STRA

Strayer Education, Inc. (STRA)

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Strayer Education, Inc. (STRA)

Q3 2009 Earnings Call Transcript

October 29, 2009 10:00 am ET

Executives

Sonya Udler - SVP, Corporate Communications

Rob Silberman - Chairman and CEO

Mark Brown - EVP and CFO

Analysts

Sara Gubins - Bank of America/Merrill Lynch

Andrew Fones - UBS

Amy Junker - Robert W. Baird

Ariel Sokol - Wedbush Securities

Andrew Steinerman - J.P. Morgan

Jeff Silber - BMO Capital Markets

Kelly Flynn - Credit Suisse

Mark Skitovich - Piper Jaffray

Trace Urdan - Signal Hill

Corey Greendale - First Analysis

Gary Bisbee - Barclays Capital

Scott Schneeberger - Oppenheimer

Brandon Dobell - William Blair

Jerry Herman - Stifel Nicolaus

Bob Wetenhall - Royal Bank of Canada

Todd Young - Morningstar

Kristina Colombe - Morgan Stanley

Presentation

Operator

Good morning, everyone. And welcome to the Strayer Education Incorporated’s third quarter earnings results conference call. This call is being recorded. On today's call, we will the opportunity for questions and answers. At this time, for opening remarks and introductions, I would like to turn the call over to Strayer Education’s Senior Vice President of Corporate Communications, Ms. Sonya Udler. Ms. Udler, please go ahead.

Sonya Udler

Good morning. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education; 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 PM, Eastern, through Thursday, November 5th. The replay is available at 888-203-1112, pass code 1914628. Again, 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 would like to turn the call over to Rob. Rob, please go ahead.

Rob Silberman

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 the detailed financial results for the third quarter, after which I’ll comment on our enrollment results for the fall academic term, provide an update on our growth strategies, and discuss the company’s earnings outlook for both Q4 and full year 2009. Finally, Mark and I would like to share our thoughts on Strayer’s business model and our investment plans for 2010.

Strayer Education, Inc. is an education service company whose primary asset is Strayer University, A 54,000-student, 70 campus post secondary education institution, which offers Associate's, Bachelor's, and Master's degrees in Business Administration, Accounting, Computer Science, Public Administration, and Education. Strayer students are working adults who are returning to school to further their careers.

Our revenue comes from tuition payments and associated fees. Approximately 70% of our revenue comes to us from federally insured Title 4 loans.

Our expenses include the costs of our professors, our admissions and administrative staff, marketing expenses, and facilities and supplies cost. We currently operate campuses in 15 States in the Eastern half of the United States as well as throughout the world over the Internet. We serve students in all 50 States and over 30 foreign countries with our online courses. Strayer University is accredited by the Middle States Commission on Higher Education.

Mark, you want to run them through the financials?

Mark Brown

Sure. Revenues for the three months ended September 30th, 2009 increased 31% to $114.4 million, compared to $87 million for the same period in ’08, due to increased enrollment and 5% tuition increase, which commenced in January of this year. Income from operations was $27.3 million compared to $18.3 million for the same period in ’08, an increase of 49%. Operating income margin was 23.8% compared to 21% for the same period in ’08. Net income was $16.7 million compared to $11.8 million for the same period in ’08, an increase of 42%. Diluted earnings per share was $1.21 compared to $0.83 for the same period in ’08, an increase of 46%. Diluted weighted average shares outstanding decreased to $13,780,000 from $14,240,000 for the same period in ’08.

Revenues for the nine months ended September 30th, 2009 increased 29% to $364.8 million compared to $282 million for the same period in ’08 due to increased enrollment and a 5% tuition increase, which commenced in January of this year. Income from operations was $120 million compared to $87.4 million for the same period in ’08, an increase of 37%. Operating income margin was 32.9% compared to 31% for the same period in ’08. Net income was $73.2 million compared to $56.6 million for the same period in ’08, an increase of 29%. Diluted earnings per share was $5.29 compared to $3.97 for the same period in ’08, an increase of 33%. Diluted weighted average shares outstanding decreased to $13,850,000 from $14,275,000 for the same period in ’08.

At September 30th, 2009, the company had cash, cash equivalents, and marketable securities of $93.4 million and no debt. The company generated $89.8 million from operating activities in the first nine months of ’09, compared to $63 million during the first -- during the same period of ’08. Capital expenditures were $22.1 million for the nine months ended September 30th, 2009 compared to $15.3 million for the same period in ’08. During the three months ended September 30th, 2009 the company invested $5 million to repurchase 24,528 shares of stock at an average price of $202.13 as part of a previously announced stock repurchase authorization.

During the nine months ended September 30th, 2009 the company has invested $70.1 million for share repurchases. Also during the first nine months of ’09 the company paid regular quarterly dividends of $21.1 million. For the third quarter 2009 bad debt expense as a percentage of revenues, was 4.5% compared to 3.7% for the same period in ’08. Date sales outstanding, adjusted to exclude tuition receivable related to future quarters, was 15 days at the end of the third quarter of ’09 compared to 13 days at the end of the same quarter of ’08.

Rob?

Rob Silberman

Thanks, Mark, just a couple of comments on the third quarter financials before we get into a more detailed discussion on the operating results on the budget for next year.

In the third quarter we exceeded the midpoint of our EPS forecast by $0.06 per share. That was almost entirely caused by higher than expected revenue. This is a pattern we’ve had through the year where our revenue per student growth has been more than Mark and I were expecting. The revenue growth from the third quarter at 31.5%, was about 150 basis points more than Mark and I had thought it would be three months ago when we were forecasting.

Based on our announced enrollment growth of 24% for the summer term that additional revenue growth was caused, as it has been for the last couple of quarters has been the trend this year, by lower student drops inter-quarter as well as some higher ancillary fees. For our expenses, Mark was right about on target for his forecast for the quarter. That higher revenue led to operating margin expansion of 280 basis points, which again was quite a bit above our forecast. We thought we were going to do about 150 basis points better. Mark, right?

On distributable cash flow, for the first nine months of the year, we're up 43% on 29% net income growth, which is well ahead of our model. However, that cash flow growth is somewhat inflated by the timing of tax benefits associated with stock based compensation. If you back out those tax benefits, the free cash flow growth is more in line with our net income growth, which is what we would expect.

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