Grand Canyon Education Inc (LOPE) 2010 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 fourth-quarter and annual 2010 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) I would now like to turn the call over to Mr. Chris Richardson, General Counsel and Director for Grand Canyon Education.

Thank you, operator.

Good afternoon, and thank you for joining us today on this conference call to discuss Grand Canyon Education's 2010 fourth-quarter and full-year 2010 results. Speaking on today's call are CEO, Brian Mueller, and our CFO, Dan Bachus. 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 restraints.

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 its 10-K report for fiscal year ended December 31, 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 report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K filed with the Securities and Exchange Commission before taking a financial position in our Company.

And with that, I will turn the call over to our CEO, Brian Mueller.

Good afternoon. Thank you for joining our fourth-quarter fiscal year 2010 conference call.

While we are not pleased with the fourth-quarter revenue and earnings miss, we are pleased with the direction the university is moving. I would like to accomplish four objectives on the call. One, briefly comment on the slowdown in the industry. Two, explain our response to the current conditions. Three, review the results of the fourth quarter. And four, give guidance for fiscal year 2011.

I believe the slowdown in the industry is the result of two things. First, there is an increased amount of competition for working adult students. More universities are entering the space and offering working adults options to return to school. Two, the economic downturn of the last three years created a countercyclical environment, and some of the growth that took place was with students that met admissions requirements, but were not adequately prepared for the rigors of college.

As many of you know, Grand Canyon entered this space as a for-profit institution in 2004. Between 2004 and 2007, the university grew mainly with masters degree students in education and nursing. In 2008, Grand Canyon University increased its focus on enrolling undergraduates, especially in business and liberal arts. The rapid growth in these types of students placed pressure on the existing infrastructure to support them. The overall retention levels declined during this time.

In the second half of 2009 and throughout 2010, we made significant operational and academic changes which have moved us in a positive direction. First, we slowed growth significantly by hiring fewer enrollment counselors and reducing the marketing spend as a percentage of revenue. This will allow us to grow on a smaller base going forward. Second, we focused on the quality of our online student body. Graduate students have increased as a percent of the total online student body going from 44.5% in 2009 to 45.5% in 2010.

Students in business and liberal arts, most of whom are undergraduates, and who as a group have the lowest graduation rates and highest default rates on loans, have decreased as a percent of the total online student body. Between 2009 and 2010, business students decreased from 21.8% to 16.5%, and liberal arts students decreased from 15.6% to 14.6%. Students with the highest graduation rates and lowest default rates are in the College of Nursing and Health Sciences and the College of Education. Nursing and Health Science students went from 13.4% in 2009 to 19.3% in 2010. Education students also went up from 49.1% to 49.6%.

Third, we continue to focus on the quality of our traditional students. We currently have just under 3000 students on our campus. We have approximately 8000 applications for the fall 2010. We expect to select between 2200 and 2500, which would bring our total to between 4200 and 4500 campus-based students. We expect to move the total to 6000 by fall of 2012. The quality has continued to improve because we are rarely accepting traditional students on a provisional basis if their GPA is less than 2.75.

Fourth, we made four operational changes which had a significant negative impact on the financial results of the Company in the short run, but which we believe are in the long term, best interests of the Company. We changed the student refund policy, strengthened the academic progress policy, raised admissions requirements and moved into a borrower-based financial aid environment.

Those changes were not strictly necessary from a regulatory perspective, but were all made to ensure that no student would come to GCU who wasn't motivated by the right reasons, and second, to ensure that their borrowing was strictly in line with their academic progress. As is discussed in more detail later in the call, had we not made those changes, we estimate our revenues for second half fiscal year 2010 would have been $30 million to $37 million higher. This obviously impacts all the expense lines as a percent of revenue, which we will discuss later in the call.

Fifth, we continue to focus on academic excellence initiatives. First, we will roll out a new learning system in the first half of 2011. We expect that this system will increase student learning and increase faculty effectiveness, which will result in higher retention rates. Second, we continue to build out our instructional design team. They are working on curriculum, instruction, and course sequencing in many of our programs, but especially those at the undergrad level in business and liberal arts.

I believe we are in a good place moving forward despite the competitive marketplace for the following reasons. One, we slowed our growth fairly quickly, and are building on a smaller base. Two, our online student body is moving in a positive direction from a quality perspective. Three, our traditional student body is growing rapidly with high quality students. Four, operational changes ensure that going forward, student loan levels will be strictly monitored and in line with their academic progress. Five, the growth of our traditional campus and the continued focus on academic excellence in all areas will continue to strengthen our brand, especially in Arizona and the Southwest.

Turning to the results of operations for the fourth quarter of 2010, net revenues were $100 million in the fourth quarter of 2010, an increase of $22.5 million or 29.1% from the $77.5 million in the prior year period. Excluding the impact of the $9.2 million contract termination fee to a related party recorded in the fourth quarter of 2010, and the contribution made in lieu of state income taxes, operating margin for quarter four 2010 was 21.5% compared to 24% for the same period in 2009. Net income was $13.4 million for the fourth quarter of 2010 compared to $11.1 million in the prior year period, and after tax margins was 13.4% compared to 14.3% for the same period in 2009.

Instructional costs and services grew from $25.7 million in the fourth quarter of 2009 to $36.1 million in the fourth quarter of 2010. As a percent of revenue, IC&S increased from 33.2% to 36.1%. If you add in the midpoint of our estimated reduction in revenue, which was between $30 million and $37 million as a result of the operational changes as discussed previously, IC&S as a percentage of revenue would have been 30.5% in the fourth quarter of 2010.

Selling and promotional expense increased from $23 million in the fourth quarter of '09 to $28.5 million in the fourth quarter of 2010. As a percent of net revenue, we had significant improvement of 1.2% from 29.7% in quarter four '09 to 28.5% in quarter four of 2010. This improvement occurred as a result of slowing the growth of our enrollment counselor hiring in 2010 as compared to 2009.

Enrollment, advising, and promotional salaries and related expenses as a percentage of revenue decreased 163 basis points between periods. Advertising and revenue share as a percentage of net revenue decreased 23 basis points in the fourth quarter of 2010 versus the same period of 2009, primarily as a result of continued focus on attracting students in the highest retaining academic programs. Our internet advertising has remained stable. Cost per inquiry has gone up slightly because of our desire to generate more graduate level interest. If you add in the midpoint of our estimated reduction in revenue, as a result of the operational changes as previously discussed S&P as a percentage of revenue would have been 24.1% in the fourth quarter of 2010.

Excluding the effect of the contributions made in lieu of state taxes, general and administrative costs increased from $8.8 million in the fourth quarter of '09 to $13.7 million in the fourth quarter of 2010, and as a percentage of revenue increased from 11.4% in quarter four of '09 to 13.7% in quarter four of 2010. This increase was primarily the result of an increase in bad debt expense as a percentage of revenue of 174 basis points between the fourth quarter of '09 and the fourth quarter of 2010, primarily due to the continuing economic downturn in the US as well as our change to borrower base beginning in April of 2010, which has resulted in us making changes in our estimation process such that we are now reserving for accounts earlier in the aging process, which caused our bad debt expense to increase during the second half of 2010. We anticipate bad debt expense as a percentage of revenue will remain slightly higher than we initially forecasted until the second quarter of 2011.

If you add in the midpoint of our estimated reduction in revenue as a result of the operational changes as discussed previously, G&A as a percent of revenue would have been 11.6% in the fourth quarter of 2010 and bad debt expense would have been 5.9% in the fourth quarter of 2010. Contract termination fees to a related party of $9.2 million were expensed in quarter four of 2010 which represents the agreed upon termination fee with Mind Streams. Dan will discuss this in further detail in a few minutes.

As a result of the above, net income declined from $11.1 million in fourth quarter of '09 revenue to $7.6 million in the fourth quarter of 2010. Excluding the contract termination fees net of taxes, net income would have increased to $13.4 million, a 20.8% increase over quarter four 2009.

We have revised guidance for fiscal year 2011 to the following. On a year-over-year basis, revenue will grow between 10% and 15% in the first half of 2011, and between 13% and 18% in the second half of 2011. Our targeted operating margins are 18% in the first half of 2011, and 22% in the second half of 2011.

We revised guidance for 2011 based upon the following three enrollment trends. One, the operational changes, especially moving to a borrower-based financial environment, didn't have a negative impact on enrollment in our two strongest colleges, health care and nursing, and education; however, we underestimated the impact of a change on undergraduate business and liberal arts students, most of whom are undergraduates and fell approximately 2000 students short of our goal as a result.

Some students were disappointed that their loan levels matched up closer to their actual tuition costs for the academic aid year, which lowered their out of pocket expense money but ensured that they would not exceed aggregate loan limits, and thus be able to successfully complete their program. This is absolutely in the best interest of both students, the university, and our investors in the long run. It ensures that we are able to maximize student graduation rates, lower student default rates and increase active repayment percentages. Without this move, we estimate our revenue would have been greater, as said previously, by between $30 million and $37 million.

Two, we held static the number of enrollment counselors in the undergrad business, and liberal arts areas. We expect to regain some momentum in this area based on the increased persistence rates of these students, but not adding additional enrollment counselors or increasing the marketing spend. Three, the slowdown in the industry has impacted us but not to the degree it has others at this point; however, because there is an obvious difference in marketplace conditions, at least in the short run, we think it is prudent to take a more conservative approach to guidance.

With that, I would like to turn over to Dan Bachus, our CFO, to give a little more color on our 2010 fourth quarter, to talk about changes in the balance sheet, and other items.

Thanks, Brian.

As we have disclosed previously, subsequent to our transition to BBAY from a term-based institution, our definition of an enrolled student had to be changed. Enrollment is now defined as the number of individual students who attended a course during the last two months of the calendar quarter. Prior to our transition, enrollment had been defined as the number of individual students that attended a course in a term that was in its session as of the end of the quarter.

We estimate that between 34,000 and 35,000 individual students attended a course during the month of November and December of 2009. Thus, using a consistent count methodology, our ending December 31, 2010, enrollment grew between 19% and 22% from December 31, 2009.

We previously were a party to a collaboration agreement with Mind Streams LLC. Under this agreement, Mind Streams identified qualified applicants for admission to the university in return for which it was paid a stated percentage of the net revenue calculated as tuition actually received less scholarships, refunds, and allowances derived by us from those identified applicants that matriculated at the university.

As a result of new rules adopted by the US Department of Education, and effective July 1, 2011, we determined that revenue sharing arrangements, like the collaboration agreement, and the manner in which we pay amounts due Mind Streams under that agreement, will most likely no longer be permitted. Accordingly, we and Mind Streams entered into a termination agreement dated December 30, 2010. The amount paid by us settles both the future amount that would have been due to Mind Streams under the original terms of the agreement as well as the value of an acquired database of student leads. In the aggregate, we expensed $9.2 million in 2010 relating to the termination of this contract. No additional amounts will need to be expensed related to the termination of this agreement.

We did not make significant strides in the fourth quarter of 2010 related to the transition for certain students from 3 credit hour courses to 4 credit hour courses. Most of our students that were still in the 3 credit format at the end of the third quarter still remain on this format. As of the end of the year, 75% of our students that were to be transitioned have been. Those students remaining will be transitioned during the first half of 2011.

Our effective tax rate for the fourth quarter 2010 was 31.9%. The decrease from our annual effective tax rate is due to us making $1 million in contributions to various Arizona school tuition organizations to assist with funding for education in December 2010. And in connection with contributions made, we received $1 for $1 state income tax credit, which resulted in a reduction in our effective income tax rate. Had these contributions not been made, our effective tax rate would have been 37.5% for the fourth quarter 2010, and 39.9% for the year. We anticipate our effective tax rate for 2011 will be 40%.

We did not repurchase any of our stock during the fourth quarter of 2010 under the $25 million repurchase authorization. We still have $24.3 million available under this authorization.

Turning to the balance sheet, total cash unrestricted and restricted at December 31, 2010 was $86.6 million. Accounts receivable, net of allowance for doubtful accounts is $33.3 million at December 31, 2010, which represents 31.5 days sales outstanding compared to $32.7 million or 32.9 days sales outstanding at the end of the third quarter of 2010.

CapEx in the fourth quarter 2010 was approximately $23 million or 23% of net revenue. CapEx in the fourth quarter 2010 was higher than we anticipated primarily due to the timing of payments. For the year, our total CapEx spend was $62.6 million or 16.2% of revenue, which was approximately $2 million over our budget with the overage being an IT-related spend in the third quarter of 2010. The ground campus building projects remain at or under budget. We anticipate CapEx as a percentage of revenue in 2011 to be between 12% and 15% of revenues.

We anticipate that IT spend will remain at roughly 5% of revenues while ground campus building projects will make up the majority of the rest of the spend. During 2011, we will complete the 5000 seat arena, a third dorm and we'll begin construction on a new nursing and health sciences classroom building to meet the demand for our nursing and health sciences programs.

In terms of the legal and regulatory environments, on December 27, 2010, the United States filed a motion with the court of appeals seeking to voluntary dismiss its appeal of the district court's order approving the settlement of the Qui tam action that was initially filed in 2007. The court of appeals granted this motion on December 28, 2010. As a result, the settlement agreement previously approved by the district court took effect on the terms previously disclosed. Subject to the distribution of the settlement amount from escrow in accordance with the terms of the settlement agreement, we believe the Qui tam matter, which was originally filed in 2007 and unsealed in 2008, is now resolved.

Our cash basis 90/10 amount for 2010 was 84.9%. A couple of quick comments on this amount. First, this amount does not include the temporary relief authorized in 2008 and set to expire this year. Our 90/10 amount did increase this past year. We believe this is a primarily a result of a higher percentage of students choosing to use Title IV funds to pay for their education, given current economic conditions, and the fact that our low tuition rates and scholarship programs ensure that all of our programs are under Title IV loan limits.

Last, our 90/10 percentage did decrease in the fourth quarter 2010 due to the growth in our ground campus. Last week, we received our draft cohort default rate related to student loans that went into repayment between October 2008 and September 2009 for students whose last day of attendance at the university was between April 1, 2008, and March 31, 2009. That rate was 9.8%, which is significantly higher than the rate we had anticipated based on the information we received from the guarantors.

As we have previously mentioned, we anticipated our cohort default rate would rise to between 5% and 7%. The amount of defaulted loans used in the numerator calculation of roughly 700, was slightly higher than the information we had received; however, the total number of loans in repayment used in the denominator of the calculation was significantly lower than we anticipated based on our own records and the information received from our guarantors.

The number included in the calculation as the denominator is roughly 7900. The total number of students whose last day of attendance fell within that time period was almost 14,000. We have heard that other universities have raised similar concerns with the draft cohort default rates, and we are currently working with the Department of Education to determine if the amounts are correct.

With that said, we believe the increase is the result of a couple of factors. First, prior to late 2009, the university relied solely on the servicers to provide loan counseling to our students. During this transition to the direct lending program, we became aware that in some cases, these services were no longer being provided. Thus, in late 2009, we began providing these services to our current and former students.

The current focus of our internal group is to ensure that current and former students are reminded of their obligation to repay their loan, and the ramifications if they do not. Second, the growth in our undergraduate business and liberal arts student population had a significant negative impact on our rate. Our nursing and graduate education default rates remain low and fairly consistent with prior years.

I will now turn the call over to the moderator so that we can answer questions.

(Operator Instructions) Bob Wetenhall, RBC.

I wanted to understand on your guidance for 2011, what gives you confidence that you're going to be able to achieve the targets that you put out given the fact that you just took out your prior estimates.

The confidence would come from I guess two things. One, they are lower than we initially had anticipated. And secondly, we've got a good look into the first quarter already given that it's the end of February. And so, we feel good about how things are going at this point.

Okay, and from Dan's standpoint, there's a pretty sizable margin difference between the first half and the second half, and I was hoping you could walk us through a little bit where you're getting that 400 basis point ramp up from 18% to 22%.

Yes, Bob. And actually back to your first -- again, one of the main things that happened in the fourth quarter is that the effect of the borrower-based move was more significant than we thought, and so now with 6 months operating in this environment, we feel we have better historical information to compare and come out with our expectations with. So, I think that's another piece in addition to what Brian said on why we feel more confident with our guidance today than previously. In terms of the margin expansion, I think it primarily has to do with again the amount of time that we have being on the borrower-based non-term environment. I think that we believe that there are going to be some retention improvements, although we haven't modeled much into our guidance, but retention improvements as we get through this year. We also have a tuition price increase that will go into effect in the second half of the year. So, there are a lot of little small reasons on why we think the margins will be higher in the second half of the year than the first, but I think we feel comfortable with those target margins.

One final thing. Could you comment on the degree of enrollment visibility that you have at this point? And I'm just trying to understand, is the reduction in guidance -- how much is attributable to countercyclical enrollment head winds versus the switch to a borrower-based lending environment? I know it's a tough question, but just in broad strokes if you could paint a little picture for us.

In the short run, the majority had to do with the transition to the borrower based environment because the biggest impact was felt with undergraduate business and liberal arts students. The reason we are confident going forward is that those students are a smaller percentage of our students than they were a year ago, and certainly smaller than they were 6 months ago. So, we're not relying as heavily on them. We have had very strong retention performances with our nursing, health care and education students, and so, that's the biggest reason that we feel confident that we can hit both the revenue line and the margin lines both in the first and second half.

Got it. Thanks very much.

Okay.

Ariel Sokol, UBS.

So, I understand that you don't provide new student starts, but given industry challenges, the lowering of guidance, I thought you might want to share how you're thinking about new student start growth in 2011, and ideally, if you could give us a range that would be fantastic.

a range of percent -- what kind of range were you talking about?

New student start growth rate or decline alternity. For example, is new student starts be in a decline by 20%, by 15%, or new students starts are they going to grow year-over-year in 2012?

At this point, I think we'll hold our own or they will grow slightly. Most of the enrollment and revenue growth that we will get, or are getting, is the result of increase in retention levels.

I think a little bit from a historical trending perspective from new starts, we really look at our students in the buckets that we talked about. If you look at certain programs like nursing and health care, we have seen a pretty significant year-over-year increase in starts even in the fourth quarter in those areas. Other areas, we've seen flat to slight increase year-over-year starts, primarily education, but then when you get to business and liberal arts, as Brian suggested, you would have seen a pretty significant decrease in year-over-year starts.

Let me help a little further with that, if you think back a year ago at the number of enrollment counselors we had and then if you look the number of enrollment counselors we have today, it's fairly similar. The number is about the same, but we have 20% fewer enrollment counselors that are enrolling students in undergrad, business, and liberal arts programs. And so, as long as we can push an increasing amount of new starts into healthcare and education and nursing, you don't need as many new starts to get the total enrollment number you're shooting for. In the last 6 months we've been successful at doing that.

That's helpful. Next question. So, the Company provided guidance, like when you guys recorded results for Q3 on November, and then the Company missed revenue by $4 million, I think, from the low-end range of guidance. So, when exactly after November 9 did you realize that you might not be able to achieve the guidance? How many days afterward was it?

It was actually December, Ariel. $4 million might sound like a lot, but the fourth quarter guidance was primarily a December miss associated not with permit drops or with new starts, but with temporary outs. As you know, one of the positives, but also I guess could be one of the negatives from being in a borrower non-based term environment is that students can take time off. They can take up to 29 days off without losing their ability to receive Title IV financial aid. We had a larger percentage of our students take time off during the December time period than we anticipated, and we did have a large percentage of our students actually take off between Thanksgiving and after Christmas, that entire period of time. So, we, from a modeling standpoint, we were right on through October and November. In fact, a little ahead, and then December came in way below our expectations.

Just to add a little color to that. If you remember, when we were in a term-based environment and on a semester system, the semester would go through near the end of December and there would be an automatic two-week break, and then people would resume early in January. The way we do it in a borrower-based environment is that if the students take one course at a time, and if your course extends across the vacation time, the holiday time, that course simply is 10 weeks instead of 8 weeks, or 8 weeks instead of 6 weeks. What we didn't do a good job of is explaining to students that they didn't really need to take any time off because we had given them the two weeks off. It was just in the structure of the course and it was just the first time around, and we didn't do as good a job of that as we should have. And so, we lost some. We didn't lose students permanently. We lost them temporarily, and we feel good. Like I said before, January and February are tracking well because those students we that we did lose in December did come back in January.

This is very helpful. If I could ask one more question. So, some of your publicly traded peers, like Strayer is seeing a 20% year-over-year decline in new starts, I guess effectively for Q1; Capella, a 35% year-over-year decline; Apollo with University of Phoenix, 40% year-over-year decline. It sounds like you guys are anticipating relative new start flat growth for the year. Thinking about the Company from the perspective of competition and pricing, what gives you the confidence that you'll be able to achieve flat year-over-year growth whereas some of your competitors are seeing basically a hemorrhaging or enrollments due to new starts and on persistents?

If you remember, even as long ago as a year, we were one of the few companies that were saying this is clearly countercyclical, and there are more students coming back and there are more students coming back that are not prepared to do the academic work. Now, we got caught up in that for a period of about 12 months before we recognized what was happening. I'm now talking about the end of 2008 through maybe 75% of the way through 2009. It's at that point we started aggressively putting in measures to greatly reduce the number of what I would call countercyclical students, and honestly, I think we responded a little bit quicker.

Now, have we gone overboard? Some might say we have, but I would say it's the best thing. We're way past now where we need to be in terms of monitoring students' academic progress. We prepare them as best we can. We work hard with them, but if they're not making progress, we get them out fast. So, I think we moved a little quicker, and I think as a result, we're building off a smaller base. And I think that we have moved back in a direction of a higher percentage of our students falling into those good categories. If you're building off a previous year where you had a higher percentage in the bad categories, you don't need to exceed by 20% on new starts to get your growth because you're getting students who are going to stay longer. And so, we've been working at that for 12 months now, and I think that we're in a good position as a result of that.

Very helpful.

Peter Appert, Piper Jaffray.

Thanks. Brian, I'm wondering if you could just talk a little about the relative profitability of the campus versus the online programs. And I assume, given that the campus enrollments are relatively consistent with, I think, what the expectations were that a lot of the downside in profitability is a function of the online business. Is that fair?

Yes, yes.We've talked about this before, what we've really learned and this has been reinforced just recently. We had over 85% of our first semester students come back for the second semester, which is a very high number. When you add to that the students we started in the second semester, we were almost at a break even number, which that's hard to do in a traditional campus environment. What we've figured out about the traditional campuses are number one, you pay the same to acquire the student, but you get 85% to 90% of them four times, which means that you're paying one acquisition fee and really getting four students. Their retention rates are just so high that even with the added expense of physical facilities, they are far more profitable -- they are not as profitable as an online, but they are far more profitable than what we thought they would be. And if the retention rates continue as they are, they may be equally as profitable a year from now.

Brian, could you talk a little bit about what you're doing differently, if anything, in terms of marketing promotion to drive the enrollment numbers, and any expectation that you will step up the hiring of enrollment of counselors in '11.

Step up significantly, no. What we're going to continue to do is focus on moving them to the highest quality programs, and if we can continue to diversify our marketing efforts in those highest quality programs, that's what the primary focus is. Now, with undergraduate business and liberal arts students, which typically don't retain at a high level, we are doing things with those students to increase their retention levels. We're experimenting with, for example, with full-time faculty members, teaching those students, and the early results of that are good. What we don't want to do is grow with those students by increasing the marketing and spending, and hiring more enrollment counselors. We want to increase the retention rates of those students.

And the last thing Brian, you're very focused on the education programs because the metrics have been pretty good there. Yet. I would think that is a fairly challenging end market in the context of employment dynamics in that marketplace and pressure on salaries, et cetera, et cetera. Any more recent color in terms of trends you're seeing from an enrollment perspective there, or competitive dynamic in that market?

People are making broad brush statements about that which really can't be made. We are focusing in the states where we still have -- where teachers still have the greatest amount of incentive to go back. So, yes, there have been some changes in some states, but not all. In a lot of our work, in the masters degree in education and the doctoral program education, a lot of that is done in states that we've been working in for a lot of years, and where the dynamic has not changed. So, I would tell that is one thing. The second thing is that slightly, maybe 40% of our education students are now studying at the undergrad level. And there is going to be a huge change over because of the baby boomers exiting the teacher ed market. There's going to be a big need for incoming undergrad or graduates of baccalaureate programs in education. So, we're not worried about thing that slowing, but then if you followed our numbers, the biggest gain from a percentage standpoint, is in health care and nursing. And we're expanding into other states with our pre-licensure program, which will then allow us to get in there and be more aggressive with our RN to BSN and MN nursing students. I mean that has very honestly exceeded our expectations, and that has not shown a sign of slowing down at this point.

Just one last thing. So, it's 19.3% I think you said in 2010 was nursing, health care. Any thought on what that percentage could look like in '11, or by the end of '11, let's say?

Not really at this point. I don't expect it to go down, though.

Okay, thanks.

James Samford, Citigroup.

Thank you for taking my questions. Just a couple on the comps going into next year. Looks like the BBAY impact next year will carry us through to Q3. What kind of impact will the transition to BBAY have on overall persistents? I know the benefit that you'll see from finally cleaning out some of the students who are probably taking on loans that they shouldn't have.

Obviously, our hope is that we see long-term significant increases in persistents. At this point, though, we haven't felt comfortable modeling in to our guidance significant persistents improvements, but that is our hope. Our hope is we're recruiting the right students, and if we do a good job in both the classroom and from a student services standpoint, that we will ultimately see gains on the persistents side. Right now, it's just too early to see that. A lot of the students have started in BBAY are only in there second or third course now. And so, it's just too early to make a conclusion.

Thanks, Dan. And just a quick follow-up. Sounds like you still have 4 to 3 credit transitions coming ahead in the next quarter. How should we think about revenue per student over the next year as we've lapsed onto that? It sounds like there's still some benefit of getting there, and you also mentioned, I think you said, you'll be raising prices again. How comfortable do you feel that's the right strategy given the more price-sensitive environment that students are in right now?

Again, it's not a significant increase in price. It averages about 3.5%, which is similar to what we did the year before. It's not across every program. So, we look at every single program and make a decision based on competition. So, I think as you guys all know, we feel we're very, very competitively priced versus our competition, generally. We could raise it in a lot of our programs, and a lot of our large programs, much higher than we are, but we like where we are positioned from a pricing standpoint. So, I think we feel comfortable doing it at the 3.5% rate.

In terms of your first part of your question, I think, in the first half of the year you will see revenue exceed enrollment growth absent the effect of the borrower-based effect. I think the hard part to talk about in terms of average revenue per student is the effects that we've seen on the move to borrower-based around temporary outs, permanent drops, et cetera, has messed up the year-over-year comparisons. We're much more comfortable talking about the second half of the year in terms of year-over-year revenue per student comparisons than the first half, just given that we were on term-based in the first half of '09, and now we're on the borrower-based.

Got it. So, second half you should be thinking tuition plus a little bit then in terms of increases year-over-year.

Yes.

Okay, thank you.

Amy Junker, Robert W. Baird & Co.

Sorry to go back to the guidance, but Dan, can you perhaps give us just a little bit of color in terms of trends throughout the year? Do you expect the first quarter to be the weakest and gradually improve, or do you think we'll see things worsen a little bit before they really start to get better?

I think based on our target margin amount -- we gave it by half. I think you should expect it to be slightly lower than that number in the first quarter of the 6 month period and slightly higher than that in the second quarter. So, I think that kind of answers your question in terms of it should improve. The margin should improve over the course of the year. One of the things Brian wanted to point out and I think rightly so, was on a year-over-year margin basis, what would our margins have been had we stayed in the term-based environment. And the reason we really did that is the margin decreasing really is not as much of a function of our spend as it is of the lost revenue. And so, that's kind of why we wanted to give you that sense of what the margin rates would have been had we just stayed in the term-based environment. So, now that we're in the borrower-based environment, unfortunately our margins will decrease, but as we continue forward, we will find ways to increase our margins.

That's helpful. Thanks. And you gave operating margin guidance but not EPS. I'm just wondering, is there any uncertainty with items below the line that prevented you from doing so? Is there a question about where the tax rate would come in or some other items?

No, no. I think that's how we felt we should talk about things, and frankly listening to the other companies in our space, that's really how they're talking about things right now. So, that's how we chose to do it, but no, we don't view the -- I gave you the 40% tax rate. That's our anticipation for the year. Interest expense should be roughly the same as what it was for this year, and our share count should be roughly the same as what it is this year, absent significant change in our stock price or significant repurchase activity.

Great. Thank you. And one last one, and I'll pass it over. Brian, can you just talk a little bit more about the learning system you're putting in? What are the main areas of improvement over your current system? Do you think you'll see, and I'm curious if the 2011 projections assume any potential disruption from that platform change?

No. There's no anticipated disruption. We'll roll that out very gradually, very gradually. And so, we don't anticipate any disruption from that. It really has been a year in progress and we really have developed this specifically to how we teach students and how we expect faculty members to teach students. It's extremely organized. It's very structured. There are very few clicks to find where you're going. It's a lot more intuitive and easy for students to use, especially easier in their program. It's very calendared. Students know exactly what they are supposed to do and when. It's very easy for faculty members to stay with students and on top of students, and then there's a lot of analytics built in that allow us to evaluate what's working, what's not working in terms of what the students are reading and not reading, what parts of the curriculum they're getting, and which parts they're having difficulty with. We can really monitor the overall presence of the faculty, and we're increasing the amount of presence we expect the faculty members to have in the classroom. We can measure the response rates of the faculty members. How soon do they get back? What's the quantity of the feedback that they provide? It's not a system designed to cross the needs of a thousand different universities. It's a system designed around the needs, specifically in terms of how we teach students and how we expect our faculty members to use it.

Perfect. Thanks for the color.

Sara Gubins, Bank of America Merrill Lynch.

Hi, thank you. Are there any areas where you're cutting costs or trying to hold back on costs given a slower top-line growth environment?

Enrollment counselor costs are down if you look at it from a year-over-year basis, very definitely. We are trying to, like I said before, move counselors into those higher retained areas, so that we can grow the total enrollment without having to grow the new starts as much. So, that is down, but not really in the other areas. One of the things that we are doing, which is interesting, is that there's a lot of administrative work that needs to be done in this business, and we've got a traditional student body that we're utilizing heavily in some of that work. And we're employing probably now 350 of our students who are doing things that typically in the past, we had a full-time employed person with benefits too, and we expect to see some gain as a result of that. Advertising is going to be about the same in terms of percent of revenue. And like we indicated, if we would not have been as conservative as we were, in terms of getting students out early when they were not making academic progress, our revenues would have been $34 million or so higher, which means, our expenses would have been not above the line, but they would have shown a significant improvement compared to the prior year.

From a leveraged perspective?

Yes.

Okay. Got it. And then can you talk about, for the enrollment advisers that are there, are you seeing any changes in productivity? Any changes in either voluntary or involuntary turnover? And I'm wondering specifically if that changes to enrollment advisor compensation.

I'll give you just from having been in this for a long time, I think what's happening from enrollment advisor standpoint is that we're moving in a different direction. It is very definitely more competitive. That's my opinion. I think your best enrollment counselors, those people who are really good and can thoroughly explain exactly why students could benefit from your program, they're doing as good as they ever did because they can compete against 3 or 4 other schools and do well. I think an enrollment counselor who is at the lower end has a lot more difficulty doing it because it's not just advising them around what's good about your program, but you have to compete against 3 or 4 other schools. So, as we're moving forward, I think what we're going to see is fewer enrollment counselors, but those that can do better than what we've done on average in the past.

Okay. And have you now fully implemented changes to the enrollment -- to the compensation structure there?

Yes, we have, with the exception of -- we still haven't eliminated annuities because we have until July 1 to completely change your plan and we haven't got final word on that, but likely we will have to eliminate that part of what we do fairly soon.

Okay, and just last question, Dan. On the enrollment numbers you reported last year, I'm just trying to think about how we can look at those on a comparable basis given the new reporting structure. Should we just roughly speaking take out about 2000 in the first and second quarter?

Probably. Fourth quarter was, I had previously said, it was somewhere in the 2% to 5% range of a decrease. I think we talked about this first in either the second or third quarter call last year. The fourth quarter was a bigger decrease than that, and again, it's just that time of the year. September is typically your largest start period of the year. October is a very large enrollment month, but then it trails November and December because of the holidays and what not. And so, the reported enrollment number at the end of the year was significantly higher than the number of actively engaged students at that time. I don't think it's nearly that extent at the end of March. So, 2% or so is probably somewhere between 2% and 5% is probably a good estimate.

Okay. Thank you.

For the end of March.

Jeff Silber, BMO Capital Markets.

I wanted to circle back to some of the earlier discussion about the end-markets for your students. You talked a little bit about education, and I wanted to focus on nursing. Some of the traditional nursing schools have been reporting disappointing placement rates. Can you just discuss that in terms of the job markets for your graduating students?

We have not experienced that at all. In fact, our success on the NCLEX exit examinations is higher than it's ever been, somewhere between 92% and 94%, and we have not had a single student say they couldn't get a job. In fact, they're being recruited. They're selecting a job that they want. We have not experienced that in any of the markets that we are in.

And do you think it's because you're in specific markets that aren't experiencing that weakness? Is it because your career services is strong? What do you attribute that to?

That we're in the right markets and that our nursing school as well as our school of education has a really, really strong reputation in the markets that we operate in.

Okay. Fair enough. You mentioned in terms of the share buyback there were no shares repurchased last quarter. Was there any specific reason for that? You think you'll be back in the market fairly soon?

We might be. I think our Board is really involved in that decision, and their thought process to date has been that they think that we should be using our excess cash to spend on building things, like on our ground campus or our IT infrastructure that's going to generate the university revenue over a very long period of time. And so, that's been their constant philosophy, but they also want to have the flexibility to buy back stock if warranted. And so, I think we will be aggressive in buying back stock if it makes sense and the Board believes it's the right time.

All right. Great. Thanks so much.

Brandon Dobell with William Blair & Company.

From a marketing perspective, have you made any significant changes that's helped you drive more referrals or less reliance on traditional internet channels within your targeted areas where you want to be, like health sciences and nursing education, or how are your changing the mix there to try and avoid being in the thick of all the competition with those high quality students?

We've made some gains. If you look at where we're at from an advertising perspective compared to where we were 2.5 or almost 3 years ago, we've made steady improvements there. Probably not to the extent that we'd like to, but we're still doing pretty well in alternative kinds of ways to generate leads in education and in our nursing program. We haven't been really successful in business and in the liberal arts areas, and you know that one of our strategies is to work the Christian marketplace. We've got 6 major contracts that are done. They're all in cost per lead basis, so they're very low risk. I can't tell you that at this point, we're going to go from 11% down to 9%, but we're working at it. We're moving in the right direction. We probably haven't seen as much progress as we'd like.

Fair enough. From a faculty perspective, you've seen different models in this industry the last couple of year, full-time versus part-time and for a variety of reasons. Where do you guys stand with the mix for just the online business for a second, the mix between full-time and part-time? And any change that you plan on making because of the change in the academic calendar, or just as part of the overall operational focus on academic progress?

I think one of the things, and it's related to the last question as well, I don't think it's going to be good enough to just be okay in this thing going forward. I think you're going to have to be significantly better than others to do well, which is why we're making significant investments now. Our traditional ground campus, I think, is going to grow to 6000 plus students because it's going to be a really great place to come and go to school because of the facilities and everything that exists around that. From an online standpoint, two things. One, the delivery systems are really systems that have been designed around meeting the lowest common denominator from a needs standpoint across a lot of universities. And so, there's not a lot you can do to distinguish yourself as a superior provider.

If you have your own system, if that system has been designed around specifically how your students learn and how you expect your faculty members to use it, that could give you a leg up in the educational world. And that's why we've invested heavily in that, and we're ready to roll that out. And then the third thing is the practitioner faculty model was a good one when you had nothing but masters degree students and students studying at the upper end of the baccalaureate level. But what you've got now, very honestly, is a cottage industry that's grown up where you've got faculty members teaching for 3 or 4 different institutions and maybe 10 or 11 courses at a time. It's become, in essence, an electronic correspondence model, and the students aren't getting near what they should get from a time and attention standpoint. So, we're making some changes around that. I think there's been a lot of money put on the operational side of these businesses in the past. I think in the future, that's going to start shifting for those people that win. I think they're going to start shifting more of it to the academic side of it, both in terms of curriculum delivery and in how you utilize faculty. I don't want to give out all that we're doing there, but we are doing some things that are significantly different and they're starting to have an impact.

And final question I have. Dan, this may be in the K that I haven't gotten to yet this afternoon, but any sense of where your Pell and military exposure, or as a percentage of students receiving that kind of aid, or more relevantly as a percentage of revenue, where that came out in 2010?

I don't have the exact numbers, but both of them are pretty small, especially compared to our peers. So, we don't have a lot of risk either from a Pell standpoint or from a military standpoint.

Fair enough. Thanks, guys.

We've reached the end of our fourth-quarter conference call. We appreciate your time and interest in Grand Canyon Education. If you still have questions, please contact either me or Bill Jenkins. Thank you for your time.

Thank you for joining today's conference call. You may now disconnect your line.