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

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division Gary E. Bisbee - Barclays Capital, Research Division Peter P. Appert - Piper Jaffray Companies, Research Division Sara Gubins - BofA Merrill Lynch, Research Division Suzanne E. Stein - Morgan Stanley, Research Division Corey Greendale - First Analysis Securities Corporation, Research Division Jeffrey M. Silber - BMO Capital Markets U.S. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division Brandon Burke Dobell - William Blair & Company L.L.C., Research Division Trace A. Urdan - Wells Fargo Securities, LLC, Research Division Brian Karimzad - Goldman Sachs Group Inc., Research Division Kelly A. Flynn - Crédit Suisse AG, Research Division

Good morning, everyone, and welcome to Strayer Education Inc. Second Quarter 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 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.

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 p.m. Eastern through Thursday, August 2. The replay is available at (855) 859-2056, conference ID 39822252. 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 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 our second quarter financial results and ask Karl to comment on our second quarter operational results, including our enrollment statistics for the summer academic term. Finally, I'd like to provide an update on our growth strategy, our business model and our earnings outlook for the third quarter of 2012. Strayer Education is an education service company whose primary asset is Strayer University, a 50,000-student, 100-campus, post-secondary education institution founded in 1892 which offers bachelors, masters and associates degrees in Business Administration, Accounting, Computer Science, Public Administration and Education. Unlike traditional universities, Strayer University students are working adults who are returning to college and graduate school to improve their lives. Our revenue comes from tuition payments and associated fees. Approximately 75% of that revenue comes to us from Federal Title IV loans issued to our students. Our expenses at Strayer Education include the cost of our professors, our admissions and administrative staff, marketing expenses and facilities and supplies costs. We serve students in 23 states through physical campuses, as well as in all 50 states and over 30 foreign countries through our online courses. Strayer University is accredited by the Middle States Commission on Higher Education. Mark, will you run through the financials?

Sure. Revenues for the 3 months ended June 30, 2012 decreased 11% to $146.3 million compared to $163.8 million for the same period in 2011, principally due to lower enrollment. Income from operations was $36.2 million compared to $50.1 million for the same period in 2011, a decrease of 28%. Operating income margin was 24.7% compared to 30.6% for the same period in 2011. Net income was $21.2 million compared to $29.6 million for the same period in 2011, a decrease of 28%. Diluted earnings per share was $1.85 compared to $2.53 for the same period in 2011, a decrease of 27%. Diluted weighted average shares outstanding decreased 2% to $11,483,000 from $11,737,000 for the same period in 2011. Revenues for the 6 months ended June 30, 2012 decreased 12% to $295.8 million compared to $335.7 million for the same period in 2011, principally due to lower average enrollment. Income from operations was $77 million compared to $109.4 million for the same period in 2011, a decrease of 30%. Operating income margin was 26% compared to 32.6% for the same period in 2011. Net income was $45.2 million compared to $65.4 million for the same period in 2011, a decrease of 31%. Diluted earnings per share was $3.94 compared to $5.34 for the same period in 2011, a decrease of 26%. Diluted weighted average shares outstanding decreased 6% to $11,480,000 from $12,263,000 for the same period in 2011. At June 30, 2012, the company had cash and cash equivalents of $48.7 million. The company generated $42.7 million from operating activities in the first 6 months of 2012 compared to $87.4 million during the same period in 2011. Capital expenditures were $9.9 million for the 6 months ended June 30, 2012 compared to $18.1 million for the same period in 2011. During the 6 months ended June 30, 2012, the company paid regular quarterly dividends of $23.7 million or $1 per share for each of the quarterly dividends. At June 30, 2012, the company had $85 million outstanding under its term loan facility and $15 million outstanding under its revolving credit facility. The $15 million was subsequently repaid earlier this month, leaving us $100 million available under this revolving credit facility. For the second quarter of 2012, bad debt expense as a percentage of revenues was 4.4% compared to 4.1% for the same period in 2011. Days sales outstanding was 15 days at the end of the second quarter of 2012 compared to 12 days at the end of the second quarter of 2011. Rob?

Thanks, Mark. Karl?

Total enrollment for the summer academic term was 44,236 students, which is a decrease of 7% versus the prior year. Our continuing student enrollment decreased 11%, and our continuation rate decreased approximately 150 basis points. The decline in our continuation rate is due to small variations in graduations, drops and our academic failure rate. Our new student enrollment increased 9%. Enrollment at mature campuses decreased 12% while our new campuses grew 31%. Global online students increased 8%. We also announced today the opening of 2 new campuses in the Chicago market, bringing the total number of campuses in that market to 4. These 2 campuses along with our 2 Minneapolis campuses comprise 4 of the previously announced 8 for 2012. We expect the remaining 4 campuses to open in the latter half of the year. Lastly, in terms of student mix, total graduate students now represent 33% of all students and undergraduate students comprised 67% of students, with business and accounting representing roughly 2/3 of that population. Rob?

Thanks, Carl. As Mark reported, our Q2 financials were right on our forecast, so I don't believe any additional comments are necessary there. However, I did want to briefly update our 2012 business model, which Mark and I had put out last October. When Mark and I presented that model, we announced that our Board of Trustees had set only a 3% tuition increase for Strayer University for 2012 versus our historical 5% but more importantly, we reported then that based on the student mix shift we were experiencing towards more graduate and corporate-sponsored students, as well as selected use of targeted scholarships, we didn't expect to realize any of that tuition increase and indeed forecast that our revenue per student would be flat to slightly down in 2012. With our first and second quarters now in the books and with visibility into our summer term enrollment, we can now more specifically forecast that our revenue per student will be down about 1% to 2% for 2012. That lower revenue per student will flow through our business model and cause slightly lower revenue and earnings for each of the indicated enrollment ranges in the model we had provided. The other point that I wanted to make with regard to that is, is that we tried in that model to give you all a look as to the effect of new student enrollment growth on our total student enrollment growth, mainly to point out that given the shortfall in new students in 2011, which would flow through our University system throughout 2012, the increases in new students would not necessarily translate into increase in total students right away. Now the thing that we see now to date is, as Karl mentioned, we have slightly lower continuation rate but more importantly, our…

[Operator Instructions] And our first question comes from the line of Jeff Volshteyn from JPMorgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Could you give us a little more color on the performance of these new campuses as far as students and the associated investment and not only the 4 that are open now, but also the ones that have been open over the last 12 months or so?

Well, the 4 that were opened for 2012, we have very few students in right now. They're actually the 2 downtown in the Aurora won't even take students until the fall. Minneapolis, we've got, I think, a handful of students. Those are open for the spring term and then there'll be 4 more that we open during the fall term, which will probably not take students prior to the winter term 2013. The 4 campuses that we opened in 2011 are running, I would say at or slightly below our notional model. It's a little variable by geography. A couple of our Texas campuses, I think, are probably doing a little bit better and some of the north central or upper Midwest campuses a little bit worse but -- and actually going back to the 2010 openings, which we've done, again you're -- for a while, we were running quite a bit above that notional model. We were adding on average 140, 150 students per year. With the downturn in new students that we experienced in 2011, the campuses that opened in that during that time frame, that cohort of campuses, were much closer to the notional model, and we'll watch that over the next year or so to see what their breakeven point is but I would expect that the 2011 campuses would be breaking even towards the end of this year, or early 2013. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: In the investments that go into these campuses, are they generally on target or are they changing compared to the last couple of years?

No, they're precisely where they've been over time. That's sort of a set model for us. If you open the campus at the beginning of the year, there's about $1.5 million or so of expense and then if you open towards the back end of the year, it's obviously less than that current year, not a lot less actually because there's a lot of preopening expenses but you certainly have a higher operating income loss because you have less revenue.

And our next question comes from the line of Gary Bisbee from Barclays.

I guess, Rob, I asked you a couple of quarters ago about the debt covenants and in light of the third quarter guidance, I guess I'll ask it again. It looks to me like you're going to fall somewhat short of the $60 million 2-quarter EBITDA covenant and could fall short of liquidity covenants depending on how that's defined, is that -- how are you thinking about that?

Well, we're obviously going to maintain compliance with all our covenants. I don't see any issue at all with regard to liquidity compliance because that's the revolver itself is part of the liquidity and our debt, the trailing EBITDA covenant will take a look at as we get closer to it.

And then, can't you say any more than that? By your guidance, what the EBITDA should be, it looks to me like you fall short of it. So is this something you're talking to the bank or anything else you can say?

I think that's wrong, Gary. By our guidance, we won't fall short of it.

Okay. All right. I'm going to take a look at that. How about -- can you give any color on the mature campus enrollment trend? Obviously you can see it from the data you reported, but how are those trending? A quarter ago you talked about some stability in bachelors and I guess is that still going on and are you likely to see any improvement there in the mature campus or mature geographies, I should say specifically?

I'd say on the last quarter call, the mature campuses have -- I mean they've certainly come down from where they were in 2010. And the upturn in growth on new students, we certainly see some of that in the mature markets as well. Although it's been geared, I would say, more heavily toward the graduate students. We have benefits in our mature markets and that those are the markets in which we tend to have the most and the longest-standing corporate alliances and those programs have actually done quite well and so it continues to be the unaffiliated, no transfer credit bachelor student that I think has been most -- demand's been most diminished by the economic circumstances and that's certainly the case in our mature markets as well.

Okay. And then just one last one, can you give any color on exactly how the scholarship activities changed or what's driving the change in that revenue per enrollment? I think the mix shift is certainly part of it but it seems like you must be doing a lot more there and are you seeing, I guess maybe the bigger question is, are you seeing any retention benefit from those scholarships such that the lifetime value would be similar or do you think it's sort of a loss at the end of the students' term of stay from a revenue and a profit perspective?

We wouldn't do it if we didn't think that it was an increase in lifetime value per student. Not the least of which is these scholarships are geared towards those students who we think are going to academically perform the best. So if you put aside a focus, if you will, on even on a midterm sort of revenue per student or financial value per student over its lifetime and think about the institution as a whole, we've constantly run this enterprise with the view that the most sustainable and best increase in value for owners is increases in the performance of Strayer University academically. And so we clearly, that's a driving force for us as we look at these -- putting these scholarships in place. I do think as a matter of fact that the, or as an ancillary benefit that the financial value per student over the lifetime is improved or is increased based on what we expect to be higher continuation rates, because students who perform better academically continue at a higher rate. It's as simple as that. The other thing, though, is that as we described last quarter, we've always had scholarships and we actually eliminated some scholarships and some other types of marketing benefits in 2012 as we put these in place, so the net effect is nowhere near as large as the impact of the mix shift towards students that tend to generate less revenue per student, i.e., graduates and corporate alliance students.

And our next question comes from the line of Peter Appert from Piper Jaffray.

So Rob, I was hoping you might be able to give us some incremental color on cost dynamics here in the third quarter, even more broadly in the back half of the year. Are there any issues around timing or specific spending decisions you're making that might account for the pretty significant margin contraction you're anticipating beyond just the deleveraging associated with slower revenue growth?

Sure. Peter, well first off, that deleveraging is always most apparent in our summer term because we have lower revenue anyway, less students as our students take the summer off, but the simplest and largest impact is we've essentially got the full cost associated with 8 brand-new campuses in the back half of the year. So that's probably a good $10 million to $12 million of expense that we didn't have in the first half of the year.

And the, I guess the bigger question might be just in terms as you think about the -- and you've discussed this in the past I think, but as you think about the longer-term margin implications and the changes in the market dynamic, can you give us any thoughts in terms of what the appropriate level of margin is for the business going forward?

I honestly don't really think about it that way, Peter, because it is a high margin business, if it's done properly and you're getting good academic outcomes. We've always believed that. It's certainly going to be affected by your rate of capital expansion because new units are -- they lose operating income for a couple of years. But if you think about it in a purely steady-state, i.e., we've completed our nationwide expansion, we're not -- and just think about that part of our business because you might be doing other things at that point that would affect the overall corporate margins. But at that point, obviously the margins will go up and probably the biggest single impact on where they go up to relative to where they were when we took over, when we started the nationwide expansion is that I do think that at least over the midterm that the public policy implications of the cost of education are quite apparent right now. And that the idea that you're going to have significant increases in tuition revenue per student compounding on an ongoing basis I think is probably, it's not part of our plan right now. We're thinking about building this university and assuming that you're not going to get much revenue per student increase over that time frame, and so that will obviously diminish margins. And frankly, by about -- if you were thinking that it was previously it was 5% a year and you're not going to get that 5% a year, it's going to come down not by that full amount because there are some things you can do on the cost side as well, but it has a dilatory impact, a curious impact.

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

On recent calls, you've been giving us some detail about growth in new students coming via the national accounts and relationships with community colleges. Could you update us on that this past quarter or the summer term?

Yes. Karl can. The one that sort of stuck out to me was the Central Intelligence Agency.

Yes. Just in terms of National Accounts, we had 11% growth in new students in our national account. I believe there were 6 new agreements in the quarter overall and on community colleges, we added 4 articulation agreements in the quarter, bringing our total amount to 200.

And the growth in new students from what I'll refer to as unaffiliated students, I think that had turned slightly positive, if I remember correctly last term. Can you talk to us how that did this past term?

It was up sort of mid-single digits.

Great. Okay. And then just last, you mentioned weakness in the continuation rate and gave a couple of reasons why. Could you go into some more detail on that?

Yes, I mean I think -- clearly, you've got some economic distress. We certainly focus to our students who had left, had dis-enrolled and we did hear quite a bit of that. We had a slightly higher drop rate in the quarter, and the students who dropped are unlikely -- who don't finish the current quarter are unlikely to sign up for the next quarter and then we've got a smattering of academic policies that we're constantly updating and we were a little tighter on a couple of those. We put those in place in the beginning of the quarter. But Sara, we do that all the time and there's a variability to that, that has been [ph] always so I wouldn't put too much in that. I do think that the economic distress hurts us and it's hurt us in new students and it's hurt us in those students particularly that have academic difficulty. It makes it more difficult to continue to make that commitment. But it was up slightly the quarter before, down slightly this quarter. There's variability and variation to that, and so far I'm comfortable it's within the normal range of variability.

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

I just want to follow up on the question of expenses in the back half of the year, particularly in Q3 and I understand that Q3 is kind of a high number for marketing but has it changed sort of seasonally this year? Will that number accelerate to try to generate enrollment growth or how should we think about that because I guess I'm just having trouble sort of getting to the guidance number without really boosting some of these numbers up.

Well, let me make it simpler for you, Suzi. On the revenue side, we're going to have about 3,500 less students, which is about roughly $10 million of less revenue than we had the year before. And then you're probably going to have another $1 million less of revenue associated with lower revenue per student and we have about $6 million more of expenses. Almost all of that $6 million is associated with the additional campuses, actually higher than $6 million but it's offset by some lower variable costs. And we don't really think about our marketing spend as a direct means of generating larger amounts of enrollment right off the bat. We have a strategy to build brand over time in markets and that marketing line is going to be most affected by the fact that we've probably got 4 or 5 new markets in the quarter based on our campus expansion strategy. But the whole idea behind the model is you're spending a modest and relatively fixed amount of brand building advertising in those markets. You don't get very many students to start with because they don't know you very well and then over time, you get a few and if those students do well and they talk and you've got a few corporate alliances and things like that, it tends to build slowly and then if there's not additional cost for those markets except for the variable costs of educating those students. So that's what generates the guidance, if you will, and it's -- try to make it as straightforward as possible.

Just one more question. Just given sort of your cash position and the outlook for the second half of the year, what are your thoughts going forward in terms of your dividend policy?

Well, we'll take a look at that in the third quarter. We always do with our Board and our view is, even in these diminished financial conditions, we're still a very profitable business, generate excess free cash and mine and the Board's responsibility is determine each year what's the most value-enhancing way to redeploy that cash. We always want to put as much of it as we can back in the business in high-value, high-return investments but given the constraints, the practical constraints on growth, if you're trying to generate or produce a first-rate academic product, we've always had more cash than we could invest and so we'll look at that and figure out, given our view of the conditions outside, the things that we don't control, tax policy, things of that nature, what we feel is an appropriate balance of returning capital to owners either through share repurchases or dividends.

Okay. And just quickly, the $15 million drawdown that was -- was that just compliance with financial responsibility temporarily?

No, it was just -- we use the revolver to match our cash position when we need it. So it's just a normal draw of cash. It's payroll, what we use to manage the working capital and it's working capital.

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

A couple of questions. So first of all, maybe not much to this but ordinarily in your press releases, you give us sense of where your new campus openings are going to be in the following term. You didn't do that this time, so I was just wondering if there's more uncertainty about regulatory approvals or why you didn't do that.

No, I think we've already announced it. We already said it's Kansas City, St. Louis, San Antonio and Houston.

Oh okay, sorry if I missed it. And secondly, on the revenue per student. So given that you still are seeing and one would imagine will continue to see better growth among graduate students and the institutional alliances than in the broader market, I mean is it fair -- I guess the question is when does the bottom of that continue if it was down 2% now could it be down in the back half for the year 3%?

No. The update to the forecast I gave was intended to give you our visibility into the back half of the year. So the 1% to 2% includes a continuation of the current trend through our Q4 fall term enrollment. As to the future, first off, I don't know that graduate students will grow at a faster rate indefinitely. They haven't always done that. I think that the current economic conditions are creating the situation where you have very high levels of unemployment, much higher than normal and particularly among students, among individuals who don't have a college degree and so those obviously affect our undergraduate enrollments and the most important point about that is the sense that it's not a countercyclical business. I've never felt that. I've never suggested that. It's too much of a financial and time commitment for a working adult to really effectively address themselves if they are unemployed. So as long as you've got very high levels of unemployment among individuals without a college degree, I think our undergraduate, particularly our unaffiliated undergraduate students will be affected by that. I have a lot of confidence in the American economy over time, notwithstanding -- without regard to the political leadership. So I wouldn't say that's a permanent condition. And we're building this asset for a very long period of time. So I would expect that at some point though that rate of growth among graduates and undergraduates would revert back to a more equal or normal. But as to when, I don't have any idea.

Okay. Maybe I'll ask it in a broader way to just -- the question I think is on a lot of people's minds about the sector generally, which is there seems to be more use of scholarships and I understand you change that all the time. You've done in the past. Do you think generally that students are more price sensitive in a meaningful way and that we're going to see more significant kind of erosion in tuition prices via scholarships or some other vehicle?

Well, our students are always somewhat price-sensitive. So I wouldn't suggest that that's not the case. I think that in general, the cost of education has clearly been highlighted as something which has increased significantly and so has generated a lot of public policy attention, which makes it a more topical and more real subject and that's a stakeholder venue that we have to be concerned about, as well as the individual students. And then you've got a very severe economic downturn. I mean there's just no other way to describe that and particularly among the types of students that we're trying to attract by definition had been undereducated, that's why they're coming back to school. So I do think that pricing is much more of an issue over the next 10 years than it was over the previous 10 years. The use of scholarships in many cases, as I said, really, it's primary purpose because you could take those same dollars, it's really just a discounted tuition, you could take them, leave tuition where it is. Use more marketing if you thought that was a way in which you could affect shaping the student class that you wanted or there's a variety of ways in which you take that capital and use it to generate your student population in the way that you want to do that. And so I can't really speak for other management teams but it's a tool for us which has been effective in the past, and we would expect to continue to use it.

Our next question comes from the line of Jerry Silber from BMO.

It's Jeff Silber, close enough. I know you're not talking about next year yet but given everything that's going on, I'm just wondering are you potentially rethinking in terms of your new campus openings strategy, either changes in the number or maybe locations, maybe staying a little bit closer to home so maybe you don't have to invest as much in marketing going forward?

Well, the staying closer to home, I assume by that you mean putting more of your new campuses in existing markets.

Or close to, yes.

Because we have markets now that are quite a ways away from Washington DC where we have a lot of brand recognition and so -- but no, actually having clarified that the answer to that is no. We haven't really started or looked at next year yet, and we'll be doing that over the next couple of months. But in general, we'll take a look at what's the best use of our owner's capital, and we continue to believe that opening new campuses, building a nationwide University is a very, very high return use of our owner's capital. We have done 100 campuses over the last 10 years or I guess 88 since we inherited 12, and we slowed down in the last 2 years based on a sense of regulatory and legislative uncertainty. A lot of that again will clarify itself over the next couple of months, and we'll take all that into account. So we don't update at this point because we really haven't done all of the thinking.

Okay that's fair enough. And in terms of capital spending plans for this year, if I remember correctly, you had guided to somewhere in the range of $25 million to $30 million. Is that still accurate for this year?

Yes, Jeff, we'll probably be at the lower end of that range but it's still accurate.

Our next question comes from the line of Jerry Herman from Stifel, Nicolaus. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: I just want to get clarification on this RPS situation. Just to be clear, Bob, you indicated that, that 1% to 2% decline is predominantly mix as opposed to scholarship. Is that correct?

Yes. Well the overall, you've got a 3% tuition increase. And so on a net basis, you're really down 4% or 5% after the tuition increase and that is predominantly mix shifts, both towards graduate students that have lower revenue per student and corporate alliance partners who are growing at a significant rate and that for which there is a 5% to 10%, in some cases a little bit higher than 10% discount. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: And what are the current course loads, graduate versus undergrad?

I think that the average course load for an undergrad, well average becomes sort of meaningless. Undergrads just tend to take 2 and graduates take 1. And the price differential, Karl, is on a class seems like $1,700 and $2,200 or something like that. So you get 2 times $1,700 versus 1 times $2,200. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: And then on the scholarship side, you guys implied that there are targeted scholarships yet when you look at the web site, it really doesn't look like they're targeted. It looks like they're basically available to anybody that applies.

Well, that has those conditions. That has either transfer credits or other things that we're trying to facilitate. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: And the reason I asked that question is the notion that there's this large bubble of students on scholarship matriculating through the system, what prevents RPS from declining into the forward quarters and years?

Well, we'll manage the process. Nothing prevents it beyond our own decisions. On a steady-state, RPS will decline if we continue to have a mix shift towards graduate students and corporate alliance students. Or the other way to say that is if our unaffiliated students continue to stay flat or shrink slightly, but the scholarship decision and the tuition -- the setting of tuition levels is something which is under our control. But the tuition levels are set by the Board of Trustees but the amount of scholarships that we offer, in a sense it comes to a contra-revenue item that's something that we decide. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Then just one last quick one. You helped with the upgrade or with the updating of the outlook, based on what you said it looks like the scenario most likely to happen is scenario 1, revenue declines of high single digits and margin in the low 20%, very low 20% range.

Well, let me put it this way. If we performed in the -- if our fall term enrollment was exactly analogous to our summer term enrollment, that is correct.

Our next question comes from the line of Jeff Meuler from Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Just wanted to ask a follow up on that last question. Based on the minus 9% student enrollment if that scenario would unfold, should we haircut that $570 million revenue number by 1% to 2% and then have that, I guess $5.7 million to $11.4 million drop straight down in terms of a decline in operating income as well relative to the prior notional model? Will it change the RPS expectations?

I understand the question. It's a little bit blunt, but it's directionally accurate. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then, Rob, how did you think about the, I guess, underlying expense-based inflation, net of efficiency gains, just given your updated commentary on pricing expectations, just, do you think that it's kind of like 1% or 2% underlying increases or you talked about being able to do some gaining productivity to offset some of that, how do you think about that?

Well, I mean most of our expense are human capital, and we've got a lot of first-rate faculty and staff and they're going to get a salary increase next year. So there's some increase there. We have to use technology effectively. We have to constantly look for ways to lower nonhuman costs, and that's an ongoing exercise, whether you're revenue is going up or down, something that you ought to be focused on. And so -- and then the other really important thing with regard to 2013 is you have an annualization of costs. In other words, the new investments that we put in place in 2012, the 8 new campuses, and then we added some personnel as well, the Jack Welch Management Institute. We've got some -- a few things going on in the corporate headquarters. Those are added during the year. Those will anniversary the next year. So you've got some inherent increase in costs that are based on that. You've got an increase in salary at some level and then you've got -- you have to look at everything else and think about productivity and scale and make the adjustments that are most efficient for providing the type of academics that you want to provide. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: And I guess, as you look over like a 3- to 5-year period of time and assume constant mix, do you think that the tuition x scholarships increase will be in excess of this kind of underlying rate of inflation?

I don't know the answer to that, Jeff. That's a little early. I would say in the near-term that it's incumbent upon all of us in education to focus on how you lower the cost of education to the student, which is a tuition issue and we're going to spend a lot of time thinking about that and figuring out how to be both proactive and hopefully leaders in that area. A lot of that you hope can be offset with costs, but you take a look at it, you still have to run a university. And again, we expect this asset to be around for another 100 years. So we're not going to do anything that threatens its viability or its value over that time frame abruptly so that will all go into the mix.

Our next question comes from the line of Brandon Dobell from William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Quick question on scholarships. I guess the uptick from potential students or interest from potential students, has it been in line with your expectations and I guess to a certain extent, are the local school presence and school employees pushing back on more of the students given what could be lower transfer credits or I mean not being as qualified as you'd like them to be? Or is it the opposite where you're finding a lot more students picking this up so the utility or the usage of it is above expectations?

Well first off, we only have 1 University President, the campus directors, and I would say that the use of the scholarships have been consistent with what we would have hoped. What has occurred over that same time frame is that we continue to be quite limited in our no transfer credit unaffiliated types of students who enroll at the bachelors level. And so as a mix it's probably a little higher than we might have anticipated, but we really didn't think too much about that to be honest. I mean ultimately, because I forget, to somebody else's question, "Where does it stop?" The answer is it depends on what happens to these other types of students and over time, my expectation is education is still a very valuable, very necessary asset to have for an individual. I mean the kind of sad irony is even more so in a down economy because it's the differentiator between very high levels of unemployment and still high but significantly lower. The problem is that the access to it, the availability of -- the ability for an individual to commit themselves both financially and from a time standpoint just is below what people can do given the stress that they're under. And so I would say that the general mix, the usage has been about what we expected and that the individuals who don't qualify for it have done slightly worse than we would have hoped but better than last year and no longer declining, certainly not at the rate it was in 2011. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Okay. And then early last week one of your peers, Capella, talked about the rising popularity or at least their kind of broadening profile or course catalog or certificate programs, post-baccalaureate certificate programs for students who are not quite sure about a master's degree, want something more, want a more specialized skill but not aren't ready to commit to a 2- or a 3-year educational program. Have you guys thought about those kind of shorter-term certificate programs in light of, let's call it, consumer price sensitivity but also the need for a little more upscaling in some of your students?

Well, we do have some postgraduate certificate programs but frankly, our growth in graduate students has been very healthy. That's not really been where the issue is. So I think our graduate school and the programs that it offers are fairly well situated right now and we're pleased with that. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: And then final one for me, in the last several quarters any change in matriculation of bachelors student into graduate programs within Strayer University?

I don't know the answer to that. Do you know that Karl?

There's been no real change in terms of the rate year-over-year.

So the percentage of undergraduate graduates will then go into...

It's about flat.

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

I didn't really want to be the guy to ask this question, but I fall here in the queue so I'm going to. So Rob, we had the opportunity to see some more detail on the gainful employment data recently and I know that the issue of gainful employment is not germane the way that it was but the data -- we had additional data, right? So it confirms that your graduates make a good living and those numbers seem to be quite strong, but there was still a range between the different program offerings and repayment. And I wondered if you had any other observations based on having looked at that data. Did it tell you anything about your business? Do you think that there's still issues with the data? Can you speak to that?

Sure. I mean we were pleased with the confirmation of what we had determined by survey. Our own alumni surveys on the debt to income, but it was somewhat of a release to see that the process of extracting that data from Social Security Administration confirms the very extensive surveys we did. So that part we were pleased with. On the repayment rate, I don't really have any additional insight because again, we were not provided with the underlying student records and I think that's always been one of the frustrations that I've had with regard to repayment rate calculations because you've taken an additional test beyond the cohort default rate, which is absolutely measurable and it is confirmed by student record, there's a whole process for doing that. And then frankly, just pulling from the NSLDS and the department status system, you can tell exactly which students that you have either in forbearance or deferment. So if you grant the department a reasonable concern, a public policy concern as to large numbers of deferments or forbearances, again that's identifiably you can add those numbers to your cohort default rate you'll know exactly where you are. Introducing this new sort of vague concept of reduction of $1 principal and in a manner in which we have no way of confirming whether students are up-to-date on their loans and meeting the terms of their loans has always been a real frustration for me. We communicated that to the department. They did what they wanted to do, and then now you've got a federal court saying that, that particular test is arbitrary and capricious. So I guess you're back to square one. I think there's certainly been some salutary impact of the whole regulatory process because I think in general all institutions are more focused on academic student outcomes, which is a good thing, and we'll just have to see what the department does in terms of going back to address the district court's concerns on the repayment rate, and then I'll have a better answer for you, Trace. At this point, we have nothing more than what you have and our attempts to get more underlying data that explains, by program, the variations in repayment rate relative to our cohort default rate and at the rate at which if you add in forbearance and deferment, have been unsuccessful so far.

Fair enough. And then just a small question, are you guys anticipating any kind of variance related to advertising spending in the fourth quarter relative to the elections?

Not particularly. I mean we've known there's going to be an election for a long time, so I'm sure Karl's team has put that into their thinking.

Our next question comes from the line of Brian Karimzad from Goldman Sachs.

Just to help understand a little bit more on why the corporate alliance impact on revenue per student surprised you a bit versus your initial plan. Was there a change in the mix of what came in, say, on new agreements versus existing or the source of the students? And then I have a follow up.

I wouldn't say that we were surprised. We've had more students who have enrolled through our corporate alliances relative to students who didn't. And that's -- we're quite comfortable, Brian, with variability in our student mix and in our revenue lines. I mean it's a profitable business and we don't try and forecast it down to a gnat's eyelash. I think surprise is the wrong term. What we try and do is when we have additional clarifying data, we try and share it with you all as soon as we get it.

Okay. And then just generally among your working student population, I don't know if you have this granularity but do you have a sense of what percentage of them are employed by government institutions or private sector firms that you kind of classify as fairly dependent on the government as contractors?

I mean we certainly know how many work directly for the government, and if you add in active duty military, what do you think that is, Karl, 5%, 7%?

Yes, yes, sounds about right.

It's gone down over time as we've moved outside of the Washington DC area, but we have a number of federal government agencies that are direct partners with us. In terms of contractors who are dependent on the government, that I really don't have a good view for. I mean it obviously would be more significant in the DC area than elsewhere, but I don't have any data on that.

Our next question comes from the line of Kelly Flynn from Crédit Suisse. Kelly A. Flynn - Crédit Suisse AG, Research Division: I've got a couple of quick ones. Just turning back to the question someone else asked, I just want to kind of simplify. On the business model update you gave me, you didn't give the EPS update associated with kind of the revenue update. What is the EPS range associated now with that high end -- high single-digit enrollment decline, if you can give that?

If you extrapolate out, I mean, your 1% of revenue is what, $6 million, Mark?

Yes.

Yes, because I think we had $600-something million last year and every dollar of operating income is about $0.04 or $0.05 of EPS. Kelly A. Flynn - Crédit Suisse AG, Research Division: So it's basically the low end of the scenario minus about a $0.05?

I think if we were at $5 million or $6 million below the low end and a point of operating margin, it would be more than a $0.05. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. And then just a couple of other quick ones. This model, I mean, I think the business model does imply that the fourth quarter margin should improve significantly versus the third quarter. I mean, am I correct in inferring that, that margin based on your model should be at least mid-teens?

Yes, absolutely, Kelly. I mean our operating margins are always much lower in the summer term because we essentially have all our fixed cost, but we have a lot less students. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay, got it. And then, Jack Welch, can you tell us how many starts and enrollments that had for the quarter?

I mean the whole institution now is a couple of hundred students. Kelly A. Flynn - Crédit Suisse AG, Research Division: A couple hundred.

And that does conclude our question-and-answer period. I would like to turn the conference back over to Mr. Rob Silberman for any closing remarks.

Thank you, Ben. Thanks to everybody for listening. We look forward to talking to you again in November.

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 the day.