Strayer Education Inc. (STRA) Q4 2018 Earnings Conference Call Transcript

STRA earnings call for the period ending December 31, 2018.

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Strayer Education Inc.  (NASDAQ:STRA)
Q4 2018 Earnings Conference Call
March 01, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, everyone, and welcome to Strategic Education, Inc.'s conference call in which we will discuss fourth quarter 2018 results. With us today to discuss results are Robert Silberman, Executive Chairman for Strategic Education; Karl McDonnell, President and Chief Executive Officer for Strategic Education; and Daniel Jackson, Executive Vice President and Chief Financial Officer for Strategic Education. Following remarks, we will open the call for questions. Please note that this call may include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements are based on current expectations and are subject to a number of assumptions, uncertainties, and risks that Strategic Education has identified in today's press release that could cause actual results to differ materially. Further information about these and other relevant uncertainties may be found in Strategic Education's 10-K to be filed today and other filings with the Securities and Exchange Commission as well as Strategic Education's future 8-Ks, 10-Qs, and 10-Ks. Copies of these filings and the full press release are available for viewing on the website at strategiceducation.com.

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

Robert S. Silberman -- Executive Chairman of the Board

Thank you, operator, and good morning, ladies and gentlemen. We have a fair amount of material to cover today. So, let me turn it right over to Karl and Dan. Karl?

Karl McDonnell -- President and Chief Executive Officer

Thank you, Rob. Good morning, everyone. At the outset, let me remind people that along with our earnings release this morning, we have also provided a supplemental earnings presentation, which has good information and is available from our website strategiceducation.com. Our fourth quarter and full-year 2018 results reflect the fact that we have a strong and growing business that is well positioned to take advantage from all the benefits of our merger with Capella Education Company. Our two primary operating segments, Strayer University and Capella University, are performing at levels not seen in nearly a decade and the merger integration itself remains on track to be completed in 2019. On a pro forma basis, our fourth quarter adjusted results include a 6% increase in revenue to $245 million, a 20% increase in our pre-tax income to $47 million, and a 42% increase in our earnings per share to $1.56. Results within the two university segments were both quite strong.

First, Strayer University's fourth quarter new student, continuing student, and total enrollment; all increased 9% versus the prior year. Revenue at Strayer University also increased 9% and Strayer's operating margin increased 30 basis points to 18.8%. Also during the fourth quarter, Strayer opened its third and fourth new campuses of 2018 in Decatur, Alabama and El Paso, Texas. And as we said last quarter, Strayer intends to open between six and eight new campuses in 2019 pending regulatory approvals. For Capella University's fourth quarter, new student enrollment grew 11% from the prior year and total enrollment increased 2%. FlexPath, Capella's competency based -- excuse me -- competency -- pardon me. FlexPath, Capella's competency based direct assessment degree program, continued to perform exceptionally well.

Robert S. Silberman -- Executive Chairman of the Board

We have a small respiratory problem here. So, I'm going to take over for Karl on some of the operating results. FlexPath is doing terrifically, the enrollment increased 46% versus the prior year and the total FlexPath enrollments increased 42% and they now comprise one-third of all Bachelor and Masters enrollments.

Karl McDonnell -- President and Chief Executive Officer

Okay. Sorry about that. Capella remains on track to open its first two physical locations in the first half of 2019 in Orlando, Florida and Atlanta, Georgia. Capella was also concurrently researching potential future physical location sites so that they can be in a position to open additional locations in 2019 should the two test locations perform well. Turning now to a brief update on our merger integration. At the end of 2018, we had implemented synergies worth $24 million on a run rate basis. The remaining $26 million from our previously announced $50 million target will be implemented by the end of this year. We still forecast the cost to achieve these synergies will be dollar for dollar meaning each dollar of synergy saved will cost the Company $1 to implement.

The synergy savings will allow the Company to fully offset significant ongoing investments the Company is making in our various classroom innovations, technology investments, and new campuses so that we expect 2019 operating expenses to be roughly flat to 2018 on a pro forma basis. We are also in the process of operationalizing the first wave of best practice sharing, including the deployment of Strayer's artificial intelligence enabled technologies inside Capella University. Seven months post close, we couldn't be more pleased with the progress of our merger integration and most importantly with the strong and vibrant culture being created across our organization, which reflects the best of both Strayer and Capella. And I'd like to thank our talented team of professionals who work all day every day on behalf of our students.

And with that, I'll ask Dan to run through the financials.

Daniel W. Jackson -- Executive Vice President and Chief Financial Officer

Thanks, Karl, and good morning everyone. Today, we're reporting consolidated results for Strategic Education, Inc, which includes three segments; the Strayer University segment consisting of Strayer University and the Jack Welch Management Institute; the Capella University segment consisting solely of Capella University; and the non-degree program segment, which includes DevMountain, Hackbright Academy, The New York Code & Design Academy, and Sophia. Note that our consolidated results exclude the financial results of Capella Education Company that occurred prior to August 1st, 2018. For a pro forma view of our full-year 2018 segment level results, please see the fourth quarter earnings release slide deck posted to the Investor Relations section of our website. I also want to remind everyone that our earnings release references as reported or GAAP results and adjusted or non-GAAP results.

This format is intended to illustrate the financial performance of the core business as reflected in the adjusted numbers in addition to our GAAP results. Our adjusted results exclude a number of merger-related items and other non-core adjustments including purchase accounting related revenue adjustments associated with the valuation of Capella University deferred revenue, amortization expense related to Capella assets acquired in the merger, transaction and integration costs associated with the merger, fair value adjustments and asset impairment charges, and certain discreet tax adjustments. Please refer to the non-GAAP financial information included in the fourth quarter earnings release we issued this morning for additional information. Now for a few comments on our consolidated Q4 results. SEI's adjusted revenue for the fourth quarter of 2018 was $244.6 million compared to $118.7 million in 2017.

Our adjusted income from operations for the quarter was $45.4 million compared to $20.2 million for the same period in 2017. Our adjusted operating margin for the quarter was 18.6% compared to 17% in 2017. Fourth quarter 2018 adjusted results exclude a $2.5 million deferred revenue adjustment associated with purchase accounting for the Capella merger, $15.4 million of amortization expense related to intangible assets acquired in the merger, $8 million in merger related costs, and $600,000 of fair value adjustments and impairment of intangible assets associated with the New York Code & Design Academy. Fourth quarter 2017 adjusted results exclude $8.5 million in merger-related costs. Fourth quarter 2018 adjusted net income was $34.4 million compared to adjusted net income of $12.3 million for the same period in 2017. And adjusted diluted earnings per share was $1.56 compared to $1.09 in 2017.

SEI's adjusted effective tax rate for the fourth quarter was 27.1%, which excludes the impact of the deferred revenue adjustment, amortization of intangible assets, merger costs, fair value adjustments and impairment of intangible assets, and other discrete tax adjustments. We expect our adjusted effective tax rate for the first quarter of 2019 to be approximately 27.5%. Moving to our first -- our fourth quarter segment results. Strayer University segment revenue for the quarter increased 8.5% to $127.5 million from $117.5 million in 2017 driven by higher fourth quarter enrollment and relatively stable revenue per student. Revenue per student for the Strayer segment was better than we expected due to lower drops in scholarships in the fourth quarter. For the full-year 2018, revenue per student for the Strayer segment declined 310 basis points.

Moving into 2019, we expect revenue per student for the Strayer segment to decline between 50 basis points and 100 basis points on an annual basis due to continued use of scholarships and the continued mix shift to lower paying corporate sponsored students. Strayer University segment income from operations for the fourth quarter increased $24 million from $21.7 million last year and the operating margin improved slightly to 18.8% for the quarter compared to 18.5% in 2017. Capella University segment adjusted revenue for the quarter was $113.7 million reflecting higher enrollment and slight improvement in revenue per learner, which increased about 150 basis points in Q4. Revenue per learner for the full-year 2018 increased about 100 basis points. For 2019, we expect flat to slightly higher revenue per learner at Capella University reflecting tuition increases that commenced in July 2018 offset by continued mix shift to our lower cost FlexPath programs.

Adjusted income from operations for the Capella segment was $23.2 million for the quarter and the adjusted operating margin was 20.4%. Q4 2018 revenue for the Non-Degree Programs segment increased to $3.5 million from $1.3 million last year, mainly due to the inclusion of revenue from DevMountain, Hackbright Academy, and Sophia. Loss from operation was $1.8 million compared to a loss of $1.6 million in the same period in 2017.

Moving to our consolidated full-year 2018 results. SEI's adjusted revenue for the year increased to $662.9 million from $454.9 million in 2017, primarily due to the inclusion of Capella revenue. SEI's adjusted income from operations for 2018 was $97.4 million compared to $56.6 million for 2017. Our adjusted operating margin was 14.7% for 2018 compared to 12.4% in 2017.

2018 adjusted results exclude a $28.7 million deferred revenue adjustment associated with the purchase accounting for the Capella merger, $25.7 million of amortization expense related to intangible assets acquired in the merger, $45.7 million in merger-related costs, $19.9 million of non-cash impairment charges associated with the New York Code & Design Academy. 2017 adjusted results exclude $11.9 million in merger related costs and a $7.5 million benefit from the elimination of contingent consideration associated with the New York Code & Design Academy. On a pro forma basis, which includes Capella Education results prior to August 1st, adjusted operating income for 2018 was $136 million compared to $121.8 million in 2017 and the adjusted operating margin was 14.7% for 2018 compared to 13.6% in 2017. 2018 adjusted net income was $75.1 million compared to adjusted net income of $34.9 million for 2017 and adjusted earnings per share was $4.75 compared to $3.11 in 2017.

SEI's adjusted effective tax rate for 2018 was 25.6%, which excludes the impact of deferred revenue adjustments, amortization of intangible assets, merger costs, fair value adjustments and impairment of intangible assets, and other discrete tax adjustments. We expect our adjusted effective tax rate for 2019 to be approximately 27.5%. Moving to the balance sheet and cash flow. SEI generated $46.9 million in cash from operations in 2018 compared to $56.2 million during 2017 and ended the quarter with $386.5 million of cash, cash equivalents, and marketable securities and no debt. The decline in operating cash was due primarily to merger transaction and integration costs. Our bad debt expense for the quarter was 6.1% of revenue compared to 5.8% for the same period in 2017. Regarding capital expenditures, SEI spent $27.5 million during 2018 compared to $18.1 million last year. For the full-year 2019, we expect capital expenditures to be between $40 million and $45 million. And finally, we continue to maintain $250 million in available credit on our revolver. Rob?

Robert S. Silberman -- Executive Chairman of the Board

Thanks, Dan. One final comment before we open it up to questions. At this time of year, we always like to run through at a high level for our shareholders our capital allocation decisions over the past year. Now obviously our biggest capital allocation decision of 2018 was issuing 48% of our equity capital to acquire Capella Education Company, but I think we've already covered the value of that, sufficient detail both in Karl's and Dan's remarks and on previous calls. In terms of cash, we started the year with $155 million of cash and securities on SEI's balance sheet. The pre-tax operating results of our business generated $111 million in 2018 and that includes $80 million from SEI's pre-transaction assets, the legacy Strayer assets, combined with $31 million from five months of contribution from Capella assets. Going forward obviously we won't make that distinction; but I think in this first year, it's helpful to shareholders to see where the cash generation came from.

Now we used the $111 million of generated cash in 2018 as follows. We paid $13 million in federal, state, and local taxes. As Dan just mentioned, we invested $28 million in capital expenditures mostly in the area of technology. We paid approximately $46 million in cash costs associated with the Capella transaction, including severance payments to affected employees. And we added the remaining $24 million to our balance sheet. We also during the year added Capella's $235 million of cash and marketable securities to our balance sheet, which brought our total available financial assets through the year to $414 million. Now based on the very accretive nature of the Capella transaction, SEI's Board of Directors decided as of August 1st, 2018 to double our annual dividend from $1 to $2 per share. That increase in the dividend plus the roughly 10 million additional shares of SEI, which we issued to Capella shareholders, led us to use $28 million of cash during the year to fund our common dividend.

As a result, we ended the year with a rock solid balance sheet of $386 million of cash and securities, 22 million shares outstanding, an undrawn $250 million bank revolver, and no long-term debt.

And with that, operator, we'll be pleased to answer any questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Thank you. Our first question is from Peter Appert with Piper Jaffray. Your line is now open.

Peter Appert -- Piper Jaffray Companies -- Analyst

Thank you and good morning. So, the enrollment performance remains very impressive relative to many of your peers and I'm wondering if there's anything you would call out specifically for the Strayer University part in terms of any programmatic offerings or particular initiatives that are driving this performance?

Karl McDonnell -- President and Chief Executive Officer

Good morning, Peter. I can't call anything out specific other than maybe what we commented on in the last quarter, which is we continue to see pretty favorable macro conditions. The growth has been primarily undergraduate, which is a trend that we've seen before. But the Jack Welch Management Institute at the graduate level continues to perform well. So, I can't point to any one thing other than just pretty favorable macro conditions.

Robert S. Silberman -- Executive Chairman of the Board

I might add slight uplift from the new campuses too.

Karl McDonnell -- President and Chief Executive Officer

That's true.

Peter Appert -- Piper Jaffray Companies -- Analyst

And then on the Capella enrollments, obviously you've called out the FlexPath initiative and I'm wondering how much -- maybe how much juice there is left in that. I think the competency based market is perhaps getting a little bit more competitive. How do you see the sustainability of growth there?

Karl McDonnell -- President and Chief Executive Officer

I think we're very confident in the sustainability of FlexPath. It's highly differentiated. Within FlexPath, the nursing program there continues to grow quite strong. So, we see a lot of momentum with FlexPath and we don't really expect that to slow down.

Peter Appert -- Piper Jaffray Companies -- Analyst

And maybe Karl for you or for Dan, the $50 million cost synergy target, you've obviously made very good progress on that. I wonder if at this point you see any opportunity to perhaps flex that number a little bit higher?

Karl McDonnell -- President and Chief Executive Officer

We're just focused on delivering the $26 million on a run rate basis this year. But our teams are always looking, Peter, for ways to just increase productivity and if there is an opportunity to extend synergies beyond the $50 million without compromising any of the academic quality, we'll take a look at that. But we're just focused on delivering the $26 million on a run rate basis this year.

Peter Appert -- Piper Jaffray Companies -- Analyst

Okay, fair enough. And since I am morally required to ask you a hard question as well as these easy ones. I'm just wondering as it relates to the non-degree program offering, I know it's tiny as a percent of the total pie, but what's the expectation for that business? Can it make money?

Karl McDonnell -- President and Chief Executive Officer

I think so. We're focused on getting that business to breakeven this year. We've always thought that that coding space is somewhat nascent and it's going to take some amount of time for that industry to mature and we see it as a good option value. If we can provide high quality programs that create tangible value for the students that attend those programs, we're happy to run it at breakeven and then if and when the demand is there, we'll be able to capitalize on that.

Peter Appert -- Piper Jaffray Companies -- Analyst

Great. And actually then just one last thing. Karl, you've talked in the past about some of these technology initiatives which you highlighted again today. Any report at this point in terms of the results you're seeing from the AI tools to expand class sizes? Are you still seeing positive response from the student standpoint and how is that impacting the financial results?

Karl McDonnell -- President and Chief Executive Officer

We continue to see very favorable trends from that program, Peter. And it's about 50% of the Strayer University seats now and we're seeing gains in continuation rates and student achievement and some of the productivity gains that are happening on the Strayer University side are a direct result of that program. And we're preparing to test that approach inside of Capella University here later this year.

Peter Appert -- Piper Jaffray Companies -- Analyst

Excellent. Great. Thank you.

Karl McDonnell -- President and Chief Executive Officer

Thank you, Peter.

Operator

Thank you. Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Jeff Silber -- BMO Capital Markets -- Analyst

Thank you so much. If I could focus a little bit upon on your new campus rollout strategy. Actually first, maybe just talk about the Capella test locations. What are the type of indicators you're looking for to see if those are successful and how long will it take you to make a decision before potentially accelerating that rollout?

Karl McDonnell -- President and Chief Executive Officer

Well, we just want to see the enrollment trends. I should note one distinction is Capella will not be teaching on ground classes in their locations. So, those will be enrollment centers or student advising centers. And so we'd be looking to see if we're able to attract students to these locations and what the performance of those students are once they enroll. And if they perform similar to the Strayer new locations, then we'd be looking forward to rollout additional Capella locations perhaps later in 2019 or certainly in 2020.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay. Appreciated that. Thank you for the clarification on the Capella locations. On the Strayer potential new locations, would those be in new geographic areas and maybe areas you were in beforehand and you rolled back?

Karl McDonnell -- President and Chief Executive Officer

I don't think they'll be in any of the locations where we previously were, Jeff. But I do think it's likely that there will be some entirely new locations meaning cities and potentially new states as well.

Jeff Silber -- BMO Capital Markets -- Analyst

And would it be I guess somewhat contiguously close to where you are now? It's not like we're going to see something on the West Coast?

Karl McDonnell -- President and Chief Executive Officer

I think it's more likely than not that they would be contiguously located, but some of the sites have not been finalized. So, we'll just announce those when we open them.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay, fair enough. I also was wondering was there any impact of the government shutdown on your business? I know you have a number of locations in some of those areas?

Karl McDonnell -- President and Chief Executive Officer

No, we didn't seem to be really adversely impacted by that at all.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay. That's great to hear. And then finally, since you are in the DC area. I know we've been seeing some noise about some potential proposers -- proposals, excuse me, under higher -- the Higher Education Act reauthorization. Is there anything on the horizon that might be either beneficial or detrimental for your business?

Robert S. Silberman -- Executive Chairman of the Board

Well, Jeff, we're obviously tracking that as closely as we can, but it's pretty variable. I mean we hear proposals all over the lot. I think the best way that we focus ourselves on this is that we do operate in a very highly regulated industry. We are the beneficiaries of a significant government program in terms of the Title IV Loan Program and we're going to continue to focus on maintaining the highest possible academic quality figuring that that's really the best way to sort of position yourself vis-a-vis any kinds of regulatory or legislative initiatives. But I wouldn't say that even with our geographic proximity or the discussions that are happening that we have any real insight into the likely changes or modifications that are coming through. And the ones that we're paying attention to are sort of within the boundaries of what we've dealt with before. So, we're not particularly concerned one way or the other on it.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay, great. Thank you so much.

Robert S. Silberman -- Executive Chairman of the Board

Thank you, Jeff.

Operator

Thank you. And our next question comes from Corey Greendale with First Analysis. Please go ahead.

Corey Greendale -- First Analysis -- Analyst

Hi, good morning. Couple of questions. First of all, appreciate, Rob, the discussion of how cash was allocated. Since that was based on pre-tax income, I was hoping to get some sense of the impact of the merger cash costs on cash flow from ops. Can we just add back the $46 million or is that pre-tax so we need to tax effect it?

Robert S. Silberman -- Executive Chairman of the Board

Corey, it would be between $70 million and $75 million if you adjusted it for the merger costs.

Corey Greendale -- First Analysis -- Analyst

Okay. Thank you. That's cash flow from ops?

Robert S. Silberman -- Executive Chairman of the Board

Excuse me -- go ahead, Corey.

Corey Greendale -- First Analysis -- Analyst

Sorry. I appreciate the guidance on flat OpEx. I just want to be sure, first of all, what are you using as the baseline like what is in there and what's not in there and if you're willing to even give us the number that when you flat, flat with what. That would be great.

Daniel W. Jackson -- Executive Vice President and Chief Financial Officer

Corey, the earnings deck that we posted on the website has the pro forma expenses for 2018. That's the baseline we're working off of.

Corey Greendale -- First Analysis -- Analyst

Okay, perfect.

Daniel W. Jackson -- Executive Vice President and Chief Financial Officer

It's roughly $788 million in expenses pro forma.

Corey Greendale -- First Analysis -- Analyst

Good. Don't trust analysts to figure that out on their own so I appreciate that. And then I apologize if I missed this. Did you comment on whether there was any effect of the partial shutdown on enrollment in the quarter?

Daniel W. Jackson -- Executive Vice President and Chief Financial Officer

There was no impact on that, Corey.

Corey Greendale -- First Analysis -- Analyst

And given -- the federal government, you do have a not trivial number of students coming from the federal government, is that right?

Daniel W. Jackson -- Executive Vice President and Chief Financial Officer

We have a fair number of VA students, which are not part of the government and some active duty military and I don't know the number of the actual government employees. But I would think that's a relatively small number now in our combined base.

Robert S. Silberman -- Executive Chairman of the Board

When you think back of the history of the Company, Corey, maybe 15 years ago it was an enormous number because we were basically only in Washington, DC. But now given the geographic dispersion and now you also add on the student population from Capella University, it's a pretty small number now.

Corey Greendale -- First Analysis -- Analyst

All right, thanks. That's the downside to having people who've covered the Company for 18 years for remembering it goes back to when I was there. I want to go back to Peter's question about what's benefiting or why the Strayer enrollment has been so good. I just want to look at it in comparison with Capella given that it's a good environment generally. Is there something different about the degree mix that would suggest Capella wouldn't be impacted as much benefit or over time do you think it could get up to the same enrollment level?

Karl McDonnell -- President and Chief Executive Officer

Well, I mean one difference is the program mix. Capella skews much heavily on the graduate side and we've observed that the graduate space is one that's got a fair amount of competitive intensity notwithstanding the fact that we think Capella's programs are highly differentiated and have been growing nicely here over the last few quarters. Other than that, Corey, there's nothing that I would really call out. Other than Rob's good point that on the Strayer side, we have had some contributions from new campus openings. So the four that we have opened in 2018, all have been performing essentially above our expectations.

Corey Greendale -- First Analysis -- Analyst

Fantastic. All right. I will turn it over. Thank you.

Karl McDonnell -- President and Chief Executive Officer

Thanks, Corey.

Operator

Thank you. And our next question is from Alex Paris with Barrington Research. Your line is open.

Alexander Paris -- Barrington Research -- Analyst

Good morning.

Karl McDonnell -- President and Chief Executive Officer

Good morning, Alex.

Alexander Paris -- Barrington Research -- Analyst

I have a follow-up question. First of all, it looks like great progress on the cost savings as a result of the acquisition and integration. It looks like you're in line if not little bit better than expected here by year-end. I wanted to focus in a little bit on potential revenue synergies. So you said earlier that you're moving some of that AI technology over to Capella and then I think you commented on it a bit in terms of its success within Strayer so far. I wanted to dive a little bit more into the success at Strayer. If I heard you right, you said very favorable trends, 50% of seats are now encompassed in that program which was at one time referred to as 10x. And then what's then the opportunity over the Capella side given that Capella is heavily skewed toward graduate degrees?

Karl McDonnell -- President and Chief Executive Officer

The constraints on the Capella side is not so much the degree mix, it's really in the class size. One of the things that enabled Strayer to be so successful in that model is we had a fair number of courses that were quite large, introductory business being one of them where you might have 5,000 to 7,000 students in any given quarter taking that particular class and it would be divided up into several hundred sections. And so, the online scaling approach that we took worked quite well. On the Capella side, you don't have as many courses that have that volume in them just because they have a more disparate program portfolio. We do expect to get all of the benefits of the teaching approach itself meaning I would suspect you to get higher student satisfaction, you get higher retention which will translate into higher revenue, but the productivity savings would be less just because the opportunity is less given there's fewer high volume courses.

Alexander Paris -- Barrington Research -- Analyst

Okay, good. That's clearer for me now. And then what other revenue synergies could be down the road. I realize we're not there yet. You're focusing more on taking the cost out, but what other sort of transplanting can go both directions?

Karl McDonnell -- President and Chief Executive Officer

Sure. I think the biggest opportunity near term are the physical locations for Capella. If they perform even remotely like the new Strayer locations, that will be a meaningful add to revenue moving forward. Beyond that, we're looking at new program offerings. I think there'll be some synergies as our marketing teams work more closely together on the revenue side, but in the near term I would just focus on the Capella physical locations. B2B would be another one to extend. That's an area actually where we've yet to harmonize, which we will do in the first part of 2019 meaning we'll have one SEI level B2B management structure to -- just to continue our outreach to companies.

Alexander Paris -- Barrington Research -- Analyst

Can you remind me the difference in terms of size of both programs? At one point at least, Strayer had 25% of enrollment associated with corporate partnerships. Is that correct?

Karl McDonnell -- President and Chief Executive Officer

It is and that's still roughly where we're at. Quite honestly, Alex, I don't have that figure for Capella, but I know that they do quite well, particularly in the health segment.

Alexander Paris -- Barrington Research -- Analyst

Great. Last question, again on the revenue synergy side. Is there the potential or the desire to transplant FlexPath from Capella to Strayer? I realize that will require regulatory approval, but could that be something that we could look forward to?

Karl McDonnell -- President and Chief Executive Officer

It's something that our teams are evaluating and you're right, it has to go through a fairly lengthy approval process requiring approval first from the creditor, in Strayer's case that would be Middle States, followed by the Department of Education. But it is something that we are evaluating.

Alexander Paris -- Barrington Research -- Analyst

Okay, good. That takes care of me for now. Thanks again, guys.

Karl McDonnell -- President and Chief Executive Officer

Thanks.

Robert S. Silberman -- Executive Chairman of the Board

Thank you, Alex.

Operator

Thank you. And our next question is from Jeff Muller with Baird. Your line is open.

Jeff Mueller -- Robert W. Baird -- Analyst

Yes. Thank you for taking the question. Just first, someone that hasn't been around for a couple of years. Karl, these results also take my breath away so congrats to you guys and Kevin, if he is listening. But I did have I guess a bigger picture question similar to Corey and Peter's, but maybe tailored over a different time horizon to somebody that hasn't been as close the last few years or somebody that's newer to the story. So, I understand that there's macro factors and you're getting a contribution from new campuses. I think you also made pricing adjustments in the past. But could you just kind of recap for me the last few years what the biggest changes you've made from a student experience perspective program, launch or development perspective, your marketing execution? Just any big picture changes over a multiyear horizon that may be having a benefit to enrollment trends currently that could lead to this strong performance being sustainable? Thanks.

Karl McDonnell -- President and Chief Executive Officer

I'd say the two biggest changes occurred 2014 on affordability where we reduced undergraduate tuition by 20% and then simultaneously launched the graduation fund which allowed students the opportunity to essentially earn their senior degree -- senior year for free. Combined that reduced the cost of a Strayer undergraduate degree by about 45%. Strayer's grown its new students every year since we made those moves. Layer on top of that improving macro conditions, layer on top beginning to open new campuses again, continued penetration through some of our largest corporate clients. So if you think about it at just a high level, those would be the biggest drivers of Strayer's growth over say the last three to five years.

Robert S. Silberman -- Executive Chairman of the Board

I'd also add into that the increased continuation rate from the higher student performance from all the technology and academic investments you've made as well. I mean there's probably 3 points or 4 points of growth that just come from more students succeeding in the classroom, which means that they continue with the program and move toward graduation at a higher rate.

Jeff Mueller -- Robert W. Baird -- Analyst

Appreciate the follow-on, Rob. So, what are the biggest tech and academic changes that you've made?

Karl McDonnell -- President and Chief Executive Officer

Well, there's been -- if you go back three plus years, it started with predictive analytics. We've done a lot on adaptive learning. We've completely upgraded the learning content itself with Strayer Studios. And then over the last year, we have this new program that's enabled us to scale the online classroom and achieve really incredible gains in student achievement as well as frankly student satisfaction. For students that participate in this new teaching method, which we had called 10x in prior iterations, you've got net promoter scores in excess of 85% and over probably an 18 month period you've got retention gains 500 basis points or more. It's something that we've spent a good year working to perfect and I'd say that we're in, probably the eighth or ninth inning now in terms of its reach within Strayer University because there's not that many large courses left where we can apply this methodology. And so our focus now is to see if we can introduce it into Capella University and get similar gains.

Jeff Mueller -- Robert W. Baird -- Analyst

Very helpful. Thanks for taking my question and again congrats to all. Thanks.

Karl McDonnell -- President and Chief Executive Officer

Thank you.

Daniel W. Jackson -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Thank you. And I'm not showing any further questions in the queue, I would like to turn the call back to Rob Silberman for his final remarks.

Robert S. Silberman -- Executive Chairman of the Board

Thank you, operator, and thanks everybody for participating. We look forward to talking with you at our next earnings call and for those of you that are around at our Annual Meeting, which will be in Minneapolis this year. And if there's any other specific questions, please feel free to call Dan, Karl, or I otherwise we'll talk to you in about two months. Thank you.

Operator

And with that, ladies and gentlemen, we thank you for participating in today's conference, This concludes the program and you may all disconnect. Have a wonderful day.

Duration: 36 minutes

Call participants:

Robert S. Silberman -- Executive Chairman of the Board

Karl McDonnell -- President and Chief Executive Officer

Daniel W. Jackson -- Executive Vice President and Chief Financial Officer

Peter Appert -- Piper Jaffray Companies -- Analyst

Jeff Silber -- BMO Capital Markets -- Analyst

Corey Greendale -- First Analysis -- Analyst

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