Strategic Education Inc (STRA) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to Strayer Education, Inc. fourth-quarter 2015 earnings results conference call. This call is being recorded. (Operator Instructions) With us today to discuss the results are Robert Silberman, Executive Chairman for Strayer Education; Karl McDonnell, Chief Executive Officer; and Daniel Jackson, Executive Vice President and Chief Financial Officer. 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 the Safe Harbor provisions of the Private Securities Litigation Reform Act. These statements are based on the Company's current expectations, and are subject to a number of assumptions, uncertainties and risks that the Company has identified in the paragraph on forward-looking statements at the end of this press release, and that could cause the Company's actual results to differ materially.

Further information about these and other relative 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 Investor Relations Department.

And now I would like to turn the call over to Robert Silberman. Mr. Silberman, please go ahead.

Thank you operator, and good morning, ladies and gentlemen. Now we are going to begin this morning with Karl discussing both our Company's operating results for the fourth quarter, as well as a little more detail on our acquisition of the New York Code and Design Academy, which we announced in January. Dan will then report our financial results for both the fourth-quarter and the full-year, and I will conclude with some comments on our capital allocation over the last year, after which we will stay for as long as you have questions.

Karl?

Thanks, Rob. Good morning, everyone. First, I would like to make a few comments about financial results that we reported this morning. Our revenue per student was down 3.9% for the fourth-quarter and 3.1% for the full-year. Both of these declines were better than we originally anticipated, and are primarily due to slightly more seats per student, which is the result of a slight mix shift to undergraduate students who tend to take two courses per term, as opposed to one.

The overall declines in revenue per student attributable to our lower undergraduate tuition has mostly worked its way through our income statement at this point. The expected decline in 2016 is estimated to be about 100 basis points.

We also continue to be very focused on cost management. In the fourth quarter, our total operating expenses were down 1.5% from the prior year, notwithstanding the fact that our enrollment was 2% higher. For the full-year, operating expenses were flat despite higher enrollment, as we were able to offset incremental investments we made in the Jack Welch Management Institute and Strayer@Work.

Turning now to our enrollment results for the winter academic term, our total student population increased 40 basis points to 40,872 students. Our new students decreased 5% from the prior year, and our continuation rate was flat. The reduction in new students was entirely concentrated in the University's unaffiliated students. As new students from our national accounts increased 4%, new students from the Jack Welch Management Institute increased 55%, and we also added several-hundred new students from Strayer@Work, for which there is no annual comparable.

With regard to the Welch Management Institute, in addition to their 55% growth in new students, total enrollment increased 36% and student satisfaction remains incredibly high, with their most recent net promoter score coming in at 77%. We were also pleased that JWMI was just named the number one most influential education brand on LinkedIn in the world. Strayer@Work continues to gain more traction in the B2B space as they signed nearly a dozen new engagements over the past quarter.

Lastly, I would like to comment on our recent acquisition of the New York Code and Design Academy, or NYCDA as we refer to it -- one of the country's leading providers of web development, mobile app development, and design training. Although we looked at many opportunities in the coding space, we were most interested in NYCDA based on their focus on producing outstanding learning outcomes for their students, and their focus on superior customer service, both values that we share.

NYCDA's current management team will remain in place and will work with our team to create as many synergies as possible. Beginning this year, and subject to regulatory approval, based on what we see as rapidly increasing demand and significant projected shortages of web developers and designers, we will start a multiyear expansion strategy to bring NYCDA's programs to as many markets as possible, leveraging our campus footprint and existing infrastructure.

NYCDA's financial results will be included in our consolidated financial statements beginning in the first quarter of this year. For the full-year 2016, we expect modest dilution of between $0.20 and $0.30 per share, half of which is non-cash amortization of items related to the transaction. We think this is a great long-term opportunity for us, and we are thrilled to have NYCDA as part of the Strayer family.

And with that, I'll ask Dan to talk about the financials in more detail.

Thank you, Karl, and good morning, everyone. I will start with revenue, which, for the fourth quarter, was $113.7 million, a decrease of 2% from 2014. The decrease was driven by lower revenue per student, which was down 4%, offset by 2% total enrollment growth for our fall term. And as Karl mentioned, the decline in revenue per student was better than expected, due to higher classes taken per student, as our mix of students shifted slightly towards undergraduates, who take more classes per term.

Our income from operations was $21.7 million compared to $22.6 million for the same period last year. Our operating margin was 19.1% for the quarter compared to 19.5% in 2014. Bad debt expense was 3.3% for the quarter, compared to 4% for the same period last year. Net income for the quarter was $13 million compared to $12.9 million in 2014. Net income this quarter was helped by lower interest expense, resulting from the payoff of our term debt in the third quarter. Earnings per share for the fourth quarter was in line with 2014 at $1.21.

Moving on to our full-year results, total enrollment for the year was up slightly, while revenue per student declined by 3%, contributing to a 2.6% decline in total revenue to $434.4 million compared to $446 million in 2014. Income from operations was $69.7 million for the year compared to $81.7 million in 2014.

Excluding non-cash adjustments to our liability for losses on facilities that we ceased using in 2013, income from operations was $69.3 million in 2015 and $77.6 million in 2014. Excluding the non-cash adjustments, our operating margin for the year was 15.9% compared to 17.4% last year. Net income was $40 million for the year, compared to $46.4 million in 2014. Excluding the non-cash adjustments, net income was $39.8 million this year compared to $43.8 million in 2014.

Diluted earnings per share for 2015 was $3.73, compared to $4.35 last year, a decrease of 14.3%. Excluding the non-cash adjustments, EPS was $3.70 this year compared to $4.12 last year, a decrease of 10%.

We ended the year with $106.9 million of cash and no debt. For the year, we generated $76.9 million in cash from operations compared to $77.6 million in 2014. Cash flow from operations this year was impacted positively by fewer lease buyouts and non-cash lease adjustments relative to 2014.

We spent $12.7 million on CapEx during 2015 compared to $6.9 million in 2014. And as I have said before, the large increase in CapEx this year is related to our investment in academic programs, including the RN to BSN program; investments in our technology infrastructure; and a few campus renovations. We expect to sustain a maintenance level of CapEx in the range of 3% to 4% of revenue on a go-forward basis. And finally, we continue to maintain $150 million in available credit on our revolver.

Rob?

Thanks, Dan. Just to put Dan's numbers on cash for the full-year in a little more of a narrative form, if you think about it, we started the year with $162 million in cash on our balance sheet, and we had 10.7 million shares outstanding, and we had that large term loan, $119 million in principal was outstanding at the beginning of the year.

As Dan mentioned, we generated $77 million in cash from operations during the year. And we think about that pool of cash as a bucket of resources, which essentially belongs to our owners, but we try and invest on behalf of our owners. And what we did this year was, roughly $18 million in investments inside the business, if you aggregate the CapEx, the maintenance CapEx, the academic technology.

We decided to prepay our term loan. We paid off the entire $119 million. We wanted to be debt-free going into the year. And as part of that transaction, we did secure a new five-year $150 million revolver, which extended our access to that liquidity far into the future. And then consequently, at year-end, we had $100 million -- a little over $100 million of cash on our balance sheet. We did not repurchase any shares during the year, so it's still 2.7 million shares outstanding.

And as Karl mentioned, we have already used some of that cash to accomplish our New York Code and Design Academy, or NYCDA, acquisition, which we did in the -- a couple of weeks ago in the first quarter. So, for the balance of the year, we are going to continue to compare all of our potential uses of this owners' distributable cash, because we do believe that we will have a healthy cash flow during the year from our operations in 2016.

And we'll -- all these potential uses, which includes internal investments, acquisitions; we're very excited about NYCDA and the opportunity to put capital to work in areas that have higher growth, less regulatory risk, more of a diversification for us. And then finally, return of capital to owners. And we think about all three of these equally.

They are all uses of owners' cash, and we allocate capital on the basis of what we believe will be the highest long-term return to our owners on a risk-adjusted basis. And that is how we will look at it for the upcoming year as well. It is an issue that we talk about every quarter with our Board and gets a high amount of attention.

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

(Operator Instructions) Corey Greendale, First Analysis.

So, first, quick, Karl, I just had a clarifying question. I think you said you signed nearly a dozen new engagements in the last quarter for Strayer@Work. I just want to make sure I am getting my terminology right. Strayer@Work, that is still a relatively small pool as opposed to the national accounts, which is a larger pool, is that right?

Yes. The national account agreements are essentially tuition discount programs that we have with large companies. We have over 300 of those. Strayer@Work is a dedicated team of professionals that are designed on implementing customized learning solutions for Fortune 1000 companies.

Okay, so I think that you only had a couple of those going into the quarter? Is that wrong?

No, that is not wrong. It is still a relatively new entity, just crossing the one-year anniversary, so they are starting to get some good traction. They have completed several engagements with some very positive reviews on the part of some of our clients. And, in fact, among the 12 are some repeat engagements inside the same company. So, we see that as a vote of confidence for the work that they are doing.

When you say repeat, you mean that the arrangement is -- have a finite duration and they are re-upping? Or what --?

Well, slightly different. So, part of what the Strayer@Work team does is work with companies to create a specific engagement to solve a specific problem inside of a company. And so, it is a fixed duration. It could be six weeks, it could be 12 weeks, depending on the complexity. And then that engagement will close.

In several cases, the companies for whom we provided those services have said we really like that; there is a different part of our business we would like you to tackle, and we would like to engage with you to do that.

And so, although the FCA deal garnered the most news, because that is what we consider to be what we call a Degrees@Work product -- and we do have companies that we are talking to about that -- there is another part of the Strayer@Work portfolio which is all around creating customized learning solutions for these companies.

Non-degree.

Non-degree.

Training programs.

All right, that is very helpful. And then, just a couple questions about 2016, which you may or may not be able to answer, but I appreciate the thoughts on the dilution from New York Design. Do you -- can you give us some sense of the revenue contribution?

No, I really can't, Corey. First of all, we don't comment on forward-looking revenue. But in this case, there is just a lot of moving pieces that we are still working through, and we will obviously comment on it once we start our expansion strategy.

Okay. And I imagine if you were going to do this, you would have done it, but this last year, you gave us some sense of where you thought revenue would come out for the year. Anything you can give us for 2016?

No. No, we are not providing any forward revenue visibility.

Hey, Corey, just on New York Code and Design Academy, as a kind of a narrative, or as a illustrative example, in thinking about the dilution, it reminded me very much, when we first started talking about this, of the analysis and the strategy and the decisions we made in the summer of 2001 about rolling out campuses, where we looked at the business that we had. We are excited about expanding that business into new markets.

Recognize that you are going to have operating losses in the early quarters or years of operations in those markets, and happily accepted that dilution, if you will, or those operating losses, because we were excited about the business that we thought it could build. And that, on a much smaller scale, that is essentially what we are looking at here with NYCDA.

Yes, that makes a lot of sense. And actually that leads into my other question about NYCDA, which is -- can you give us -- so, the -- clearly, there is some great supply/demand characteristics to that area, to the -- helping people learn how to be better -- how to code at a relatively low cost.

Can you just give us some sense how this particular one differentiates from some others in the market, like General Assembly or others? Or is there so much demand that you don't actually need to differentiate that much?

Well, it's -- they are a small entity, and they are young in their lifecycle. They are -- to our knowledge, they are one of only two coding boot camps that is licensed presently in New York, which provides some regulatory differentiation.

We did a considerable amount of diligence in this space, Corey, and what we found was NYCDA's outcomes were superior. And they've got very strong relationships with employers with whom they work to provide services for their students. And mostly, once we were confident that there was strong outcomes -- and to your point, we know there are strong supply/demand characteristics -- then it came very much down to a cultural fit.

The management team is very strong. And we see that capitalizing on our existing infrastructure, our expertise, and running multisite operations is something that we can help NYCDA with. And we just think it is a really good natural fit for us, and we'll provide some very good long-term growth prospects.

Great. Thanks for taking my questions.

Sure.

Trace Urdan, Credit Suisse.

I would like to stick with the NYCDA theme, if I may, initially here. Can you talk a little bit about the buy versus build decision there? Because the NYCDA brand is not that broad, in our estimation. And I wondered if you looked at what it would cost you and what the timeline would be for you to simply enter the market on your own versus going out and buying in entity. It strikes me as a fair amount of dilution for a business that is as small as NYCDA is at the moment.

It's good to hear from you Trace. Welcome back. Yes, we looked very hard at whether or not we should build this organically ourselves. Our current IT programs in the degree side, the Strayer University side, are not necessarily aligned to web development, mobile app development, web design and so forth. So, it is not a natural sweet spot from us from a talent perspective. We would have to go acquire that talent, and we would want to be comfortable with who we are having -- or who we are hiring, I should say.

And at the end of the day, Trace, I think what it comes down to is, we wanted to enter this market more quickly. I think entering it on ourselves would be a multiyear effort. And when you juxtapose the opportunity to quickly expand something that already exists across our existing infrastructure -- our existing campuses, our marketing expertise, our operating expertise -- in our estimation, over a five to seven-year period, the synergies created by an NYCDA/Strayer combination looked a lot more favorable to us than us trying to do it on our own.

Hey, Trace, one other clarification, too. The actual dilution that I care about, which is the cash dilution, would have been the same -- it probably would have been more on a build. Because the dilution as the operating loss is associated with rolling out the programs.

The amortization -- the non-cash amortization is actually related to a clawback provision, because we really like this management team and we want them to stick around. And so, buy versus build is always the right way to look at it, but it wouldn't have affected the cash dilution, in my judgment, in terms of choosing one over the other.

And as Karl said, the speed to market, the cultural fit with these young entrepreneurs that we felt -- we thought this made more sense.

That's great, thank you. That's very helpful. I wanted to also go back to the Strayer@Work discussion. Obviously, the buildout of helping companies over time is an attractive revenue stream, but I think the sexier part of Strayer@Work is certainly the deal that you have with Chrysler. And I am wondering if you can characterize your sense of the market's appetite for more deals like that, whether you can speak to what the pipeline looks like for that potential -- more potential to breed deals like that one that might be in place?

Sure. Regarding appetite among companies, I think it is growing every day. More and more companies are reaching out to us to learn more about the FCA arrangement. Degrees@Work, the FCA arrangement, is really designed to solve two problems for companies. One, attract the best people in their space, and then obviously retain those individuals over long periods of time.

And so, within industries or companies that experience high levels of turnover, Degrees@Work, we believe, is a very strong antidote to the turnover that they experience. So, the appetite is growing.

It is a complicated product. It requires a lot of coordination amongst ourselves and whatever company we are working with, so it is not something that is able to be stood up in what I would consider to be a short amount of time, meaning several weeks -- it's months.

And to answer your question around, is there a pipeline? Yes, there is. We are talking to several large companies at a scale equal to FCA, if not slightly larger. But I can't comment to when we think another one might come, because we obviously don't know. But we are actively talking to many organizations about it.

Do you think it is a reasonable expectation that you could add one more FCA-like deal in the course of 2016?

I can't speak to when we think another Degrees@Work client will come in, but I do anticipate that, over time, we will have more than FCA as a client with that product line.

Okay. I mean, last question for me, I don't think anybody doubts your commitment to returning cash to shareholders, Rob, when you made those comments. But I am wondering more specifically, the outlook that caused you all to eliminate the dividend, I am wondering if that -- if those conditions are still in effect in your mind? Or what you think the Board needs to see in order to reconsider that decision? Are there sort of external factors that you look to that would say, okay, now it is time, now we feel confident enough to turn the dividend back on again? Or to be more active on the share repurchase program?

Well, I actually think the larger issue there, Trace, is the availability of opportunities to reinvest capital into related businesses, but ones which supplement our key skill sets. And for a long time, we want -- it wasn't so much cash that we were concerned about; it was management bandwidth, to fully take advantage of the opportunity of the -- our traditional post-secondary education.

In the last four to five years, it is clear that demand for post-secondary education has been muted. And so we now look at -- and in that time period, we did not want to dilute management attention away from that mission in terms of acquisitions. We are less concerned about that now, because we feel like we are doing everything we can to run a first-rate university, to get great learning outcomes, protect this brand, build for the long-term.

And we have the opportunity to look at some other areas that are in higher growth and more diversification, as Karl has mentioned. So the -- on the one hand, you've got the return of capital to owners versus implementing it or investing it in terms of acquisitions. And so the opportunity for acquisitions will, in some measure, dictate our willingness in terms of return of capital to owners.

But then, the direct answer to your question that you are driving at is, we have been bouncing along the bottom. We haven't really shown -- the economy hasn't firmed enough to generate organic demand for education at a rate that is anywhere close to what we had before. And we have always felt that trying to generate demand through aggressive marketing is the wrong way to run a university.

So, I would say that we felt like we have reached the bottom and have bounced along it for the last sort of 18 months. And if we continue to be at that bottom, or to grow off of it, and we don't have other opportunities to invest capital through acquisitions, then that will make myself and the Board, I think, more -- the return of capital would be -- at a more attractive use of cash for us at that point. But we are not in a position to say that at this point.

Okay, thanks. I appreciate that thoughtful response.

Thank you, Trace.

Sara Gubins, Bank of America Merrill Lynch.

Could you break down the start trends at the undergrad versus graduate level?

This particular quarter, they were fairly even. And I would just like to maybe amplify some thoughts on the new student results that we had. Our view of the new student performance, Sara, we try to look at that over a much longer trend period, say three to five years. And over a three to five-year period, there were quarters when we were up 20% and there were quarters when we were down 20%.

So, if you contextualize that over what we have seen over the last year, the volatility has been substantially reduced. And having a quarter where we are down 4% or 5%, that, to us, is not just been acceptable but perhaps a normal level of variability that we've always said that we were willing to accept. And to Rob's point, not being overly aggressive on marketing to draw in students who perhaps are not qualified enough.

So, in the broad sense, we continue to think that our enrollment results are stabilizing. But we accept that they will bounce around a little bit quarter to quarter.

Okay, great. And then you mentioned that the declines were really because of unaffiliated Bachelors. Could you quantify what unaffiliated Bachelor new student declines were?

I don't have the exact number, but given the offsets that we had with the national accounts, and JWMI and Strayer@Work, it probably would have been down 8% -- 7% to 8%.

More than 5%, anyway. (laughter)

Yes.

Right, right, okay. On the cost side, based on your initial 2016 budget, could you talk about how we should think about your costs this year? I am assuming -- and maybe excluding the amortization associated with the recent acquisition?

If we exclude NYCDA, I would anticipate costs would be anywhere from 1% to 2% up, as we continue to invest in Strayer@Work, JWMI, and then layering in whatever we decide to do and what is required for NYCDA's rollout.

Okay, great. And then for the acquisition, will you report the number of students in that in your overall count? Or should we not expect to see that included?

No. And that is a good point. NYCDA is not a part of the University. It is a wholly-owned subsidiary of Strayer Education, Inc. So their students will not be reported as a part of the University's enrollment.

It will just be in Other, Sara, until it gets to be meaningful. And then we will break it out.

Okay, okay, got it. And then, just two more. One, getting back to your comments about not wanting to be overly aggressive or particularly aggressive in marketing as a way to drive enrollment, I fully appreciate that. But it's interesting, because we have seen ramped marketing from nonprofit schools, particularly for their online programs over the last several years.

And we will often hear from lead providers that those schools are acting almost the way that proprietary schools had been in the past. And so, I wonder from a competitive perspective, how do you look at the changing overall environment, recognizing that you don't want to push too hard on marketing because it might not drive -- for students that would retain, but that the environment from an overall marketing perspective is changing?

Well, Sara, for a long time, we have had a policy of not commenting on other competitors. And I consider traditional universities competitors in this format. And so I -- we wouldn't comment on their strategies in terms of lead acquisition or anything else.

I can say that having spent 15 years watching this enterprise, and balancing out the inputs and the outputs to create value, that the worst thing you can do is try to peg a certain rate of growth for a university and move levers around like marketing to try and achieve that. Because, ultimately, you end up with students who will not succeed and do not belong. It is just the nature of trying to maintain those balances.

And I don't care how good your brand is or how long it has existed as a traditional university, that will hurt your institution long-term if that happens. And so, it's -- the competitive pressure that you describe is one that we see and have a very deliberate strategy in terms of dealing with.

But the strategy is based on building a brand around Strayer University, attracting the kinds of students that we want to attract, that we -- not all of which will be successful, but we have the best opportunity to get successful students, and doing it in a way that creates value over a long-term. So, it's just -- it's not going to -- it doesn't really matter what they do; it's not going to change our view of that.

Okay. And then just last question, there have been some press reports about the economics around the Fiat/Chrysler relationship within Strayer@Work. I am assuming you're not going to give us a lot of details on economics, but I am wondering, from a financial perspective, does Strayer have any incentive or disincentive to enroll more students? Meaning, is there a point at which you would have negative economics if more and more students signed up?

It's really complicated pricing structure, Sara. And there are scenarios where the economics would be unfavorable to us for a fixed period of time. And I say that because, as part of this arrangement with FCA, we are able to not reset, but change the price or adjust the price as needed --

On a go-forward basis.

-- on a prospective basis, if we got to a situation where more students than we had thought were enrolling, and therefore the economics were not working. I mean, FCA is a great partner. They understand that this is not a program we can operate at a loss. It certainly is a program that has got smaller margins than perhaps the core University, but it is complicated.

But to answer your question, we want as many FCA students as possible. There is no scenario with which we would try to diminish enrollment from that program. Because we -- personally, we all think that this is a very innovative product that could be one model of the future of how the secondary education is delivered. So we want as many students as possible to come from not just this agreement, but future ones as well.

Great, thanks so much.

Sure.

Thanks, Sara.

Peter Appert, Piper Jaffray.

Just sticking with Strayer@Work for a second, I was thinking beyond the Degrees@Work programs that the margins of the training-oriented programs are probably below what you have done historically at the University, just because there is the customized costs associated with that. So the question is, number one, is that true? And then does the growth therefore of Strayer@Work suggest just a little bit of pressure on overall level of margins for the Company?

I would say that that is actually not true, Peter.

Okay.

As more and more engagements are signed up and then completed, we are creating a body of work and expertise, if you will, that enables us to shorten the amount of development time, for example, that exists. We are able to, in some cases, repurpose content.

And so in the only early part of Strayer@Work, there would be some margins that would be smaller, but not unlike what we see in the other part of the University. marginal contributions are growing as we get more and more clients, and we are able to leverage our body of work across what is becoming a growing client base.

Okay. Got it, that is helpful. Thank you. On the Code Academy, can you give us any color in terms of price of typical program, duration of the programs, current enrollment numbers?

Well, current enrollment numbers are pretty small. And as Rob said, we are not going to really break that out until it gets to be of a more material size. But typical programs are, they have full-time/daytime programs that run anywhere from eight, 10, 12 weeks. They also have part-time evening programs. The daytime/full-time is their sweet spot today.

And they are offering these programs anywhere from $8,000 -- $10,000 -- $12,000. It is not Title IV eligible, and the value proposition, as reported by the students, is very high.

Okay. And then just on the reporting of this, Rob, I think you said something about it being in the Other category. So will you have a separate line item in revenues of -- for NYCA?

Well, at this point, no, because it is so small. But once it gets to a level of materiality, we will have a separate line item, yes.

Okay. And then can you give us a snapshot of the current mix in your enrollments? I am thinking about national accounts versus Welsh, versus @Work versus unaffiliated.

Well, national account-related enrollments, institutional national account-related enrollments, is still nearly a third of our student body. Graduate students is roughly a third.

Some of those are included in --.

There is a little bit of double counting there. The Jack Welch Management Institute crossed over 1,000 students a couple quarters ago, and it is growing pretty rapidly. That is going to increase as a mix percentage, both within graduate and just overall Strayer. Those are the rough numbers. I don't have the specific mix in front of me, Peter, but that kind of outlines broadly where we are at.

Okay, so which would imply then that the unaffiliated students would still be the biggest percentage of total enrollments, right?

They have been, over the last few quarters, the largest share of the new cohort coming in.

Right, okay. And then last thing, I know this has never been a specific focus, but can you just give us a sense of how you are thinking about margin levels in the business, and just conceptually, what you think appropriate levels of margin for the Strayer business are?

Yes, we are not targeting a specific margin. We -- to Rob's earlier point, we are making all the investments that we think we need to make in the University in the way of faculty, curricula, programs, technology and so forth.

The resulting margin obviously will be a result of whatever the enrollment is. We think we've made really strong progress on the retention side. I think we are into our -- beyond two years of continuation rate expansion; the new students bumping around a little bit.

So that ultimately is going to be the determinant of whatever the margin is. But we don't set a margin target necessarily, and then work to that and try to solve for it backwards.

Just, Peter, I mean, mathematically, we probably have a physical asset and an online base that could easily serve 60,000 students. We've got 40,000 now. If it went to that, the margins would trend back up to at -- or around what our high points were. And it is fairly mathematical. It is not linear, but it is mathematical -- or from that standpoint. And so, it is an outcome not an objective, but that is how I would think about it.

Okay, thank you.

Sure. Thank you, Peter.

(Operator Instructions) Jeff Silver, BMO Capital Markets.

Just some quick follow-up questions. In your remarks earlier about the coding school, you mentioned that you would be willing to operate this as an operating loss for a while. From an EBITDA perspective, though, is this an EBITDA-positive business? Or would you have an EBITDA loss as well in the near-term?

Go ahead.

It would be modest. And the economic characteristics of NYCDA, although it is very analogous to the Strayer campus expansion strategy over the last decade, the capital requirements are substantially less. And we believe the time to breakeven is much quicker. And so, we can't really provide too many details around what that, quote/unquote, "notional model" might look like on a NYCDA basis because, frankly, we are still working through it.

But, as I said in my prepared remarks, we think that the cash dilution is relatively modest, and the investment capital required on any given market, or any given single site, is relatively low, given we are able to utilize predominately existing resources and infrastructure.

Okay, that makes sense and it's very helpful. Just in terms of the incremental amortization impact, is that something you can quantify for us so we can update our models?

Yes. For 2016, Jeff, as Karl mentioned earlier, the $0.20 to $0.30 dilution, about half of that is amortization-related.

And that -- the tax rate for next year is pretty much the --?

Yes, 39% to 39.5%, I think you're safe in that range.

Got it. All right. That is helpful. And then just one more. It's more of a high-level question. Given you guys are down in Washington and most of us are not, are you hearing any type of maybe a mindset change on how the different regulatory bodies are looking at the sector these days?

Well, I think, Jeff, it's -- first off, I doubt our exposure to it is any greater than anybody that lives in Minneapolis or New York or Chicago or anywhere else. I think it is fair to say that this is a heavily regulated industry, and that the -- there is a certain amount of skepticism about the way this model operates, and that we have to prove ourselves to regulators and accreditors every day in terms of our commitment towards academic outcomes versus any other stakeholders' results.

And I haven't seen that change intensify, lessen, over the last year or so. I think it is pretty strong.

Okay, that is helpful. Thank you so much.

And I was chuckling, by the way, on your question on the amortization, because the two of these guys were looking at each other trying to figure out who was going to answer it, so. (laughter)

I appreciate it.

Thanks.

We have a follow-up question from the line of Trace Urdan with Credit Suisse. Your line is now open.

I think you maybe addressed this a little bit with the parsing of transcript. I am just going to ask it in a more straightforward way. Should we expect you to see you guys rolling NYCDA out to Strayer campuses, to separate physical locations? What might we expect to see in terms of your taking that offering and making it more broad across your network?

Well, as part of our discussions with NYCDA, we obviously shared with them our campus footprint. They shared with us research that they had done on what they believed to be attractive market, and there was considerable similarities between the two.

And so there clearly is opportunities in markets like Washington, DC and Atlanta and Philadelphia and others, where we know that there is strong demand for web development. But -- so to answer your direct question, Trace -- yes, we plan to heavily rely upon our campus network to accelerate the ability to expand into these markets. But it doesn't necessarily mean that it will only be in markets where we have campuses, because there is strong demand for web developers and designers, obviously in markets outside of our campus footprint. And we will look at those as well.

Does that imply, Karl, a shared location strategy? Or not necessarily?

No, we absolutely have contemplated a shared location strategy. And to the extent that we were to open NYCDA in a market where there is no campuses, that perhaps could be an excellent opportunity to have a cobranded facility that would be both NYCDA and Strayer University. And obviously leveraging two different brands with one investment, one infrastructure, if you will, helps the economics of both of those.

Okay, great, thank you.

Sure.

Thanks, Trace.

And I'm showing no further questions in queue at this time. I would like to turn the call back to Mr. Silberman for closing remarks.

Thank you, Liz. And thanks to everybody for participating. We look forward to talking to you again in, I believe, late April, right, Dan? On our next call. Thanks very much.

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