Grand Canyon Education Inc (LOPE) 2010 Q1 法說會逐字稿

Good afternoon, my name is Latania and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2010 earnings for Grand Canyon Education conference call. (Operator Instructions) I will now hand the floor to Chris Richardson, General Counsel. Thank you, Mr. Richardson, you may begin the conference.

Thank you, operator. Good afternoon and thank you for joining us today on this conference call to discuss Grand Canyon Education's 2010 first quarter results. Speaking on today's call are Brian Mueller, our Chief Executive Officer, and Dan Bachus, our Chief Financial Officer.

This call is scheduled to last one hour. During the Q&A period we will try to answer all questions, but 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 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 our 10-K report for fiscal year ended December 31, 2009, filed on February 18, 2010; our quarterly report on Form 10-Q for the first quarter of 2010 filed today; the subsequent 10-Q reports; and its current reports on Form 8-K 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 reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K filed with the SEC before taking a financial position in our Company.

With that, I will turn the call over to Brian.

Thank you, Chris. Good afternoon, and thank you for joining our first quarter fiscal year 2010 conference call. We are pleased with the financial results of the quarter, but we are even more pleased with our ability to execute on our plan to build the brand of Grand Canyon University. We continue to build the brand of the University based on building excellence in the following five important areas.

One, the student body on our traditional campus. In the fall of 2009, our incoming class of students caused our total traditional student body to nearly double and the average incoming GPAs of those students went up over 25%. Currently, for fall of 2010, we have over 6,500 applications. Our goal is to select approximately 1,750 new students, which would cause our traditional student body to increase to around 3,000, as well as bring another increase to the average incoming GPAs.

In addition, the reputation of our traditional students continues to grow in the performance areas. We will compete for a number of NCAA Division II National Championships next year; and our Fine Arts Department, especially in the areas of music and theater, is attracting top-tier performers.

Second, the caliber of our online student body continues to grow. Approximately 43% of our online students are studying at the graduate level. The vast majority of those students are earning degrees in education and healthcare, the fastest growing areas of the job market.

We just finished an HLC visit, in which the visiting team recommended that we be approved to offer a Doctorate in Business Administration degree, as well as a PhD in Psychology. The team's recommendation still must be approved by the HLC Board, but this is an important step towards becoming an institution that offers research-based terminal degrees.

Number three - the third component of our strategy involves faculty, curriculum and instruction. We have added new Deans in the Business and Fine Arts Colleges, and continue to attract faculty with strong credentials to serve at our traditional campus. To support online instruction, in the last 18 months we have more than doubled our investment in personnel dedicated to building curriculum, evaluating and improving faculty performance, and assessing student learning.

Number four - the fourth component of our strategy involves investment in infrastructure. As we have communicated to you frequently CapEx, as a percent of revenue, will be between 9% and 11% the next 18 months, and then return to a normalized rate of 5% to 7%. We are building state-of-the art classrooms and a new dormitory on our traditional campus, as well as practice facilities and performance arenas for our athletic, theater and music teams. We are also investing heavily in the technology infrastructure necessary to grow our online student body.

The fifth component of our strategy is building on the Christian heritage of the University. Two weeks ago we signed a partnership agreement with Young Life, an International Christian organization working with high school students with a current membership of one million, but with plans to grow to two million in the next five years. We intend to help them grow their membership while we will have access to a strong network of both traditional and nontraditional students.

In a time when publicly-traded education companies are being closely scrutinized, we believe it is important to make public comment on investments made to improve education for both or traditional and nontraditional students. We will do this while keeping tuition affordable and significantly below the competition on both the online and traditional student side. Our long-term goals continue to be grow enrollments 20% to 25%, revenue 25% to 30%, and produce 25% to 27% operating margins.

I would like to make a brief comment on negotiated rulemaking. As we have stated previously on our calls, we are in support of the Administration's broadly-stated goals regarding higher education which we believe are as follows.

1. The United States should have the highest percentage of its adult population graduate from college of any modern, industrial country.

2. Students should be studying in areas leading to jobs.

3. Students should be in programs with reasonable times to completion.

4. Tuition and debt rates of students should be commensurate with income levels they are likely to experience.

5. Graduation rates should reflect the mission of the institution and default rates should be as low as possible, also taking into account the institution's mission.

At this point, it is impossible to predict how the Administration will ultimately implement these goals through the ongoing negotiated rulemaking process. We feel we are in an advantageous position given our high percentage of graduate students, our low tuition levels, and our programmatic mix. However, we are also evaluating all potential scenarios and discussing possible changes that could be made if rules are adopted that would ultimately hurt our students' ability to fund their education.

We are also working closely with our members Congress to ensure they are aware of the impact any new legislation would have on our students, whose positive impact on our communities is significant. And, we believe the value of their education cannot be easily measured only by their starting salary. Our Congressional Representatives also understand the significant positive impact we make on our local economy, especially at a time when our public universities are limiting access and cutting program offerings.

Finally, we are also working closely with our peer universities in the hope of finding a compromise with the Department of Education that will allow the Administration to reach its goals in a way that allows all students to participate in and benefit from higher education.

Turning to the results of operations for the first quarter of 2010, we are pleased to report another quarter of outstanding growth. Net revenues were $89.3 million in the first quarter of 2010, an increase of $33.8 million, or 61.1% from $55.5 million in the prior period. Student enrollments at the end of quarter one 2010 are approximately 38,900, an increase of 36.8% from approximately 28,400 at March 31, 2009.

Operating margin for quarter one 2010 was 21.9%, compared to 16.2% for the same period in 2009, and net income was $11.5 million for the first quarter of 2010, compared to $5.1 million in the prior year.

I would like to make two comments about student and revenue growth. First, the makeup of our student body is going as planned. Graduate students are still approximately 43% of our online students. Graduate students bring academic credibility to the institution, as well as provide high retention and graduation rates, low default rates, and low bad debt expenses.

We have seen higher than expected growth rates at the undergraduate level in the healthcare and nursing area, as well as with military students. We see this as a positive development given their high retention and graduation rates and low default rates. In addition, these students put us in a good place with regard to any potential gainful employment changes. Nurses typically earn good starting salaries and military students don't have to borrow a significant amount of Title IV dollars.

Second, revenue growth is significantly ahead of enrollment growth, primarily because of the increase in the number of students taking four-credit courses. This allows our traditional students on campus and our nontraditional students attending online to complete their bachelors' degrees in about four and a half years, which is fairly standard.

I would like to make a number of comments about margin expansion and expenses. Operational improvements and improved student retentions have led to an operating margin increase of 5.7% quarter over quarter. Instructional Costs & Services grew from $18 million in the first quarter of 2009 to $31.8 million in the first quarter of 2010.

As a percent of revenue, Instructional Costs & Services increased from 32.4% to 35.6% in quarter one 2010; primarily as a result of our continued investment in academic and financial advisors, technical support specialists and personnel related to curriculum improvement, instructional performance improvement, and student learning assessment. We expect this line to stay at its current level as a percent of revenue for the duration of the current fiscal year.

Selling and Promotional expense increased from $19.6 million in the first quarter of 2009 to $26.9 million in the first quarter of 2010. As a percent of net revenue, there was significant improvement of 5.2% from 35.3% in quarter one of '09 to 30.1% in quarter one of 2010. This improvement reflects the maturation of our enrollment counselor workforce as well as improvements made to our advertising strategy.

Selling and Promotional salaries and related expenses as a percentage of revenue decreased 189 basis points between periods. Advertising and revenue share as a percent of net revenue decreased 127 basis points in the first quarter of 2010 versus the same period of 2009, primarily as a result of continued improvement in the acquisition and distribution of leads.

Other selling and promotional expense decreased 170 basis points, primarily due to lower promotional incentives over a higher revenue base.

General and Administrative cost increased from $8.8 million in the first quarter of 2009 to $10.9 million in the first quarter of 2010, and as a percentage of revenue declined significantly from 15.9% in quarter one 2009 to 12.2% in quarter one of 2010. This improvement was primarily the result of a decline by 129 basis points in employee compensation and share-based compensation.

Bad debt expense as a percentage of revenue decreased by 60 basis points between the first quarter of 2009 and the first quarter of 2010, primarily due to process changes made during 2009, including the financial clearing of students before they start.

We realized net decreases of 186 basis points as a percentage of revenue between periods and other expenses, including legal, audit, and corporate insurance expenses; occupancy costs; consulting; and other administrative expenses, due to our ability to leverage these costs over a higher revenue base.

As a result of the above, net income grew from $5.1 million in the first quarter of 2009 to $11.5 million in the first (Company corrected after the conference call) quarter of 2010, a 126% decrease.

Our enrollment and financial guidance is as follows. For the second quarter, fiscal year 2010, we expect enrollment growth of approximately 32% to 36%, equating to between 36,500 and 37,500 students at June 30, 2010. We expect net revenue growth of approximately 47% to 49% to between $92.5 million and $94 million. We expect diluted net income per share will be between $0.23 and $0.24 per share.

For fiscal year 2010, we are increasing our previously-planned announced guidance. We expect enrollment to be between 47,000 and 49,000 students at December 31, 2010. We expect net revenues to be between $397 million and $405 million. We expect diluted net income per share will be in the range of $1.21 to $1.27 per share.

With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2010 second quarter and full-year guidance, and talk about the balance sheet and changes in the lending and legal environment.

Thanks, Brian. Our positive revenue results in the first quarter of 2010 was primarily the result of us exceeding our expectations in March 2010, related to the number of students that are taking four-credit hour courses. This has also resulted in April 2010 revenue being slightly higher than our expectations. We have not adjusted our initial expectations for the number of students taking four-credit hour courses for May 2010 through the end of the year, as we believe those expectations are still appropriate.

As a reminder, during our fourth quarter 2009 earnings call, I mentioned that we are targeting full-year 2010 IC&S S&P, and G&A as a percentage of revenue of 33% to 34%, 31% to 32%, and 12%, respectively. And then we anticipate that as a percentage of revenue these amounts will be higher than those amounts in the first half of the year and then trend down in the second half as revenues grow.

In the first quarter of 2010, our S&P and G&A expenses as a percentage of revenue were below our expectations. We do anticipate these amounts as a percentage of revenue to be more in line with our initial expectations in the second quarter of 2010, primarily due to seasonality.

Although revenue generated from our online students continues to grow as a percentage of our total revenue, our results are still affected in the second and third quarters by the fact that the majority of ground traditional students do not attend courses during the summer months, May through August, whereas most of the costs to run our ground campus are fixed.

We are now anticipating an effective tax rate for 2010 of 40.6% rather than 40.0% as a result of higher state income taxes.

Turning to the balance sheet, our cash, cash equivalents, and investment balances, unrestricted and restricted, totaled $104.1 million at March 31, 2010. Our accounts receivable net of the allowance for doubtful accounts is $13.9 million, which represents 17.1 day sales outstanding compared to 20.9 at the end of first quarter of 2009.

Unearned revenue and student deposits increased 27.9% between March 31, 2010, and March 31, 2009, with unearned revenue increasing 28.7% and student deposits increasing 23.1%. The year-over-year change in unearned revenue is less than the year-over-year change in revenue due to the more frequent starts and the timing of those starts in comparison to the prior year.

CapEx in the first quarter of 2010 was approximately $11.6 million or 13% of net revenue. CapEx in the first quarter was primarily internal use software development, ground campus building projects, and furniture and equipment to support our additional headcount. This was slightly higher than anticipated and was more of the result of the timing of CapEx payments rather than actual spending. As has been previously discussed, we estimate that CapEx will be between 9% and 11% of net revenue during 2010.

In terms of the lending and legal environment, we are requiring that all of our financial aid students transition to the direct lending program for their Title IV needs and this continues to go smoothly.

As an update on the qui tam lawsuit and OIG investigation, on April 28, 2010, we and the qui tam lawsuit relator submitted a proposed settlement agreement to the court for approval. Under the terms of the proposed settlement, the OIG investigation would be resolved. Under a scheduling order set by the court, the United States Government may file any objections it has to the proposed settlement on or before May 28, 2010. The settlement agreement and ultimate dismissal of the action is subject to the court's approval and the court has the authority to approve the proposed settlement over the United States' objections, if any. The court has set a hearing on approval, modification, or rejection of the proposed settlement for June 10, 2010.

I will now turn the call back over to Brian.

Thanks, Dan. At this point, we'd like to take your questions.

Thank you. (Operator Instructions) Your first question comes from the line of Ariel Sokol with Wedbush.

Good morning, congratulations.

Thank you.

So, a couple of questions. The first one, could you speak a bit to the trends in acquisition costs during the quarter?

Nothing significant for us; if anything, there was slight improvement over the previous quarter. Not the same quarter of the prior year, but the previous quarter. We probably on a per enrollment counselor basis bought fewer leads, but bought better leads and so there was no significant change for us really.

Great and then, if memory serves me correct, in the last quarter you guys did start to have monthly starts. To the extent that you had monthly starts this quarter, was it material or was it a relatively small percentage of the total enrolled student body?

It was still a relatively -- let me put it this way. It was a smaller percentage than we would prefer, and so it's going to monthly starts and eventually to bimonthly starts is a very positive thing for us, both from the standpoint of starting new students but especially from the starting point of reentering temporarily out students. But we're kind of breaking in that process slowly with our staff.

And to the extent that we're thinking about Q2, is it fair to say that you're assuming again a relatively modest or immaterial amount of monthly starts?

I think it'll grow. Yes, it will continue to trend upward at a gradual basis.

Okay, thank you very much for your time.

Thank you.

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

Hello, thanks, good afternoon.

Hi, Sara.

I wanted to just follow up about some of the comments on the IC&S line to make sure I understood. Were you reconfirming that you're expecting it to be 33% to 34% of revenue for the full year, or were you suggesting that it might stay at that 35.5% level for the rest of the year?

No, we believe it'll be in the 33% to 34%. It'll be higher as it was in the first quarter, again in the second quarter, and then it will trend down in the second half of the year, primarily in the fourth quarter where revenues are the greatest such that it'll be 33% to 34% for the full year.

Got it. Okay, so those targets for IC&S, Selling and Promotional and G&A as a percent of revenue for the full year still stand in your guidance?

That's right.

Okay. Then, within the increases in your Instructional Costs & Services, I know you've detailed out a number of initiatives that you're working on, is there any way to give us a sense of the magnitude from a dollar perspective where the incremental dollars are going to in all the various initiatives?

Most of the dollars, the majority of the dollars are going to personnel. And I would tell you that in this quarter there's probably a fairly even split between adding academic and financial advisors, and, adding people in the areas of curriculum, instruction and assessing learning outcome. We've really beefed up that area significantly in the last half.

And the only other thing to add is also technical support personnel, so yes, I mean the biggest year over year increase is in the employee comp and related expenses category. We've seen a slight increase in faculty comp as a percentage of revenue, because of making our adjunct faculty employees versus independent contractors. So those are two of the biggest areas.

Okay. On media costs, we've been starting to hear that media costs are going up, although it's been more TV than online. Can you talk about what you're seeing in that area?

No, we haven't seen any change at all. We don't do a lot of national television. We do some and we do quite a bit of television inside the state and through the Southwest, but we haven't seen a change there and we haven't seen any change on the Internet side. So, no.

Okay. You may have addressed this in previous calls, but do you have any data on how much debt your students are bringing in, particularly at the Master's degree level?

You know, most of our programs are about 36 credit hours. Most of our -- our graduate tuition is $440.00 a credit hour, so the cost is $15,840.00 or so. And both of those programs take a year and a half to two years and most of those students are in education, and so I would guess that the majority of those dollars are that they are getting student loans for the majority of those dollars. But we don't have any official data here to share with you.

Sara, are you asking the amount of debt they actually bring in from their previous --

Undergrad, yes.

Yes. We haven't --

Only because right now that -- yes, I mean technically speaking that would be under gainful employment proposal right now.

Right. Yes, we don't have good data on that yet, although it's something we're trying to figure out. But you know, we haven't historically surveyed our students or done other things to better quantify it.

Okay, thank you. I'll jump back in the queue.

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

Thanks, a couple of questions. First, on the operating margin that's implied by your Q2 guidance, am I correct that you're now expecting a year-over-year decline in margin. If so, I know you talked about seasonality, but seasonality is a factor that should be washed out with the year-over-year comparison. So, could you give more detail on what's going on there on a year-over-year basis?

I mean, I think it's pretty flat, maybe up a little bit and it's going to be all in the Instructional Costs & Services line item. So as we've discussed, I think, S&P as a percentage of revenue should be very similar to the same period last year. G&A might be down a tad. But Instructional Costs & Services was 32.4% in the second quarter of '09, and as we've said, it'll probably be very close to where it was in the first quarter in that 35-plus percent range. And so that's where it's going to be.

Okay and then you said that for the first quarter S&P and G&A were lower than you expected. Why was that?

Primarily, just because of the revenue, us exceeding revenue. On the expense side, there were a couple minor things. In terms of we do annual raises for our employees. They happened a little later in the first quarter than we expected. So there were some minor things that resulted in slightly lower expenses than we expected, but almost all of it was just on us exceeding our expectations on the top line.

The other factor there is that we are running behind somewhat in our hiring of enrollment counselors, which is a good thing. We're hitting our targeted enrollment numbers without as many, so that helps you both in terms of the wage and salary line, but it also helps you on the advertising line. You don't have to buy as many leads.

Okay, great, and then can you speak to your completion rates and how you measure them?

We measure them by category. We have completion rates that we have goals around at the Doctoral level, at the Master's level, at what we call the Bachelor's degree completer level; and then also at the beginning or incoming students with very few college credits to transfer. And so, we watch those by each one of those categories. We don't give them out currently, but.

And you know, we obviously look at them course by course, but also graduation rate. Especially, we don't have a lot of students at the lower levels, but we haven't been doing this that long where you have a large cohort of students that are completing. And so, that's why historically we haven't felt comfortable giving those. As we are doing this longer, I think we'll be more comfortable giving our graduation rates.

We have seen some amount of improvement in first and second course completion levels of students with very little experience, which is a positive thing for us.

Okay, great, and the last question, can you talk a little bit about why you moved to the four-credit course? And also, you said the length of your programs or the length of stay is sort of similar to traditional schools, but I thought most traditional schools had three-credit courses. So, just a little background on that situation would be helpful.

Yes. One of the things, and we've talked to people a lot about this, Grand Canyon was on a three-credit hour model with probably 80% or so of their courses and each course running eight weeks for nontraditional students. If you play that out at one course at a time, about seven years to complete a Bachelor's degree. We recognized shortly after we came here that that was going to be a very difficult thing to make happen. It's just too long a period of time. The assumption was that students would take more than one course at a time, but the reality is most working adult students just don't find that they can take more than one course at a time.

And so, we really did a complete restructure of all of our programs and all of our courses. It took us about a year, about 12 months to do all of that work and it was a significant amount expense. Simply what it means is, rather than the student taking 30 four credit -- I'm sorry. They now take 30 four-credit hour courses rather than 40 three-credit hour courses.

And that's true both on the traditional and nontraditional side. For traditional students they take either 12 or 16 credit hours a semester, and so they're going to finish their four years, their 120 credits in about four to four and a half years. Then, on the nontraditional side, the courses are still eight weeks. They're four credits. You take 30 of them instead of 40, and now students finish in about four and a half years taking one course at time. So it allowed us to work with the same curriculum and the same model, but make it work on both sides of the house so that we got a reasonable time to completion.

Okay, but is it fair to say there's more content in the four-credit course than there was in the three?

Yes. The reason it's easy for a university like us to do that, is that the way we structure curriculum is that we start by identifying the learning outcomes by program and then we break it down by course. And so, we can do it because you don't take any of the learning outcomes away from a program. You redistribute them in terms of the number of courses that you offer making sure that you're teaching the same amount of content; you're teaching it in the same amount of time; the courses are just longer.

Okay, great. Thanks a lot.

Okay.

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

Hey, good afternoon. Nice quarter.

Hi, Bob.

I just was trying to get a little color and I think maybe this is more directed at Brian given the current uncertainty with the regulatory environment. It sounds like you're very comfortable with where Grand Canyon is and I just was wondering if you could kind of think in terms of how gainful employment relates to Grand Canyon and just provide a context of how you see stuff unfolding.

Well, I wouldn't say that we're comfortable. I mean we're working as hard at unveiling the truth and trying to get to the bottom of this for everybody, I think as everybody else is. What I'm comfortable with is that we start with low tuition rates. We start with a program area -- we start with a large percentage of our students being graduate students. I don't know for sure what that means, but I feel more comfortable given there's been less talk about that part.

So, our programmatic mix, our low tuition, I think puts us in as good a spot as anybody. The fact that nurses comprise a lot of our undergraduate students is a good thing, because they're first-year salaries are very high. Obviously, there is a small -- the areas that we're worried about, teacher education at the undergraduate level. That's not a big one for us, but it's growing. That, I think, is an example of how this thing has not been well thought out. It is true that it costs us as much to educate a teacher as it does a business professional. Their average first-year salaries are not as high.

The problem is, if you look at teacher education or a teacher's career over its entire lifespan, including pension, it's really loaded primarily at the backend. And so, when you only look at the first-year salary, you're not taking into consideration the lifespan of a teacher and how positive their pension is when they retire after 30 years. And so, it's an example of, I think, taking a shortsighted view of this thing and it's a little bit more complex than most people think it is.

Got it. That's really helpful. And just in terms of what some of your other for-profit operators are mentioning about being counter-cyclical and possibly facing slowing enrollment trends in the back half of the year, it sounds like your enrollment is holding up very well. Can you talk about maybe why Grand Canyon is a little different in terms of enrollment and less counter-cyclical?

Well, yes, 70% of our students are in education and healthcare, which are the fastest growing job areas in the country in the next six or seven years. And of that 70%, you know, over 40% are studying at the graduate level. We don't see those areas being counter-cyclical at all. So, I think we're in a strong spot there. We haven't really fully capitalized on the counter-cyclicality in the more general areas; by Business Administration, Business Management, some of those areas.

We could have grown faster in the last couple of years, including this year, by capitalizing on the counter-cyclicality that's primarily in that area. But you just set yourself up then for changing in the curricular student body, which that's part of the brand that we're trying to build. And secondly, you've got to grow off of that artificially high number then in the future and it didn't seem like it made sense for us to do that. I think from our investors' perspective I think we're better off doing what we're doing.

That's real helpful. Thanks a lot and good luck.

Thank you.

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

A little wait, so if you've answered this just skip over it. But just looking at the growth rate between your Master's and Bachelor's programs, the Master's programs while still strong, the growth rate has slowed a bit and now you're really skewing more towards Bachelors. I know you talked about this in prior calls with the shift in terms of your sales force and your recruiter focus. Are you still seeing that, or are we going to see sort of a re-acceleration of your Master's program growth?

Well, we'll keep driving with the strategies that maximize our opportunities with graduate students, because that's a core part of what we want to do. The positive development is that the growth at the undergraduate level has been in healthcare and nursing. That I have to tell you both on the ground side and on the nontraditional side is exceeding our expectations. And that's part of the reason that our S&P is down as a percent of revenue, because we're really not paying for some of that growth. Some of that is very much the result of net worth that we've built and the result of the referral leads that we're getting. So, that's a positive thing, especially given the [neg] rate process and all that's related to that.

The second area is military students and we don't want to slow that down to make maybe Master's growth be 47%, because military students you've got to give them a discount. The acquisition costs are almost nothing, number one. Number two, they don't have to borrow much Title IV money, if any, which means you're going to keep default rates low. You're going to protect yourself against the [9010] and their retention and graduation rates are high. So, as long as it stays where it's at, or even dips a little but it dips with those students, what we don't want to do is have as a percentage of all of our students low credit students in the general business area go up as a percentage. That's what we don't want, because those are where you get the lowest retention rates and highest default rates.

That should be helpful, Brian. I appreciate it. And military represents what percentage of your enrollment base now?

It's still small. It's less than 10%, but it's growing.

Is most of that on the undergrad level?

Yes. Typically, that's going to be like 80/20; 80% of those students will be at the undergrad level.

And Brian, did you comment at all about retention in any of the different verticals.

We really didn't other than to say that in that 20 or so percent of our students that are entry-level students to higher ed, which is as a percent staying the same, we are making significant improvement there in first and second course completion rates, which we think eventually will lead to higher graduation rates. Just as a general rule I'll tell you given my previous experience, in the four categories of Doctoral, Masters, Bachelors and then entry-level student, that's how we look at it those four categories, we really are below in retention percentages where we were at Apollo when I was there. Mainly due to we didn't have experienced personnel in retention jobs. We were really behind from a technology standpoint and from a process standpoint, but we're catching up. We're investing hugely in both people, process and technology, so I view that as a good thing. It represents upside for us. We know where we can get as we make the right investments.

Okay, thanks so much for the color.

Thank you.

(Operator Instructions) Your next question comes from the line of Brandon Dobell with William Blair.

Thanks, maybe a quick one for Dan. How does the outlook for bad debt the remainder of this year look now given the change to the four-credit hours and it sounds like some pretty good first and second course retention rate.

I think we're forecasting it to remain flat for the remainder of the year. You've got a couple of things obviously going on that are counteracting each other. We have our process improvement and the change to the four-credit, etc., which is clearly helping. On the flipside, you've got a worsening or negative economy, and so similar to what I think others in our industry have said, I think we see less students paying back the amounts owed to us later in the cycle. You always have students because they can't discharge their AR in bankruptcy, you know, they have to pay it at some point if they want to buy a car, buy house, etc. And so you always seem them pay it at some point. I think given what's going on in our economy you see a smaller percentage of them paying down the road than you do when the economy is really good. So I think, generally, I think it should stay in the low 5% range during the rest of this year.

Thanks. Brian, you mentioned seeing incoming undergrad students primarily in healthcare and education. I just want to get some color in that from you in that context. Are you still comfortable with I guess it's called the average credit transfer number that those students are coming in with, I mean are you still okay with the overall quality of the students? I guess and in particular outside of those two verticals, maybe in business I guess, are you still okay with what those incoming students look like compared to what they were a year ago or what you'd like to see?

Yes, we are. The strategy comes from the top. We determine what we want our student body makeup to be in terms of those four categories. We put our advertising strategy together to support that. Then, we put the enrollment, academic and financial advisor hiring together to support that. As long as it works at the top, it's going to flow down to the bottom and come out the way we want it. About 20% or so, 21% of our students are in the low-credit category. Most of them are coming in, in an area like General Business or Criminal Justice, for example, and so we know exactly how many students we'll be dealing with and we're devising strategies to work with them. As long as we can continue to grow at the rates we have set out, and we can do it by the makeup of our student body in those four categories, we're comfortable.

Okay and final question, you talked about the increase in I guess it called faculty at headquarters focused on curriculum development. But have you thought about what the right mix should be between full-time and adjunct faculty that are out there teaching? Or is that something that you would think about to maybe increase the overall academic quality or the consistency of the relationship between students and faculty? Or, do you still want us to equip both the adjunct faculty, especially for the online model?

You bring up that's a very, very interesting topic and one that we spend a lot of time thinking about. To me, my opinion here, there's a general malaise that exists out there right now with regards to online delivered curriculum and faculty instructional strategies. A lot of it looks the same. I think there are other models out there, especially with the number of Doctorate prepared, PhD prepared people who are temporarily out of work, who would like to think about working from home on a more full-time basis for a university like ours.

We have done some pilot projects and some experimentation with them working full time for us, for example. Obviously, what you want to see is, how big of an impact does it make when you've got people generally accessible to students all day long versus getting back 24 hours later perhaps. There's a lot of things that I think we can do to improve the whole area of instruction and delivery in this area. And I won't give everything we're doing away, but we are experimenting significantly with those kinds of things, because I think there's a lot of potential upside there.

All right, fair enough. Thanks, guys.

Thank you.

You have a question from the line of Sara Gubins with Bank of America.

Oh, thank you. I wanted to just talk a little bit more about the dimensions that you're seeing. I mean you're obviously slowing growth on purpose to some extent and I don't know if there's a way to break out how much you're slowing growth on purpose versus what's happening in the overall marketplace?

Let's see. Let's take this year, for example. Our targeted enrollment growth rate is at about 30%. Could we grow at 40% this year? Yes, that would definitely be possible for us to do that. It would just be more enrollment counselors, buy more leads and do more things at the lower levels of students and we just decided not to do that. So, I can't give you an exact number. We've talked before. I do think this is clearly counter-cyclical and I do think you could grow faster now, but I think that would skew what we want the makeup of our student body to be given the brand that we're trying to build.

I guess another way to ask it is, are you finding it more incrementally more difficult to recruit new students in any way, either that it's taking longer to close them or that it's harder to find leads?

No, not in the categories that we're seeking out leads and in the categories that we're trying to start students. We are pretty comfortable with the amount we're spending, the investment of personnel that we're making, and we're for the most getting the results that we would like.

The only thing I would add, Sara, is I don't think we're at this point but obviously the law of large numbers makes things more difficult as you grow. So, that's not -- I mean that doesn't make it more difficult to recruit students. But, when the base that you're growing on is bigger, you know, it's exponentially harder, so. But, we're not there given our side.

Okay and then just a last question. On the accreditation front, based on your comments about HLC recommending two new higher degree programs, it sounds like things are going well there. But, there have been some public attacks on accrediting bodies recently and I'm wondering if they are changing the way they do things, or becoming more stringent in reviewing programs, or if you're really seeing any changes in your relationships?

No, in fact, I was -- it was a big day for us for the committee to be here and for it to review those two programs, especially the PhD program. I was careful to say in the script that the committee recommended that we be approved to offer those programs. Now, that has to go to the Board and it has to be approved there. But no, we did not see any difference in their attitude towards us or in the process itself.

Okay, thanks a lot.

Thank you.

Thank you and at this time there are no further questions.

I want to take just a second to thank all the faculty and staff, management at Grand Canyon for a great quarter, all the work and effort you put in. And thank you for all of your interest, and at this point the call is over.

Thank you for participating in today's conference. You may now disconnect.