Strategic Education Inc (STRA) 2012 Q4 法說會逐字稿

Good morning everyone, and welcome to Strayer Education Inc's fourth quarter and full year 2012 results conference call. This call is being recorded. Following today's call, we will offer the opportunity for questions and answers. At this time for opening remarks and introductions, I would like to turn the call over to Strayer Education's Senior Vice President of Corporate Communications, Miss Sonya Udler. Miss Udler, please go ahead.

Thank you operator. With us today to discuss the results are Robert Silberman, Chairman 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. 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 it's other filings with the Securities Exchange Commission. Copies of these filings and the full press release are available online and upon request from the Company's Corporate Communications Department. And now I'd like to turn the call over to Rob. Rob, please go ahead.

Thank you Sonya, and good morning ladies and gentlemen. As is our custom, I'd like to begin this morning with a brief overview of both our Company and our business model for any listeners who are new to Strayer. Mark will comment on our Company's finance results for the fourth quarter and the full year of 2012, I'll then ask Karl McDonnell our newly designated Chief Executive Officer to provide an update on our operating results, as well as provide the Company's earnings outlook for Q1 2013. Finally, I'll provide some comments on both capital allocation over the last year, and on our announcement this morning regarding leadership transition.

Strayer Education is an education service Company, whose primary asset is Strayer University, a 50,000 student 100 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 Education include the costs of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies costs. We serve students in 23 states through our 100 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, will you run through the financials?

Sure. Revenues for the three months ended December 31, 2012 decreased 9% to $141.9 million, compared to $155.8 million for the same period in 2011, principally due to lower enrollment and lower revenue per student. Income from operations was $28.7 million, compared to $45.4 million for the same period in 2011, a decrease of 37%. Operating income margin was 20.2%, compared to 29.1% in 2011. Net income was $16.6 million, compared to $26.7 million for the same period in 2011, a decrease of 38%. Diluted earnings per share was $1.47, compared to $2.30 for the same period in 2011, a decrease of 36%. Diluted weighted average shares outstanding decreased 2% to 11,314,000 from 11,592,000 for the same period in 2011.

Revenues for the year ended December 31, 2012 decreased 10% to $562 million, compared to $627.4 million for the same period in 2011, principally due to lower enrollment. Income from operations was $113.6 million, compared to $179.1 million for the same period in 2011, a decrease of 37%. Operating income margin was 20.2% compared to 28.6% in 2011. Net income was $65.9 million, compared to $106 million in 2011, a decrease of 38%. Diluted earnings per share was $5.76, compared to $8.88 in 2011, a decrease of 35%. Diluted weighted average shares outstanding decreased 4% to 11,440,000 from 11,943,000 in 2011. Rob?

Thanks Mark. Karl, how about hitting the operational highlights.

Sure. During the fourth quarter, we completed our new campus openings for 2012 by opening our third campus in Houston, Texas and our first two campuses in Missouri, one in Kansas City the other in St. Louis. With the eight campuses opened in 2012, Strayer University now has 100 campuses in 24 states and the District of Columbia.

For our Winter academic term, our totals continuing and new student enrollments all decreased 5% versus the prior-year. Total student enrollment was 47,926 students, and our continuation rate decreased slightly by 30 basis points. New students from our national accounts and institutional alliances grew 12%, and on a total enrollment basis the mix of these students increased to 27% of total enrollment. Our student mix remains largely unchanged from prior quarters, graduate students comprised 33% of our total enrollments, and Business Administration, Accounting, and IT makeup the large majority of the remaining 67% of our undergraduate students.

Turning to our business outlook for the first quarter of 2013, and based on the University's enrollment for the Winter term, we estimate first quarter EPS will be in the $1.45 to $1.47 range with an operating margin in the 19% to 20% range. We also estimate a slightly higher effective tax rate for 2013, increasing 30 basis points from 39.5% last year to 39.8% this year, due to state apportionment. Rob?

Thanks Karl. I just wanted to make a couple of comments on our allocation of capital in 2012. At the end of the year, we like to just walk everyone through what we've done with the cash that we've generated.

During the year, we generated $82 million in cash flow from operations on $66 million in net income. So even though we had reduced net income, our relationship between cash and income remained pretty healthy. Included in that figure is almost $20 million in pretax operating losses from our investments in opening new campus and in opening and developing the Jack Welch Management Institute. We started the year with $57 million in cash on our balance sheet, 11.8 million shares outstanding, and $117 million in debt in the form of both a bank term loan and draws on our revolver.

Now we used the cash we generated during the year as follows. Now first, we invested $11 million in opening our eight new campuses. Routine maintenance and CapEx associated with investments in academic technology totaled $14 million. We paid $47 million in dividends, and made $20 million in mandatory principal repayments on our original term loan. Now, some of you remember that term loan would have required us to essentially repay the entire remaining $75 million in principal by early 2014.

However as we announced in the fourth quarter of 2012, we took advantage of favorable conditions in the debt markets to refinance our credit facility, and our new $125 million facility provided us with an additional $50 million of liquidity, it also helped with a lower interest rate, more favorable covenants, and extended our amortization schedule until the end of 2016 with minimal required principal repayments until then. Our $100 million revolver remains in place and was undrawn at year-end. In the fourth quarter of 2012, we used some of this additional liquidity to repurchase 485,000 shares of our common stock at an average price of around $51. So we therefore ended the year 2012 with $48 million of cash on our balance sheet, $125 million term loan, no draws on the revolver, and 11.3 million shares outstanding.

Now finally on our leadership transition, we were delighted to announce this morning that Strayer Education's Board of Directors has elected Karl McDonnell, who as you all know is our current Chief Operating Officer to be the Company's next Chief Executive Officer. Karl's new role will be effective as of our next annual meeting of shareholders, which will take place on May 2, 2013 at which time I will become the full-time Executive Chairman of our Board of Directors.

Now Karl has been my partner for seven years at the helm of our Company. I know he will maintain our success as an academic institution as a priority, while at the same time be a responsible steward of our Company's financial assets. The seven years he has spent as our Chief Operating Officer and Vice Chairman of our Board of Trustees as well as the two years he has spent on our Corporate Board of Directors, have prepared him very well to assume our Company's CEO position. And he will be ably assisted in his new role by our strong existing team, all of whom will remain in place, including our University President, Dr. Michael Plater; our Chief Administrative Officer, Kelly Bozarth; and of course our long standing and long suffering Chief Financial Officer, Mark Brown.

In my new role as Executive Chairman, I'm going to work full-time on strategic planning, capital allocation, shareholder and government relations, and most importantly, leading our Board of Directors in support of Karl, Dr. Plater, and the rest of the Executive team. I know most of you have met and know Karl, but to provide a broader exposure to our entire Management team, we're going to host an Investor's Day at this year's annual meeting of shareholders. Now we haven't had one of these in a while, so if you can spend a day with us on May 2 here at our headquarters, you'll be able to question not just Karl, and Mark, and myself as you do on these calls, but also hear from the rest of the University's leadership.

Sonya and I will get details out later, but we'll have a dinner with faculty, students, and alumni on May 1 the evening before, and then the annual meeting of shareholders and management presentations on May 2. And with that operator, we'd be pleased to answer any questions, and of course this morning we'll stay as long as there are questions. So, don't feel constrained. We'll be around as long as you need us. So Shawn, please open it up.

Thank you. (Operator Instructions)

Jeff Meuler with Baird.

Yes, thank you. I guess first, could you just talk about revenue per student? What happened in the quarter, and what are the go forward expectations?

Sure Jeff. The revenue per student was down about 4.5% in the quarter. That's really a combination of three things. As we've said for the better part of a year, we have had this mix shift to more graduate students, which tend to take one course versus two on the undergraduate level. You heard in my prepared remarks that our corporate and institutional alliance of students increased really another 200 basis points from 25% to 27% of our total enrollment. So that certainly is a factor, as well as the scholarships that we offered in 2012 and in the quarter.

I guess what I was looking for is if I look at the rate of decline 4.5% this quarter, it's greater than what it's been year-to-date entering the quarter. What was the biggest factor that changed? Was it the corporate and institutional mix relative to the overall decline? Or scholarships? Or --

Yes, it was probably -- a good part of that was scholarships, because we offered the scholarships for three of the four quarters in 2012, and you had some of those continuing students earning scholarships in the fourth quarter. But as I said, our national account and institutional alliance new students grew 12%, where the University's overall new student enrollment was down 5%. So that clearly had an impact as well.

Okay. And then go forward expectations 2013, are you expecting a similar decline? Or --

Well we don't comment on future enrollment of course, but our expectation is that we'd see a slight improvement in revenue per student next year.

Meaning year over year increase or meaning a less decline than 4.5%?

Meaning less of a decline than 4.5%.

Okay. And then, how are you guys doing maintenance CapEx if you're not going to open any offices or any locations?

If you look at our CapEx on a year over year basis, we were running about $25 million in 2012. And really, the maintenance CapEx will be about flat on a year over year basis. But because we won't have new campuses in 2013, in absolute numbers it will be about $8 million to $10 million less.

Okay. And then just one final housekeeping question. What should we expect for Q1 share count? And since I haven't taken a Strayer Accounting course yet, why is your ending share count higher than the average for the quarter if you were repurchasing stock throughout the quarter?

Well let me try that one. First off, the accounting question is the weighted average shares are run through on the basis of when the purchase has happened in the quarter. And so you'll end up with a different number based on at what period and at what time in the quarter the shares were purchased. Your ending share count if you don't do any share repurchases in the next quarter should be what is used. And I'm sorry, the first part of your question was what?

I think you already hit it. Just what to use for the share count for Q1.

Got it. Okay. Terrific.

Thank guys, and Karl congrats on the role.

Thank you.

Gary Bisbee of Barclays.

Hello, it's that Zach [Sadam] for Gary. First of all, Karl and Rob congrats on your new roles. And my first question is given the Winter term starts decline, can you update us what you're seeing on the demand front, and if anything has changed over the past several months?

Demand has been fairly even throughout most of 2012. And in many areas of the country where we have campuses, we've seen an increase. What we have seen and what our admission officers report to us is that it's still a very challenging economy. Unemployment for people without a college degree is double-digits and stubbornly high. And what our people are telling us is a fair number of prospective students are just deferring the decision to go back to school.

Okay. Switching gears a little bit. On your cash flow statement, it looks like you reversed out about $3.9 million in stock comp in Q4. Will you explain what's going on there?

Yes, we had some accrued expense associated with certain stock grants that had performance targets, which in our judgment were not going to be met, so we had to reverse that. It was actually a slightly higher number, but it was offset by other expenses that we had. Essentially nonrecurring expenses at the end of the year on some administrative consolidations that we did.

Okay. And then just last question, last quarter you shared what your costs were to open up a new campus. Can you remind us how long it takes typically for a new campus to breakeven, and how your current new campuses are trending?

Well the last part of the question is the simplest to answer. It's that it's taking longer. When Mark and I really put together our investment plan back in early 2001 in terms of opening new campuses, and what we've shared is that in general we would put about $1 million of capital in place or in use to open the campus. And then over about a six to eight quarter period, the campus would break even. And before it broke even, we would lose about $1 million of cumulative operating income.

The campuses that we've opened in 2011 have been below that schedule. The ones that we've opened in 2012, it's a little bit early to tell, because most of the more backend loaded. But it looks like it looks like they're below that trend as well. So the diminution and demand that Karl described or a better way to say that the economic impact on our prospective students has hurt that investment profile. It's still in our judgment an attractive use of owners capital, but it certainly hasn't ramped as quickly in the last two years as it did in the ten years before that.

Okay, very helpful. Thanks a lot guys.

Thank you.

Corey Greendale with First Analysis.

Good morning. Appreciate you sticking around as long as possible. this might be the first ever three-hour call. But hopefully three hours not three years. The first question is, so I don't have questions about Karl's qualifications to be CEO, but still curious about the thinking behind the change and the timing, why the decision to do it now?

Well we're obviously quite confident in Karl's qualifications. And in general, I would say that the Board and I have been discussing transition for years. Four or five years. As stewards of an organization, you want to build an institution which will outlive any individual. And I've been very fortunate to have a team including Karl and Mark that have made it very easy for me to execute and got disproportionate credit for frankly many of our successes. And as we looked at the timing of a transition, we wanted to have a transition that was both seamless, had minimal impact, and that I could continue to essentially be around and be a part of this process and know that all the things that we focused on over the last 12 years will continue to be focused on.

And so it was an ongoing organic discussion. We might have done it earlier frankly had it not been for the fact that we had over the last couple of years such a series of regulatory issues that needed to be resolved and needed to -- we needed to show that at the outer ends of any of these sorts of regulatory constraints, that we were quite comfortable operating, and I think last year we certainly did that. And so our view was this was an appropriate time. But Cory, I'm going to be around. I'm still working full-time at the Company, and I don't think anything else should be read into this beyond the fact that we're very fortunate to have an internal candidate that we know is going to do a good job, and we want to make a smooth and seamless transition.

Okay. And I think Rob a few years ago you'd received an option grant with 10 year vesting. Your plan is still to be there through the entire duration of those options?

My plan is to be here as long as the Board will have me. And that stock grant, you are correct, is not vested for another six years, and it's -- it remains in place.

Okay. And what's your current thinking on backfilling the COO role with Karl's changing to the CEO?

Well I think we both feel that at this point with Karl taking on the CEO title, my essentially managing most of the functions associated with being a Chairman of the Board, that is not necessary at this time. But an institution of our size and complexity over time will certainly we'll be looking at that. But in the near-term, that's not a necessity.

Okay. And one more if I could. And relative to -- I know you're not going to comment on my model specifically, but relative to what we'd expected, the reason that EPS was able to beat our estimate was that G&A came in significantly lower. I think was down about 20% sequentially. What were the reasons for that, and what's the go forward expectation?

Well there was a just previous question with regard to a reversal of some accrued stock-based compensation expense. Some of that was offset by one time costs in the quarter. On a go forward basis, I think Mark, you probably ought to look back to Q3 at sort of the run rate.

Yes, that's right, yes something in the $13 million to for $14 million range would be more appropriate on a go forward basis Cory to assume per quarter.

Okay great, thanks very much.

Thank you Cory.

Paul Ginocchio with Deutsche Bank.

Thanks for taking my question. You would have been offering more scholarships in the fourth quarter, and have kind of cut that back. And the new enrollment went from positive to negative. Just wondering why you made the decision to cut back on scholarships. And then as we look forward in the Spring and Summer, you've got some pretty difficult comps from a year ago. How should we think about -- do you see those as difficult comps, or is there something that we should just think about that maybe they weren't as bad as we think, or how should we think about new enrollment based on what you delivered a year ago? Thanks.

Well with respect to the scholarships, every quarter we take a look at the scholarships that we've offered, as well as the types of students that have elected to enroll in the University. We've said that our use of scholarships is designed to try to shape the class, particularly by attracting graduate students and students with transfer credit. We know that students fare very well here at the University. And I'll say we combined that with our long-term view that we are concerned about affordability for our students, and their ability to fund their education. And so on a quarter-by-quarter basis, we'll continue to look at it and try to find the right balance in terms of maintaining the very high-quality academic programs that we want to offer, but also working to address the affordability for our students.

In terms of what the enrollment might be in quarters upcoming, we don't comment on it.

So just the fact that you've cut back on scholarships, does that mean they weren't attracting the types of students you wanted? Or -- I still don't understand how -- you cut back on them and then new enrollment declined. I don't fully understand, if you want new enrollment growth why wouldn't you keep the scholarships? Thanks.

Well because for one thing, students who don't enroll, they don't necessarily tell you why they haven't enrolled. It's certainly possible that a reduced scholarship offering had some impact. But as I say, the challenging macro economy certainly had an impact as well. And that's the feedback we hear from our admissions staff out in the field. But it is something that we look at every quarter. And if we elect to make changes, then we would announce those in the quarter in which we make the changes.

Thank you.

Sara Gubins of Bank of America Merrill Lynch.

Hello, thanks, good morning. Going back to revenue per student, it had previously sounded like that would be flat in 2013 given the tuition increases being offset by more scholarships and grad students and corporate sponsored students. But given the fourth quarter decline and your comments on the call, I want to confirm that it's now likely to be negative for the year. And if that's the case, can you talk about the magnitude of revenue per student declines that you'd expect to see? It has a pretty big impact on the financial model.

Yes Sarah, we don't really know. As Karl said, we experiment through the year with various levels of scholarship. And we're not going to avoid doing that if we think it's appropriate. And there is a big impact in terms of the mix of students. i.e., graduate students and the corporate sponsored students. So I think what we said in the Fall was our model assumed that revenue per student would be flat. But like everything else from those, we adjust them as we see it. At this point, I think that the best thing we can say is that the mix shift and the use of scholarships in the fourth quarter led to the revenue per student that we saw in the fourth quarter.

But as the previous questioner pointed out, we have a more limited set of scholarships for the Winter term, i.e. the first financial quarter. And so that will have a modifying effect on revenue per student declines. So it will be what it is. And we don't really have any ability to directly forecast, nor are we trying to beyond telling you all of the levers that we see and how we're using them.

Okay. And then are expenses still expected to grow 1% to 2% in 2013 versus 2012?

Yes Sara, they are.

Okay, so no change there. And then just in terms of the negative starts that you saw in the quarter, the macro backdrop has been week all year and yet you were growing your starts earlier in the year. So I'm wondering what you're hearing from your admissions advisors about what may have changed, and if it's possible to pinpoint where the weakness was? Meaning was it inquiries or after a student inquired were they less likely to actually come? Any way to parse that out.

Well not really beyond what I've said. We do hear that it is a challenging environment. As I said earlier, unemployment for individuals with a high school only education is quite high. Certainly relative to individuals who have a college degree. And the bottom line is there's just some amount of volatility in the rate at which new students enroll. We've always said that we accept that level of volatility. We don't try to push too hard to get growth for the sake of growth. We want students who are prepared and equipped to do well in the classroom, and so we're comfortable accepting some level of variability in what the new student number will be.

Has the extent to which admissions advisors have talked about the weak macro backdrop being an issue accelerated, or did it accelerate towards the end of the year?

It's been consistent. It's a theme that we've heard for months now. And we certainly heard it in the last quarter. So I would say that it's been mostly consistent.

Okay, thank you.

Thank you.

Jeff Volshteyn with JPMorgan.

Good morning and thank you. Could you give us a little more color on the continuing students, we've seen sort of a weakness there for a few quarters. And then continuation rate if I got it right from your comments, declined this quarter. Just -- and why is that happening?

Hello Jeff. It's essentially flat. It had gone down 30 basis points, and it's been largely stabilized around that rate here for a few quarters now. After having three quarters of new student growth, we did have slightly higher drops, but by and large I see that the continuing number is -- has been stabilizing.

Okay. And just following up on one of the earlier questions in new campuses. Is there any difference in the ramp-up in different geographies? South, North, new markets versus older markets? And this is mostly for the recently opened campuses.

Yes Jeff. As we've discussed in the past, industrial Midwest has not done as well as some of the campuses that we've opened in Texas and elsewhere in the South. But there hasn't really been a market change in the last quarter on that. That's been about a two-year phenomenon.

And last question. Bad debt expense, what is your assumption for the first quarter?

Pretty consistent with what it has been the last couple of quarters, Jeff.

Okay, thank you.

(Operator Instructions)

Jason Anderson with Stifel Nicolaus.

Good morning guys. Congrats on the new roles. Just wanted to touch on Jack Welch. I'm wondering if you could comment again on your strategy there as far as the growth potential. I know it's small at the moment, but specifically, are you putting any additional sales force behind that? If you could comment on that.

Sure. Well there's three areas that we see the Jack Welch Management Institute adding significant value for Strayer. We have the core Executive MBA program, which is doing very well. We've graduated over 100 graduates from that program just since acquiring it just over a year ago. And so that part of the Institute is doing great.

We also have a six week faculty led executive certificates for people who want some continuing education, but maybe don't have the time to go to business school or get the Executive MBA. And we're just now in the process of launching Corporate Management Training, which will be branded Welch Way Training, which is a subsidiary basically of the Jack Welch Management Institute. These are short courses featuring Jack, and about 10 to 25 hours of content depending on the course that will be available both for consumers to purchase directly via Welch Way Training, as well as to license to our corporate partners and other partners. And so, we're very excited about that as well. That will be rolling out in March.

Yes Jeff, I would say in general, I have been fairly disciplined about not letting people describe our admissions officers as salespeople, because it's really not what they do and it's not how they're organized. But I'll let it slide in the case of the corporate training, because as Karl mentioned it is a different business line for us, and one in which -- I think the appropriate term is sales. We're trying through a different distribution channel to have noncredit bearing management training that's really based on the lessons that Jack learned in running GE. And having those rolled out to many of our corporate partners as a separate business line, and really a non-academic line.

Rob, thanks for the concession on that, on that misspeak there. But also, could you comment any further, is there some sort of pipeline or is this something we should expect a big uptake in the beginning here? Or is it going to take a little bit of ramp time on the rollout of these training programs?

They're will be a ramp rate with it. We're launching our first course in March. Ultimately, there will be dozens of courses that we'll be offering. And so I would expect there would be some ramp rate.

Okay. And thank you. And one more on the new program front. Could you maybe comment on your plans for '13? Are there new program development initiatives that could help contribute to the growth to re-invigorating growth? And also, I know we asked you several times on acquisitions. Is there any thought to acquiring diversity in the program front?

With respect to programs, within the last few months, we did roll out some redesigned IT and IS asked programs, which we think are doing very well. But beyond that, we're comfortable with the current slate of programs that we have. And we wouldn't comment on any acquisitions, even if it's just from a programmatic side. But I would summarize by saying that we're happy with the slate of programs that we have now.

Great, thanks for taking my questions.

Thank you.

Kelly Flynn of Credit Suisse.

Thanks, hello. I have a couple questions. First of all, can you talk about if you think the starts should be ale to grow long term, and what needs to change to make that happen?

Yes. I do think new students will grow long-term. I think that education is a valuable asset in our society and in our economy. And I'm quite happy with the quality of our academics and the value that our education provides. And our country has been through a lot worse cycles. I fully expect the economy will recover. And so even in our existing campuses, I do expect over time that our new students will grow. And as we've said in the past, our intent, our ambition is to be a nationwide University.

And so just the opening of new units over time creates growth and new students. The situation that we've been faced with over the last couple of years is significant. And I don't mean to minimize it. But I don't think it's permanent. And the issue is we're very patient. We're very focused on a deliberate strategy that doesn't chase growth in a way that harms the academic institution. And so that will remain, and so the timing of that turnaround we're certainly not -- we are not certain about.

As we've said in the past, we accept that the intake of new students will be volatile. It's just the nature of running an institution like ours. I think its fair to say that we are bouncing around a trend line that's relatively flat. We're not shrinking significantly as we were in 2011. But we certainly haven't begun to grow out of what was I hope a trough in new students. And when that happens remains to be seen.

Okay great, thank you. And then I know you gave a I think it was a 27% number of students coming from various channels. I was wondering could you be a little more specific on both size and growth of the corporate relationships, military, and community college?

Kelly, I don't have a breakdown with me. The number quoted was the sum combination of our national accounts and all of our institutional alliances.

I think it is fair to say that the active-duty military is relatively small. It's like 3% or 4%. Even less than that now. Yes.

Okay. And then earlier this year, when the start were growing nicely, we got some questions about whether the strong starts growth reflected a ramp in a few key corporate relationships, which I think you could Google and see what some of them were at the time. I was wondering if with hindsight you could indicate if that was an accurate assessment? Were there a couple different partners in particular that were growing quickly that were partly responsible for that nice growth you saw?

There's none that jump out individually. All of our corporate relationships were doing well. Relatively. They were growing and not affiliated channels weren't. And we probably had 1% or 2% of growth from the Welch Management students.

And Kelly I think what we may have announced is in just new signing's of national accounts. I don't recall ever attributing any specific growth to one specific client or another.

No, I think she was saying that her research, yes.

Okay, so that's not the case? All right. And then lastly, just could you talk a little bit more about the competitive environment? I know Rob people have asked you about Liberty University, I guess broadly speaking in your region, and obviously investors are asking a lot of questions about traditional schools getting more competitive. What's your current view on that in general, and whether or not it is impacting you more now than it was earlier this year?

Kelly, I think they're certainly are an increased number of traditional institutions that are offering classes for a working adult population. We have kind of thought about competition as being local to the markets that we're in. And it does vary some by market. Our goal is just to continue to build our brands, make sure that people who are thinking about going back to college are aware of Strayer and what we believe are some of the unique attributes to a Strayer Education. And so that's what we're focused on, just building the highest quality brand that we can.

Kelly, clearly Liberty University has been very successful, and they've grown significantly. There's been other not-for-profit traditional universities in the last couple of years have particularly through online applications, significantly grown their student population. But we've had traditional universities affecting this area of the market for a long time. A few years ago, it was Drexel, and there's just been a number -- UMass online I remember a few years ago. So, these things come and go. My view is that there is nothing wrong with an increase in high quality supply of education available for working adults. It's a net positive for the country, it's a net positive to the space. And for us, it's part of what we operate with, and we're happy to see it.

Okay. Thank you very much. Appreciate it.

Yes, thank you Kelly.

Tim Connor of William Blair.

Hello, thank you. What portion of starts did Jack Welch represent in 2012? And then where do you see that going in 2013?

I think it would've averaged 1 or 2 percentage points of growth through most of 2012. And again, we wouldn't comment on any impact moving forward, primarily because we don't know.

Okay. And for mature campuses, are you seeing any wide differences in operating performance?

Our mature campuses and their trends vary a little bit market to market. And consistent with what we've seen just in the overall performance of the University, some of our mature markets, the enrollment there is down. The expenses tend to be somewhat fixed. So as you get lower enrollment there will be slightly lower income associated with those markets. So there's some variability.

Okay. And then on graduations, have you reached a peak? And then what impact would that have on persistence and total enrollment in '13 and maybe '14 if you can project that out?

I don't know what the impact will be moving forward because again we don't know the numbers of students who will graduate in any given quarter. But I don't believe we've reached a peak in terms of the number of students that have graduated. And I expect that it would be somewhat consistent with what we've seen in the last couple of years.

I think what you're asking is, is the trough of new students running through relative to graduations and its impact on continuation. And I think that is somewhat of a peak. Because in 2012, we actually grew new students, in 2011 it shrunk significantly. So the impact of the graduations of students who enrolled in '08, '09 relative to the new student intake, I think has probably peaked.

Okay, thanks. Final one for me. Are you seeing better persistence, stronger persistence among students that received the experienced Student Scholarship in 2012?

Yes, we have. And then I think an earlier question touched on this, but why not keep that in place in some form? It looks like the new scholarships don't seem to incent your retention beyond the first couple courses.

Well again, we're not just trying to grow students in any one quarter. We're trying to build the strongest University that we can. We've used these scholarships primarily to shape the student body. Again attracting graduate students or students with transfer credit. We do consider affordability to be an issue, and that's something that we look at. And at the end of every quarter, we'll sit down and review the results that those scholarships generated, and make any changes that we think are necessary at that point.

Okay, thank you very much.

Sure.

Trace Urdan with Wells Fargo.

Thanks. So Karl, we got that talking point a second time but I'm still not sure you've answered the question. Why did you stop the scholarships in the quarter? What was the decision process that caused you to think that it was no longer useful to offer the scholarship in the Winter term?

Well we didn't stop the scholarship, and we didn't stop it in the quarter. At the end of one term, we elected to make changes to it.

Why?

And we did that two other times in 2012 as well, Trace. And we're just looking to find a good balance. Again, to see what is going to be effective in shaping the student body. It's not perfect information, and we use our best judgments on the results that we get as a result of the scholarships that we're offering. And also I think that you need to look at this on a multi-quarter basis in terms of how these students perform over time. It's not the kind of thing that after just 12 weeks you're going to be able to make an absolute judgment on the overall effectiveness of any scholarship that we offer. And so we'll look at it again at the end of the next quarter, and if we decide to make changes, we'll certainly make that known obviously to the perspective students that are out there. But also, we would let you all know once we do.

But turning down the use of the scholarship, and whatever form it took and whatever time period you did it, suggests that at some level you had determined that it wasn't producing the outcomes that you felt were optimum. Is that right? Or do you have some quotas in mind in terms of the types students you wanted, and those were filled and therefore it wasn't needed anymore?

No, we didn't have any specific quotas. But I think it would be fair to say that in trying to find what I'm describing as the right balance in terms of the types and values of the scholarships that we're offering, we did feel that a change was necessary. And we put those changes in place, and we'll evaluate those changes at the end of the current quarter.

Okay, I just -- I feel great frustration that you keep using the passive voice without describing exactly what's underneath this. As we with our limited information look at the performance of the institution over the last four quarters, it certainly seems like the R squared associated with introducing the scholarships on new student starts was a 0.95. Right? You started the scholarships, the new student starts turned around. You curtailed the scholarships, and we saw a marked reversal.

And I certainly understand that the economy is to blame to some extent, but I'm not aware that there was something that happened in the winter term that was dramatically different from what we saw in the Fall term that would have caused some kind of a spike in consumer anxiety. So is there any other information you can give us that would help us understand the dynamic here? Is there something related to the global online uptake of these scholarships relative to the ground uptake of the scholarships? Is there some dynamic there that you can share with us that would help us understand?

Not much, unfortunately, Trace beyond what I've said. I can remind you that in earlier calls, we said that only about one third of new students were participating in a scholarship. So in any given quarter, two-thirds of our new students weren't. And I think it would also be fair to say that the change in the scholarships may have had an impact in the new students results that we have. And we're looking at it. We're not trying to necessarily chase a growth number in any given quarter.

We're trying to use our assets in the best means that we can to get the most prepared students that we can, students that we're convinced are going to do well in the classroom and persist over a long period of time. And so, just as we'll evaluate the performance of the students that came in on the scholarships in 2012 now over a multi-quarter period, we'll review the performance of the scholarships for the Winter term once the Winter term is complete. If at that time we think that changes ought to be made, we'll certainly implement changes. We do think affordability is an issue. It's something that we're focused on.

And we're also focused on making sure that we have the most prepared students that we can in our classrooms. So there's not an exact science that we're just not telling you about. It's something that ebbs and flows, and we look at it every quarter.

Did the participation rate that you described for the scholarship across the entire University differ materially between the ground enrollment, online enrollment, and specifically global online enrollment?

Not to my knowledge, Trace. I don't necessarily know off the top of my head the difference between global online and online. But in reviewing it over a multi-quarter period, it was pretty consistent.

Okay, thank you very much.

Hey Trace, we can e-mail you the talking points.

I've got those. So I got those. It will be in the transcript.

Paul Ginocchio with Deutsche Bank.

Thanks for taking my follow up. But just wondering if you would -- if there's been any change to your marketing strategy or increased in advertising spend in the last couple weeks? I live outside your market, so I wouldn't see that if you'd spent more. And then second, just can you talk about what stock comp could be in 2013? Thanks.

I'll take the marketing question. There will be slightly higher marketing and advertising expense in 2013 versus 2012, which is mostly attributable to annualization of expenses that we had associated with new campuses and new markets that we entered. But there's been no real change in the strategy.

And there has been no real increase in the last couple of weeks in ad spend?

No.

Okay thanks. And stock comp for 2013?

Yes, on the second part of the question, it's obviously dependent upon the Board of Directors and the compensation committee of the Board. But based on what's happened to date, I think it's probably in the $12 million to $13 million range.

Still. Okay, thank you very much.

Jeff Meuler with Baird.

Yes, thank you. Can you remind us how many starts a new campus generates on average in its first year of existence?

The model that we had worked off of for a number of years was that a new campus that was opened in the beginning of the calendar year would average -- would end up at about 100 students by the end of that calendar year. There's some academic failure in early terms and just some dropouts. So there's a higher number of incoming new students in that year on average or there had been. So maybe, I don't know, 120, something like that. But our performance in our new campuses in the last couple of years has been quite a bit below that. Some 20%, 30% below that. So those are round number averages, and they can be markedly different campus to campus. But it's probably a fair guidepost to work off of.

Okay. And then what are the main factors you're watching in terms of a trigger figure for deciding to open new campuses again?

Well there's really two issues with regard to opening new campuses. One is, whereas we're quite comfortable that as we went through this whole two-year process of the Department of Education developing a new regulatory structure, as well as having the Congress and the Senate Help Committee look at various types of legislative initiatives, that at the end of that, that we're operating exactly where we want to be. Well within the bounds of any sort of tightening of regulations. So from that standpoint, we feel quite comfortable.

However, there is uncertainty associated with the regulations. And the department has to go back to the drawing board based on the fact that the US District Court declared invalid the regulation. And we've got a certain amount of -- more than certain amount, a fair amount of economic uncertainty that as Karl has said has impacted our new student growth and our overall student participation. So we're looking for clarity in both of those areas. Watching very carefully the real return on investment associated with our campus openings.

And then also bearing in mind, the timeframe associated with that. So we're at a point in the year now where I think it's unlikely, very unlikely that we'd have any new campus openings in 2013, and there's a good 6 to 12 month lead time. We'll be in a position as a Board to review management's plans towards the third quarter of this year that would be achievable in 2014 if some of these other conditions ameliorate. But we would let you know that probably in the latter half of the year as we normally do.

Okay. And then as you think about capital structure Rob, what would be the maximum amount of net debt that you would feel comfortable with this business model caring?

Well as a business matter, I think you could have a higher amount of debt than I think you can from a regulatory standpoint. We're quite focused on making sure that our financial composite score remains above a level at which we have free operations. And so that limits the amount of debt that you could put on. And it's a higher amount than we have now, but we think we have the right capital structure right now. And we certainly have enough liquidity to put capital to work, both in expanding the business and returning capital to the shareholders as we deem appropriate.

Okay, thanks for taking the follow-ups.

You bet.

Corey Greendale of First Analysis.

Hello. Thanks for taking the follow up. This may be a little nit picky but in response to Paul's, question you thought the stock-based comp would be I think 12% to 13% in 2013. If that's right, I think that alone could drive a 1% to 2% increase in operating expense. I just wanted to verify or clarify, do you mean 1% to 2% increase in 2013 in OpEx excluding stock -based comp?

No, and I don't think that would. Our stock-based comp on a run rate basis was about that. And so now the 1% to 2% is associated with the annualization of the increased operating expenses on the eight new campuses, almost all of which were opened at the very end of the year. So they're sort of rolling through into 2013.

I was incorporating the reversal, you mentioned in Q4 into the 2012 results. And the other quick question is, I heard what you said about CapEx. But other than that, is there any reason to expect a differential between distributable free cash flow and net income in '13?

It ought to be about the same relationship, Cory.

Okay. Great, thank you.

You bet.

This concludes our Q&A session. I would like to turn it over to Mr. Silverman for closing comments.

Well thank you very much for participating. Karl, and Mark, and I are available if you have other questions give us a call, and we hope we'll see you on May 2nd here at our Investor Day. Thanks very much.

Thank you ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.