Strategic Education, Inc. (STRA) Q2 2010 Earnings Report, Transcript and Summary

Good day, everyone. And welcome to today’s Strayer Education Incorporated Second Quarter 2010 Earnings Results Conference. Just as a reminder, today’s call is being recorded. Following today’s presentation, we will offer the opportunity for questions-and-answers. As 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, Ms. Sonya Udler. Ms. Udler, please go ahead.

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 1:00 p.m. Eastern through Wednesday, August 4th. The replay is available at 888-203-1112, pass code 4187238. Following Strayer’s remarks, we will open the call for questions-and-answers. Please note that today’s press release contains 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 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. And now I’d like to turn the call over to Rob. Rob, please go ahead.

Thank you, Sonya, and good morning, ladies and gentlemen. As is our custom, I’d like to begin this morning with a brief overview of both our company and our business model for any listeners who are new to Strayer. I’ll then ask Mark to report on our second quarter financial results and Karl to comment on our second quarter operational results as well as our enrollment statistics for the summer academic term. Finally, I’d provide an update on our growth strategy and the company’s earnings outlook for Q3 2010 and some thoughts on the department of Education recently published notice and proposed rule making. Strayer Education, is an education service company whose primary asset is Strayer University, a 55,000 student, 80 campus post-secondary education institution founded in 1892, which offers Bachelor’s, Master’s, and Associates degrees in business administration, accounting, computer science, public administration, and education. Unlike traditional universities, Strayer University students are working adults, who are returning to college and graduate school to improve their lives. Our revenue comes from tuition payments and associated fees. Approximately 70% of that revenue comes to us from federally insured Title IV loans issued to our students. Our expenses at Strayer Education include the cost of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We serve students in 15 states through 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. Mark, you want to run them through the financials?

Sure. Revenues for the three months ended June 30, 2010 increased 26% to $159.3 million, compared to $125.9 million for the same period in 2009, due to increased enrollment and a 5% tuition increased which commenced at the beginning of this year. Income from operations was $58.7 million, compared to $45.1 million for the same period in 2009, an increase of 30%. Operating income margin was 36.8% compared to 35.8% for the same period in ‘09. Net income was $35.7 million, compared to $27.5 million for the same period in 2009 an increase of 30%. Diluted earnings per share was $2.60, compared to $2 for the same period in 2009, an increase of 30%. Diluted weighted average shares outstanding decreased to 13,704,000 from 13,771,000 for the same period in ‘09. Revenues for the six months ended June 30th, 2010 increased 27%, to $317.2 million, compared to $250.4 million for the same period in 2009. Due to increased enrollment and a 5% tuition increased which commenced in January of this year. Income from operations was $118.6 million, compared to $92.7 million for the same period in ‘09, an increase of 28%. Operating income margin was 37.4%, compared to 37% for the same period in ‘09. Net income was $72 million, compared to $56.6 million for the same period in ‘09, an increase of 27%. Diluted earnings per share was $5.25, compared to $4.07 for the same period in ‘09, an increase of 29%. Diluted weighted average shares outstanding decreased to 13,716,000, from 13,886,000 for the same period in 2009. At June 30, 2010, the company had cash, cash equivalents and marketable securities of $141 million and no debt. The company generated $87.9 million from operating activities in the first six months of 2010, compared to $71.9 million during the same period in 2009. Capital expenditures were $22.6 million for the six months ended June 30, 2010 compared to $13 million for the same period in ‘09. During the three months ended June 30, 2010, the company used $7 million to repurchase 29,200 shares of stock at an average price of $239.77, as part of a previously announced stock repurchase authorization. The company’s remaining authorization for stock repurchases was $68 million at June 30, 2010, having invested approximately $22 million during the six months ended June 30, 2010 for this purpose. During the six months ended June 30, 2010, the company paid regular quarterly dividends of $20.9 million, or $0.75 per share for each of the quarterly dividends. For the second quarter 2010, bad debt expense as a percentage of revenues was 3.6% compared to 4.2% for the same period in ‘09. Day sale as outstanding adjusted to exclude tuition receivable related today future quarters was 12 days at the end of the second quarter of 2010, compared to 15 days at the end of the second quarter of 2009. Rob?

Thanks Mark. Karl, why don’t you hit the highlights on the operational side and also walk people through enrollment results for the summer term?

Sure. Total enrollment for the summer academic term increased 23%. Our new student enrollment increased 17% and are continuing student enrollment grew 24%. Our continuation rate for the quarter increased 170 basis points. Enrollment at mature campuses grew 12%, and our global online students increased 31%. Our global operation center at Salt Lake City broke even for the second quarter, and we expect it will break even on a full year basis in the fourth quarter. During the quarter, we opened two new campuses for the summer academic term, one in Dallas, Texas, and one in Jackson, Mississippi. And we also announced today four new campuses for the fall academic term, two in Houston, one in Dallas and one in Columbus, Georgia, including these four campuses we have completed our plan 13 for 2010, and we will announce our plans regarding new campus for 2011 in our October earnings release. Also, during the quarter we signed seven new national account agreements, including agreements with Nestlé USA, ADP and USAA. We also signed 10 new articulation agreements with community colleges, including a statewide agreement with the Louisiana Community and Technical College system, which covers 50 colleges with more than 64,000 students. Nationally, we now have over 170 articulation agreement is 33 states covering more than 4 million community college students. Lastly, in terms of student mix, we have seen no really changes. 70% of our undergraduates students are enrolled in business and accounting programs, roughly 20% in information system programs and graduate students continue to comprise roughly 30% of our total student mix. Rob?

Thanks, Karl. Just one comment on the financials from my perspective going back to Mark’s report. For the second quarter at $2.60, we earned $0.05 more than the midpoint of our forecast from 90 days ago. Similar to last quarter, that positive variance was almost entirely caused by lower than expected bad debt expense. Our other revenue and expense lines were just about on target. Mark and I had forecast bad debt to be flat with last year at about 4.2% of revenue. And as he reported, we actually achieved 3.6%. Both our current quarter tuition collections and our recovery of previously written-off accounts were significantly better than both our forecast and the prior year. The improvement in bad debt expense to 3.6% of revenue led to a little over 100 basis points of operating margin expansion in the second quarter, versus the 50 basis points that Mark and I had forecast. And that also, as I said, led to the $0.05 of EPS outperformance. As we discussed in April, operating cash flow in the second quarter was flat with last year, as last year’s cash flow timing benefit from the tax benefits of a restricted stock vesting reversed itself in this quarter, so now we’re back to even from that standpoint. As Mark touched on, with our better working capital management, we now expect distributable cash flow growth for the full year will be in the low 20% range versus the mid-teens that we originally forecast last October. Turning to a brief update on our growth strategy, many of you will remember that our strategy is based on five objectives. The first is to maintain enrollment in the company’s mature markets. Second, invest our human and financial capital in opening new campuses, particularly in new states and markets. Third, continue to build our online offerings. Fourth, increase our corporate and institutional alliances. And the fifth and final objective is to effectively redeploy our owners’ capital. I think Karl really covered the update on our first four objectives. I don’t think there’s much that needs to be added there. On capital redeployment, as Mark said, we did announce our regular quarterly dividend of $0.75 a share, and also that we repurchased approximately $7 million of our common stock during the second quarter of 2010 at an average price of about $240 a share. On our earnings outlook for the third quarter of 2010 based on the University’s 23% enrollment growth for the summer academic term, offset by planned expenses and operating loses associated with the new campus openings, we expect earnings per share in the range of $1.68 to $1.70 in the second quarter. And that would entail approximately 200 basis points of operating margin increase versus the prior year. Finally, I’d like to make just a few comments on last week’s Department of Education Notice of Proposed Rulemaking. After a couple of days of studying the proposed regulation, our view has not changed from our last quarterly call. First, we have always known that we operate in a highly regulated and scrutinized sector, and we welcome that scrutiny. Second, the federal government along with state and accrediting authorities has a legitimate and indeed necessary role to play to ensure that institutions which operate enterprises with federal support in the public good achieve the proper balance among all their stakeholders. In our case, these stakeholders include our students, our alumni, our faculty, our fellow academic institutions and accrediting bodies, the employers of our alumni, the communities in which we operate our employees and our shareholders. And finally, while this proposed regulation seems overly complex to us, and it appears at least over the last couple of days that the Department of Education itself may not currently have all the data it needs to implement it properly, our preliminary internal analysis using the extensive data we have collected on our students and alumni over the last 10 years, indicates that under this purposed regulation all our programs would comfortably pass both the 45% loan repayment test and the debt to income ratio test, placing all our program in the department’s highest category or full title for eligibility with no required debt warning disclosures. And with that, operator we’ll would be pleased to answer any questions. Operator.

(Operator Instructions) We will go first to Andrew Steinerman of JPMorgan.

Thank you for jumping right in to gain full employment. I just wanted to know if you felt that you had enough data on things like deferment and forbearances to make an accurate assessment of what you are repayment rate is or are you so above the 45 on all your programs that it might not be so accurate but it doesn’t matter because you have a lot of cushion.

It’s a little bit of both, Andrew. We have good data on deferment and forbearance for those loans that are not consolidated. We have, over the last several months actually gone back over 15 years in the NSLDS, the database the department has to keep track of our loan performance. When a loan is consolidated it becomes more consolidated, it becomes more difficult to see the exact status of deferment or forbearance, but so in order to make our calculation in terms of the affect on us from the regulation, we just decided to make the most conservative assumptions we could about those loans that have been consolidated. Recognizing that after a loan is consolidated you actually have a lower monthly payment, but we decided again for the sake of conservatism to sort of ignore that. And with that, we are far enough above the 45% test in each of our programs that I just have very little concern about that.

Perfect. And then just a word on persistence. Obviously, I noticed that continuing student enrollment is higher than total enrollment. So, it makes me think of persistence. Can you just talk about trends and student persistence?

Karl why don’t you comment on that?

Sure I think Andrew, there are probably two primary drivers in the increased continuation rate for us, one is just the affect of our ongoing efforts to make the classroom experience as good as possible. And that speaks to all the efforts we have underway on curriculum review and faculty development, combined with just continued emphasis on admissions. We place a great deal of emphasis on the quality of student that’s entering Strayer University. And so our view continuation rate reflects the fact that we have got a good effort on quality student enrollments through the admissions process combined with an academic experience that’s continuing to get better.

Right. But I really meant the question from a quantitative standpoint, how is persistence trending now?

Well, as I said, it was up 170 basis points for the quarter. As we said before, depending on the quarter, our continuation rate is anywhere from the low to mid 80%. And when you factor out academic failures and students who graduate, you sort of get to a theoretical boundary of somewhere between the low to mid-80s. We’ve said in the past we think we’re sort of hit that threshold, but in any given quarter, there is a little bit of room as some of those other numbers move around, the academic failure rate and the percentage of students that graduate.

Plus, also for the summer term you’ve got a little bit of phenomenon on de-calendarization, are you getting more students who will go to school in the summer who hadn’t in the past?

From Bank of America we’ll move next to Sara Gubins.

Another gain full employment question. When you are looking at income-debt service to income ratio. How did you get that data and can you share information what your salaries or income look like for your graduates?

Sure. We collect every year extensive data on our alumni. We have for at least 10 years that in I’ve been here. And it’s a fairly strong response rate. I’m told that it’s more than statistically significant, about 25%. In our most recent survey for the class of 2009, our average under graduate salary is a little over $60,000 bachelor’s awarded salary. And it is little bit higher at the Master’s level.

And then, what percentage of your students are going from Bachelor’s Degrees into Master’s Degrees?

You mean in Strayer University?

Yes. And I guess I am wondering did you factor that in the announcements of the amount of debt they would take on because they would carry the debt load into the Master’s program?

Yes. We don’t have that many that go on, as far as I know. But we calculated the debt repayment individually in terms of their bachelor’s degree or their Master’s degree. So we have a median debt load per graduate at the bachelor’s level and a median debt level per graduate at the Master’s level. If the individual happen to have been both a bachelor’s and Master’s degree they would have been counted in both categories.

Okay. And the debt that they would have brought in from their Bachelor’s Degree would be counted in the ratio of the Master’s degree debt?

No, it would have been counted in the ratio for the degree that they earn with that debt at the bachelor level. It’s done by program.

Okay. My understanding was that debt from, as long as it was within the same institution would carry from one degree to the next. So if they graduated with Bachelor’s Degree debt and went on to a Master’s Degree program you would bring that debt with them. Is that incorrect?

Your understanding is inaccurate.

Trace Urdan of Signal Hill has our next question, please go ahead.

Thanks, Rob, I wanted to ask about criminal justice. And whether I heard you loud and clear that all your programs were free and clear. But I’m wondering if you have enough data on criminal justice with respect to both repayment and salary to kind of comfortably make that determination with respect to those graduates specifically?

Well, we don’t have that many graduates in criminal justice. It is a relatively new program. The graduates that we do have are performing consistent with the bachelor level medians and averages. And I think that really speaks to one of the fallacies of this regulation, which is the idea that in a broad based University that offers University level degrees at the bachelor’s and master’s level, the actual major, if you will, or the actual subject matter focus is that relevant with regard to the earnings potential. We have always believed that for a regionally accredited university with a strong liberal arts/general education component, that what the student chooses to major in is not really that relevant in the long run to their long run success and earnings potential. And that certainly bears itself out as we look at our graduates. But the answer to your question is, we don’t have as much data on criminal justice as we do to other programs. We obviously will be collecting more of that as that program progresses. But for the graduates we do have, it is right in this center line of our medians.

And if I could ask a follow-up, is there a lower incidence of tuition reimbursement for your criminal justice student?

I don’t know the answer to that. You know that Karl?

It is a little less than what is normal.

Yes. I know in a fair number of those students, I just know anecdotally from speaking at campuses, our existing law enforcement officers who I know in some of our markets do have tuition reimbursement from their municipal governments, but I don’t have the exact day Trace.

We will hear next from Amy Junker of Robert W. Baird.

Hi. Thanks. I’m not going to ask a question again for employment. I just had a couple ones, Rob, about the first corporate accounts. As you open up campuses and new markets, obviously that follows an amount of market research that you do. But do you also work with corporate partners or community colleges in advance of opening your campus to ensure you can be enrolling students right way or how long do you typically, are you typically in a market before you begin adding local, corporate and community college relationships.

On the community colleges, those relationships in many cases pre-date the opening, not so much to facilitate the enrollment of new students right off the bat, but because part of our process of being approved in new states is to reach out to the academic institutions in those states, and let them know how much we can help them. And in many cases those community colleges are a big part of that. At the corporate level, we obviously have national accounts that may have local activities in a new market. We don’t really start the outreach to local businesses until we are basically up and running in the community.

Great. If I can just ask one other. On kind of self selection, a key part of your retention has been communicating the requirements to incoming students and having students self select out. Have you made any specific internal operational challenges to improve that, or have you noticed, has that been any more challenging in this environment? And do you have any way of sort of tracking your success and helping enroll, kind of, the better prepared students up front?

There has been no real changes from a administrative or operational component, Amy. It is an on going effort to make sure that all our admission officers are adequately trained in what the specific requirements are. Say for example, the college level proficiency in English and math, the fact that we have add the science requirement. And what we do, actually, is before the start of class, remember that we only have four, start to year, so we are enrolling students for 10 to 12 weeks by quarter, we will start to reach out to all of the new students, who have enrolled for that academic term and then we ask them some very basic questions. We ask them, for example, have you purchased your textbooks, have you participated in academic advising, have you attended new student orientation. And if we get too many no’s to those very basis questions which we believe are very solid red flags around how committed or determined the student is, we will drop the students from our enrollment and ask that they reapply just to verify that they are indeed at determined as we may have thought they were when they actually enrolled in the first place. And so we do that each quarter. And really what we are looking for Amy is two things. We’re looking for a level of preparedness academically and a level of commitment and determination. And we find that if you don’t have both of those, you’re not going to have a very good outcome with respect to those students.

From Credit Suisse, we will hear from Kelly Flynn.

Thanks. I have questions about the competitive environment, as Amy kind of eluded to, you are seeing other players talk more about shifting more toward Bachelor’s Degrees and if you will, kind of moving the market broadly. Are you seeing any changes in the competitive landscape in your key markets? And specifically any changes in marketing add rates and overall student acquisition cost. Thanks.

Well, let me take that in reverse order. We spend the same amount, roughly, per year, per market. And so our acquisition cost, as you put it, go down over time as you get more students in a market. And that pattern is holding. There is nothing really significant about that. We are not a really big advertiser, so I don’t think I am the best person to comment on national advertising rates or media costs. In general, media costs over the last 10 years have been going down, as media is dis-intermediated by the internet. In terms of the competitive landscape, I wouldn’t say that I have seen any change, Kelly there are a lot of opportunities for students to choose from going back to school. But the fact of the matter is, there isn’t enough of them, and the demand for education is increasing as we continue to shift away from a manufacturing base and towards a knowledge-based economy. And so it’s actually kind of a rare circumstance among businesses that I’ve been associated with. The competitive landscape, in terms of other providers of educational services really factors very little into our decision making in terms of how we run this University.

Great. Can I follow-up with a regulatory question? I think you have been pretty consistent for the past several quarters in your comments, but is there anything that you have seen in the MPRM, the broad MPRM, not just is gainful employment one, or in just a broader environment, including the rate at which campuses are approved or anything related to that, that would give you pause as it relates to long term growth rate, anything you think could change your business?

No.

And Gary Bisbee of Barclays Capital has the next question. Please go ahead, sir.

On the last point, do you think any change in terms of the interaction is going in terms of timing to get approval for new states and campus openings? It sounds like the department wants to get a little more involved with new programs but anything that could slow down in your ability to open the number of schools you want to?

Well, we haven’t seen any slowdown in the rates at which states approve us. And there has always been a wide variability in terms of the arbitrary body, the deciding body in the state. Sometimes it is politically appointed, sometimes its in some states it happen to be the Board of Governors of a particular State or University, and they all act a little bit differently. We have a number of states that we’ve opened this year, we’ve got a number that we’ll announce in October that we opened for next year. I think overtime I would say its gotten slightly easier for us just as our reputation has grown. The thing about any regulator is, more than anything else, they don’t want to be embarrassed. And if you can bring a level of confidence to their review and understanding of your institution, it gets easier. And when we first started, we weren’t really known outside of Washington D.C. and so there was a bit of an education process. Now, we’ve been successful in other communities and so that start to build on itself. I guess the only other point I would make in regard to Kelly’s question is, I don’t see anything at all that’s going to affect our plans to go to a nationwide University. I don’t think it is a particularly healthy or helpful debate. I mean I have been somewhat disappointed by some of the rhetoric and the way in which the capital structure of the University has been use by some people to suggest that, that’s indicative of its academic outcome. I do not believe that.

Thanks. On average, how successful are the articulation agreements for the community colleges? I mean, is it safe to say a significant portion of the people entering Bachelors are degree completers who have a full two years?

Gary, about over a third of our under graduate students are coming to us from articulation agreements. And we are work with community college to increase that number each quarter.

Okay. So, just generically thinking about it, it is reasonable to assume the average kid comes into a Bachelor’s Degree would do 2 to 2.5 years of credit with you in.

Well, first of all these aren’t kids, these are working adults, remember.

Yes.

And that’s accurate, for people coming to us from these community colleges, transferring in an Associate’s Degree, they would be with us for a couple of years.

But, overall, including the two thirds that don’t come from those agreements is, it would 2.5 years be a reasonable number, or is it much different than that?

No, I think that is average. I think it is. I think it is about 10 quarters, right? Academic quarters, so, yes, I think that is right.

Okay. Thanks. Last question. The movement in a couple years time to the three-year cohort default rate. A lot of companies have talked about the numbers released last fall aren’t very accurate, because the schools weren’t sort of working their default management in the third year. Do you think you could have or would have had an material impact on that number if you had been doing so? In other words, the forward-looking numbers, when you are actually working on it, likely to be somewhat less of an increase than you saw in the numbers you gave us last fall?

We shifted, about a year ago, Gary, a way from really focusing on either two or three year cohort default rates more toward lifetime. I think that’s a more relevant indication of the success of the programs. I haven’t really focused that much on our three-year rate and what, if anything, could be done in terms of default management. In general, the best default management is the care and communication that you have with your incoming students, and as Karl mentioned, the quality of the academics in the classroom. Some amount of any short-term default measurement is going to be based on the economic environment that you are taking the measurement in. And I don’t get to worked up one way or the other about that. But, in terms of what we could have done with regard to three-year rates, I really haven’t focused on that, to be honest.

Okay. Just another way to think about that is, with the government loans going direct, I have heard from a bunch of companies they expect somewhat less aggressive servicing of the loans. Are you planning to implement any additional default management or servicing capabilities yourself?

No. No. And actually, I would expect that the department is aware of the fact that with the requirement to service those loans, they are going to be held responsible for that performance, and I would frankly be surprised if they miss badly on that.

(Operator Instructions)We will go next to Bob Wetenhall of RBC.

Do you guys have bad debt for the full year?

What do we have for the first half of the year, Mark?

In the neighborhood of 4%. Maybe 3.6 to 4.2 a quarter.

Maybe a little less than 4.

Yeah. I would say the high 3’s, maybe 4.

So you guys are pretty comfortable that these trends are going to continue?

Yes. We are pretty comfortable. I think we sort of broke the back of that problem, and that is definitely trending in the right direction.

That is a nice benefit. Just moving on to your $1.68 to $1.78 guidance for the next quarter, does that kind of assume that the improvement or the decline in instruction and education support costs is a percent of revenues that is likely to continue, as well?

We don’t really think about margins that way, Bob. We are spending what we expected to spend in our educational areas and we’ve opened some new campuses. We’ve hired new professors. So there is an increase in raw dollars there and in a lot of campuses we don’t have very many students. So that causes margin pressure. But on the other hand overall for the University, we had a fairly healthy enrollment for the summer term, so we’re going to have a little bit more revenue in what’s necessary to keep stable margins, and therefore we will have margin expansion.

Got it. It seems like you got a lot of sales leverage of the bottom predicated on strong enrollment growth. I am just curious is there is something that would disrupt that?

We never really think about as sales leverage. Our admission staff really aren’t salesmen. We have fixed costs semi-fixed costs in terms of our faculty, our admissions officers, our administrative staff and the facilities for us, and that’s why we tell you in October of the preceding year what we think the model will look like. We know what the costs are going to be, whatever the enrollment is, then dictates in terms of revenue whether we have margin expansion or stable margins or contraction. In this case we’ve had a couple of percentage points higher enrollment growth in the first half of the year than what was necessary to have stable margins, so we’ll have a little bit of margin expansion.

Excellent. And just one final question. I think you said you spend $7 million in share repurchases during the quarter. Would it be okay to expect that as kind of a normalized rate going forward on a quarterly basis?

We never comment on capital redeployment, before it happens.

From BMO Capital Markets, we’ll go next to Jeff Silber.

I wanted to focus on the enrollment trends specifically for classroom students in your mature campuses. It was up almost 20% year-over-year. I think that’s the fastest growth in that metric, at least as far as have data. Was it that more schools went into the mature campus bucket, is there something going on at specific locations? Any color would be great.

Well, we only have one school, its one University, so there is individual campuses.

Sorry about that.

No. That’s okay. We did have a number of relatively young, mature campuses go into that bucket, as you put it, but actually, I had the same reaction you did when I saw the numbers. And so we dived down into that. And the reality is, in our campuses that were either more than 10 years old or had more than a 1000 students; we actually had double-digit overall growth and that is a lot higher than has been in the past. And in those mature campuses, we tend to have a higher percentage of students taking classroom classes than online. I think that drove, the number you’re describing.

Did it have anything to do with adding the Criminal Justice program?

I don’t believe so, because criminal justice curriculums are available online, as well.

Brandon Dobell of William Blair has our next question.

Hi. Thanks, guys. Going back to the bad debt versus enrollment got a dynamic there. Maybe some color on how much of the improvement is been driven by let’s call it collections on the students who have been out of University for a while versus expectations of incoming students or higher quality, or you expect fewer, second quarter drops? Is there anything else going on that has been a bigger driver?

It’s all of that. But, just, mathematically, financially, you can’t make up that much on the ones who have already dropped out. We got most of that benefit, really, last quarter. This quarter, it was just stronger collections from our students. Lower drops, stronger collections.

Thanks. Has the job markets or the continuing lack of a job market, I guess, has that changed at all what cities or states you think make the most sense or it doesn’t really matter given the low unemployment rate for college educated people?

Well, it doesn’t matter, but not so much the reason you’ve suggested, Brandon. It doesn’t matter because our strategy is to always open the market that’s closest because it is easier to keep track of. The determining factor for us, we believe, will be execution in the classroom. And that’s hard to keep track of the further away you are. And so you can look at the map where we are currently and feel fairly confident that communities on the literal of that are going to be where we move into next. It does, the worsening economy or the continued bad economy, particularly in some of our markets in the upper Midwest, Cleveland, Akron, areas like that, we can see some variation there. We can see a slightly higher level of unemployed student that are truly shifting their professional career. They are moving out of manufacturing and hopefully into more managerial, or service-based jobs. But we’re relatively new in those markets, also, so I don’t have enough data to be able to compare it to what it looked like four or five years ago. But we are sensitive to that, but it doesn’t really change our view that those are markets that would benefit from having a Strayer University campus and that our university would benefit from serving in those market.

It looks like I probably shouldn’t ask about how the LeBron decision changed your viewpoint?

No. But I understand they had really great sponsorship on that show.

All right then let’s move on. If there were some legislative proposals thrown out there like perhaps a loss share provision, either with a default rate hurdle or that one, or maybe a reversion on 9010, back to 8515. Maybe some color on your thoughts around the efficacy or the utility of those kinds of proposals? Or is there anything else that you see what that actually might be a good thing for the proprietary sector versus a really damaging proposal?

In general, I think that the regulatory structure needs to change the focus on regulating Universities as Universities. And that the capital structure shouldn’t really be the determining factor there. And because of that, I think the 9010 is a curious way of overseeing the quality of these institutions. I am not opposed to loss sharing at certain default levels, particularly if it’s applied across the whole educational community. And it’s done judiciously and appropriately. I think that can be a way in which the government stewardship of the tax payer funds in supporting education could be leveraged and improved. But obviously a lot of that depends on the details of how its presented and thought through.

Okay. And then final question for you. Given how you kind of listed out the relevant stakeholders in your kind of prepared remarks around the policy environment. Its kind of a weird question, but are there any disadvantages versus advantages to being a publicly traded company, regardless of the current environment versus where it was two years ago, where it might be two years from now. But given the stakeholders you have, it seems like perhaps shareholders are almost the last on the list not because they are not useful or helpful. But things that are most important to new students, regulators, communities things like that. I’m trying to figure out the benefit for you guys are particular, given the university structure you have of being a publicly traded company. Or is there something else compensation for the employees things like that, that would override some of those other kind of stakeholder opportunity?

Well, first off, if you go back to my letter to shareholders last year, I tried to address this issue. I think you can meet the demands of all the stakeholders in an enterprise like that in a way which is very beneficial to shareholders. And we recognize our obligation as managers of the enterprise to do that. The shareholders provide the capital, if they don’t receive a return on that capital, they obviously can put it someplace else. That would not be significantly different, whether you were held publicly or privately. Whoever your shareholders are, you have that obligation to ensure that you are using the capital they give to you in a way which is efficient and helpful. So, again, I don’t really think that there is philosophic distinction between being public or private with regard to the relative priority of stakeholders. You operate in a situation like this, the enterprise really for our students, for our faculty, building our academic reputation, on behalf of our owners. It is a totally inextirpable relationship that and that would be the case whether you were privately held, publicly held or publicly traded.

From Stifel Nicolaus, we’ll hear from Bob Craig.

How I proposed after complete one commentary there. Good morning guys.

Morning.

A follow-up on a question from Amy earlier. Have you noticed any changes on the percentage of students required to take your developmental courses or any changes in the past rates of students taking those course?

There is some geographic bias to that. And that is a perfect example of our focus on academic outcomes in our ability to improve really in a pretty quick cycle time. We have a broad effort at institutional assessment where we pull the outcomes across the whole university of all the courses. The developmental courses are key to us. We recognize those as really the building blocks for under prepared student s. We have been able in the last couple of quarters, to determine a couple of different areas where our outcome in the developmental English and math hadn’t be as high as we would like them to be. We have to drilled down and required increased oversight and rigor in those areas. You get paradoxical impact on that. What you end up is with a higher failure rate in the developmental course, and then a much higher success rate for those students who pass the developmental course and then enroll in the college level, the 100 level, the university level courses. So, that is part and parcel of what we do every everyday, every quarter is constantly balancing our academic outcomes in these various courses and how it’s going to help us really improves both the quality institution as a whole and the learning outcomes of the students who attend.

Rob can you see Strayer moving into greater selectivity over time, being a more selective institution. I know you mentioned last quarter you wanted to remain in an open enrollment, but could that change over time.

It is not open enrollment, it is open access.

Okay.

We are not an open enrollment institution. You have to have a high school degree. You have to have a number of other attributes that show us you were prepare to be a student. And most importantly, if you don’t transfer college level credit in English and math, you are not allowed to enroll in our University Level courses, unless you pass the diagnostic test or as you pointed out past the developmental English and math test. I think you can be an open access University that maintains high academic standards and real academic career and still creates real high levels of student achievement as long as you keep all three of those in appropriate balance. So, no, I do not intend for us to be a more selective or not be in open access University, but I do intend that our University and I think the Board of Trustees of the University feels very strongly about this well, as an open access University have real academic standards and real academic vigor and do the best we can in terms of identifying those students who, they just really don’t belong for one reason or another, and help them find other institution.

Rob, I know over the last couple of years 40% of new schools have been in existing schools roughly and the balance of new states. Should that compensation change materially next year?

I don’t know, Bob. We really haven’t planned that out yet.

And last question. The Criminal Justice in the total percentage of students, is the assistance rate the same as what you have been seeing elsewhere?

I think about 5% of total students, Karl, you have the continuing rate for…

It is about on par with our other under graduate programs.

Kelly Flynn of Credit Suisse has a follow-up question. Please go ahead.

Thanks. Two quick ones. Some, the price increase. You said 5% in the press release in January. Can you talk about your plans for next year and whether or not you think that is a kind of sustainable rate given everything that we have talked about the with regulatory environment. Then, also, the lifetime CVR’s which you mentioned, I was wondering if you would be willing to give us a sense of kind of where that stands or broadly how we should think about that relative to the two and three year CVR’s. Thanks.

Sure. On the tuition increase our Board of Trustees has already approved a 5% increase for next year. And our intent is to continue to increase our tuition at 5% a year, because we believe that the value of education is increasing at least that amount. And specifically with regard to your question, there is more than enough headroom and assuming this regulation is adopted as written there is more than enough headroom for a very long period of time for that. And I am sorry, what was the second part of your question, Kelly?

It was the lifetime cohort?

Yes. Exactly. Yeah. I mean, we’ve talked about this publicly. I mean, we can only go back at this point 15 years, because that is all the data we can get from the department. But it is roughly on a dollar basis, slightly below 5%, and on a student basis, or on a loan basis, I think it was 8 or 9%, Mark. Is that correct? Somewhere between 8 and 9%.

And it appears we have no further questions at this time. I would like to turn the call back over to Mr. Silberman for closing remarks.

Thank you, ma’am and thanks all of you for participating. We look forward to talking to you again next quarter. Thanks.

And that concludes today’s conference. We thank you all for joining us.