Strategic Education, Inc. (STRA) Q3 2011 Earnings Report, Transcript and Summary

Mark C. Brown - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Sonya G. Udler - Senior Vice President of Corporate Communications Karl McDonnell - President and Chief Operating Officer Robert S. Silberman - Chairman of the Board and Chief Executive Officer

Trace A. Urdan - Wunderlich Securities Inc., Research Division Sara Gubins - BofA Merrill Lynch, Research Division Peter P. Appert - Piper Jaffray Companies, Research Division Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division Kelly A. Flynn - Crédit Suisse AG, Research Division Amy W. Junker - Robert W. Baird & Co. Incorporated, Research Division Thomas Allen - Morgan Stanley, Research Division Jeffrey M. Silber - BMO Capital Markets U.S. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division Corey Greendale - First Analysis Securities Corporation, Research Division Gary E. Bisbee - Barclays Capital, Research Division Brandon Burke Dobell - William Blair & Company L.L.C., Research Division Peter Wahlstrom - Morningstar Inc., Research Division

Good morning, everyone, and welcome to Strayer Education Incorporated's Third Quarter 2011 Earnings Results Conference Call. This call is being recorded. Following today's call, we will offer the opportunity for questions and answers. At this time, for opening remarks and introduction, 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.

Thank you, operator. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education; Karl McDonnell, President and Chief Operating Officer; and Mark Brown, Executive Vice President and Chief Financial Officer. For those of you that wish to listen to the conference via the Internet, please go to strayereducation.com where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available beginning today at 1:00 p.m. Eastern Time through Thursday, November 10. The replay is available at (855) 859-2056. Conference ID 94195606. 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 Provision of the Private Securities Litigation Reform Act. The statements are based on the company's current expectations and are subject to a number of uncertainties and risks that the company has identified in the paragraph on forward-looking statements at the end of its press release and that could cause the company's actual results to differ materially. Further information about these and other relevant uncertainties may be found in the company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission. Copies of these filings and the full press release are available online and upon request from the company's Corporate Communications department. 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 it's 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 then report on our third quarter financial results, followed by Karl commenting on our third quarter operational results including our student enrollment for the fall academic term. Finally, I'd like to provide an update on our growth strategy, discuss the company's earnings outlook for both Q4 and full year 2011 and share our thoughts on Strayer's investment plans and resolving business model for 2012. Strayer Education is an education service company whose primary asset is Strayer University, a 55,000-student, 92 campus, post-secondary education institution founded in 1892 which offers bachelor's, master's and associate's degree 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-insured Title IV loans. Our expenses include the costs of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies cost. Strayer University is accredited by the Middle States Commission on Higher Education. Mark, you want to run through the financials?

Sure. Revenues for the 3 months ended September 30, 2011, decreased 8% to $135.9 million compared to $147.6 million for the same period in 2010 due to lower enrollment, partly offset by a 5% tuition increase which commenced in January of this year. Income from operations was $24.4 million compared to $38.2 million for the same period in 2010, a decrease of 36%. Operating income margin was 18% compared to 25.9% for the same period in 2010. Net income was $13.9 million compared to $23.3 million for the same period in 2010, a decrease of 40%. Diluted earnings per share was $1.20 compared to $1.72 for the same period in 2010, a decrease of 30%. Diluted weighted average shares outstanding decreased 14% to $11,647,000 from $13,557,000 for the same period in 2010. Revenues for the 9 months ended September 30, 2011, increased 1% to $471.6 million compared to $464.8 million for the same period in 2010 due to a 5% tuition increase which commenced in January of this year, offset by lower average enrollments. Income from operations was $133.8 million compared to $156.9 million for the same period in 2010, a decrease of 15%. Operating income margin was 28.4% compared to 33.8% for the same period in 2010. Net income was $79.4 million compared to $95.4 million for the same period in 2010, a decrease of 17%. Diluted earnings per share was $6.58 compared to $6.98 for the same period in 2010, a decrease of 6%. Diluted weighted average shares outstanding decreased 12% to 12,055,000 shares from 13,663,000 shares for the same period in 2010. At September 30, 2011, the company had cash and cash equivalents of $57.1 million, the company generated $122.7 million from operating activities in the first 9 months of 2011 compared to $141.4 million during the…

Thank you, Mark. Karl, you want to run through the operation results and also hit on the fall term enrollment?

Sure. Total enrollment for the fall academic term was 54,233 students, a decrease of 11% versus the prior year. Continuing student enrollment declined 9% and our continuation rate declined 60 basis points. New student enrollment decreased 15%. Enrollment at our matured campuses decreased 13%, while enrollment at new campuses grew 21%. Global online students decreased 15%. During the quarter, we added a new statewide community college articulation agreement with the state of Wisconsin which has 11 community colleges in its system, and presently, we have 195 articulation agreements including 9 statewide agreements. Together, these agreements cover more than 430 colleges nationally. And in total, students from these colleges represent approximately 1/3 of our total undergraduate student population. We also signed 4 new national accounts during the quarter, including agreements with Volkswagen America, McGraw-Hill and Eli Lilly. New students from national accounts grew 4% versus the prior year and total student population increased 6%. During the quarter, we also successfully opened our final 3 campuses for 2011. These included our fourth campus in the Dallas, Texas market and our first campuses in the state of Illinois with 2 campuses in the Chicago market. Lastly, in terms of student mix, approximately 70% of our students are enrolled in undergraduate degree programs with business and accounting comprising roughly 2/3 of that population. Graduate programs continue to comprise 1/3 of our overall student mix. Rob?

Thanks, Karl. I'm just going back to the financials for a second, a couple of comments in the third quarter from my perspective. Our operating margin was about 200 basis points better than our forecast. And that was caused by both, I would say, fairly effective cost control efforts as well as much lower bad debt expense than we were forecasting. On distributable cash flow for the first 9 months of the year, we're down 11% on a 17% decrease in net income, reflecting what I believe is a fairly effective working capital management by Mark and his team. On our business outlook for the fourth quarter of 2011, based on the university's enrollment for the fall term, which is you know we've already started so we know exactly what that is, we estimate our fourth quarter EPS will be in the $2.24 to $2.26 range with approximately 500 basis points of lower operating margin versus the prior year. Now turning to a brief update on our strategy, many of you will remember that it's based on 5 objectives. First, maintain enrollment in the company's mature markets. Second, open new campuses, particularly in new states. Third, invest in our online curricula. Fourth, increase our corporate and institutional alliances. And the final objective is to effectively manage our owners' financial capital. In terms of a third quarter update on those objectives, Karl already covered the first 4 and Mark covered the fifth, so I don't feel I need to add anything here. However, since we now have visibility into our fourth quarter earnings, I would like to take this opportunity, as we do each year at this time, to give a full year 2011 forecast and then compare that forecast to our 2011 business model, which we first provided last October…

[Operator Instructions] Our first question comes from Amy Junker with Robert W. Baird. Amy W. Junker - Robert W. Baird & Co. Incorporated, Research Division: Rob, the decision to open up 8 new campuses, again, is that really still predicated on the regulatory uncertainty and demand concerns? Or does that really reflect your bench strength at this point?

For a second year in a row, we've got deeper bench strength than we're using, and it certainly doesn't reflect demand. Our new student enrollment is down on a year-over-year basis but the new student -- the new campuses that we opened in 2011 are performing according to plan. And so it really is a continued comment on the fact that the regulatory situation, while clearer than last year, still requires a fair amount of effort and additional clarity in terms of implementation to really feel comfortable to have the full impact of our bench strength and our financial capital. And so again, it was just a decision to be a little more prudent than otherwise while we wait until next spring and watch how the department continue to illuminate and illustrate how they intend to execute these regulations. Amy W. Junker - Robert W. Baird & Co. Incorporated, Research Division: That's great. And then just a quick follow-up on that, because my next question, I know I've asked about this in the past, but you have had some more challenges with some of the campuses in the upper Midwest, here in Milwaukee, Cleveland, you cited in the past. Has that started to improve yet? Or are you still struggling in some of those geographic pockets?

I wouldn't say we were struggling. What I would say is that both, in terms of geography and corporate time, they didn't enroll as many new students as quickly as some of the campuses that we had opened in the South in '07 and '08. But they've all been at least according to our plan. And we were delighted to open the 2 campuses in Chicago. The one thing that we see is, and particularly as you mentioned in Cleveland, Ackerman [ph] and Milwaukee, I don't know about Chicago -- Karl, you have to correct me on this or illuminate -- but there was a higher percentage of new students who were unemployed and were trying to be students full-time, which in our model is a difficult thing to do. Do you know about Chicago whether that was the case?

I'd say it was less so in Chicago.

Okay. But that's still has been the case and we are obviously trying to create an academic home and a method by which that student can be served but it's clearly more difficult.

Our next question comes from Andrew Steinerman with JPMorgan. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: Could you go over your core management initiatives? Obviously, happy to see all the operating margins come in better than expected. But are we holding back on any branding or other investments that if we were in a different environment maybe we would be making?

No. I mean, we spent everything that we intended to spend in terms of brand building and campus openings and marketing. We've kept our -- the lineup of courses exactly as we would have hoped it to be managing class count, seats per classes to an appropriate level. What we basically have been able to do -- and I don't know any other specific way to describe this, but then just to describe the outcome which is over a prolonged period of less revenue than you're expecting, you just get better at finding discretionary items that don't need to be spent on. And so there wasn't any one particular thing I would point to, but as a culture and as an organization we try to be as efficient as possible, and we did a better job than I was expecting over the last 3 months and found areas where expenses didn't need to be incurred. But without really -- there was nothing related to our academic model or any of our rollout plans that were affected by that. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: Right. And since you just described them as discretionary, when enrollments do start to grow, you don't think of this as a kind of a deferred headwind on margins, do you?

No, I'd don't. I mean, I used to work for a guy who said, "It's never a bad time to cut costs and to look hard at it." We -- we're building the university, we're growing the university. We know that there are additional costs that are necessary, and frankly, I've always felt limited economies of scale as you grow a university. But as I said before, it's never a bad time to take a really hard look at certain things in the whole -- none of this was dictated from the top. The whole organization just did a better job sort of managing expenses.

Our next question comes from Bob Craig with Stifel, Nicolaus. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Questions about the 2012 model and in particular the relationship between total and new. If you guys run 10% new students start decline for the next 4 quarters on top of the 19% decline that you've had for the last 4 quarters, I'm wondering how you could get to that negative 9 in total for '11. Is there something happening with retention or reentries, or something that's impacting that relationship?

No. And Jerry, the reason we decided to put this model in here is to really try and provide visibility for you all in the same way that we see it. The best way to think about this, as I said, is that the average student stays for 8 or 9 quarters and it varies year-to-year. Obviously, that's not every student. We have some students who drop out after one quarter, and the we have some students that would take 16 or 20 quarters to finish a program. But for modeling purposes, if you think of it that way, you've got a stock and flow concept. You got really 8 different cohorts that are in existence in the university at a given time. And our retention rate has remained quite high, our cohort retention rate with each individual starting class, the percentage that goes on to the next level net of graduations and academic failures. And so when you model that through, we know how many students we have in 2011 who haven't graduated yet. We have a high level of confidence on how many of them will continue to 2012. We know that there is a trough of new students in 2011. It was down roughly 20% versus the prior year. When you model all that through, if in 2012 our new students are down 10% over 2011, that creates the -- was it minus 9%, Mark, that we modeled. The purpose of providing this visibility is so you all can see the relative impact of different rates of new student growth. And it's not intended to bound anything either. I mean, if we are plus 20% on new students, or interestingly enough, plus 20% with that 8-quarter life is basically going to bring us back to stable revenue and stable operating margin versus this year. Because the plus 20% will offset the minus 20% in the prior year. And by the same token, if you are minus 20%, you're going to double down on that trough for a couple of years. So it's really just an attempt to try and give you a sense of the stock and flow. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: I see, okay. And just a follow-up to Andrew's question with regard to cost. Can you identify any big buckets of cost savings, Rob?

It really went across the board. It was just a tighter and more efficient management of everything that we do. It is really -- I mean, if I could point to it, I would. And I was, obviously, pleasantly surprised to the quarter. And also cognizant of the fact that you don't want to cut back on things that are important. So Mark and Karl and I have a fairly steady hand on this to make sure that nothing is being cut that we think is necessary. One thing that you end with, is strictly in a summer term, is more of your costs are variable. I mean, you have an ability to -- because all your classes are essentially taught by adjuncts in the summer. The full time, you get the summer off. You do get a slightly higher amount of variable impacted that Mark and I did frankly miss when we were modeling 3 months ago.

Our next question comes from Corey Greendale with First Analysis.

Also a question on the cost side. Can you just talk a little bit more about what you attribute the lower bad debt to? And then what you're assuming bad debt does in 2012 in the model you provided?

Well, bad debt went down because more people paid their receivables to us, and we actually collected more on the previously written off receivables than we had the quarter before. And we have felt that bad debt in the 3.5% to 4% range is an acceptable level given the credit authority that we give our campus directors and deans. And I don't know exactly what we have modeled, but it's going to be consistent with that.

Second question also on the margins. So Rob, I think you said you expect operating margin to be down 500 basis points in Q4. Obviously, that would be a less than negative result than you just had in Q3. Is that entirely because you're opening 3 campuses versus 4 last quarter? Or what else, would you expect the lower -- the lesser decline, too?

No, it's more mathematical. We have less revenue in a summer term in Q3. And so the impact -- we have less revenue anyway and more expenses. Because you're spending most of your marketing -- not most, but a greater amount of your marketing dollars for the fall term start. And so incremental decreases in student revenue has a bigger impact than it does in the fourth quarter. And then also, we're a little bit better on enrollment on a year-over-year basis as well.

Okay. And if I could just throw in one more on a totally unrelated topic. Looking through the information on the Strayer University website now for the required gainful employment metrics, it talks about as required typical debt of graduates. And the number I thought for the program that's posted is in the 31,000 range. Can you just -- in the past, I think when gainful employment was first discussed, you would talk about typical debt loads in the low 20s. Can you just talk about the reason for the differential and what's the actual number we should think of this?

Yes, absolutely. The reason for the differential is that the debt information that was required to be posted on November 1, or whenever that was, is calculated in a different way than the median debt level for gainful -- for the debt income rate ratio calculation and gainful employment regulation. I think it has to do with previous costs or total.

Total debt as opposed to the lower..

Yes, but so it's really the expenses and things like that that gets rolled into that. Whereas the debt income ratio and the gainful employment is the lower of full tuition or total debt so as to basically focus in on what the cost of the actual education is. And in that case, I think all of our numbers are in the 20 to 25 range, if I remember correctly.

Our next question comes from Gary Bisbee of Barclays Capital.

I guess, I'll continue to beat on this cost thing because it seems like such a stark change. I understand that some of the costs are variable and revenue began to decline. But instructional costs, and I guess I also understand that you're opening fewer campuses than the year before, but you did open a net 10% more campuses and the instructional costs flowed from 15% growth to less than 4%, and at the same time marketing cost actually declined year-over-year and admissions advisory also declined. I guess, I'm struggling to understand how when you're adding new campuses at a rate of almost 10% versus the prior year, how those 2 cost items could actually fall slightly and how you can have such a rapid deceleration in the growth rate of instructional cost.

I'm not sure I understand your point on rapid deceleration in -- our instructional costs went up about almost $4 million year-over-year.

Which is 4%.

But we have less students. Instructional costs are going to be related to the number of students that you have. The reason that it didn't go down even more is that we have more campuses.

So how much of that -- I guess maybe I'll ask it a different way, how much of that cost should we think of being -- on the instructional cost side being variable in direct proportion to the number of students? I got your point earlier about adjunct, more adjuncts in the summer, so maybe you can flex that more than you could in other terms potentially. But I've always thought that you had somewhat higher, maybe than some of your peers, full-time faculty. And there is some cost, obviously, for adding the new campuses. So should we think of that as there's just much more ability to flex this quarter than others? Or there is quite a bit of variable cost in that line item when we go forward?

Well, let me try and illuminate the question. Our academic costs consist of our full-time faculty and full-time academic staff, the physical classrooms, the instructional technology for online and then adjunct professors. The full-time faculty, essentially don't teach in the summer, so there is more flexibility in Q3 to match costs with actual student enrollment. Because as I've said earlier, we're building the university for the long term and we're quite comfortable with the fact that both our physical classrooms and our full-time faculty members will be amortized over a lower number of students if we have a reduction in enrollment. And so there's clearly an advantage in Q3. In Q4, what you end up with is now you have all your full-time faculty back teaching. You still got all of the fixed costs of your facilities and the instructional technology for the online classrooms. And then you also have more students. So it just flows from one to the other. You're at the level of granularity, Gary, that I'm not sure is frankly helpful, certainly not the way we look at it. But from our standpoint, the one thing that Mark and I probably were a little conservative on in looking at our model 3 months ago was the impact of the full amount of faculty being -- even full-time faculty who teach in the summer paid at adjunct rates.

Okay. And so let me take one more cut at this. If in the middle case under the 2012 business plan where you have sort of a mid-single digit decline in enrollment, presumably somewhat lesser decline in revenue, would it be reasonable opening 8 new campuses to think that instructional and education support costs could actually fall in that scenario? Or would it likely continue to grow based on opening the new campuses and presumably some full-time faculty at those new campuses?

Yes, for the full year, I think, it's unlikely that it would fall. I expect it to go up. In the third quarter, it might fall. But for the full year, I mean, it's -- we tend to think of this on an annual basis as opposed to a quarterly basis.

Okay, and then just one last one. On the marketing and admissions advisory where the cost in dollar terms did fall year-over-year slightly, is that -- I realized their seasonality, but on a year-on-year basis they were both down. I guess that struck me as a little surprising given that you are opening a net 10% new campuses this year. Is that just these cost efforts you talked to earlier? And can you tell us if there is like headcount reductions or anything?

No, there's no headcount reduction. I think what's going on there is number one, we had more new markets last year at this time than we have at this time. And it's less new campuses versus new markets. And then also last year we had a significant amount of cost in developing some new media that we rolled out this year which we didn't have this time.

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

I just want to expand on Gary's question a bit. And again, just looking at the midcase of your 2012 business model, it does imply some sizable operating margin traction. Where are the -- which other line items do you think that we'll see most of that on?

Instructional education. We're building more campuses. And if we have 0 new student growth, we'll be amortizing those campuses and the ones we have and our faculty over the less students. I'm not sure you could deep dive anymore in Gary's question. I thought we covered that.

Well, I was looking at the other line items of that.

Okay.

And also just a clarification, the total student enrollment student change, you're talking an average for the entire year not necessarily the year-end number, correct?

Yes.

Yes. There is no year-end number. We do it by quarter. So the average for the full year is what we report at year end.

Okay, great. And then there's a couple of other number questions. What are your capital spending plans for 2012?

Mark?

Yes, we expect them to be in the range of $25 million to $30 million for 2012.

Okay. And then in terms of the business outlook for the fourth quarter, what tax rate and share count are you assuming?

So for the fourth quarter, we're assuming a 39.6% tax rate for Q4. And in terms of share count, I think it's probably safest to use our Q3 diluted share count of 11.650 million.

Our next question comes from Kelly Flynn with Credit Suisse. Kelly A. Flynn - Crédit Suisse AG, Research Division: A couple of similar questions to those that were just asked. For the guidance for the fourth quarter, I guess I was having a little trouble getting to the EPS number. Can you be a little more specific about the revenue per pupil expectation? I guess what growth or decline you would expect year-over-year based on the dynamics you laid out?

I'm not sure I can, Kelly. Mark, can you -- anything you want to add to that?

No, I think it's similar to what you described. We're not expecting to get a lot of incremental revenue per student.

Right, yes. Kelly A. Flynn - Crédit Suisse AG, Research Division: So I mean, it grew 0.6% year-over-year, I think, in the quarter you just reported. So I mean, do you think it would be prudent assume something similar or to assume flat?

I think you should assume 0.575%, Kelly. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. All right, different question. Probably you won't answer this one neither, but I'll try. So for marketing for the fourth quarter, this relates to Gary's question but I suspect you know the answer, you did, last quarter -- last year you had a similar marketing spend in the third quarter to what you did this year, so roughly $23 million. And then it declined to about $18 million in the fourth quarter. Should we expect something similar? Your guidance seems to imply actually even lower, so can you maybe help with that?

Yes, our third quarter is always our biggest quarter in terms of marketing spend because our largest students start is always in the fall. And so, Karl and his organization takes the annual budget that we give them to spend on marketing and spread them through the year consistent with when the highest likelihood of students are going to enroll. So it will go down. I don't know exactly what it's going to go down to, but it's probably similar in scale to last year. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. And I guess maybe another way to state that question is you said you expect a 500-basis point margin decline year-over-year for the fourth quarter, right?

Right. Kelly A. Flynn - Crédit Suisse AG, Research Division: But your revenues likely to decline more than it did in the third quarter. So normally, I would expect worst negative operating leverage as your revenue gross or your revenue decline widens. But you're saying the opposite is going on here, so I know that relates to the cost savings. But can you just kind of help with why that's happening? Is it -- where should we assume the savings really show up? I know you said it's across-the-board, but you pretty much only have marketing and instructional. I mean, where should we put the cost savings?

Let me try it the other right. I mean, I think the 500 basis points, most of that is going to come in instructional and education. Is that correct, Mark?

Yes, I mean, that's the largest line item.

So if you take last year and you take the lion's share of that diminishing in margin, it's going to be in instructional and educational. And you're right, we have more revenue. We have a higher -- that's why I wouldn't say this, a greater decline relatively in the fall than we did in the summer. But you also -- I think it might be helpful to sort of look at it that way we do and that a lot of the incremental margin impact has to do with levels or bands of enrollment. So you have a certain amount of capacity with the faculty that you have that are laid out. As you add students above that, you get a very positive impact on operating margin because there's very little additional cost until you get to a certain level and then you actually incur some additional variable cost and then the incremental amount of margin declines. It's the same thing on the downside. As you lose students and as you lose revenue relative to a plan you have for the first tranche, a larger amount of diminution. And then after that, every 20 or so students you actually illuminate a class. And so it kind of works its way going down as well. So it's just it's not quite as -- I mean, we don't manage it as granularly as you all seem to be asking the question about it. We tend to think about it more along the lines of what's it going to take to build this university? What's the appropriate cost structure for that? And then, the revenue flows in based on how many students we enroll.

Our next question comes from Peter Appert with Piper Jaffray.

So I was hoping you could just give us a little bit of color on what you're seeing in terms of competitive dynamic in the marketplace. Do you have a sense from your recruitment advisers that maybe students are looking at more options before they choose to enroll? And to just sort of a sense of competitive intensity whether it's, perhaps, the higher level that you've seen historically?

Karl, you're closer to the admissions officers.

Sure. I would say we have not seen any real change in terms of the number of other schools that people are looking at. We know that most of our students consider many schools from which to attend. As we said on our last call and I would say is still the case, we have seen maybe a lengthening in a student's decision cycle about whether or not to attend school. But nothing really in the way of increased competition.

And Peter, the other thing I would add to that is there's just sort of a prisoning effect I've always found on this question in that you all are necessarily focused on an increased number of opportunities for education in the area that you cover, i.e., investor-funded, publicly traded entities. And it was a relatively small number of those and that number has gotten bigger. That's really not the competitive set that our students are looking at. And it's harder for the addition of 1 or 2 of those to actually make that competitive set that much more difficult. Because, I mean, if you think about the markets that we operate in, they're saturated with traditional universities that have night and extension programs. And that doesn't get much bigger or smaller over time, at least it hasn't in the markets that we've operated with, but it's always been quite competitive. And so it's just something that for the last 10 years that we've lived with, we've planned around, and that we're comfortable with.

How about specifics in terms of conversion rates or show rates? Can you give us any color on that?

The -- I mean, again, conversion rates, for me, it's somewhat of an unhelpful metric, and let me explain why. You can always buy leads. You can -- I mean, it's really quite amusing to me the way this discussion has gone over the last year where there's clearly been a diminution in demand that is, I think, probably been caused by the economy. And yet these people who sell leads can always sell you the same number of leads. And then, if you think about that student as sort of a factor of production in some manufacturing concept, so therefore the admissions officer has a conversion rate and it goes up or down and that's going to explain or help illuminate the efficiency of the organization. I just, I really don't see it that way. What we've seen is that, as Karl said, over the last year students have had a more difficult time dealing with a number of issues that caused them to either want to enroll or to enroll. I think the increased unemployment rate at the target band of students that we're looking at clearly has hurt us. And also the consistency of that over the last 4 years on a compounding basis limits by some, I don't know, 10%, 20% the market that was available to us 3 or 4 years ago. But it's not something that from our standpoint, we look at in terms of we're going to adjust the conversion rate or shift to adjust the conversion rate. The real problem with that, Peter, is I've always felt that if you're having to convince the student to enroll, you're having much less likely successful students. The students who are successful are the ones who have convinced themselves and their conversion rate is going to be 100%, unless you really do something bad with them in the process.

Right. And just one last thing, Rob. How about the time to profitability or time to maturity on new campuses, is that changing?

Well it is. On the ones that we've opened in the last 2 years, it will be slower than the ones that we opened 2 years before. but It's actually more analogous to the investment model that we originally used 10 years ago which is about 2 years. Some of the campuses that we opened in '06, '07, '08, frankly, reached profitability in a couple of quarters. But again, we tend to look at this across broad averages and it affects our decision as a return on capital as opposed to an IRR. And so that the speed of it, while it has a big impact on short-term profitability, does not affect our decision very much in terms of how many we do.

And that you're attributing again more to the macro environment as opposed to some evolution and competitive dynamic in these newer markets?

Well, yes. Because the same -- we've opened campuses, additional campuses, in existing markets in the last 2 years that have also slowed. And also, if you look at our existing campuses in those markets, they are not enrolling students as fast in the last 12 months than they did 12 -- the previous 24 months before that.

Our next question comes from Peter Wahlstrom with MorningStar.

As you do look to open the 8 campuses this year, could you help us think about the marketing strategy and how you go to market in a new market versus an existing market, particularly, given some of the general softness that we've seen? And I know this is kind of a tack-on to some of the other questions that have already been asked. But maybe do you become a little bit more aggressive in terms of how you're marketing the institution?

We really don't. We've got kind of a set playbook which has worked quite well for us. In the early couple of terms, it's really just name identification. And we're obviously trying to piggyback on any institutional or corporate alliances that we have that happen to be in the new market. Quite often, we'll have existing online students in a brand new market, and they are a key early beachhead for us in terms of communicating. But we spend about the same amount adjusted for cost of media in each of our markets in the first, say, 4 quarters. And then our marketing team tends to adjust based on what they've learned, what they've seen, which channels tend to be most effective in brand building. But we're really quite patient. I mean, we feel that the best way to build the university is to just get a handful of students that first term and do a great job with them and have them talk about it. And that's going to drive the kinds of success that we've seen over time. Whether we get 30 students or 60 students that first term, we're not going to spend dollars differently to try and make 30, 60. It's just, it's not, in my judgment, the right way to build the university for the long term.

Very good. And then with the decision to implement the 3% tuition increase. Could you talk a little bit more about what you think you need to see in order to -- from maybe a macro perspective, to get back to 5% target tuition increase? And maybe how tuition changes at the traditional colleges and universities has impacted your decision?

Well, I mean, I think traditional colleges and universities have much more than 3% this year. We're always cognizant of that. But honestly, we try and think of it from the standpoint of what we're providing and what our students need. And honestly, there was less analytics that went into this than I'd like to be able to portray. We went full year with significantly less new students than we've had the year before, and that's never happened to us. And we're operating in a social and political environment now where, I mean, I think everybody realizes the country's going through a pretty tough patch. And it's particularly tough for the students in our target market. Our costs are increasing. I do believe that we have pricing power because I think education is increasing in importance over time. But when we weigh all that together, Mark and I decided that this would be the year in which we decide rather than stick with this straight 5%, we would ratchet that down and then we'll see what happens.

Very good then. And one final last one. As you look into the 2012 business model, what do you have in terms of assumptions for corporate partners? And are you concerned that given the economic outlook is relatively fuzzy, are you finding it more difficult to convert some of those corporate and institutional partners? And kind of what's the outlook there?

No, as Karl mentioned, that's really been the strength over the last year, and that's starting to be a bigger part of our overall student population. I think it speaks to the fact that for the individual student making a decision, there's an approbation that comes from your employer saying this is the place that we like. And so it helps deal with some of the other insecurities or uncertainties that a student goes through in what is making such an important decision. And so we always sort of budget based on recent trends or current conditions. And that's one reason why Mark and I are budgeting for very little revenue per student growth because we expect that that's going to continue into next year.

Our next question comes from Suzanne Stein with Morgan Stanley.

It's Thomas Allen filling in for Suzi. Can you help us think about your liquidity a little more? How willing are you -- how low are you going to go in cash? And then on the other side, how high would you go up on leverage? And then in terms of dividend versus share buybacks, would you ever consider cutting the dividend if the stock price is at a level where you would be buying back stock is the more attractive use of capital?

Let me take that in reverse order. The answer to the last question is yes. Your dividend and share buyback decision always has to be affected by view of the value that the price of the stock and the value of the stock. On the other hand, for the last 7 years, we felt that our model, even with slightly shrinking revenue, is very cash generative. And since when you're buying back shares, all you're really doing is providing a in kind dividend to the shareholders who stayed because they own more of the company at that point. And we're really taking their decision away. And so some portion of that excess cash, we felt it makes sense to allow the shareholders themselves to make that decision. And that would also weigh in with a decision based on whatever the stock price was as to whether to pay a dividend or buyback shares. And then in terms of liquidity, we obviously need a certain amount of cash on hand to run the university. We have generally kept more cash and that significantly more of that on hand because it helps you with a number of regulatory and educational entity views, a view as an institution. And then it's further, on the regulatory side, you're obviously further constrained beyond what a normal debt equity ratio would be in a different type of company based on the financial composite score requirements of the Department of Education.

Okay. And then, you've had like a full year starts down over 15%, and I know you don't want to give any one quarter guidance. But was there anything that happened a year ago that you maybe anniversaried this past quarter that could get see starts get easier this next quarter or going forward?

Well, there was a lot that happened a year ago, and by the nature of the calendar, you do anniversary that. So I tend not to think about comparisons getting easier or harder. It's the raw number of students that you bring in and based on the size of the university that you're building. But you are correct to point out that there was an awful lot that happened last fall in terms of regulatory and media coverage of institutions of our type, and you have an extended period of an economic downturn, all of which had an impact over the last year. And at this point we are anniversarying that.

And just to confirm, you never paid incentive comps so you don't think that really had an impact, right?

No, we have never paid any incentive compensation to admissions officers. It's always been straight salary, and so there's nothing to anniversary their. There's no company management changes that are anniversarying. That is accurate.

And our next question comes from Sara Gubins with Merrill Lynch.

Can you talk about use of scholarship? I'm sorry if I missed that if you talked about it already.

Sure. Go ahead, Karl.

Sure. Well, we've always used scholarships just as we use various tuition discounts for our corporate institutional alliance partners. That's something that we've done for quite some time.

Okay. And that's not increasing much at the moment?

Well, only as much as the corporate and institutional partners are increasing. And some of those have built-in tuitions and scholarships. So if they get to be a bigger portion of our total student population, there's an incremental increase in that.

Our next question comes from Brandon Dobell with William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Couple of quick ones. I think leveraging on Peter's questions around conversion rates, maybe from a different perspective. I would imagine you guys track application flow and then actual enrollments showing up in classes, any change the past couple of quarters in terms of how that outlook has looked for you guys?

You mean what percentage of the students who actually apply, enroll? Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Correct.

I mean, I think we've just had less applications, so the percentage has been about the same. Is that right, Karl?

Yes, yes. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: All right, fair enough. And then it sounds like you guys spent a little bit of time thinking about the right pricing structure for the coming year. Was there any discussion about either not raising price or lowering price or maybe offering bigger discounts to the corporate or alliance channel?

Yes. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: So you did have it. And what was the reasoning behind not going in that direction if -- just trying to get to your point Robert and kind of a pretty deep prolonged recession. What's the reasoning with trying not making maybe a bigger move to make the program more affordable?

Because we think that this is the right price that it fairly balances the value that's being created and the cost to create it with the value that the student and graduate receives, and that's what we came up with. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Fair enough. And then final one for me. Looking at the growth from new locations which was actually pretty solid in, I guess specially considering the year-on-year comparison of schools that is relatively flat. Are the schools, and I don't think they are, but are the schools ramping in a different pace than the ones you opened last year, for example? Or are they still, both for 2010 and '11, still well off the pace of ramping schools back in '07, '08? I'm just trying to I guess get at the underlying cause for the kind of low 20s growth in the new campuses.

Yes, but you'll remember, Brandon, back in '07 and '08 those numbers were like 100%. So they are clearly lower than '07 and '08. And the impact, the diminution of demand, whatever you want to describe it, has been pretty uniform across both the new and the mature markets. The difference is the mature markets were growing. We were surprisingly delighted they were growing at mid-single digits. We've always expected them to be flat. And so they come down quite a bit. And then the newer markets, some of them were doubling in size, some small numbers obviously. But on a quarter-to-quarter basis and now they're down in the 20% to 50% range. So it's really -- it's consistent across both classes that it's slower now than it was 2 years ago.

[Operator Instructions] Our next question comes from Trace Urdan with Wunderlich.

My question, I'd like to take you back to Peter Appert's question, Rob. And it's certainly always been the case that you have competed with traditional universities' night school programs, but there seems to be a greater availability and interest in the level of marketing by traditional schools than in online environment. And so I'm wondering specifically if you see that as something new and potentially threatening from a competitive standpoint?

Well, we certainly don't see it as new mainly because where we've come from our heritage is here in the Washington D.C. area. And the University of Maryland has always had the strongest working adult-focused extension university if you will of any traditional. And about the same time that I took over here, they were rolling out very significant advances in online. And over the last 10 years, I mean, there's -- every year there's the new traditional university who's got the new online application. I mean, it clearly increases the amount of available educational opportunities to prospective students. I don't see it as increasing it significantly above what was there already. And so that's, and for my judgment, what allows us to say that from our standpoint, we don't see that as a major competitive impact. The other thing is, as I said in the past, everybody's student enrollment has been going down. I mean, some are still growing slightly versus tripling in size, others -- and I think a lot of that depends on the sort of the attitude and the marketing focus of the bigger institution. Others were growing at some stable rate and some have shrunk a lot more. It's hard for me to suggest that anything that's happening with regard to our enrollment is more affected by competitive dynamics, except in as much as when you have less demand, the players that are involved have a larger impact, it was less of a margin for error. But I don't think it's the traditional universities rolling out online programs that is actually the positive factor.

I'm not showing any further questions. I'd like to turn the conference back over to Rob for closing comments.

Thank you, Sean. I appreciate everybody's participation. We look forward to talking to you again in February. Thank you.

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.