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

Corey Greendale - First Analysis Securities Corporation, Research Division Jeffrey M. Silber - BMO Capital Markets U.S. Faton Begolli - BofA Merrill Lynch, Research Division Jason P. Anderson - Stifel, Nicolaus & Company, Incorporated, Research Division Trace A.

Urdan - Wells Fargo Securities, LLC, Research Division Paul Ginocchio - Deutsche Bank AG, Research Division.

Good morning, everyone, and welcome to Strayer Education, Inc.'s Third 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. 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 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, operator. And good morning, ladies and gentlemen. I just have a few general comments on the quarter this morning before I turn it over to Karl and Mark for their more detailed reviews.

First, Q3 was self-evidently one of our strongest quarters in the last several years, and all of our important academic metrics were up, and financially, we significantly outperformed our plan, both in terms of revenue and cost control.

However, I did want to point out that of the $0.46 of quarterly per share earnings we reported this morning, $0.09 was related to a noncash beneficial adjustment to our lease loss reserves, and a penny was associated with a lower tax rate, which Mark will discuss in more detail.

Now admittedly, even backing out this $0.10, the remaining $0.36 of EPS is a healthy increase over the $0.30 we reported for Q3 of last year. But I did want to put our reported EPS in proper context for our owners.

The second point I wanted to make concerns the administration's gain for employment regulation, and we obviously have not yet had an opportunity to adequately review the nearly 1,000-page document, so we don't have any detailed comments this morning.

But I would like, once again, to reiterate our previously an off-stated commitment to run this institution in full compliance with all regulatory and educational requirements.

And based on the last version of the draft regulation, which the department had released, we do not anticipate any material changes to either our academic offerings, operational plans or capital structure in order to comply with this regulation.

And finally, on capital allocation, our Board of Directors on Tuesday extended our share repurchase authorization of $70 million through December 31, 2015.

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

Sure. Thank you, Rob. And good morning, everyone. I'd like to begin by commenting on our results in the third quarter, which as Rob noted, were particularly strong across a number of areas. First, higher student retention and a lower overall drop rate resulted in better-than-expected decline in revenue per student at 2.8%.

On a year-to-date basis, we're down 2.9%, and while the fourth quarter is likely to be down between 4% and 5%, we think the full year decline for 2014 will be below 4%. Our operating expenses were down roughly $12 million from last year.

Most of that is related to savings from our restructuring, and about $2.6 million is from continued efficiencies within our marketing group. I should point out, however, the third quarter is likely to be the last quarter where we'll have large year-over-year restructuring-related expense savings.

And last year, we generated about $5 million in restructuring saving as a result of early implementation of some of our initiatives in the fourth quarter of last year. Turning now to our fall-term enrollment results.

Our 5% new student growth or 10% excluding the close campuses, combined with a 120 basis point gain in continuation rate resulted in just over 42,000 students. And throughout 2014, we've made considerable progress on our goal of returning to total enrollment growth. In Q1, we began the year down a bit over 14%, and in Q4, we end the year down just 2%.

We believe, should our enrollment trends continue, total enrollment growth should occur either in the first or second quarter of next year, followed by revenue growth approximately 2 quarters later.

Under that scenario, we would expect revenue for the full year 2015 to be flat to down 2% and operating expenses, inclusive of several new investments we intend to make, to be flat to up 2%. And under this scenario, we would expect 2015 to be our trough year for earnings.

Within the fall term, our national accounts and institutional alliances continued to perform well. New students for this segment grew 5% and total enrollments grew 6%, again, ahead of the university's overall performance. And we also added 7 new national accounts during the quarter.

Also, the Jack Welch Management Institute's total enrollment grew 46% to just under 800 students now, and new student growth at JWMI increased 32%. And so, that program continues to perform very well. And now, I'll turn it over to Mark, so he can run through the numbers in more detail..

Thanks, Karl. And good morning, everyone. I'll start with revenue. Revenue for the third quarter of 2014 was $100.8 million, a decrease of 8% from the same period in 2013. The decrease is primarily driven by lower enrollments, which were down 6% for our summer academic term and lower revenue per student was declined 2.8%.

As Karl mentioned, the decline in revenue per student was less than what we were expecting as a result of lower drops during the quarter. Income from operations was $9.2 million for the third quarter of 2014 compared to $6.6 million for the same period in 2013, an increase of 39%.

Income from operations for the quarter includes a $1.5 million noncash adjustment to reduce the company's liability for losses on facilities no longer in use. Operating income margin was up 310 basis points to 9.1% compared to 6% for the same period in 2013.

Net income for the quarter of 2014 was $5 million compared to $3.1 million for the same period in '13, an increase of 57%. Net income for the quarter includes $0.9 million in after tax benefits from the adjustment to the company's liability for lease losses.

It also includes a lower effective tax rate of 37.7% for the quarter, as we reduce our full year effective tax rate estimate to 39.5%, down slightly from 39.8%. Diluted earnings per share was $0.46 for the third quarter compared to $0.30 for the same period in 2013, an increase of 53%.

Diluted earnings per share for the quarter includes $0.09 per share in after tax earnings related to the reduction of the company's liability for lease losses and about a penny from an anticipated lower effective tax rate for the year.

Diluted weighted average shares outstanding increased 1% to $10,663,000 from $10,552,000 for the same period in 2013. At September 30, 2014, the company had cash and cash equivalents of $150 million. We generated $62 million from operating activities in the first 9 months of 2014 compared to $72 million during the same period in 2013.

Capital expenditures were $4 million for the 9 months ended September 30, 2014, compared to $7 million for the same period in 2013. We are now estimating full year CapEx to be about $8 million this year.

Regarding our credit facility, at September 30, 2014, we had $119.5 million outstanding on our term loan and no outstanding balance under our revolving credit facility. Finally, for the third quarter of 2014, our bad debt expense as a percent of revenues was 3.6% compared to 4.5% for the same period in 2013.

Rob?.

Thanks, Mark. So with that, Ben, we're happy to take any questions..

[Operator Instructions] Our first question comes from the line of Corey Greendale of First Analysis..

First, I appreciate the thoughts about what 2015 could look like if current trends continue. It sounds like -- and tell me if I'm getting this wrong. It sounds like you're saying that revenue per student might be relatively flat in '15.

Is that right? And you know why would we not see continuation of the negative trend as more people take on the new tuition structure?.

Well, Corey, we expect that revenue per student next year will be down between 4% and 5%, and that's mostly attributable to the fact that just a higher percentage of our total enrollment will be on the lower-undergraduate tuition of the mix percent.

This year, earlier in the year, we thought 2014 would be down between 4% and 5%, but we've had higher retention and lower drops, which has really offset some of that decline. But I would expect next year, the mix shift would lead us to be down between 4% and 5%..

Okay, then does that suggest you think that total enrollment -- if current trend continue, total enrollment would be up on average for the year high-single digits?.

Well, should current trends continue we would have single-digit, probably, enrollment growth for 2015..

Okay. And then next question. Karl, I think you said that within national accounts, new students were up 5%, which is good given the current environment. But I think it's slowed down from the last couple of quarters and it's more like 20%.

Can you just speak to us what's beneath that? And also, what does that suggest about the trends outside the national account?.

It just moves around, Corey. I won't read anything into it. If anything, I would point to the fact that, that segment's total population actually grew 6%, where the overall university was down 2%. So we have really healthy outcomes and very healthy retention rates. And I'd just attribute it to timing..

Our next question comes from the line of Jeff Silber of BMO Capital Markets..

You mentioned the lower-than-expected drops.

Can we just get a little bit more color on that?.

Sure. Well, we've had a strong focus throughout the year on the student experience, really in the classroom. And as a result of that, and as Rob noted, we've had really strong student outcomes, which directly translates into higher retention and lower drops.

So really, those metrics feed off what's happening in the classroom academically, and as our leadership team there has really tried to improve the student experience, it's resulted in better retention and lower drops..

Okay, that makes sense....

Just one clarification. Just so it's clear, from a modeling standpoint what happens is, when students drop during the quarter, we don’t recognize the revenue. So if you have lower drops or higher intra-quarter retention, that increased revenue is going to offset some of the revenue per student decline from the lower tuition..

Okay, got it. That makes sense.

The $1.5 million adjustment, which line item is that in?.

That's in the I&E line, Jeff..

Okay, great. And I hate to ask this question, but I'm going to.

Given the news that we got from Grand Canyon last night that they were potentially considering a not-for-profit conversion, I'm just wondering if you guys have ever looked into this? And if so, what are your thoughts?.

I don't know why you hate to ask the question. I mean, it's a legitimate question. Now, I mean, look, when you run a public company, you're always focused on running the institution in a way that enhances long-term shareholder value.

I would never comment on another company's intentions or their sense of valuation vis-à-vis their own shareholders, but we're -- Strayer University was owned by the Strayer family as a proprietorship for about 80 years, and we've been very satisfied as a source of capital to run the university with the public markets.

So our view is, as I said, there are some complications with running a university that is funded by investor profit-seeking capital, and there are different regulatory constraints but we've been quite comfortable with those in the past. And our comments with regard to the current set of regulations are a matter of public record.

But their results are, we're quite comfortable with it. We'll be able to comply and operate without any changes. So barring some enormous change in either tax structure or valuation or regulatory oversight, I would say that we're quite happy with our capital structure. And we don’t really have any focus or intent on changing it..

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

Hello, this is Faton Begolli calling in for Sara Gubins. So the first one I have is on scholarships.

Do you think we can see changes in the way you approach pricing in 2015? Or are you comfortable with the current structure?.

We're very comfortable with the current structure. We're not really offering scholarships. We've just reset our undergraduate tuition at a lower price point, and we're comfortable with where it is..

Plus the Graduation Fund, yes..

Okay.

Can you give us color on the amount of the resell on the lower undergrad tuition?.

Well, when we implemented it earlier in the year, it was a 20% reduction in undergraduate tuition. And we maintain the fact that we have the Graduation Fund, which offers undergraduate bachelor students the opportunity to earn up to 10 of their 40 courses in a bachelor program without tuition, provided they complete, essentially, 30 of them..

And I just have one more on demand.

So what are you seeing in terms of lead flow on conversion item? Overall, would you say that the market is getting better or slightly worse or is it the same?.

We've seen a pretty healthy demand environment. We have generated on a year-over-year basis probably a little more demand than we had last year. We've done that through some pretty efficient use of the dollars. As you've seen in the P&L that we've had a couple of quarters now of year-over-year declines in marketing expense.

And so, the demand environment is relatively strong from our perspective..

I think from a macro level, the economy is not getting worse. Yes, I don't think it's getting a lot better for our target market. But for several years, it was really getting a lot worse, and that was clearly impacting our nonaffiliated or undergraduate students that tended to have less employment prospects.

But seeing that bottom out, that's definitely helping us..

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

On the -- did I hear you right? You said total in 4Q would be down 4%? Or did I mishear that?.

Revenue per student, we would....

Oh! you said RPS, okay..

Revenue per student, down, yes..

Okay.

So therefore, you're not assuming a continuation of improved drop rates or -- I guess, that's a potential each quarter I would assume?.

Well, it's not that we are or not forecasting any gains in retention. We don't know what that will be. The quarter is still underway. But again, it's really mostly a mix shift. So every quarter that goes by, more and more of our students from a total mix standpoint are on that lower undergraduate tuition..

And then, on -- when it comes to cost cutting, thanks for your comments on the potential or the FY'15 operating expenses, but does that entail -- you talked about investment, but is there really a mix of more cost cutting, and then the offset of some investment? Or how should we think about that going into '15?.

Well, going back to the end of last year, you'll recall that we took out $50 million of expenses, which we realized and achieved this year. With those reductions, it really puts our expense base at a level that we're comfortable at for the foreseeable future.

So any increases in expenses that we would have next year would largely be attributable to investments that we make in new services for students..

Great. And then, one more.

For the Welch Way partnership there with Skillsoft, how's the progress with that? And is there -- I mean, I can't remember if you guys have given this before, but -- is there a potential size, like maybe a revenue market opportunity, potentially you think with that?.

Well, it's still relatively early. Skillsoft has indicated to us that the feedback has been overwhelmingly positive on the part of their clients. They're essentially on track to deliver what we had planned for. It's a relatively small number in the first year.

And in terms of how big it ultimately could be, I just can't really provide any detail on that. We never had a product like that, so there's nothing from a historical standpoint to benchmark against. So we'll just wait and see how big it gets over the years..

Our next question comes from the line of Trace Urdan of Wells Fargo Securities..

Without giving away any secret formulas, I wonder if you could give us a little bit more color on the marketing efficiencies you're seeing and what's behind that and how much more you might expect from the efforts that you're making there?.

Sure, Trace. Again, going into any given quarter, we don't look for these savings.

And most of the time, when we're able to generate dollar savings like this, it's the result of taking dollars from a more expensive channel, such as traditional broadcast media, and re-purposing those dollars into digital channels, such as paid search or display advertising, and that's the case that we've seen in the last couple of quarters.

And as I say, it's helped generate some healthy demand that we've seen across the university. The overarching strategy that we always have is just to build brand around having a strong academic offering for our students and to make sure that when prospective students are thinking about returning to school, they give Strayer their consideration..

So Karl, does that mean that you think that savings are really more, sort of, tactical and opportunistic than representative of a trend?.

I would characterize it as opportunistic. And to put it into perspective, we are planning, essentially for 2015, to budget largely the same amount that we budgeted this year. Where the team can get savings, they take them, but we encourage them to spend the full budgeted amount..

Okay.

And then, a relatively minor point, but I wonder is the writeup on the lease liabilities reflects your experience that you were able to kind of get better deals than you expected with landlords? Or was it more just a matter of you kind of budgeting conservatively and throwing up at the end of the process?.

No. I mean, look, we ended up shutting down 20 facilities. So there is quite a bit of square footage around a number of markets, and we had what I thought was very valid representations from various commercial real estate people. I think it's as simple as that the -- our ability to sublet has been slightly better than what was anticipated.

It could go the other way next year, Trace, so I really tried to isolate it so that it's outside of the analysis of the core underlying academic operations..

Yes. I was just curious, because other folks are shutting down campuses, too, and I wondered if it was representative of the trends? That's all..

Yes. I couldn't really tell you on that..

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

[indiscernible] on for Peter. First question. We're now sort of a full year into the graduate funds scholarship.

I'm just wondering maybe if you could give us a little bit more detail on sort of the early cohort metrics from students who have now been enrolling underneath that scholarship here for almost a year?.

Sure. Well, we definitely have seen better retention throughout 2014 really in every quarter. It's actually quite complicated or difficult to parse out what exactly drives that higher retention because there's obviously multiple variables at work.

So we've got ongoing efforts to improve the academic experience in the classroom, and that could be as tactical as changing out textbooks, scheduling different faculty members, changing the course load. So there's a lot of forces that work. And it would be almost speculative on our part to assign it to any particular one variable over another.

We think over time, over some amount of many years, we hope to ultimately be able to quantify the impact specifically of the Graduation Fund. But we think it's a major part of our attempt to address affordability for our students and we intend to keep it intact..

Great. And then, just if I can ask one more question on the investment side. It sounded like you said there would be some new investments in the way of student services.

I wondering if you could expand on that a little bit more in terms of where you are going to be putting those incremental dollars in '15?.

Well, it's all around the idea of just enhancing -- continuously working to enhance the students' experience. Some of that may involve technology to make the classroom experience more rich.

It could be extended use of some of the adaptive learning technologies that we're already using, some of the predictive analytics that we're using that are really helping to drive some of the higher student retention. So it'll be a combination of things but all geared around making that student experience stronger..

[Operator Instructions] Our next question comes from the line of Paul Ginocchio of Deutsche Bank..

Great. I've got 2 questions. One, I don't know if there's any variation between new enrollment or overall enrollment growth between masters and bachelors? Or by field of study? And then, second, just I think the Department of Education ran some scenarios around 90/10.

And there was a release of some data that showed you at 92%, if you included DOD funds. I'm just trying to square that with your exposure to national accounts. Is it big chunk of your national accounts DOD related? Thank you..

Sure, Paul. First, on your first question regarding new enrollments around field of study or degree level.

We actually did see a decline in new graduate-level enrollments this past quarter and an increase, therefore -- obviously, given we were up overall at the undergraduate level and particularly with the unaffiliated student, which helps our view of the economy firming up a little bit because that's a segment of the population that really had fallen off quite a bit for us previously.

And with regard to your second question, we are, of course, proud to serve the VA and military students. It's a very important part of our student body. And beyond that, Paul, we just -- we don't comment on speculative legislation..

The other thing I'd point out, Paul, is just that, between DOD and VA, I think the majority of that had to have been VA. Because our overall DOD is just a few percentage points. But as Karl said, we're proud to serve those students and we'll continue to do so..

And Karl, still -- I'm not trying to speculate on regulation, just trying to ask you whether VA is the biggest chunk of your national accounts?.

When I'm quoting our national account enrollment statistics, I'm not including military or VA..

Great, thank you..

And I'm showing no further questions. I'd like to turn the conference back over to Mr. Silberman for any closing remarks..

Thank you very much, Ben. And thank you, ladies and gentlemen, for participating, and we look forward to speaking with you again in February with our full year results. Thanks, again..

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..