Robert Silberman - Executive Chairman Karl McDonnell - Chief Executive Officer.

Henry Chien - BMO Capital Markets Peter Appert - Piper Jaffray.

Good morning, everyone. And welcome to Strayer Education Incorporated Second Quarter 2017 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; and Karl McDonnell, Chief Executive Officer. 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.

These 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 that could cause the company’s actual results to differ materially.

Further information about these and other relevant uncertainties maybe 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. As you heard on the introduction of the call, you are stuck this morning with just Karl and I, as our [ph] crack (01:36) CFO, Dan Jackson had a biking accident and broke his hip on Sunday. He is fine. But he is laid up this week and will not participate on the call.

All of the detailed financial information on the quarter is contained in our earnings release so I will not deliver those points here and Dan will be back next week, if you have any specific modeling questions, which you can direct to him specifically.

However, I did want to highlight this morning one important issue from my perspective on the Q2 financials. Our reported Q2 GAAP EPS of $0.92 is up significantly versus the prior year.

However, that $0.92 includes approximately $0.20 of non-cash earnings from our reduction in the liability associated with the potential five-year earn-out payment from our acquisition of The New York Code & Design Academy.

That $0.20 comes from the fact that roughly half of our $25 million purchase price for NYCDA within the form of an earn-out, which would only be paid to the sellers if the business achieve certain targets within the five-year period and we carry that portion of the purchase price on our balance sheet as a liability.

Each quarter we determine the likelihood that the business will achieve those targets within the five-year measurement window, which is all that counts for the earn-out and adjust the liability accordingly.

In the second quarter we adjusted that liability down by approximately $2 million and when you subtract out the EPS associated with this liability adjustment, you are left what I call our core earnings for Q2, which were roughly flat with the prior year.

However, with our current strong enrollment growth trends we do expect those actual core earnings for the second half of the year to increase at double-digit rate versus the same period in 2016.

Finally, before I turn it over to Karl to comment more fully on our operational and financial results for the quarter, I wanted to remind everybody that we will hold an Investor Day on October 26, 2017 here at our headquarters, which will coincide with our Q3 earnings announcement.

During the Investor Day we will provide a deep dive on our business model an academic products including Strayer Studios, The Jack Welch Management Institute and The New York Code & Design Academy, as well as discuss more fully our growth plans for 2018 and beyond. With that, I will turn it over to Karl.

Karl?.

Thank you, Rob. Good morning, everybody. I would like to begin this morning with an update on a couple of regulatory matters. First and foremost, we were very pleased that our regional accreditor, the Middle States Commission on Higher Education reaffirmed our accreditation for an eight-year period, which is the maximum duration that they allow.

This affirmation follows the review of our self-study. It included multiple site visits by a peer review team and was a multiyear effort on the part of the university’s leadership team. I would like to specifically acknowledge [ph] Dr.

Sunder Stoller (04:28), Strayer University’s President Emeritus and Brian Jones, Strayer University’s current President, as well as his senior leadership team for the incredible work they did not just on the self-study, but on the all of the improvements made since the University’s last self-study in 2007.

The second regulatory update is also during the quarter we received our specialized programmatic accreditation for our RN to BSN program from Collegiate Commission on Nursing Education or CCNE for a period of five years, which is their normal duration.

Next just a couple of comments on our second quarter financial results, our revenue per student declined 1.8% from last year. That’s better than the decrease of 2.6% we had in the first quarter. However, in prior earnings call I indicated we thought revenue per student would be down in 2017 on a full year basis by roughly 1 percentage point.

But based on our current trends, which is more undergraduate students, as well as our slightly higher drop rate, we expect revenue per student to decline between 1.5% and 2% now for the full year 2017. Our operating expenses were up 3.4% in the second quarter when you include the reversal of the NYCDA contingent liability.

Otherwise they would have been up 6%, excluding that adjustment. About a third of that increase was associated with higher advertising cost as we work to support our various branding efforts. Much of the remaining increase is essentially timing.

We have about a dozen active large projects design to improve both student learning outcomes and the overall student experience, and we invested in those a little more heavily in the second quarter.

For the full year, we think our operating expenses will increase roughly 3% on a year-over-year basis and that figure assumes that our current enrollment trends continue.

And then lastly on enrollment, our positive enrollment turns continued in the second quarter, with new students up 6% and total enrollment up 8%, our continuation rate in the quarter increased 100 basis points.

Quickly on the Jack Welch Management Institute, they posted another very strong quarter with 34% new student growth, 31% total student growth and they almost doubled the number of graduating students from 52 last year to 94 this year and they've crossed over the 1,500 student threshold and we couldn't be happier with their performance..

94 in the quarter..

In the quarter..

Yeah..

Lastly our enrollment outlook for the third quarter is for both new and total enrollment to grow approximately 7% versus the prior year. And with that, Operator, we’d be happy to take questions..

Thank you. [Operator Instructions] And our first question comes from Jeff Silber from BMO Capital Markets. Your line is open..

Hey. Good morning. It’s Henry Chien calling for Jeff..

Good morning, Henry..

Good morning. I was wondering if you could add a little bit more color on what's driving the new enrollment growth in the quarter and what you're seeing for 3Q. Is there anything that you are doing internally or are seeing more returns on your marketing or advertising, just any kind of color there to help us understand the trend? Thanks..

Sure, Henry. First, we continue to see a pretty positive demand environment. Meaning that interest in the university continues to grow at a double-digit pace. We saw that in the second quarter. And I think it’s a combination of just general brand awareness.

The health of, as I just commented on, Jack Welch Management Institute, the health of our corporate alliances, all of that is contributing to the new student growth that we've had. We also had pretty healthy retention gains in the quarter, 100 basis points.

So it's combination of just the ongoing efforts to build the brand awareness so the university can find with some of the more proprietary things that we have in the way of JWMI and the 300 plus corporate partnerships that we have around the country..

Yeah. And Henry, I would also add. I think it’s common to focus on the fact that, Karl, and his team had made significant improvements in the academic product.

Our graduation rate is up and that -- it's a virtuous cycle, as you get more satisfied students who are benefiting from the program, just makes it easier for your brand to be perceive positively..

Got it. Okay. Great. That’s good to hear.

And then shifting to operating margins, how should we think about for the next few quarters or for the remainder of the year, in terms of balancing the additional spend you are putting into the new investments and for new enrollment growth, is there framework or any direction of how we should think the margin going forward?.

Well, you heard Robert comment in his remarks that we expect double-digit earnings growth in the back half of this year and with that we would expect our margins to expand..

Got it. Okay. Great. Thanks for the color..

Sure..

Thank you. [Operator Instructions] And our next question comes from Peter Appert from Piper Jaffray. Your line is open..

Thank you. Good morning. I will just….

Good morning, Peter..

Continuing on the enrollment question, give us any more color in terms of maybe programmatic areas where you're seeing particular strength and then any particulars in terms of the partnership channel, in terms of how that's going?.

Sure, Peter. I -- unfortunate I don't have the by program list in front of me. I know similar to prior quarters the bulk of the growth is that the undergraduate level. In prior quarters the growth has been pretty spread evenly across most of our programs, the bulk of what we teach is business..

Yeah..

So, for example, the BBA is our largest program, so that would be a program that had a lot of growth in it. And in terms of the second part of your question, the health of our corporate channels is very strong.

We are benefited by the fact that we have a lot of them, well over 300, and we are also benefited from the fact that we've got this campus network, which enables us to activate a lot of these relationships at a local level. So we may sign a relationship at the corporate level and let's say it’s with a nationwide retailer.

And then our local staff and the 80 campuses that we have around the country can go visit those retailers and get to know them and build relationships at a local level, and that has always worked well for us. And in this quarter it was a big contributor to our growth and we expect it will be in the future as well..

And how big is the corporate channel as a percent of enrollments at this point, Karl?.

Well, what we refer to is that along with community college enrollments and taken together it's about a third of our total population..

Got it.

And just tell me what you're doing currently in terms of pricing?.

We had a 1% undergraduate tuition increase at the start of this year and we felt that implementing that tuition increase did not in any way move us up the affordability comparative universe that we look at.

We still feel like we are among the most affordable institutions and basically in line with your average in-state four-year institution on the public basis.

The Jack Welch Management Institute will be implementing a 6% tuition increase for the fall term for new students and that’s I think about the fifth tuition increase that we've had there reflecting the strong outcomes in the institute and the strong demand that we see there. And we haven't made a decision on 2018, yes.

So we can comment on that on Investor Day..

So the lower revenue for students is exclusively a function of mix in terms of….

Yes..

… more undergrads, okay..

Yes..

And then last, Karl, thing, the reversal of the reserves for the contingent liability on NYCDA would seem to imply that, the performance isn't quite as good as what you anticipate or would like to see.

Can you just speak to the operating results and I am asking this obviously partly in the context with some of the consolidation we are seeing in that industry currently?.

Sure, Peter. The -- it's actually two different measurements. We have an internal budget and that was associated with the value that we anticipated the purchase of NYCDA. And then as a measure of just capital discipline, we put a fairly heavy burden on the sellers with regard to the earn-out of the full capital cost if you will.

The -- we are actually quite pleased with what we are seeing in NYCDA and we're continuing to invest behind it. And -- but in order to achieve the earn-out there was a very high rate of growth that was required within a relatively short period of time and that just -- as we get farther into that five-year measurement period.

Just on a pure accounting test basis, we have to measure the likelihood of that's going to get paid. There is still a -- we didn’t eliminate that liability. That's -- we just reduce it by couple million dollars.

But overall I think the long-term attractiveness of coding as a business and as an academic area for both Karl and I looks I think quite attractive.

They just -- we see within our own business and our ability to automate and to drive artificial intelligence through a lot of things that we are doing, just seems us that the likelihood that coding will be a smaller skillset in the economy going forward is pretty low. So we want to nurture this business carefully.

The way we do all of our academic products and make sure this rollout in a way that we can absolutely assure that we are achieving the academic outcomes. And as a separate matter we have this calculation with regard to the -- let -- the other half of their purchase price. It’s not really related directly in the way that you are asking..

I see.

Can you give us a sense of how big the business is currently and what the impact is on your operating results?.

It's still pretty small, just a few million of revenue. We are not breaking it out at this point. It’s not big enough to break out. And it's -- we hope it will be breakeven at the end of the year. It’s not quite breakeven yet, it’s still little bit of a drag on the earnings..

Got it. Thank you..

Thank you, Peter..

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Robert Silberman for any closing remarks..

Thank you, Operator. We appreciated and look forward to seeing all of you in October here at our headquarters. Did you have any other questions, please give us a call. And as I said, Dan will be back next week, if you had detailed modeling questions. Thanks very much..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..