Grand Canyon Education Inc (LOPE) 2009 Q2 法說會逐字稿

Good Afternoon, my name is Kayla and I will be your conference operator today. At this time I would like to welcome everyone to this second-quarter 2009 Grand Canyon Education Earnings 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)

I will now like to turn the call 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 Educations 2009 second-quarter results. Speaking on today's call 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 Chris Richardson, General Counsel, will be available during the q-and-a period. The call is scheduled to last one hour. During the q-and-a period we will try to answer all questions and we apologize in advance for any questions that we are unable to address due to time constraints.

I would like to remind you that many of our comments today will contain forward looking statements with respect to the future respect 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 facts are discussed in the Company's Securities and Exchange Commission filings, including its 10-K report for its 2008 fiscal year filed in February 2009; its 10-Q reports for its 2009 fiscal quarters, including a 10-Q report for it's second fiscal quarter of 2009 to be filed with the SEC later today; and its current reports on Form 8-K filed with the SEC from time to time.

The Company does not undertake any obligation to update anyone with regard to the forward looking statements made during this conference all and we recommend that all investors thoroughly review our annual and quarterly reports and current reports filed with the SEC before taking a financial position in the Company. And with that I will turn the call over the Brian Mueller.

Thanks, Chris, good afternoon, thank you for joining Grand Canyon Education's second-quarter conference call. This is our third reporting period and we have again exceeded expectations. Our results validate two important components of our strategy.

First, adult students want to be associated with a traditional campus with a strong brand and rich academic heritage. We recently surveyed our online students and the vast majority indicated that the strong traditional campus was ranked either one or two in their decision to select Grand Canyon.

Second, we continue to benefit from the job growth expected in education and healthcare, which are two of our most important verticals. Recent statistics cited by the US Department of Labor Statistics indicate that in the next six years the two fastest job growth areas are healthcare, adding 3 million jobs, and education, adding 1.4 million jobs.

There are four goals I would like to accomplish on this call before taking your questions. First, review the five key areas of management focus as we move through fiscal year '09 and into fiscal year 2010. Second, review the four strategies employed to differentiate Grand Canyon from other Universities offering similar programs. Third, review the results of second-quarter operations and provide guidance for third-quarter of '09 and update guidance for all of '09. Finally, Dan Bachus will review highlights on our balance sheet.

As stated in our previous call, our mission is to offer our students high-quality, professionally relevant academic programs that enhance their career prospects. Our colleges are targeted within professional verticals and are tailored to offer maximum flexibility to accommodate the needs of traditional students living on campus and working adult students attending online. To accomplish that mission our management team continues to focus on the following five initiatives.

One, ensure that current and future programs are consistent with employment trends in the country. In the second-half of '09 we are adding additional programs in healthcare, education, business and liberal arts with the majority being at the masters and doctoral level.

Second, develop curriculum in our core programs that are relevant to schools, hospitals, churches and businesses, delivering to both traditional students and non-traditional students online.

Third, build on one of our greatest assets, our full-time traditional faculty. Growing our traditional on campus student body to 4,000 in the next three years will allow us to bring approximately 100 additional full-time faculty, many of whom will have impressive academic credentials, which will further build the academic reputation of the University.

Fourth, build innovative software applications through our academic web services department that make learning interesting and engaging, as well as, help build strong learning communities. In a recent competition conducted by Angel Learning Systems, the Grand Canyon University submission was selected as the course that demonstrated the most innovation in technology mediated learning.

Fifth, build a cross-functional team environment that will use advanced systems and tools to provide superior administrative service to students. We are continuing to invest in people and technology as we increase the size of our student body. Both people and technology are key to our most important objective which is to increase student success and retention levels. I will say more about that at the end of the call.

Many of you are concerned with the growing competition within higher education. Grand Canyon has a, clearly, differentiated position in four important areas.

One, we continue to build the scope and reputation of our traditional campus. Our incoming class of traditional students on campus this fall is anticipated to be 100% larger than last year's incoming class and their average incoming GPA is higher as well. Our focus on ground, as well as online, is growing our overall student base but also attracting high quality students.

Second, we continue to maintain a strong percentage of graduate students in our overall student body. Our second-quarter ending enrollment consists of 50% undergraduate students and 50% graduate students.

Third, continue to build the academic reputation of our three core verticals. Our graduating Nurses received a pass rate in excess of 93% on the NCLEX exit examination for baccalaureate nurses. Indicators like this of academic excellence and achievement are an important mark of progress and success at Grand Canyon.

Four, continue to operate out of the basic framework of a Christian worldview, which focuses on employing a highly ethical approach in our teaching and in our operations. Both online and traditional students have indicated the fact that Grand Canyon is a Christian University was important in their decision to attend.

Turning to the results of operations for second-quarter of '09, we are pleased to report another quarter of outstanding growth. Net revenues were $59.4 million as of June 30, 2009, an increase of $24.8 million or 71.8% from $34.6 million in the prior year period.

Student enrollments at the end of quarter-two, 2009, are approximately 27,600, an increase of 67.3% from approximately 16,500 at June 30, 2008. Operating margin for Q2 2009 was 16.8% compared to 1.1% for the same period in 2008 and net income was [5.8] (corrected by company after the call) for the second-quarter of 2009 compared a net loss of 0.1 million in prior period.

There are four areas contributing to this strong growth. One, our advertising strategies are producing strong results. We continue to focus on identifying quality students, especially graduate students, and we continue to see advertising as a percent of revenue decline.

Two, enrollment counselor productivity in the second-quarter of '09, was higher on a per counselor basis than it was in second-quarter of 2008. A major contributing factor here is the continued maturation of the overall counselor base.

Third, the cross-functional operation teams are continuing to make strides in pre-clearing students for educational funding and better preparing students academically for their initial courses. We are seeing improved retention levels of new students, which has resulted in a significant improvement in bad debt expense as a percent of revenue.

Four, finally, as our traditional students, as a percent of our overall student body, declines because of the growth of our online population, the impact of the 5% tuition increases on an annual basis becomes more apparent. In the second-quarter, revenue increase outstripped enrollment increase by 4.5%.

Now, turning to expenses. Operational improvements led to operating margin increase of 15.7% quarter-over-quarter. Instructional costs and services grew from $12.4 million in the second-quarter of 2008, to $20.1 million in the second-quarter of 2009. As a percent of revenue, instructional costs and services improved from 35.9% to 33.7%. Faculty compensation, as a percentage of net revenue, [decreased] (corrected by company after the call) 222 basis points as a result of class size increasing from approximately 18.4 in Q2 '08 to 19 students per class in Q2 of '09.

Employee compensation and related expenses increased 204 basis points, this is primarily the result of adding academic and financial advisors at the end of the fourth-quarter of 2008 and continuing during the first-half of '09. We expect this line will continue to increase slightly as a percentage of revenue in fiscal year '09. Other instructional costs and services decreased 197 basis points between periods, as we were able to leverage those costs over a higher revenue base.

Selling and promotional expense increased from $14.9 million in the second-quarter of '08 to $20.6 million in the second-quarter of '09. As a percent of net revenue there was an improvement of 8.3% from 43.1% to 34.7%. These continuing operational improvements reflect the return on our investment in enrollment counselors hired in the third and fourth quarter of '08 as these employees have become more productive.

Selling and promotional salaries and related expenses, as a percentage of revenue, decreased 691 basis points between periods. Advertising and revenue share, as a percentage of net revenue, decreased 143 basis points in the second-quarter of '09, versus the same period of '08, primarily as a result of continued improvement in the acquisition and distribution of leads. In general, we have not seen a significant change in advertising costs over the last year.

General administrative costs increased from $6.4 million in the second-quarter of '08 to $8.7 million in the second-quarter of '09 and as a percentage of revenue an improvement of 4.0% from 18.6% in the second-quarter of '08 to 14.6% in the second-quarter of '09. The 390 basis point decrease was primarily the result of a 259 basis point decrease in legal, audit and corporate insurance expenses.

132 basis point decrease in bad debt expense as a result of improved processes and increase in the number of financial counselors. Net decreases in employee compensation, occupancy, consulting and other administrative expenses were offset by the increase related to share-based comp of 115 basis points. As a result, net income grew from a net loss of $0.1 million in the second-quarter of '08 to $5.8 million in the second-quarter of '09.

Our enrollment and financial guidance is as follows. For the third-quarter fiscal year '09, we expect enrollment growth of approximately 48.9%, equating to roughly 32,700 students. We expect net revenue growth of approximately 61.4% to roughly $63.5 million. We expect diluted net income per share will be $0.13 per share.

For full fiscal year '09, we are again raising guidance. We expect enrollment growth of 44% to 46% to between 35,500 and 36,000 students. We expect net revenue growth of 61.5% to 63% to $260.5 million to $262 million. We expect diluted net income per share will be in the range of $0.66 to $0.67 per share.

I would like to take a minute to talk about a change that we are in the process of making. Our success in building the online program at Grand Canyon, at this point, has been accomplished while using the back office system used to manage campus-based traditional students. We are now moving to a system which will allow us to manage our non-traditional online students with far greater ease and flexibility. The new system, CampusVue, will give our staff an opportunity to work with non-traditional students any way that will increase their ability to start students and also retain them in the programs.

The Company spent $11.1 million on CapEx in the first six months of 2009 or 9.4% of net revenues. These expenditures included leasehold improvements and furniture and equipment for our increased number of employees, as well as investments in internal-use software development to enhance our process improvements.

The internal-use software development spending is principally enhancements we are making internally to our CRN system and a $1.1 million payment to Campus Management Corporation for licenses towards CampusVue and campus portal products. We have historically used Datatel for our back office systems including financial aid, accounting and student records.

We have also, historically, been a term-based institution. As a term-based institution our students can start their education at one of only six terms. From a financial aid perspective, the certification funding is based on which term a student starts and is dispersed for that term.

A student has very little scheduling flexibility. We have made the strategic decision to change to a borrower-based, non-term institution, which will allow us to manage non-traditional students with greater efficiency and ease. As a non-term institution we will be able to start students as frequently as we choose and students will have a lot greater flexibility in scheduling, which will result in increased persistence rates.

In the second-half of 2009 we anticipate paying Campus Management Corporation additional fees related to additional licenses and implementation. In the near term our CapEx as a percent of revenue will be higher than originally planned. The gains we are making in other operational areas will allow us to stay on track with the guidance we have given. With that I would like to turn it over to Dan Bachus, our CFO, to talk about the balance sheet and changes in the lending and regulatory environment.

Thanks, Brian. Our cash, cash equivalents and investment balances unrestricted and restricted totals $31.5 million at June 30, 2009. The decrease in these balances from March 31, 2009 is primarily the result of a purchase of the land and buildings that comprise our traditional campus and 909,348 shares of our common stock from Spirit for an aggregate purchase price of $50 million, partially offset by the loan agreement with a financial institution pursuant to which we received net proceeds of $25.5 million, all of which was used to fund a part of the purchase price.

In addition, due to the timing of our term starts and estimated tax payments, cash flow from operations, historically, has been much lower the second-quarter than in the first and third quarters. Our accounts receivable, net of the allowance for doubtful accounts, is $10.6 million, which represents 18.5 day sales outstanding compared to 20.1 at the end of the second-quarter of 2008.

Unearned revenue and student deposits increased 83.9% between June 30, 2009 and June 30, 2008 with unearned revenue increasing 65% and student deposits increasing 130.4%. Additional paid-in capital decreased $12.3 million between December 31, 2008 and June 30, 2009, primarily due to the repurchase and retirement of 909,348 shares of our common stock in the Spirit transaction.

In terms of the legal, lending and regulatory environment, we continue to cooperate with the Office of Inspector General to facilitate its investigation and have completed production of all requested documents. The Company plans to vigorously contest the qui tam lawsuit.

During the three months ending June 30, 2009, we worked out an agreement with the Internal Revenue Service in which we agreed to pay $235,000 and effective July 1, 2009, began classifying of our faculty as employees. Previously we had classified our online adjunct faculty as independent contractors. Although, this change will slightly increase our faculty pay going forward, it will allow us to require more out of our online adjunct faculty.

We have completed the programming necessary to move out students to the government's direct lending program. We are recommending that all of our graduate financial aid students use their direct lending program for their Title Four needs beginning with our Fall 1 term. And if all goes smoothly, we will recommend that our undergraduate financial aid students use it no later than our Spring 1 term. I will now turn the call back to Brian.

We have reached the end of our second-quarter conference call.

Open it up for questions now.

(Operator Instructions)

Your first question comes from the line of Ariel Sokol with Wedbush.

Guys, congratulations on a good quarter. A couple of questions for you. The first one, with the year half over and the Company performing better, relative to the guidance which you provided for the past two quarters, trying to think about how we should model out 2010. I know you haven't provided formal guidance, but has your thinking at all changed with respect to potential investments that you might make in 2010, perhaps relative to when you guys IPOd?

Not really, I think what we did was we pushed forward a little bit some of the technology that we eventually wanted to implement. We made some significant changes in our customer relationship management system, which will allow our financial and academic counselors to have a lot more information and better information to service students.

And then secondly, we had pushed forward the advancement of a term-based -- a borrower-based system that will allow us to manage students, borrower-based financial aid environment and give us a lot more flexibility in terms of scheduling them. So in the near term, CapEx expense will be a little bit higher but it doesn't change our long-term outlook.

Great. Thinking about the decline year over year in ground students, can you speak to that a bit? I am trying to understand what the revenue for enrollment implications were for the quarter.

There is no long term slow down in ground students. Ground students as a percent of all students will be lower in the future because of the rapid growth of our online student body. Are you talking about just in the second-quarter?

Yes, the 25.5% decline year-over-year in ground students.

Yes, you know a big piece of that is just the number of students, ground, traditional students that were taking summer school year-over-year. Those students don't generate a significant amount of revenue because there are taking a couple of classes in the summer. As we talked about, our goal for ground traditional students was 1,000 new students for this fall coming up and we are on target to hit those goals. And so our ground traditional campus strategy is on target. Don't read too much into that year-over-year Q2 ground traditional student decrease.

Sounds fair enough and just the last question. In the last conference call you talked about bad debt expense as percent of revenue being roughly 6% for the full year. And for the first two quarters it has been below that. Are you still expecting 6% for bad debt expense or is there a change in your thinking now?

No, we are making improvements. The prequalifying students for financial aid, getting them qualified in advance of them starting is really making a big difference and then we are having some retention improvements as well, which has caused it to go down and we expect to see continued improvement as we move forward.

All right, thank you.

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

I just wanted to get a little bit more color on the CampusVue investment that you mentioned. You've referred a couple times to CapEx going up. What kind of budget should we be looking for in terms of CapEx for this year and next year?

Long-term it is between 5% and 6%, which is the advice we have given. I would say next year it is going to be slightly higher than that, especially in the first part of the year. It will go down as we get towards the end of the year.

When do you think the full migration will be completed by?

End of first-quarter, March, April of the year. We will transition earlier than that, but the full migration will finish by March or April.

And are there any incremental operating costs associated with this?

No, long-term we hope there is a plus there because we will have a lot better system, a lot better tools and our financial and academic counselors will be able to handle more students as a result.

Okay, great. Just shifting over to the enrollment side, you are roughly at a 50-50 split between bachelors and masters, again, looking over the next few quarters and the next few years, where do you envision that going?

It is going to slip a few percentage points, but we don't expect it to slip a whole lot more than that. With the number of students and the growth that we are projecting, we can be pretty purposeful about adding doctoral programs and masters programs and therefore doctoral and masters degree enrollment counselors, and so we are focused. The law of large numbers would tell you that there is a bigger market at the baccalaureate level but, with the numbers that we need to get, we can be pretty purposeful about continuing to add masters and doctoral programs, which we are going to do.

Okay, great, and just one quick follow up on the class size comment, in terms of that increasing. What drove that increase? Was it more at the grad or undergrad level and how high do you think that number will go? Thanks.

Yes. It won't go much higher than what it is. We will keep it at 20 or a little bit under that. That is a comfort level with the current learning model that is in place and with the ability of the faculty to actively to manage an online classroom, so we don't expect it to go much higher than that.

And again, just what drove that increase? Was it grad, undergrad, et cetera?

Both, it wasn't weighted towards one or the other. Kathy and her team have been very focused on getting the class sizes to the optimal levels across the board.

Really it is a matter of scale. The more students you have, the more you can spread students across the number of courses. And so we are getting to the scale in some programs where we don't have to teach low numbers.

Okay, great. Very helpful, thanks.

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

Thank you, good afternoon.

Hi, Sara.

Could you give us an update on the number of enrollment advisors you have and your plans for hiring them, and if they are at the level of productivity that you expected them to be at?

We are hiring between 12 and 15 a month and we accelerated that just a bit because of our success in getting military leads and opening up our military division. But for the most part it is between 12 and 15 a month.

Okay, and is the productivity where you would have expected it to have been?

Yes, yes. The glut of people we hired a year ago are now stocked and maturing, so the average productivity on a per-rep basis in this quarter was higher than second-quarter of the prior year, so we are happy with that.

Okay, and then on the on-ground side, sorry. I know that you said that you were expecting 1,000 new students for the fall. Is that 1,000 additional as of a year ago or just as of the second-quarter?

No, as of a year ago, minus the senior graduating class. And so, we are going to put about 1,000 new in this year. And we are targeting to put in about 1,500 new next year with a very small graduating class of about 250 students. And so we will be approaching 3,000 and getting closer to our goal. We think we can hit 4,000 three, maybe four years.

Okay. And do you need a lot of more infrastructure in order to have 4,000 students?

Yes, but that infrastructure in terms of just supporting that student, housing is something that is seen as -- you can make money on housing, so that is not going to be seen as something that is going to be expense related that will be a negative. As long as you can put students into housing you can make money on the housing. Now whether we outsource that or do it ourselves is a decision that we have to make. If we outsource it, we keep cash in our balance sheet. If we give it to somebody else, we lose the revenue. So we have to make a decision from that stand point.

There will be some additional classrooms required but we took a major step in buying back the campus. It allows us now to do what we need to do on the campus and to make the right investments. One of the things that you have to realize about a traditional student versus a non-traditional online student is that the retention rates are very, very good. You really get greater than 90% retention rate from the fall, when they start, to the spring. And then greater than 70% of the students come back. And so the economics of those students are better than what most people would think.

Great, and just last question. I think in the Q it talks about tuition increases of about 2% to 15%, the range, and I am wondering how that varies between online versus on-ground.

That was online and there is a big range there, because as we talked about before, historically, undergraduate was all one price, graduate was one price and we, actually, did some price increases not consistently within graduate, undergraduate. The effective rate increase was around 5%.

We are in the bottom quartile and near the bottom in terms of our competition from a pricing standpoint. The MBA program was just so drastically under where everybody else was that that went up 15%. But the effective --

15%

About 5%. I'm sorry, 15%.

All right. Okay. And on-ground is going up how much? Or went up how much?

I think it is about 6%.

Yes, it is in between 5% and 6%.

Great, thank a lot.

All right.

Your next question comes from the line of Mark Marostica with Piper Jaffray.

Thank you. I wanted to follow up on CampusVue and get a sense for whether your implementation of the product will be a big bang implementation or are you implementing certain modules along the way? What those are and the timing, if you could give us a little color there, it would be helpful.

Yes. We have got some people here who build the business requirements for all the systems that we built when we were at Apollo. And those people are going through a very methodical process of implementation which will take the next four months. So we have got a very experienced group of people who have done this with greater scale than we are doing it here.

So implementation will take place gradually over the course of the next four months, there will be a tremendous amount of planning. There will be lots of training and we have confidence that we have done things like this with far greater students before. So there won't be a big bang.

Okay, so as I understand it, then, you will be, actually, implementing part of the system before the end of Q1 of 2010. There will be certain modules actually installed and up and running, then, as we through the next four or five months?

Yes.

Okay, fair enough. And then on that same point, moving to a non-term institution -- when will that actually occur and how will that change the seasonality of your business?

It will happen once we are ready to fully implement. It will happen. So, it will probably be February. It is a big thing. I don't know that there is any other company in this space right now that operates in a term-based system. It is very, very cumbersome to do. Number one, you can only start students, for the most part, every eight weeks.

So you have got eight weeks between start periods. Number two, when students need to take a break, which consistently they are going to have to do because life gets in the way, they have got to actually sit out for as many as eight weeks at a time without being able to re-enter. And so your persistence percentage and your starts are really negatively impacted. Once we transition to CampusVue from a scheduling standpoint, which will be probably in February, we will be able to start students on a very consistent basis.

Probably, at first, once every four weeks; eventually, once every two weeks. Then as we grow, probably, every week. Most importantly, we will be able to customize the schedule to students so that if they need to take a break for family vacation or any other purpose, they are only out for a very short period of time. In addition then, the ability to administer financial aid over an academic year defined by that bar or base system which is 24 credit hours allows us to evenly distribute the disbursement so that we can apply them to students' accounts in a way that today is very, very difficult and very cumbersome.

We talked about the number of financial counselors we hired. Part of the reason is that each student is such an individual student and requires so much individual thinking as we apply financial aid that that will largely go away when we transition to the new system.

In terms of seasonality, we will still be more seasonal than probably others in the sector because of the effect of the ground traditional student. But there is still some seasonality but from an online student perspective, as Brian said, it will probably be a little less seasonal because if a student wants to take a couple weeks off, they can do that under the non-term base. Where, before, they might have to sit out an entire term.

Fair enough. And then last question, you mentioned success with the military. Where do you stand, right now, in terms of percentage of enrollments in the military?

It is pretty low, it is less than 5% but we've got a lot of experience in dealing with the military. We are priced in a very good spot and we are building a military division that we think will compete very strongly as we move forward. So that is an exciting thing. And obviously, you do that for a number of reasons. One, undergraduate students that are in the military look a lot like graduate students in terms of their retention percentage. Their retention rates are very high. Bad debt is very low, it is nonexistent. And obviously, it really helps you from the standpoint of your 90/10 calculation.

Great, thank you.

Thanks, Mark.

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

Thanks. I have a couple of questions. Back to the CampusVue topic. Can you just be very specific on what modules you are implementing, here and candidly we have seen some ERP issues across the space over the past couple years. I know you touched on it a little bit. But why shouldn't we be worried that this is going to lead to execution issues? Is it a scope thing or an experience thing and then I have a couple of follow ups. Thanks.

Yes, as far as the exact modules and the implementation of those exact modules, that is all being done right now. We have got a very experienced group of people who are putting the business requirements for that implementation together and as we get all that done we will decide on the exact order that we will implement the stuff. We have got another four or five months of planning here before we actually do that. So I can't give you the exact --

Well I just want to understand what is the scope of this. You mentioned scheduling and a couple other things.

Financial aid.

Yes.

Accounting and student records is what is going on to this. So it is clearly back-end driven. It is not our CRM system. So it is really accounting, financial aid and student records.

Okay, so it is not recruiting or enrolling, basically?

It is not recruiting or retention. Or really administering financial aid from a customer service standpoint either. That is all done in CRM.

Theoretically, it should be.

This is really around financial aid and getting us to borrower-based from the current term-based financial aid.

Okay, so it really shouldn't impact the enrollment function, basically. Is that fair in your view?

It should not.

Okay, and then on the time frame. I know you mentioned four to five months, but you said a couple of different things. You are going to be thinking about it for four to five months, it is going to be implemented. When is it going to be done?

The majority of it will be done in February. But it is the kind of system that you are never done with. You are going to be keep working at that system forever. But, in terms of it being completely transitioned and all of our employees using CampusVue and not Datatel, that will be in February.

Okay, got it. And then a couple more. On CapEx I think you touched on '07 there, but can you give us a little more specific guidance on what you think CapEx will be in the next couple of quarters? And I guess for the year on a percentage of sales basis, also.

In the next couple of quarters it will be between 8% and 9%.

Of sales?

Yes.

Okay, and is the delta between your prior guidance and this new guidance, is that all related to CampusVue?

No, it is also related to the employees that we are hiring and putting them in call centers. That is another big part of it.

So it is software development and it's the additional costs associated with the employees and the call center technology, et cetera.

Okay, this real estate transaction that you did, the Spirit thing, did that have any impact on CapEx, or no?

No.

Okay. All right. And thanks for your patience. One more, on the bad debt expense, I know you said you think the year will be a little better than six or lower than six, but there seems to be a lot of seasonality in the history of the bad debt. Basically, leading to lower bad debt expense at the percentage of sales in the third-quarter. That said, can you give us a little help on what we should be modeling there for the third-quarter, so we don't end up with a problem next quarter?

Our target is consistent with where the second-quarter was, so about 5.5% for the rest of the year.

Okay, thanks a lot.

What we have tried to do, Kelly, is remove the seasonality of the bad debt expense. So, I think, you know, 5.5% both the third and fourth-quarter.

Okay, thanks a lot.

Your next question comes from the line of Bob Wetenhall, with Royal Bank of Canada.

Nice quarter.

Thank you.

Wanted to inquire, could you give a little more color on the IRS settlement?

Sure. We've got here, obviously, I am sure you read it as a risk factor in our original S1. One of the concerns that we had is that the Company had historically treated its adjunct online faculty as independent contractors. The Company had good reason to do that given things that had been put in place. But we felt that a better way to treat those individuals were as employees.

It would give us more control over specifically what the faculty was doing and what our expectations were, et cetera. And so we approached the Internal Revenue Service and asked to make the change and under one of their current programs they have in place, we agreed to pay a small amount for previous periods of treating them as an independent contractor and agreed to make them employees beginning July 1st.

So effectively, the $250,000, you are paying out, that's a one-time payment, non-recurring, and the new qualification will be as full-time employees?

Yes, we had been in conversations with the IRS for a long period of time, so that $250,000 had actually been previously accrued. It did not get expensed through our income statement this last quarter but we had previously accrued for it. And this quarter we actually made the payment and starting July 1st started treating them like employees.

Cool, can you provide some color, what is left under the basket for share buy-backs?

In terms of stock buy-back of our company stock?

Exactly.

Our Board has not approved any share buy-backs on the open market. The Spirit transaction was a unique transaction that the Board had approved us moving forward, so at this point there aren't any plans to do share repurchases at this point.

Great, nice job, thank you.

Thank you.

(Operator Instructions)

Your next question comes from the line of Brandon Dobel with William Blair & Company.

Hi, guys. I want to go back to the faculty thing for a little bit. How shall we think of the impact of the change in status of all your adjuncts either from an instructional costs and services perspective or what that might mean from a productivity or class size perspective going forward?

I don't think -- we don't currently have any plans to change class size or productivity at all. I think our expectations are that we can really focus the faculty on specific things that we want them to be doing in the classes. In terms of a cost standpoint, generally, as you know, faculty comp as a percentage of revenue has run roughly in the 10% range.

I would expect that on the faculty pay, this change will have about a 6% or 7% on that that 10% because some of our faculty were already full-time faculty and already were getting taxes and benefits, et cetera, but the adjuncts would now be eligible for some minimal benefits but also, we would have the employer portion of taxes.

Okay, and does change in status -- does that change how they can interact with other colleges or are they exclusively going to be working for you guys now? Just trying to get a sense of how many other options they have.

Well if they were smart, they would. But I can't predict that. No, this is kind of a cottage industry that has grown up there. And so, yes. You do things to get -- number one, we pay well. So you do things to get faculty to work exclusively for you, the best faculty. So the more detailed about rating them and understanding who are producing the best results, the more you can schedule them for classes and keep them exclusively for you, but you can't do it just as a result of that status.

Your next question comes from the line of Todd Young with Morningstar.

Incredible quarter, guys.

Thank you.

I wanted to ask, can you talk a little bit about -- do you guys have any community college relationships and what percent of your students are possibly transitioning from the community colleges?

Yes, we do have community college relationships and they exist in different parts of the country, especially Arizona. I will tell you that undergraduate students who come to us that have credits, by far, most of them come with community college credits. So I can't tell you what percent come as graduates of community colleges but a large percentage of our undergraduate degree completers do come with undergraduate credits earned at community colleges.

Okay, and can you comment at all about the initiative for the $12 billion to be spent on the community college. Do you see that as something that would be beneficial to you, going forward?

Yes, absolutely, the more people are going to college at community colleges the bigger potential pool of transfers that we have. And some will intend on getting associate degrees from community colleges but by far the biggest percentage do not. By far the biggest percentage of students who are attending community colleges for the purpose of transferring to a four-year institution, there intent is, really, not to get a degree and then transfer. So yes, that is a positive thing for us.

Okay, thanks so much.

Your next question is a follow-up from the line of Brandon Dobel with William Blair & Company.

Sorry, Brandon, we are not sure what happened there.

Hope you guys can hear me this time.

Yes.

Okay, perfect. I just want to go back to the productivity comment you made at the outset, Brian, with the enrollment counselors. How much the productivity increases you are seeing are driven by, let's call it, reduced attrition, on average. Tough labor markets giving you better overall tenure from your people or a combination of working together with the financial aid counselor or admissions enrollment counselors, or just having that sort of structure in place. Or is it just better training and better leads that are generating better productivity?

I think you hit all three of them. I would say if you look at second-quarter of '08, we are up a little bit more than 10% in productivity on a monthly basis. And part of that is due -- I think the biggest part is due to the maturation. It's we have more experienced enrollment counselors. That is by far the biggest thing. I would say the second thing is that they are getting a lot more support from academic and financial advisors in the front-end part of the process.

I think those are the two biggest things. Now the fact that job market is tough has helped on the maturation end, I am sure, to some extent. But we are giving the students a lot better service on the front end, which is helping them convert from an application into a student that stays.

And then final question for you. As you look at the incoming students and their characteristics. So age, former or previous transcripts, transferring credits, those kind of things. Any major changes from that perspective or are you trying to selectively manage the types of students that are coming in either to hit that 50/50 split or you want to be the higher credit transfer student. So any trends going on there?

Well we are reversing the trend. If you would look at the percent of all enrollment counselors since second quarter of -- I'm sorry, take January 1, 2009. If you look at the percentage of all enrollment counselors that were selling business undergraduate programs, it is lower today than it was six months ago. So we are very deliberately hiring baccalaureate prepared or masters prepared counselors that are selling masters degree programs in education and business.

We have also really increased the number of counselors that we have selling our doctoral programs and we intend to petition to add both masters and doctoral programs. I can't tell you that we have been able to change the demographic of incoming baccalaureate student at this point other than to say we are getting students with slightly higher GPAs. I can't tell you that we have got students with higher number of transfer credits, which would be a goal, but we are getting slightly better students in terms of their incoming GPAs.

Okay, and the final question for you. As you look at the size of the incoming traditional ground campuses and the decisions you have to make around the dormitory space. When do you need to make that decision? Obviously, you have got capacity here, near term, but with a couple of big incoming classes the next two years, should we expect a decision on the use of capital, or not, within the next month or two, or is this more of a next year decision point?

No, it will be in the next three months. We have enough space for Fall 2010, but we will need to add both classrooms and dormitory space for Fall of 2011. And we will have more information for you in three months or so on how we are going to handle that.

Great, thanks a lot.

Thanks.

Your next question comes from the line of James Maher with ThinkEquity.

Good afternoon, guys.

Hello.

Question for you, can you give us some color please on what, if anything, you are seeing in terms of the fallout from the budget mess we are seeing in California and Arizona both in terms of student enrollment and whether or not you are seeing any impact on that in terms of availability of faculty?

Well we are really seeing a very positive movement from the standpoint of ground traditional students. With where our tuition rate is now and our costs for dormitory and living costs, we are getting very, very competitive with the State University system here in Arizona. So that 1,000 new students that we talked about are good students. I mean we have really raised the incoming GPAs of our incoming class.

We feel good about that. I think what we will see over the next two, three, four years is our ability to select some very good traditional faculty members for our traditional campus. And that is really important because it helps you from a traditional campus perspective but those are the people, also, that write your curriculum and oversee your curriculum and deliver it for your online program.

So we expect to have real good selection process for a traditional campus. For the non-traditional faculty that deliver our online programs, we are in a very, very good position there. I can't tell you that we have seen a huge increase in quality because it was already good and we were already in a selection mode there versus a recruitment mode.

That is very helpful, thank you.

Thanks.

There are no further questions at this time. I would now like to turn the call over to Mr. Brian Mueller, CEO, for any closing remarks.

We have reached the end of our second-quarter conference call. We appreciate your time and interest in Grand Canyon Education. If you have any additional questions, please contact either Dan Bachus, our CFO, or Bill Jenkins. Thank you.

This concludes today's conference call, you may now disconnect.