Grand Canyon Education Inc (LOPE) 2008 Q4 法說會逐字稿

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2008 Grand Canyon Education Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the conference over to Mr. Chris Richardson, General Counsel. Please go ahead, sir.

Thank you, operator. Good afternoon and thank you for joining us today on this conference call to discuss Grand Canyon Education's fourth quarter and full-year end results for 2008. Speaking on today's call are Brian Mueller, our CEO; and Dan Bachus, our CFO. Additionally, Brent Richardson, our Executive Chairman; [Stan Meyer], our Executive Vice President; Dr. Kathy Player, our President and Chief Academic Officer; and myself, Chris Richardson, General Counsel, will be available during the Q&A period.

This call is scheduled to last one hour. During the Q&A, we will try to answer all questions but we apologize in advance for any questions that we are unable to address. I'd like to remind you that many of our comments today will contain forward-looking statements with respect to the future performance of Grand Canyon Education that involve risks and uncertainties.

Various factors could cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the Company's SEC filings, including its 10-K report to be filed later today and its subsequent 10-Q reports filed with the Securities and Exchange Commission.

The Company does not undertake any obligation to update anyone with regard to the forward-looking statements made during this conference call and we recommend that all investors thoroughly review our annual and quarterly filings with the SEC before taking a final position in our company. And with that, I'll turn the call over to our CEO, Brian Mueller.

Thank you, Chris. Good afternoon. Thank you for joining Grand Canyon Education's fourth quarter conference call. I am pleased to report strong fourth quarter results and to provide guidance for the first quarter in all of 2009. We continue to see tangible validation of our strategy to bring a differentiated experience to our students. In contrast to the weaker economic conditions we are seeing broadly, our institution is benefiting from an environment where increasing numbers of students are seeking to improve their skills, achieve higher credentials and to enhance their employment opportunities.

In addition, our focus on the core verticals of education and healthcare continue to provide strong employment potential and increase earning power for our graduates, ensuring that they achieve a high return on their education investment. There are four goals I'd like to accomplish in the call before taking your questions.

One, or first, since this is our initial communication with you since the successful completion of our initial public offering, I wanted to give you the five key areas the management team is focusing on as we move into fiscal year '09. Second, I will review the three strategies we continue to employ to differentiate Grand Canyon University from other non-profit and for-profit institutions offering similar academic programs.

Third, I'll review the results of fourth quarter operations and provide guidance for the first quarter of '09 and for all of fiscal year '09; and fourth, Dan Bachus will review highlights on our balance sheet and discuss the lending and regulatory environment.

As many of you know, our mission is to offer each of our student's high-quality professionally relevant academic programs that enhance their career prospects. Our educational schools are targeted within specific professional verticals and are tailored to offer maximum flexibility to accommodate the needs of traditional students and working adults. In furthering those fundamental objectives, our management team is focused on the following five core initiatives.

One, ensure that current and future programs of study are consistent with employment trends in the country. We will continue to build our programs in high demand verticals, particularly education and healthcare where job growth is strong and there is a frequently defined relationship between advanced credentials and earning power as well as career opportunities. We also continue to see broad applicability for our business and liberal arts programs -- both within the education and healthcare professions -- as well as more broadly across the business environment.

Second, a developed curriculum in our core programs that are relevant to schools, hospitals, and businesses. As part of our sixty-year heritage, we enjoy a strong reputation for preparing professionals who can make immediate contributions in their place of employment whether undergraduate or graduate. We will continue to invest in high-quality programs to support this brand equity amongst our current students; new prospects; and most importantly, employers within the professional community.

Three, build on one of our greatest assets -- our full-time traditional faculty. They are to employ innovative, instructional strategies that maximize the learning outcomes achieved by our students. Our full-time faculty has developed an advanced and sophisticated system of assessing learning outcomes in order to continuously improve instruction in all our courses.

Four, build innovative software applications that enhance the student experience, enabling us to most effectively engage students and thereby maximize persistence rates and learning outcomes. An academic web services department was started six months ago and we will continue to build expertise in that area.

And five, build a cross-functional operations team environment that will utilize advance systems and tools to provide superior academic and administrative service to students. As an institution with a large online presence, we are committed to tracking the performance of our students closely to make sure they are making satisfactory progress and achieving graduation success consistent with our institutional mission.

Over the long-term, this is integral to ensuring that our brand remains respected by students and employers; and each of our students maximizes their potential in return for their investment in education through our institution.

With those five core operational initiatives reviewed, I would like to move next to the broad theme of differentiation. As an institution, we compete with a number of non-profit and for-profit institutions that offer similar programs focused on our core professional verticals. In addition, while employment prospects in those fields remains strong, our graduates face meaningful competition for jobs and advancement opportunities.

As a result, it is critical that we continue to reinforce the differentiation of our academic offerings and student experience for new prospects as well as the quality and capabilities of our graduates for employers. We seek to do this in three primary ways. One, build the scope and reputation of our traditional campus in Phoenix. We will continue to invest to enhance the academic reputation of Grand Canyon University in each of our professional verticals, bringing innovative high-profile faculty to oversee our academic efforts.

In addition, we will continue to approach admissions with the spirit of increasing selectivity, with the goal of ensuring that every student admitted to Grand Canyon is well-suited for academic success. In addition, it is our objective to excel in other performance related areas such as athletics, music, theater, etc. that are integral to a robust higher-education campus environment.

Second, we will continue to build on the sixty years of heritage in the three core verticals Grand Canyon has used to build its current stellar reputation in education, healthcare and business, and especially at the graduate levels. We have and will continue to collect data from employers that give us important feedback on their performance as professionals.

Three, continue to operate out of the basic framework of a Christian worldview, which focuses on employing a strong values-based and highly ethical approach in our teaching and in our operations. Our goal is to ensure that each of our employees and graduates is highly regarded, not only for their skills, but more importantly for their integrity.

Turning to the results of operations for fourth quarter of fiscal year '08, we are pleased to report a strong quarter. Student enrollments increased 67%, from approximately 14,800 at December 31st of '07 to approximately 24,600 at the close of fourth quarter of fiscal year '08. Revenue increased from $3.8 million in the fourth quarter of '07 to $51.7 million in the fourth quarter of '08, a 67.5% increase.

There are four areas contributing to this strong growth. One, we have improved control of the acquisition and distribution of leads. We are focusing on working with fewer vendors, providing them with better feedback and therefore increasing the overall quality of leads. Secondly, new enrollment growth was in line with our expectations.

As you know, our enrollment staff grew almost 100% between September of '07 and September of '08. Average EC productivity declined as a result of having a large percentage of inexperienced counselors. We expect the productivity to reach previous levels over the course of the first half of '09. The hiring of new EC's will align with our new start growth goals in '09.

Thirdly, we are currently working hard at supporting higher levels of student retention, which is frequently a function of support services and engagement. We have reorganized into a cross-functional team environment, added academic and financial advisors, and are putting together the business requirements to build a software necessary to better support our students. As a result, our investment in enhanced services is translating to slight improvements in retention. Of course, we believe we can make significant additional improvement and remain committed to this continuing effort over the long-term.

Finally, the last factor impacting revenue is an increase in the average tuition per student caused by tuition price increased and to a lesser extent, an increase in the average credits per student. In '08, the average tuition price increase was 5%, and we are building approximately the same amount of increase into our '09, 2010 school-year budget.

You might have noticed that our year-over-year growth in enrollment grew in line with our year-over-year growth in revenue, even with the tuition price increases. This is due to the continuing [mix-shift] towards online students, which has a lower tuition price per credit hour, and fewer credit hours per semester than our traditional campus students. We expect this trend will continue in the near-term given the relative rates of growth and our primary focus on online delivery.

Now turning to expenses -- instruction costs and services grew from $11.6 million in fourth quarter of '07 to $17.5 million in the fourth quarter of '08. As a percent of revenue, [IC&S] actually declined from 37.3% to 33.8%. Faculty compensation, as a percentage of net revenue, decreased 307 basis points due to better leverage in student-teacher ratios, with the average class size increasing from approximately 17 students to 20 students per class.

In addition, while employee compensation declined 140 basis points, additional academic and financial advisors were hired at the end of the fourth quarter of '08. As a result, this line with increase slightly as a percentage of revenue in fiscal year '09.

Occupancy, instructional supplies, and depreciation expense declined 208 basis points as a result of being able to leverage these costs over higher revenues. The cumulative gains in these areas were somewhat offset by FAS 123R share-based compensation, recorded in IC&S in the fourth quarter of '08 equal to about 3.4% of net revenue.

Selling and promotional expense increased from $10.8 million in the fourth quarter of '07 to $19.5 million in the fourth quarter of '08. As a percent of net revenue, it was also an increase from 35.2% to 37.8%. 37.8%, however, represents an improvement of 9.4% from 47.2% in the third quarter of '08 reflecting the return on investment in admissions at the recently hired EC's became more seasoned and more productive.

Advertising as a percentage of net revenue declined 80 basis points in the fourth quarter of '08 versus the same period in '07 as lead acquisition in the quarter improved due to the new systems and processes described earlier. Enrollment counselor salaries increased 103 basis points due to the rapid hiring of counselors in the second half of '07 and first half of '08, resulting in a higher percentage of unproductive EC's as a percentage of the total EC's in the fourth quarter of '08 as opposed to the fourth quarter of '07 -- thus, a decline in average productivity for the aggregate group.

Tier-based compensation recorded in S&P in the fourth quarter of '08 was 2.6% of net revenue. General and administrative costs as a percentage of net revenue increased from $5.2 million of net revenue in the fourth quarter of '07 to $10.8 million of net revenue in the fourth quarter of '08.

The 430 basis point increase was primarily the result of 129 point increase in employee compensation mainly in the executive management, accounting, and compliance areas and a payment that we made during the fourth quarter of '08 to various Arizona school tuition organizations in lieu of the payment of state income taxes, which Dan will discuss in a few minutes, and share-based compensation recorded in the fourth quarter of '08 in G&A expense of approximately 3.7% of revenue.

Bad debt expense was slightly down at 6.1% in quarter four of '08 versus 6.2% in quarter three of '07. As a result, net income grew from $1 million in the fourth quarter of '07 to $2.2 million in the fourth quarter of '08. This represents 120% increase.

Our enrollment and financial guidance is as follows -- for first quarter fiscal year of '09, we expect enrollment growth of approximately 63%, equating to roughly 28,460 students. We expect net revenue growth of approximately 60% or roughly $57 million. We expect diluted EPS will be in the range of $0.08 to $0.10 per share.

For fiscal year '09, we expect enrollment growth of approximately 40% to 42% to between 34,500 and 35,000 students. We expect net revenue growth of approximately 55% to 58% to $250 million to $255 million. We expect diluted EPS will be in the range of $0.52 to [$0.57] (corrected by company after the call) per share.

With that, I would like to turn it over to Dan Bachus, our CFO, to talk about taxes, the balance sheet, and the lending and regulatory environment.

Thanks, Brian. Our effective tax rate for the fourth quarter of 2008 was 30.9% compared to 40% during the fourth quarter of 2007, and 39.1% for the first nine months of 2008. This decrease is primarily the result of $750,000 in payments we made in the fourth quarter of 2008 to various Arizona school tuition organizations for which we received a direct state tax credit for the same amount.

Thus, our cash expenditure was the same for the expense as reflected in G&A rather than tax expense. Had this payment not been made, our effective tax rate for the fourth quarter of 2008 would have been 44.0%; and for the year ended December 31st 2008, it would have been 40.8%. We do not anticipate making a similar contribution in 2009. So our estimated 2009 effective tax rate is 40%.

Total stock-based compensation recorded during the fourth quarter of 2008 was approximately $5 million. We are forecasting stock-based compensation to be $0.9 million in the first quarter of 2009, and $3.9 million during fiscal 2009 depending on the level of future equity grants.

Turning to the balance sheet, our cash, cash equivalents and investment balances, unrestricted and restricted, totals $40.8 million at December 31, 2008. Our accounts receivable net of allowance for doubtful accounts is $9.4 million, which represents 21.4 days sales outstanding. The end of the fourth quarter is typically a low point in our DSO due to the timing of the start of our terms.

CapEx in the fourth quarter of 2008 was approximately $2.4 million, or 4.6% of net revenue. The majority of the CapEx was furniture, equipment and [lease hold] improvements to support our additional headcount and internal use software development costs. Unearned revenue and student deposits increased 37.5% between December 31st, 2007 and 2008 with unearned revenue increasing 103%, and student deposits actually decreasing 29% as we improve processes around student refunds.

Capital lease obligations increased $1.3 million between December 31st, 2007 and December 31st, 2008 primarily due to the scheduled bi-annual CPI adjustment reported in September 2008, partially offset by payments made during 2008. Additional paid in capital increased $57.1 million between December 31st, 2007 and December 31st, 2008 primarily due to the conversion of the convertible preferred stock to common stock at the time of the initial public offering and the net proceeds after the special distribution from our initial public offering of $20.1 million.

In terms of the legal, lending, and regulatory environment, we continue to cooperate with the office of Inspector General to facilitate its investigation; and we are nearing completion of our rolling responsive document production which commenced in September 2008. The Company's motion to dismiss the [Key TM] lawsuit has been denied. The Company plans to vigorously contest the lawsuit as it believes it is without merit.

Our certification to participate in the Title IV programs remains on a month-to-month basis. We are proud to report that our draft cohort default rate decreased slightly to 1.4% for the 2007 federal fiscal year. Our 2008 composite score is strong. Using the Department of Education's formula under the ninety-ten rule, there was in fact prior to the August 2008 reauthorization of the Higher Education Act, for our 2008 fiscal year, we derived approximately 78.6% of our revenues calculated on a cash basis from Title IV program funds as compared to 74% in 2007. We are currently in the process of determining the impact the revised formula will have on our ninety-ten calculation, but it is our expectation that the amount will be less than the [78.6%] (corrected by company after the call).

Private loans represented approximately 2.9% of our revenue calculated on a cash basis during 2008 as compared to 5.1% in 2007. The increase in the amount of Title IV funds calculated on a consistent basis and the decrease in private loans is primarily due to the increase in federal loan limits in July 2008. Most of our student's tuition needs are less than Title IV loan limits. However, tuition and living expenses for most of our ground traditional students are in excess of Title IV loan limits.

Thus, some of these ground traditional student's access to private loans to fill the gap. We have not seen a significant change in access to private loans for these students. I will now turn the call back to Brian.

Thanks, Dan. I also want to thank all the Grand Canyon University's faculty and staff for all the hard work that has led to a very successful quarter and a great beginning as a public company. And with that, I'll turn it back to the operator to open up line for questions.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mark Marostica with Piper Jaffrey.

Q and a nice job on the quarter.

Thank you, Mark.

My first question relates to the mix of Masters degrees students at the end of the quarter compared to a year ago. And I want to go back to I think the point Brian raised regarding revenue per student growth and enrollment growth; and to what degree did that masters mix, if at all, play into the behavior of those two growth rates?

No, I don't think it does. Our master's tuition obviously is higher, but typically our undergrad students take more credits per term. And so there's kind of a neutral effect on tuition per student per term. The 53%/47% mix of graduate to undergraduate students; long-term, our goal is to keep that at 50-50, or as close to that as we can. And we are going to do some things in the next two or three quarters to keep it there, or maybe even reverse it slightly. But we're in good shape from that standpoint. We feel good long-term, but we'll work very hard to keep it as close to 50-50 as we can.

And if you look at some of your verticals, in terms of education curriculum, I'm curious how enrollment growth played out relative to your expectations. We are, of course, seeing some pockets of weakness in the teacher market in certain areas and also nursing in certain markets. But I'm just curious from your perspective -- how did those verticals host enrollments relative to your own internal expectations?

They were strong. In fact, we thought -- we think we can probably do better there than we are currently doing. There's probably -- there's some strategies that we're going to employ, we think, to do even better in that area. The -- our deal is that 70% of our students that are in education are graduate level students. In fact, it's a little bit more than 70%. So we're dealing primarily with existing teachers who want to pursue both Masters and Doctoral degrees to even move up as teachers or into administration or whatever.

Okay, and, Brian, you did mention increasing selectivity. I just want to clarify -- that is for the ground campus, not the online campus? Or is it for both?

It is primarily for the ground campus, yes. There is some slight selectivity that is going on at the lower levels -- students who are very inexperienced and with very little credit. But for the most part, it's at the ground level.

Fair enough, and one last question on the ground campus -- I wonder when do you expect to turn a profit on the ground campus, and maybe if you can give us an idea of what level of profitability the ground campus is currently at in capacity to utilization, and how you intend to push forward to that level.

It's difficult to determine at exactly, although what I'll tell you is that we're in a very strong position. The state universities in Arizona, where we get 70% of our undergraduate traditional students, are really having a tough time. They're cutting back on programs; they're increasing class size, to sometimes as many as 1,000. In fact, Arizona State University is shutting off its enrollment for incoming freshmen as of March 1st, and so we're in a very strong position that way. We have big goals in terms of our incoming freshmen class. We've said historically, around 2,000 students, we would be at a break-even point; and we're moving fast in that direction.

Great, thanks. I'll turn it over.

Thank you.

Thank you. Your next question comes from the line of [Sarah Gibbons] with Bank of America, Merrill Lynch.

Hi, thank you.

Hi, Sarah.

Could you talk a bit about the cost associated with the various initiatives that you listed? And I guess, within that context, it looks like you're expecting operating margins to be down year-over-year in the first quarter, but up for the full year. I'm assuming that's mostly in instructional costs and services? So if you could talk about where you're investing and how that plays out on the P&L, that would be great.

I'll talk about the investments; Dan can talk about the margins. There are a number of areas we need to invest. One of them is in academic and financial counseling and student services to support greater levels of retention. That will be in instructional costs and services and there'll be a slight increase. But it won't be material. So -- that's one of the investments.

The second investment is going to be in IT and in software development. That's been something that the Company has traditionally outsourced. We are going to bring that in-house and so there'll be some expense there but it will be capitalized. And so it shouldn't have a significant impact income statement. And then in terms of margins, in first quarter of '09 versus first quarter of '08, go ahead, Dan.

I think you'll see a slight year-over-year increase in IC&S -- selling and promotion to be pretty flat and an increase in the margin in G&A as a percentage of revenue. Talk about all three -- ITS, you look at Q1 of '08, it was 32.5%. We're targeting the 33% to 34% range based on some of the expense initiatives that Brian's talking about, and that would be fairly in line with where we were from the Q4 of '08 of 33.8%.

In terms of S&P, we're at 35.2% in Q1 of '08. That has come down as we talked to 37.8% in Q4 of '08 and we're forecasting it to be in that same kind of range in Q1 of '09. And then G&A is where you're going to see the biggest bump. It was 21% in Q4 of '08, 12.7% in Q4 of '08 versus Q1 of '08, and so we're targeting it. So it won't be as high as where it was at Q4 of '08 but it will be higher than it was in Q1 of '08.

Okay, so margins, theoretically, would be down year-over-year because of the investments in the first quarter and then is it more for the rest of the year that you'd be expecting year-over-year margin expansion?

Yes.

Okay --

Yes, and I think the biggest thing to keep in mind is between the first and second quarter of '08 is where you saw the huge margin -- or the expense increase in the selling and promotion line with it going from 35% to 43% to 47%, and now we have it ticking back down. And so I think that you throw on the public company costs from a G&A standpoint and then just getting, as we've talked about, getting the S&P down -- back down to that 35% level is why you would see that.

Okay. With IC&S costs up as a percentage of revenue for the full year?

Yes, slightly higher -- or -- what we're projecting is pretty much in line with the full year of '08.

Okay. And could you give us an update on enrollment advisor productivity? I know that that had come down because of the new enrollment advisors that have been hired. But how are they trending?

It's not returned totally, but in -- did not in fourth quarter of '08, but it's trending up and we expect that over the course of '09, it will return to where it was early in '07. Most of the enrollment counselor hiring that will take place into next year will be in education and healthcare and not very much in business, which helps a lot of different areas in the business.

Okay. And then last question, thank you for providing the detail around the sources of revenue. It looks like there are about 18% of your revenue that's not coming from private loans or federal financial aid. Could you talk about what's in that 18% and if much of its corporate tuition reimbursement, if you're seeing -- what kind of trends your seeing there?

Most of it is in corporate tuition reimbursement. A lot of it is in healthcare. Some of it is in education, some of it's in business, but we see no -- we see very little problem in that area because so much of it is in areas that are somewhat unaffected by the recession, namely healthcare and education. So we're not seeing a trend that's having a negative impact on enrollment.

Okay. Thanks very much, I'll turn it over.

Thank you.

Thank you. Your next question comes from the line of Kelly Flynn with Credit Suisse.

Thanks. A couple of questions -- can you just give a little color on your bad debt, just explain in more detail why it's enough higher than we might expect it would normally be given the profile of your students and your low cohort for default where you've been -- where you think that can trend over time? And then I have another one too.

Yes, bad debt based on our student profile mix -- the assumption would be it would be lower than it is. And I think in the longer term, it will come down. Historically, from a process standpoint, the Company did not financially clear students before they started, thereby taking a lot of the risk on its own balance sheet versus dispersing, certifying and dispersing students and delivering that financial aid to students on day one of attendance.

We have improved processes in the last few months around the certification and disbursement process, so that you will see bad debt trending down over the long term. But that's a process that has to work through the system. And so you won't see a decrease in bad debt significantly in the near-term.

(Cross-talk)

It really does have to do with the financial clearance of students before they start the program. And if you look at the 6.1% inordinately in the area of undergraduate students, and so once we get that cleaned up and cleared, over time that will come down, but it takes -- it's in arrears.

Okay, and does your guidance contemplate staying where it is?

It does, yes.

Yes.

Okay. Alright, and then can you just talk a little bit more about the weak economy and how you think it's impacting, how much of your very strong growth is related to the weak economy? Just any views on that issue, Brian, just in light of what you've seen in your many years in the industry?

Yes, it's a good question. I don't think we're being impacted by it very much. The large percentage of our new students are still in the area of education and healthcare and the education market is so solid because 70% of that is at the graduate level and with existing teachers who are trying to move up in their organization. The 30% that are undergraduate in education -- those retention rates for us are better than the retention rates of undergraduate business students.

I think the thing that I would be most concerned about is undergraduate business students who don't see a very direct relationship between the degree earned and what's going to happen in terms on their income earning potential in the job area that they're in. And so we're trying to really stay, for the most part, at the upper end of the undergraduate population, namely with degree completers, people who bring significant college credits so that any negative impact that would come from that counter-cyclicality that would manifest itself eventually in a larger cohort default rates, we're guarding against that taking place.

Okay. But I was actually thinking you'd be helped by it, not hurt. So do you think that in ed and healthcare people are pursuing those areas more now because of the weak economy, making them relatively more attractive?

That would be undergraduate students in education and undergraduates and [VSN] students. Yes, I think we are positively impacted by that to some extent. I guess my major point was if as that dissipates and the economy eventually turns around, I don't think that we'll see a sudden drop-off.

Okay, I got you. Thank you.

Okay.

Thank you. Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Thanks so much. I know you talked a little bit about the enrollment counselor productivity. But I'm curious just at the front end, in terms of costs per start lead generation, etc., what are the trends you're seeing at that end of the market? Thanks.

Yes, hi. This is Stan Meyer. We've really seen pretty stable pricing for leads over the time period. The positive numbers on advertising line, really as Brian mentioned, was an improvement on the acquisition side of those leads and the distribution of the leads to counselors. Does that help?

Yes, that's fine. I appreciate it. And again, any diversion trends among the different verticals that you have?

No.

No, not really. We're holding, we're -- for a relatively new institution, who's trying to gain traction here; from an advertising standpoint, the percent of revenues spent on advertising. We're right in line with where the rest of the companies are, and so we feel good about our ability to get leads at reasonable rates. We just had a period of time there between '07 and '08 where we added or nearly doubled our enrollment counselor staff, and it was during that time that you saw a drop-off in productivity.

You would think you would have thought also an increase in lead acquisition costs, but we were able to hold our own there, which is a really positive sign. We just simply now have to get people up to speed. And I guess the one trend, yes, to be fair, the one trend would be that our -- if there's a lower conversion rate, it would be on in the business area versus the education and healthcare area; those things have remained very stable.

Okay, great. In terms of brand recognition, I'm just curious -- since you've gone public, have you seen any impact from a student's perspective? I know you get a lot of press from a Wall Street perspective because the IPO was so successful, but I'm just wondering if that translated in any business?

No, I don't think so. I think our students are all very interested in what's going on. This is very new to Grand Canyon, and so I think our students are very interested in what's going on. But we haven't seen an uptick, for example, in leads as a result of that.

Okay, great. And just one numbers question -- what are you budgeting for CapEx in '09.

At this point, we're still budgeting, as we've talked about, before the 5% of net revenues.

Okay, fantastic. Thanks so much.

Thank you.

Thank you. Your next question comes from the line of Brandon Dobell with William Blair.

Thanks. Guys, wondering if I can just step back in a bit in enrollment counselor data for a second and I may have missed it, but -- was there a headcount number you gave out, or how we should expect that headcount to grow through 2009, at a comparable pace to online enrollments, slower paced -- just some color there would be helpful.

Yes, we're not actually giving out the headcount number. But Brandon, our plan is to add about 120 enrollment counselors in '09. That has been our plan; it is still our plan.

Okay.

So it would be obviously 10 to 12 a month.

Right. And retention in that EC pool -- how has that trended the last couple of quarters?

It's real strong --

Yes.

-- because -- the unfortunate thing if the economy's down and the jobs are down, the fortunate thing is that people are tending to stay in jobs that they have, so, yes. We feel that about two things -- number one, we think the retention of our current staff will be good; and number two, the number of people that we do hire in the upcoming 12 months, we think we can get at a very high caliber.

Okay. Shifting over to the online business for a second, any commentary on average class size, where you are now, where you're targets may be, and how confident you feel about closing that gap?

We've got, we've done a really good job in the last 12 months or so, and it has gone from 17 to 20. And we don't feel, at this point, we have enough evidence to indicate that we should increase it from there. We feel good about 20 and there are certain classes or certain areas where maybe we can increase it, we will. But we feel good where it's at.

Okay. With the ground programs in healthcare and relationships with your local healthcare providers, what's the strategy that we should think about the next year or so, just given what's going on with your competition -- cutting back on those programs, but also just the difficulties those healthcare providers are having in California, Arizona, Nevada, and New Mexico?

Should we expect a lot of new relationships going forward from that? Should we expect more group discounting as you push, as you get more students from those sources? I'm just trying to get an idea of how that part of the business looks to play out in '09.

Well, we will benefit from the fact that people are cutting back on the pre-licensure programs. And whereas that's not a tremendously profitable program, it really ingratiates you to hospitals. What they need mostly is new nurses, and the fact that we have Grand Canyon, over the years, has done a very good job of producing new nurses that passed their exit exams with very high scores has put us in a good stead.

So that gives us a lot of business -- are in the BSN business and Masters degree in nursing business, which are the profitable programs. We will continue to expand in Arizona with all the programs and we will look to expand, even in pre-licensure programs in states that are adjoining Arizona, and we have a process underway to do that. So it is -- that's just a very strong area for us.

Okay. And final numbers question -- I would imagine in the [K], you're going to break out the revenue contribution between online, ground and other. But any color you can give us, especially in terms of how scholarships filled out in 2008, and what we should expect in '09 as a percentage of revenue, maybe?

Yes, hold on just a second. Go ahead.

Scholarships was 18.4 million for the full year 2008, which is -- I have it, hold on one second. Trying to talk and look at the same time. In the fourth quarter, scholarships as a percentage of revenue was 11.6% --

Okay.

-- which was higher than it was for the full year. It was primarily because of a scholarship program that was run associated with Fall I. Our thoughts going out is to keep scholarships in line with where they were at -- for 2008 or even decrease them slightly by trying some other things like promotional activities to generate interest in periods that aren't as easy to recruit students in. So overall, I think the scholarships as a percent of revenue as revenue goes will over time go down.

Okay. Great. Thanks, guys.

Okay.

Thank you. There's no further questions at this time. I would now like to turn the call back over to Mr. Brian Mueller.

Thanks again for participating in the call. We appreciate it and we'll talk to all of you soon.

This concludes today's conference call. You may now disconnect.