the scholarships. Although we are growing in corporate alliances, we don't see the same increase maybe on a year-over-year basis that we have had this year with some of the more significant discounts associated with that.

Okay, great. And then just switching gears, has anything changed about your perspective on the long-term ROI of new campuses or the long-term growth prospects and economics of the market opportunity?

Yes. Our recent experience would suggest that the long-term return on investment on new campuses is lower than what it was prior to 2009. It's still quite a bit above our judgment weighted average cost of capital, so we fully expect to be opening campuses. But, again, we don't really think of it as a land grab. It's not like we're giving anything up by not opening the campus in January or March that we might open either later in the year or January or March of 2013.

The more important thing for us is to really watch how the macroeconomic structure resolves itself over the next six months and take advantage of that pause to really give our organization an opportunity to absorb what has been a significant increase in new campus openings. As I said, 40 over the last three years is -- we've got quite a bit of unused pipeline in our organization right now. So while it is almost certainly a lower return on investment than we might have projected in 2008, I still believe that it is a very, very healthy and profitable return on investment over time and we expect to be opening new campuses in the future.

Okay. When you think about it having come down, the potential ROI, what has changed? Is it about acquiring students, costing more? What are the biggest changes you've seen since pre-2009?

Again, we just don't really think about acquiring students. It's just not the way our methodology works. I think the easiest and the simplest way to think about it, Kelly, is there are less students enrolled at earlier periods in a campus life, which makes it slightly longer to get to profitability. And on a pure mathematic basis, that lowers your numerator where your denominator is the same, so your return goes down.

Okay, that's very helpful, thanks so much.

Jeff Meuler, Robert W. Baird.

Rob, you mentioned tax policy first when talking about the Board's decision on the dividend. Was the decision made before Tuesday night or after?

(Laughs) well, the board met on Wednesday, (multiple speakers) so it was made after Tuesday night.

That's helpful. And then on the human capital development, can you just talk about how bench strength is and how turnover has been recently throughout what has been a pretty obviously challenging environment?

Yes, we're blessed by having a very committed and high-quality academic and administrative staff. Our turnover has been extremely low, and that's a positive. It's both a financial positive for our investors, but frankly, it's a social and quality of work positive for Mark and Karl and I because we're surrounded by a great team that we like to work with.

It definitely -- since -- in the past, my biggest concern with regard to opening new units has been the potential diminution of academic quality as you get a broader base and more diverse student population -- I don't mean diverse in terms of racial, but just you are just spread geographically across a larger area. And the rate at which you are adding students always puts at risk, I think, in any sort of human service business the quality of provision that you apply to them. We have always tried to throttle that down to a number we were comfortable with.

We are clearly, in the last two years, opening campuses at a rate below what I would believe is the human capital trial. So the more you do that, the deeper you build your bench strength and the less risk you have going forward with regard to academic quality.

So it's a long-term positive and we are -- it's not the reason we are doing it, but it is a salutary side benefit that comes from it.

Okay, and then in your discussion on the notional model, you talked about the 1% to 2% expense impact from anniversarying the campuses. On the call, you had talked about the increase in cost and professors and administrators getting a modest salary increase. Should we think of that as being baked into this notional model, but there being productivity, I guess, increases that are offsetting those costs? Or, should that be additive to this 1% to 2% cost increase from the campus (multiple speakers) --

That's all baked in, and most of the productivity is, frankly, I mean it's financial productivity. We don't really think of it that way, but as you add students to campuses that you have already opened, the incremental margin, the owners' share of that tuition, it goes up because you have already paid for the campus, you have paid for the professors. They are doing some level of brand building in those markets. And it's like an airplane that leaves with more seats filled than less seats filled. It's a very high percentage of variable marginal income.

I get that, but doesn't the base case notional model assume, as you have walked there before, roughly flat total enrollment so you wouldn't have that incremental leverage on those students?

Yes, it's a fair point, but you're also -- included in that is some diminution of losses in campuses that are brand-new, because they are growing. You are adding students in those campuses.

Okay, thank you very much, Rob.

Jeff Silber, BMO Capital Markets.

You talked a little bit about the new credit agreement, and I know it's in the 8K, I just haven't had a chance to read it. Can you give us a high-level overview in terms of the new debt covenants? I'm specifically interested -- are there any restrictions on either share repurchases or dividends?

The simple answer to the last question is no, there are not. I guess Mark can walk you through the -- I mean, it's total leverage, and it's --

Yes, there is the total leverage covenant, Jeff, and there's a fixed coverage ratio, and then the third one is to comply with the financial composite score of the Department of Education at 1.5.

Which I (multiple speakers) I would say, Jeff, that that is an indirect limitation on both share repurchases and dividends, but one which we operate under, independent of the debt instrument.

Alright, great, and then I just had a couple of numbers-related questions. I think when you answered Sara's question, you talked about the $1 million to $2 million costs, or opening costs for a new campus. Which line items do you see the most impact on?

Those mostly go into instructional and education. And you have a little -- depending on the age of the market, you may have some market expense -- in a brand-new market, like Karl mentioned San Antonio, you are doing a modest brand build in that market that you don't have before, and so that would run through your marketing and admissions line. But most of it is in instruction and education.

Alright, great. And in terms of your business model for next year, what would that imply for capital expenditures?

Jeff, what we are planning on spending is somewhere between $15 million and $20 million. So, obviously, that's lower than what we spent in the past. But of course, that would exclude any costs for opening new campuses at this time.

And if you could just remind us what you're looking for, for this year?

This year will be in the $25 million to $28 million.

A less than $30 million.

Yes.

So if you think about it, Jeff, in a steady-state with a 50,000-student, 100-campus network plus extensive investments in online technology, that $15 million to $20 million is really kind of a base case maintenance CapEx. Plus, it's not all maintenance because there are some dollars associated, particularly with technological advancements, mobile technology and things of that nature.

Alright, great, that's very helpful, thanks so much.

Suzi Stein, Morgan Stanley.

Most of my questions have been answered, but just going back to the question on the cost structure, you talked about expanding some campuses. But are there any plans to rationalize any underperforming campuses?

We don't have any underperforming campuses, Suzi, so no, there's not.

Okay, alright, great, thank you.

Trace Urdan, Wells Fargo Securities.

I've got a lot of cleanup here. So just to Suzi's point there, she used the word underperforming. What about the concept that you may have some markets where you have excess capacity and might consider shrinking the footprint in a given market? Is that something that you are looking at or might look at?

Yes, I really wasn't trying to be cute with Suzi. We don't have any markets where we consider that we've got too much capacity.

Okay.

So, no, that was a pretty straightforward answer on that.

Got it, alright. And then I wanted to go back to Sara's question because I -- or, maybe I could just ask the question outright. How much in new campus openings, basically, losses or expenses were incurred in 2012 that won't be incurred in 2013 as a result of not opening campuses? Because I, frankly, would have expected that you would have had more savings from deciding not to open campuses.

It really has to do with the calendarization of 2012. Our expense line in -- total expenses in 2012 are not going to be a whole lot more than 2011, even though we have opened eight campuses. The issue is that most of those eight campuses were opened in the back half of the year, so they had less dollar impact on 2012 and then create anniversaried impact in 2013. So that's how that all balances.

So on a steady -- yes, but there also were campuses opened in 2011 that carried over into 2012. Is the notion, then, if you were to not open any more campuses, ever, which I understand is not the case -- but then would we see, then, some kind of a benefit in 2014, conceivably?

Well, not conceivably. You would. And the issue with regard to 2011, if you remember, is that in 2011, most of the campuses, which was -- was it eight campuses in 2011?

Yes.

They were mostly in the front end of the year. So it has to do with just -- check the records of when campuses were open in our releases, and you will see that it's -- we try and provide what's probably an overly simplistic model in terms of the impact on a year-to-year basis, because it obviously has -- much of it is affected by the point in the year in which those are open.

Just on Corey's question, when you were talking about the uncertainty, Rob, you seemed to focus primarily on economic uncertainty, and I just wanted to ask the point explicitly. Is there any regulatory uncertainty that is a factor in your decision not to open up campuses?

Well, when we make decisions like this, we are weighing all factors. And we were actually quite pleased with the outcome -- pleased may be the wrong word. We were happy and satisfied at the end of the regulatory process associated with the gainful employment in terms of how our university operates or operated, based on the illustrative data, under that regulation. There's clearly more uncertainty because that regulation is now at a point where it's declared arbitrary and capricious, at least at the district court level, and that needs to be clarified.

But we are comfortable that ultimately, if you are running a great university, that you're going to be able to operate under any reasonable set of regulations. And so our decision with regard to new campus starts for next year is really a much more complicated and integrated set of issues that we look at. And as you correctly pointed out, a pretty large part of it is what's going to happen to the economy, what's going to happen on the fiscal cliff, what going to happen with regard to overall unemployment.

And again, I just have to emphasize, when you think about it from the standpoint of we don't really see much cost in waiting, then prudence dictates the wait.

You talked about giving yourself a little time to catch your breath on the 40 campuses you have opened over the last few years. Do you have any sense that kind of Middle States would like to see that as well?

No, not at all. Our interactions with Middle States are both constant and ongoing and based on our stated objective and their acceptance of the concept of building a nationwide university.

Got it, alright, thank you.

Brian Karimzad, Goldman Sachs.

On the unaffiliated students, do you have a sense of what mix, percentage of those are unemployed when they enter and how that has trended over the last couple of years?

Well, it's very difficult for a student who is unemployed as an adult to attend Strayer University. It's a very large commitment of time and money that tends not to be in their immediate best interests while they are trying to find jobs and supporting their families. We are not really a job training program, from that standpoint. And so it has always been a relatively low number. We do have some. It's mid-single digits. But the impact of higher unemployment is less students, not more students who are unemployed.

Okay, and on the alliance side, is there any geographic bias to students who come in there? Is it more concentrated in your legacy areas as a percentage of the students on each campus or anything else you can share on that matter?

Well, if there are students at the campus, then they are almost certainly coming from partnerships that are corporations that are located near the campus. We do have roughly 10% or so of our students, a little bit less, who are in our global online. And I would say, Karl, that sort of a similar percentage of the students are corporate alliance students as we have at the campuses.

Yes.

Yes, I guess what I was getting at is, are there regions where you have a higher mix of corporate alliance students than others, like Nova or something like that?

I think it probably matches where our student population is, for the most part. I don't think it's particularly -- in a brand-new market, it's less likely to have any alliance. But over time, as you build your brand and your student experience and alumni experience in that market, you tend to pick up more alliances.

Okay. And have you noticed with some of the folks on the alliances that are a bit more biased to the federal funding side -- as they have adjusted to the budget situation there, that they have maybe change their tuition reimbursement practices or anything like that? And do you sense any of that maybe coming, going forward?

Well, the answer to the first question is no, we haven't really had any impact. And the answer to the second question is I expect people will look at that. It would be imprudent as a manager of an organization not to take that into account.

On the flip side, we have a fair number of our students who are federal government employees. So if there's a shift in employment from the private sector to the public sector, we are somewhat hedged on that basis, at least in our DC area.

Alright, fair enough, thanks.

Brandon Dobell, William Blair.

Rob, has the performance in the last couple of years of new locations caused you to rethink maybe the footprint or location or how you roll those out, given that it seems like they have been a little bit under your notional model for the past couple of years? Or, does it not really impact how you think about what the right school would look like on a go-forward basis?

No. Our view on what the right physical campus looks like has more to do with technological advancements. And we are constantly tweaking that so that we take into account the percentage of our students who actually want to take classes online and then what campus-based resources are necessary in order to support those students.

And the other thing I would say is there's not any of our existing campuses that we've opened that are truly below our notional model. You will remember that from 2004 through 2009, we were well above the notional model. And I would say it's really only in the last quarter or so that we are even touching that notional model on our most recent campus openings.

So there's no wholesale change or thought that we are looking at with regard to the physical campus model beyond, as I said, we are constantly updating and tweaking to make sure we've got the best physical appearance. You can take the elevator downstairs, Brandon; I think our downtown Chicago campus is catty-cornered to your building. So walk through there; you will get a feel for what the campuses look like.

Yes, okay. And then from a technology point of view, a number of companies in this space have talked about, I guess, advancements around the learning platform, advancements around how students interact with their systems and the people and their peers and things like that. Anything from your point of view that would be noteworthy, again, from a recent history perspective or looking out the next couple academic years that you think is going to help distinguish your academic platform or how the students go through their degree?

Well, it's a constant process for us and a constant level of investment and update. I think you have to be at the forefront of those sorts of developments in education, in order to be relevant. And again, I think it's a great thing that all the companies are doing that. I think it will improve learning outcomes across the board.

And the thing that I find most interesting is this whole concept of traditional academia and the [MOX], because the reality is, the transmission of academic material is easy to do over the Internet. What's difficult to do is the assurance of actual achievement of learning outcomes. When you think about what we do, it's an interaction between a professor and a student. You can get the high levels of scale, but the real trick, the real key is using technology to achieve real learning outcomes. And that's what we're spending a lot of time working on and I suspect many of our peers are as well. Those will be huge advancements. Those will add a lot of value to all the stake holders of the institutions.

Okay, and then final one for me -- the corporate alliance partners -- are you seeing any -- I hesitate to call it demand, or any conversations around what else you guys could be doing from a lifelong learning, so not degree-centric, but more of a lifelong learning point of view, given the technology platform, your physical presence, those kinds of things? Are those corporate partners, are a lot of partners coming to you and saying, we need help in a certain area that we can't get from traditional schools, or, we think you guys would be good at doing this for our employees, beyond kind of the bachelor's and graduate degree opportunities?

Yes, absolutely. As I mentioned earlier, the Jack Welch Management Institute is proving to be a great platform for that, and we are excited about this developments. Our core mission is providing credit-bearing Middle States-approved degree educations. But to the degree that we can help our partners with their human capital needs using the Welsh Management Institute -- and obviously, it's a great brand build for us as well in terms of developing students who ultimately would be coming in and taking degree programs as well.

Okay, thanks a lot, I appreciate it.

Ladies and gentlemen, this does conclude our Q&A program. I would like to turn the conference back over to Mr. Rob Silberman for any closing remarks.

Thank you, Ben. Thanks, everybody, for participating. We will look forward to talking to you again in February. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.