Robert S. Silberman - Member of the Advisory Board Mark C. Brown - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Karl McDonnell - Chief Executive Officer and Director.

Jeffrey M. Silber - BMO Capital Markets U.S. Corey Greendale - First Analysis Securities Corporation, Research Division Jason P. Anderson - Stifel, Nicolaus & Company, Incorporated, Research Division Jeffrey Y.

Volshteyn - JP Morgan Chase & Co, Research Division Timothy Connor - William Blair & Company L.L.C., Research Division Paul Ginocchio - Deutsche Bank AG, Research Division Denny Galindo - Morgan Stanley, Research Division John D. Crowther - Piper Jaffray Companies, Research Division Sara Gubins - BofA Merrill Lynch, Research Division.

Good morning, everyone, and welcome to Strayer Education Inc.'s First Quarter 2014 Earnings Results Conference Call. This call is being recorded. For those of you who wish to listen to the conference via the Internet, please go to strayereducation.com, where the call will be archived.

With us today to discuss the results are Robert Silberman, Executive Chairman for Strayer Education; Karl McDonnell, Chief Executive Officer; Mark Brown, Executive Vice President and Chief Financial Officer; and Daniel Jackson, Senior Vice President and Treasurer.

[Operator Instructions] I would like to remind everyone that today's press release contains and certain information on this call may contain statements that are forward looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act.

The statements are based on the company's current expectations and are subject to a number of assumptions, uncertainties and risks that the company has identified in the paragraph on forward-looking statements at the end of its press release, and it 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 Investor Relations department.

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

Thank you, Ben, and good morning, ladies and gentlemen. We don't have a lot to add this morning beyond what was included in our press release as it was a pretty straightforward quarter. Mark will just briefly highlight our company's financial results in Q1. Karl will provide an update on our operating results, including our spring term enrollment.

And I'll conclude with some comments on our cash flow, balance sheet and capital allocation. And we'll leave as much time as possible to answer your questions.

Mark, you want to run through the financials?.

Thanks, Rob, and good morning, everyone. I'll start with revenue. Revenue for the first quarter of 2014 was $116.5 million, which was a decrease of 15% from 2013. The decrease was primarily driven by lower enrollments, which were down 14% in our winter academic term.

Revenue per student declined as well by about 1.2%, which was actually a little less than we had expected due to lower drops. Income from operations is $26 million compared to $30 million for the same period in 2013, a decrease of 13%.

Operating income margin was up slightly at 22.2% compared to 21.8% in 2013 as our targeted cost savings from the restructuring are materializing. Net income for the first quarter of 2014 was $14.8 million compared to $17.2 million for the same period in 2013, a decrease of 14%.

Diluted earnings per share was $1.40 compared to $1.59 for the same period last year, a decrease of 12%. Diluted weighted average shares outstanding decreased 2% to 10,581,000 shares from 10,850,000 shares for the same period last year. At March 31, 2014, the company had cash and cash equivalents of $126 million.

We generated $33 million from operating activities in the first quarter compared to $31 million during the same period last year. Capital expenditures were $1 million for the quarter compared to $2.4 million for the same period last year.

Lastly, at March 31, 2014, the company had $121 million outstanding under its term loan and no outstanding balance under its revolving credit facility.

Rob?.

Thanks, Mark.

Karl, you want to run through the operational results?.

Sure. Thank you, and good morning, everyone. I'd like to start this morning by saying we were encouraged by the enrollment results we reported earlier today, and particularly, the positive trend we've seen in our continuation rate. For the spring academic term, our continuation rate improved by 130 basis points versus the prior year.

And as we've said in the past, student retention is clearly one of the most important metrics that we focus on. And our academic leadership team is doing a very good job working with our faculty to ensure that our classroom experience is both rich and engaging.

I'd also like to note that new students grew 1% for the spring term, and that's notwithstanding the fact that we lost 7% of our available operating capacity due to weather interruptions. Our revenue per student declined 120 basis points versus last year.

And actually, that's a bit less than it might have otherwise been, except for the fact that we had a couple of offsets, including much higher student retention and about 250 basis points improvement on our drop rate.

Notwithstanding those offsets, we still expect revenue per student to decline roughly 4% to 5% for the full year 2014 as more of our total student mix is on the new lower undergraduate tuition. Institutional alliances and national accounts continues to be a bright spot.

New students for this segment increased 19% versus the prior year, and it was also a strong quarter in terms of new national accounts, as our team added 22 new corporate partners. Currently, enrollment from these alliances makes up 31% of our total enrollment. The Jack Welch Management Institute continues to perform very well.

New JWMI students increased 39% versus last year, and their retention rates continue to be the highest in the university. Beyond the growth however, we're most pleased with the strong student feedback in JWMI.

And the JWMI management team does a great job incorporating that feedback into the program to continuously improve the experience for those students. And based on the continued strong enrollment at JWMI as well as our core Strayer University programs, graduate students now comprise just under 40% of our total student population.

Lastly, one restructuring note. We did close the one remaining physical location during the quarter, which completes the 20 locations identified as part of our Q4 plan last year.

Also, as you'll note in our release this morning, our operating expenses in the first quarter was $17 million below prior year, which puts us very much on track to achieve the full $50 million of targeted expense reductions in 2014.

Rob?.

Thanks, Karl. Just a couple of amplifying comments on the quarter from my perspective. First, we did much better than expected on cash flow in the quarter as our distributable cash flow, which you may remember, we calculate as the operating cash minus all necessary CapEx to run the business and to grow it.

That distributable cash flow was actually up 11% on net income, which was down 14%. And second, with that strong cash flow in the quarter, as of March 31, our cash position fully offsets our term loan and we now have 0 net debt.

We do, however, intend to leave both our term loan and our revolver in place as liquidity to support future investments on our business or the return of capital to our owners. And with that, operator, we'd be pleased to answer any questions..

[Operator Instructions] Our first question comes from the line of Jeff Silber of BMO Capital Markets..

Rob, since you finished your comments in talking about cash flow, I guess I'll start my question there.

First of all, were there any timing issues in the quarter that may have, I guess, artificially inflated cash flow in the quarter? And second, what does the company have to see before it becomes a little bit more comfortable in its cash position and maybe considers either paying down debt or reinstating your dividend?.

Well, the paying down of debt is really a separate issue. It's really a question of your -- what's the optimum balance sheet and how to think about cost of capital. In terms of the use of cash, we're looking every quarter against the opportunities that we have to invest in the business. And we -- there's a lot of things that we look for.

The most important of which, I think, is a general strengthening of the overall economy, because that's what we've seen over the last 4 years tends to drive -- be most impactful on the student enrollment. Plus we have a number of initiatives that we're looking at both within and around the business that may be a use of cash going forward.

In terms of the timing, we have almost a permanent timing issue now, Mark definitely -- with regard to the lease amortization, so the closed campuses. And there was a little bit of benefit from that. But I think most of the real upside was in just better working capital management, better collections and just overall efficiency in the business..

All right, great.

And as long as we're talking about timing, are there any timing issues from an expense perspective that we need to be aware of, either something happened in the first quarter or something that might happen in the second?.

No, no, Jeff. There's no real-timing expenses in our expenses in the first quarter. Our largest seasonality is we tend to have a much larger marketing spend in the third quarter as we're getting prepared for our fall enrollment. But I mean that's been evident in our quarterly distribution for the last 14 years, so....

Our next question comes from the line of Corey Greendale of First Analysis..

Can you guys just give us some sense of how the new student trends are differing between graduate and undergraduate, particularly just given the change in the tuition pricing structure at the undergrad level..

Sure. For this quarter, Corey, both our graduate and undergraduate students increased at roughly the same rate, about 1% year-over-year..

Okay. And seeing any difference in online versus -- I know your models so I know it doesn't matter that much.

But interested, given the change in the physical footprint, whether you saw any mix shift between physical campuses and online?.

No, the new student performance was pretty steady across the entire footprint. And we didn't see big shifts, one way or the other between online or on-ground students..

Okay. And then following-up on the last question that Jeff asked about the timing of expenditures.

The marketing expense was down about 8% in the quarter, which -- how much of that was because of the campus closures? So you're not doing the local marketing in those areas or some other driver?.

I think most of it, Corey, is just efficiencies in the way that our marketing team is able to generate the advertising campaigns that we're using to build brand awareness. We were pleased, obviously, that we saw about a 10% improvement in our acquisition costs for new students.

There's a tiny bit of timing to Rob's point, but it's not so much the favorable comparison we had in the first quarter. It's just how we plot the full year's marketing investment. It tends to be higher in the third quarter..

Okay.

So on a year-over-year basis, you think we should expect a decrease in marketing expense throughout the year?.

No..

Yes. And then we just -- just to amplify that, Corey, we basically redeployed advertising dollars that would have been used in markets that we're no longer in, into our existing markets..

Our next question comes from the line of Jason Anderson of Stifel..

A question on the continuation rate improvement. Obviously, it's gone from being down a couple of quarters ago to flat to up pretty nicely.

Should we continue to project that in our -- the way we try to look at persistence and that sort of thing in our models?.

Well, we can't really project, Jason, what the future continuation rate on enrollment will be. But I what can say is, as I said in my opening remarks, our academic leadership team is very focused on student retention, student outcomes. They clearly go hand-in-hand.

There's a number of ongoing initiatives that are designed to strengthen the classroom experience beyond where it is today, and so we're hopeful that over time, we will continue to see continuation rate gains. But I can't give you any specific direction on what that would look like in any one quarter..

Okay, great. And I know you're hesitant to make a comment on the grad fund impact.

But are you getting enough experience to see if that's helping?.

It's still early. We have 3 cohorts of students. So it's something, as we've said in the couple prior quarter calls that we've had, we're going to obviously continue to monitor very closely. But I think it's still too early to assess what impact that's having..

Our next question comes from the line of Jeff Volshteyn of JPMorgan..

I wanted to follow-up on the metric that I think you gave a drop rate improving 120 basis points. And I wanted to understand how do you calculate it.

Do you include the students that failed their classes into the drop rate? And also can you give a comment on the failure rate of students?.

Sure. The 120 basis point decline, Jeff, was in our revenue per student. I said that we had a 250 basis point improvement in our drop rate.

And the way that we calculate drop rate is, as a percentage of the students who are enrolled on the last day of our add/drop period and what percentage of those students were dropped between that point and the end of the quarter. And it's a simple calculation.

In terms of the number of students who fail academically, that varies quarter-to-quarter, but it's generally somewhere in the 8% to 10% range..

And that's a different number, Jeff. I mean, in other words, that's a student that's made it all the way through the course, but just hasn't achieved the learning outcomes and got a -- didn't get a passing grade on the final exam [indiscernible]..

That's helpful, okay.

In the 20 campuses that are now closed, is there still any sort of teach-out that is taking place for those students?.

Well, it's not necessarily a teach-out. What we've said when we implemented the restructuring is we were just closing the physical location itself. And you'll remember perhaps that we indicated that a very large percentage of those students were already taking almost all of their courses online.

And we retained a significant portion of those students when we closed the physical campus. So those students are still with us. They're teaching at -- we continue to enroll new students in those markets. To Rob's earlier point, we're not necessarily spending any advertising dollars in those markets, but we still get inquiries.

And we're still enrolling new students, so we'll continue to serve those markets online indefinitely. It's not a teach-out situation..

But you're serving them through your global online center, correct?.

Yes..

Our next question comes from the line of Tim Connor of William Blair..

What are your estimated starts would have been had you not had the campus closure impact?.

If you just look at it on a pro forma basis, excluding the 20 campuses, our new students would have been up 10%. And again, we lost 7% of our operating capacity, so I think it would've clearly....

On the weather..

Just on the weather..

Because there's 2 different issues..

So 10% when you exclude the new students. With the weather, it would have been clearly higher had we not had the level of weather disruptions that we had..

Okay. And then last quarter, you indicated that there's going to be an 8% revenue per student decline from the end of 2013 to the end of 2015.

Is that still how you're thinking about things?.

It is..

Can you give us some indication of what portion of that is scholarships versus Graduation Fund accruals?.

The majority of that is just more students coming in on the lower undergraduate students and the mix of those students on the reduced tuition increasing over time.

Mark, do you have any differentiation?.

Well, the accrual for the Graduation Fund is relatively small at this stage because it's got limited impact. You only have a few cohorts. The biggest impact, Tim, is not a scholarship. It's -- our -- we've reduced our undergraduate tuition. And as those cohorts roll through, that has a bigger impact..

Right.

And then final one for me, do you plan to keep the scholarship and -- excuse me, the price cut and Graduation Fund in place?.

Yes, absolutely. I mean it is our undergraduate tuition now..

Our next question comes from the line of Paul Ginocchio of Deutsche Bank..

Karl, you talked about your corporate channel, your national account channel being up 22%. Can you just talk about maybe the legion channel, the military channel and your organic channel, how they're trending....

Sure. Sorry, Paul, go ahead. Finish your question..

The follow-up was going to be -- JWMI, obviously, a great growth, 39%.

I guess would that imply the rest of graduate is down slightly? I know that JWMI is relatively small, but maybe just excluding JWMI, what's grad doing?.

Total grad students, excluding JWMI, were basically flat. The performance of JWMI helped increase it. You have to remember, too, we have the diminished enrollment impact from the 20 campuses, which mutes that overall number. I don't have the graduate number in front of me, excluding the Midwest campuses, unfortunately.

Just to make one small correction, the new students international account segment grew 19%. The 22 number was the number of new partnerships we added in the quarter.

And basically, I think the other part of your question was what did enrollment look like across the various segments? It was pretty strong across all segments, including for the first time, our unaffiliated students. Really what you have is, as I said, about 10% growth being offset by the impact of closing the 20 campuses.

And in this particular quarter, again, we just had really bad weather in the first half of the quarter, which clearly muted it a little bit further..

And I know you don't give projections, but based on the comments you just made, it sounds like this will continue?.

Well, we will see. That would be a projection. We will see next quarter. Yes, we just can't comment on it in the future..

Right. And so if 31% of your undergraduate enrollment or total enrollment's up 19%, and again, we'll use 10% as a benchmark, x the closures, that would say your unaffiliated, it's got to be up low-single digits, right? Is that sort of....

In this quarter, that would be accurate, yes. And that's probably the biggest change over the last 3 or 4 years, Paul, is just that we've always done -- we did quite well on our graduate programs and on our corporate affiliations all through the downturn.

And the unaffiliated undergraduates took a real nosedive, and that's sort of fought its way back up now..

Just a couple of minor, more follow-ups.

Can you just talk about that military channel? And community colleges are in those national accounts, correct?.

Yes, community colleges are in that segment..

And we don't really have a specific military channel, Paul. I mean we have about, what, 2% or 3% of our --.

It's less than 1% in military, active duty..

And we love those students, they're great students. But we don't have a specific marketing campaign for them..

Our next question comes from the line of Suzanne Stein of Morgan Stanley..

This is Denny Galindo on for Suzi Stein. Just had a question about the mix of students on the new tuition.

Can you give us what percentage of the students are currently on that new tuition now?.

I don't know. I don't have that in front of us.

But it's 3 cohorts, right?.

Yes, a few cohorts.

Well, for the lower tuition, for the first quarter, it would be just 1 cohort, right?.

For the first quarter, yes, just a 1 cohort....

That's right. Yes, exactly. So it's a relatively small part of that..

And then in terms of the expenses for the year, you've got most of the -- the 19 campus closures are done now, you have one more to go. It sounds like the expense cutting is kind of at its end now.

Is this kind of a better run rate for the year going forward? I know for instructional expenses, for instance, the first quarter's usually about 25% of the full year expenses.

Is that still going to be true for this year?.

The restructuring is complete. We are fully done closing the 20 campuses. We closed the last one in the first quarter. And as I said, we were down $17 million on operating expense in Q1, and we expect to achieve the full $50 million that we targeted as part of the restructuring plan throughout calendar year 2014..

So that's $50 million reduced expenses in '14 over '13..

Okay. And then lastly, and starts were up for the first time this quarter in a while. Without the weather, without the campus closures, it would have been up even more.

Do you have any update on how you long you think it will be before enrollments stabilize?.

Well, it will depend obviously on what both our new student performance is as well as what happens with our continuation rate.

And so I can't really project when overall total enrollment will increase because number one, we don't comment on what we think the future enrollment will be; and secondly, it's complex given that it's both a function of what we do in new students as well as retention in continuation rate..

[Operator Instructions] Our next question comes from the line of Peter Appert of Piper Jaffray..

You've got John Crowther on for Peter. Just following-up on that question, obviously, there's a lot of moving parts in terms of starts and continuation rates in terms of your enrollment. But just wondering, obviously, I'm guessing there's been a lot of sensitivity around what the pricing impact would have on new starts.

I'm wondering if what you saw in the first quarter is sort of consistent from a new start perspective, given your sensitivity around dropping prices..

Well, I think the best way to answer that is that our reduced undergraduate tuition was designed to deal with the broader issue of affordability. There wasn't a whole lot of analysis or sensitivity as to exactly what that drives in terms of new student enrollment. It's really not how we think about this organization.

We're building the university for a very long period of time. And in order to do that, you have to be at a price point that matches the requirements of the target market that you're trying to serve.

And so I wouldn't really provide any other commentary with regard to the new student growth, relative to the tuition, beyond to say, as Karl said, we're encouraged by the fact that with a little bit of firming in the economy and with a continued presence and great performance in the classroom that we have in these markets, that the demand for education is there and we hope to serve it with a very high-quality academic product.

And then over time, that will work out to both ours and the students' benefits..

Our next question comes from the line of Sara Gubins of Bank of America..

From a cost perspective, should we see $50 million in lower cost this year on an absolute dollar basis? Or will there be some investments since that might offset that?.

You should see $50 million of reduced operating business on a year-over-year basis. And the only caveat we might make is there is a variable component to that. And we don't know what our enrollment will be in the second half of the year. So depending on what that enrollment is, there could be a very small offset.

But based on the timing of the implementation on the restructuring plan, we do expect to achieve $50 million in a year-over-year basis in operating expense savings..

And to be fair, Sara, I mean it's a good question. The reality is savings are higher than that, and that is also being offset by investments that we're making. But the net is $50 million..

Okay.

And in terms of your relationships with corporate partners, are you seeing any changes in the discussion, perhaps as the economy's getting a little bit better or any changes in the competitive dynamics?.

The conversations are very similar to conversations we've had, Sara, over the last few years. As I say and as I have said in the past, we work very hard to provide high value for our corporate partners. I haven't really seen any changes competitively, frankly. And it's a core part of what we do.

And our team is very focused on, as I said, delivering the most value we can for those corporate partners..

Our next question is a follow-up from the line of Jeff Silber of BMO..

A couple of numbers-related questions. G&A expense of about $11 million, if I remember correctly, you had guided a little bit higher than that.

Is this $11 million a good quarterly run rate that we should be using for the rest of the year?.

Yes, Jeff, it is..

Okay.

And then in terms of stock-based compensation, what should we be expecting for the year?.

Something in the $10 million to $12 million range..

All right.

And how about the capital expenditures?.

Also in the $10 million to $12 million range..

Thank you. And ladies and gentlemen, this does conclude our Q&A session. I'd like to turn the conference back over to Mr. Silberman for any closing remarks..

Thank you, operator, and thanks to all of our listeners. We'll look forward to speaking with you again in July. Thanks very much..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day..