Grand Canyon Education Inc (LOPE) 2011 Q1 法說會逐字稿

Good afternoon. My name is Salima, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2011 Grand Canyon Education, Inc. earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I will now turn today's conference call over to Mr. Chris Richardson, General Counsel for Grand Canyon Education. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining us today on this conference call to discuss Grand Canyon Education's 2011 first-quarter results. Speaking on today's call are our CEO, Brian Mueller, and our CFO, Dan Bachus. This call is scheduled to last 1 hour. During the Q&A period, we will try to answer all questions, but we apologize in advance for 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 the 10-K report for fiscal year ended December 31, 2011, its 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 SEC before taking a financial position in our Company.

And with that, I'll turn the call over to Brian.

Good afternoon. Thank you for joining our first-quarter fiscal year 2011 conference call.

I'd like to accomplish 5 goals on today's call -- first, discuss 4 positive trends in the first quarter; second, address 3 areas of concern; third, provide some detail on the first-quarter enrollment and financial results; fourth, give an update on the rollout of LoudCloud, our new learning management system; and, fifth, give an updated guidance for the remainder of 2011.

The 4 positive trends are as follows. First, we exceeded expectations in total enrollment, revenue, and earnings in the first quarter. We are especially pleased by this because this was the third quarter of four where we are dealing with difficult comps. In second and third quarters of 2010, we made 4 significant operational changes. These changes had a negative impact on the financial results in the short run, but were in the university's best interests long term. Those were -- changing the student refund policy; strengthening the academic progress policy; raising admissions requirements; and moving to a borrower-based financial aid environment.

Second -- and this is a critical part of our strategy -- the quality of our online student body continues to improve. Graduate students have again increased as a percentage of the total online student body going from 43.4% as of March 31, 2010, to 45.8% at March 31, 2011.

Students in business and liberal arts -- most of whom are undergraduates and who, as a group, have the lowest graduation rate and highest default rate on loans -- have again decreased as a percentage of the total online student body. Between March 31, 2010, and March 31, 2011, business students decreased from 20.9% to 15.9%, and liberal arts students decreased from 15.7% to 15%.

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 grew from 14% at March 31, 2010, to 20.8% at March 31 of 2011. Education students went down slightly from 49.5% to 48.3%.

Third, the market for traditional students in the Southwest continues to improve dramatically for Grand Canyon. In Arizona, the funding for the state universities and community colleges is being reduced significantly. The tuition levels at these institutions continue to climb, while the scholarship levels continue to go down. These same trends exist throughout the Southwest and specifically in states that we are targeting, which include California, Nevada, Colorado, New Mexico, and Texas. After scholarships, our annual revenue per student is about the same for traditional and online students.

Our retention rate for traditional students are much higher and our cost to acquire them is much lower. Our online graduate students are with us on average about 18 months. Our traditional students are with us approximately 4 years. As a result, our traditional campus is not only a priority from the standpoint of building Grand Canyon's brand, but has become a very important part of the overall growth plan of the university the next 4 years. The additional benefits of traditional students are -- one, high graduation rate; two, low default rate; and three, their parents pay some cash, which helps against the 90/10 calculation. Additional sources of revenue and profit are generated through room and board.

Fourth, I believe that higher education will increasingly move in the direction of favoring local brands. Our brand has grown in the Southwest as a result of the following developments. Our nurses are passing NCLEX examination at 100% rate this year, and, historically, have always been greater than 90%. Two, our premed students are being placed at nearly 100% rate, and in prestigious schools such as Cornell and George Washington University.

Three, our College of Education has instituted a teacher guarantee policy. This guarantee allows any first-year teacher and the school where they are teaching to draw on considerable Grand Canyon resources in case the teacher demonstrates any first-year difficulties. This policy has been received very positively by school districts, especially in the Southwest. Four, our NCAA Division II athletic programs are currently ranked fourth in the country in the Directors' Cup. We will compete for a number of Division II championships next year, and we are still pursuing Division I membership.

Five, the incoming 2011 class of traditional students will be approximately 2400, with an average GPA of approximately 3.4. We no longer accept provisionally admitted students. Six, our arena is scheduled to open in September, and will have 120-plus events in its first year of operation. It is being acknowledged as one of the premiere mid-sized arenas in the country, and is expected to attract approximately 400,000 paid customers in the first year, which will add significantly to our awareness levels in the Southwest.

As our brand grows in Arizona and throughout the Southwest, we are seeing that the conversion rate of leads generated in the Southwest are considerably higher than leads generated in the rest of the country. The increased competition from traditional universities providing online education is pushing students to select local brands with traditional campuses.

I would like to say a few words about LoudCloud Systems, our new learning management system. We finished the first version early in the year. We are completing our internal pilot and have begun converting curriculum. We are excited to begin the release of this environment to our students later this summer. We'll be migrating students by program through the end of the year.

LoudCloud will significantly improve our students' learning experience for the following reasons. One, the seamless integration that exists between the core syllabus, calendar, and its structural activities. Two, the discussion engine promotes enhanced interactions between students, the instructor, and even students outside a specific classroom. Three, the system has a new set of social learning features, which makes online learning a highly interactive and exciting experience.

Four, the system has a modern user interface, and a very simple and intuitive process for navigation. Five, there is an advanced analytic component to this system that will allow us to conduct research around the quality of curriculum, instruction, and the learning outcomes produced by students. Six, with the mobile applications we expect to deliver this fall, our students will enjoy capabilities not available in any other current environment.

The 3 areas of concern are as follows. First, bad debt remains at approximately 7%. Moving to a borrower-based financial aid environment and changing our back-end student service system has taken its toll on our financial advisers. Managing financial aid in a borrower-based environment is much better for the student, but more complicated to administer. This is an area we are working hard on, and we hope to start to see improvement in the fourth quarter of 2011.

Second, we had a slight decline in the percent of all students who are in the education programs. However, in terms of gross numbers, there was growth in this area. We are watching this closely, and will be opening up new programs, specifically in the IT area that will support our growth goals if we would experience any decline in education. Third, with regard to the regulatory environment, as we have said before, we don't think, because of our lower tuition levels, we will be significantly impacted by gainful employment and we have already made most of the changes that we think will be required around enrollment counselor compensation.

Turning to the results of operations for first quarter 2011, net revenues were $101.7 million in the first quarter of 2011, an increase of $12.4 million, or 13.9%, from the $89.3 million in the prior-year period. Operating margin for the first quarter of 2011 was 18.9%, compared to 21.9% for the same period in 2010. Net income was $11.3 million for the first quarter of 2011, compared to $11.5 million in the prior-year period, and after tax margin was 11.1%, compared to 12.9% for the same period in 2010.

Instructional costs and services grew from $36.7 million in the first quarter of 2010 to $45.8 million in the first quarter of 2011. As a percent of Instructional Costs & Services -- as a percent of revenue, IC&S increased from 41% to 45.1%. Employee compensation and related expenses increased 171 basis points. Faculty compensation increased 138 basis points. And bad debt expense, as a percent of revenue, increased 153 basis points between the first quarter of 2010 and the first quarter of 2011, primarily due to the continuing economic downturn in the US, as well as our change to a borrower-based environment. We continue to anticipate bad debt expense, as a percent of revenue, will remain at current levels until the second half of 2011.

Selling and promotional expense increased from $26.9 million in the first quarter of 2010 to $29.8 million in the first quarter of 2011. As a percent of net revenue, we had significant improvement of 80 basis points from 30.1% in the first quarter of 2010 to 29.3% in the first quarter of 2011. This improvement occurred as a result of slowing the growth of our enrollment counselor hiring in 2010, and a termination of the Mind Stream arrangement. Enrollment advising and promotional salaries, and related expenses, as a percent of revenue, decreased 64 basis points between periods. Advertising, as a percentage of net revenue, decreased 87 basis points in the first quarter of 2011 versus the same period in 2010. Our internet advertising has remained stable. Cost per lead has gone up slightly because of our desire to generate more graduate level leads, and the increased competition for those leads.

General and administrative costs increased from $6.1 million in the first quarter of 2010 to $6.8 million in the first quarter of 2011, and, as a percentage of revenue, decreased from 6.8% in quarter one 2010 to 6.7% in quarter one of 2011. As a result of the above, net income declined from $11.5 million in the first quarter of 2010 to $11.3 million in the first quarter of 2011.

Our guidance for the fiscal year 2011 is as follows. On a year-over-year basis, revenue will grow approximately 10% in the first half of 2011 and between 13% and 15% in the second half of 2011. Our targeted operating margins remain at approximately 18% for 2011. Our adjusted EBITDA margin will be 23.5% for 2011.

I would like to make a comment about margin levels in the next 12 months. Our critical advantage is the huge growth potential of our traditional campus, and its impact to grow our brand in the Southwest. We will be investing in the growth of this campus up to as many as 12,000 students in the next 4 years.

As we have stated a number of times, this growth will have a positive impact on our margins long term because of high retention rates, low acquisition costs, low bad debt expenses, and low cohort default rates of these students. This traditional ground campus will make a significant player in the academic community in the Southwest, which will build our brand and make the acquisition of online students an easier proposition.

As a result, we are continuing to grow our enrollment counseling staff as well as our academic and finance counseling staff, and other student service personnel. We are continuing to grow both our traditional and online full-time faculty. We are also continuing to invest in the technology that drives the growth of the online student body. The next 12 months, we will continue to invest in this plan.

With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2011 first quarter, talk about changes in the income statement, balance sheet, and other items.

Thanks, Brian.

Effective during the first quarter of 2011, the university reclassified bad debt expense from G&A expenses to IC&S expenses within our operating expenses, and reclassified prior periods to conform to the current presentation. The university believes that this change improves the comparability of our results with others in the educational services industry.

As we have disclosed previously, subsequent to our transition to borrower-based 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 2 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 session as of the end of the quarter.

We estimate that between 37,000 and 38,000 individual students attended a course during the month of February and March of 2010. Thus, using a consistent count methodology, our ending March 31, 2011, enrollment grew between 12% and 15% from March 31, 2010.

Scholarships, as a percentage of revenue, increased from 13.4% in Q1 2010 to 16.3% in Q1 2011, primarily due to a significant increase in academic scholarships, both for our ground traditional students as well as our online students between years. Recruiting students with high incoming GPAs has been and continues to be a focus of ours. In addition, military students, as a percentage of our total student body, although still relatively small, has grown over the past year.

Our effective tax rate for the first quarter of 2011 was 41%. In the first quarter of 2011, legislation was enacted by the State of Arizona implementing a gradual reduction in the corporate tax rate beginning in 2014 that will be fully phased in by 2017. As a result of this legislation, we were required to adjust our deferred tax balances to account for the effects of the new state tax rate, which resulted in higher state income taxes for the first quarter of 2011. We anticipate our effective tax rate for 2011 will be 40.3%.

We've repurchased 945,000 shares of our stock during the first quarter of 2011 under the $25 million repurchase authorization. We still have $10 million available under the authorization.

Related to our 2011 guidance, as a reminder, the significant growth of our ground traditional campus coupled with the slowing growth rate of our online student body, is causing our business to become more seasonal than in recent years. The majority of our ground traditional students attend school between September and the end of April, which affects our revenue results and our operating margin results in our second and third quarters. In addition, the effect of the move to borrower-based and the change in our refund policy will have a greater impact on our year-over-year comparison in the second quarter than the first quarter, as our January 2000 term went through the end of April 2010, and our March 2010 term went through the end of June 2010.

Turning to the balance sheet and cash flows, total cash, unrestricted and restricted, at March 31, 2011, was $80 million. Accounts receivable, net of allowance for doubtful accounts, is $32.4 million at March 31, 2011, which represents 29.7 day sales outstanding compared to $33.3 million, or 31.5 days sales outstanding at the end of the fourth quarter of 2010.

Cash flows from operations is down significantly between Q1 2010 and Q1 2011, primarily due to a decrease in unearned revenue between periods from $38.5 million at March 31, 2010, to $18.5 million at March 31, 2011, as a result of our transition from a term-based institution to a borrower-based institution in the second quarter of 2010. As a term-based institution, our unearned revenue would spike at the end of the first and third quarters as terms began in the last month of each of those quarters. In borrower-based academic year, we do not see these same spikes as each student is on their own aid year.

Unearned revenue is up, on a sequential basis, 22.8% from $15 million at December 31, 2010. CapEx in the first quarter of 2011 was approximately $14.7 million, or 14.4% of net revenue. CapEx in the first quarter 2011 was slightly lower than we anticipated, primarily due to the timing of payments. 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%.

We anticipate that IT spending 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 will begin construction on a new Nursing and Health Sciences classroom building to meet the demand for our Nursing and Health Sciences program. It is now likely that we will also begin construction of a fourth dorm in the fall of 2011.

I can provide the following updates on our cohort default rates. Our 3-year trial 2008 default rate has been lowered from 8.4% to 7.3%, and our draft 2-year 2009 default rate is 9.3% rather than 9.8%.

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

(Operator Instructions)

Ariel Sokol, UBS.

So, my question is revenue and operating margin guidance seems to have been lowered for the full year 2011, and during the prepared remarks, there were a number of comments made regarding the transition of institution to a borrower-based institution, seasonality, the economy. For clarity purposes, perhaps you could walk us through the guidance that was provided during the last conference call, and the guidance provided during this conference call, and what assumptions have changed.

The most significant assumption is the lowering of our operating margin for the second half of the year. The Management of Grand Canyon, along with our Board, spent a lot of time over the last 6 weeks or so talking about the future of the University, and the decision was made at that time to press on with aggressive growth of both the ground campus; which, as you know, growing the ground campus is about a 12-month proposition in terms of hiring enrollment counselors and other support personnel, versus when you actually recognize the revenue. So, there's going to be a lot of spending that occurs over the next 12 months that you won't see in terms of revenue until September of 2012. In addition, we feel very good about a lot of the metrics that we saw in terms of retention rates of online students, and the growth rates of online students, especially in the programs that we're really targeting. So, rather than do layoffs and cutting back on enrollment counselors, we are actually going to invest in headcount the second half of this year and grow those as well.

I would add that you can see from the remarks that there's a slight change; not really a change, but there's an acceleration of our strategy. The focus has always been around building the highest quality student body possible. We have a lot of traction going in 3 areas. 1 -- Nursing and Healthcare just continues to get better, and the retention rates of those students are growing; and as they do, we reduce the number of people that we have committed to Business and Liberal Arts at the undergraduate level. The thing that's now accelerated even more is our really strong belief in the future value of a traditional student; and it takes 12 to 15 months to experience that. We're targeting nearly double the new students a year from now in the fall, that we're going to have this year, and we doubled this year.

If you think about the value of those students, they pay about the same from a revenue perspective on an average basis, but you only pay 1 acquisition cost for it. That acquisition cost is less than for an online student, because there's hardly any advertising costs. And then, when they retain at greater than 80% rates, you've got them for 4 years, and there's no additional acquisition cost. So, they're really worth 2.5 to 3 times what even a good online student is worth. As you can see, a lot of purely online providers are really finding the increased competition stifling, and they're having massive layoffs and they're slowing their growth. We're saying that we're in a unique position to be able to keep growing for the next 4 or 5 years. We're moving in that transitional period; we would rather sacrifice a couple marching points in the short run than conduct massive layoffs, and not be able to execute on a continuing growth strategy.

The only other thing I would add, Ariel, is bringing bad debt down from where it currently sits at 7%, to something more in the 4% to 5% range, was one of our key initiatives, as you know, to increase the margin in the second half of the year. What we're finding is that is just taking longer and is more difficult than we thought. The big disadvantage that we have operating in a borrower-based environment, is that we have very low tuition rates. So, when a student drops out of attendance, we have to do a return to lender, which is oftentimes greater than the amount of revenue we recognized on that student, because of the stipend check that the student got; because we have to return that to the lender as well. And so, we're working on some strategies to help bring that down, but it's proving more difficult than we had anticipated given the low tuition rates that we have.

That's helpful. The follow-up question is, once you guys achieve maturity with respect to getting the 12,000 students at the ground-based campus, what would the margin be for those students? Is it possible to think of it that way?

It's definitely possible to think of it that way, and obviously, we're running models. It's significantly better than the 18%. It's more in the 23% or 24% area. It's going to take us a little bit to get there. But yes, the models show that if we can execute over the course of the next 4 years, even with our low tuition that that would be possible.

Great. Thank you.

Bob Wetenhall, RBC Capital Markets.

Do you anticipate, then, your operating margin to increase in 2012, as you begin to get increased enrollment from ground students?

Yes.

Yes, especially in the latter part of 2012.

So, you're targeting 18%. I'm just trying to understand for modeling purposes, 18% for full-year 2011, and you expect that to improve in 2012. Correct?

Yes. Especially in the second half.

Couple comments. One, as I said before, we are becoming more and more seasonal because of this focus on the ground campus. So, your first and fourth quarter margins will be higher than your second and third quarter margins going forward. And so, to your point, Bob, you would expect a higher margin, I think, in the fourth quarter of 2011 than you saw in the first quarter of 2011, and lower margins in the second and third. You'll see a higher margin in the first quarter of 2012 than, most likely, in the first quarter of 2011. Second and third quarter will be slightly higher than the same quarters, but then you'll have a higher margin in the fourth quarter of 2012 than you had in the fourth quarter of 2011, if that makes sense.

That does, and can you guys just drill down a little bit -- if you stripped the bad debt out from instructional costs and services, you had a material increase in year over year on a basis point measurement. Can your just talk about what's going on in there, and should we expect this to persist going forward? Are you guys thinking about pricing to offset some of the increases in ICS?

Answer to the last question, it's not significant price increases -- 3% to 4% on an annual basis. There's a couple of things going on here. You always have to keep in mind that we're in the third quarter of an apples over oranges comparison, where we've made those changes. Revenue would have been higher, which would have made instructional costs and services as a percent of revenue not go up as much as it did. So, that's one thing to keep in mind. The second thing to keep in mind is where we're putting these people. Significant increase in compliance in OAR, our Office of Admissions and Records, some in technology, some in enrollment counseling. But it's all around increasing the level of service we provide to students to stay in this growth mode. We're not ready to start cutting back.

When Brian said enrollment counselors he meant academic and finance counselors. Again, just to weigh on that, we didn't want to really focus as much this quarter as we did last quarter on this. If you assume that the University would have earned $20 plus million additional this quarter if we just stayed on the term-based, the IP&S as a percentage of revenue would have been down year over year.

Let me qualify the enrollment counseling comment. We are not going up as much as we would have in the previous year, but we are still definitely going up. We're not laying off, and I think that's an important differentiation between where we're at as a Company and many others today.

One final question. What's your current ground enrollment, and when do you think you get to 12,000 ground students?

We'll be about 4400 or so in September, and then our target is to recruit about 4000 new students the following September, and only graduate about a thousand. So, we'll have a couple years with that kind of a run rate. So, it will be 4 or 5 years, but we're moving in that direction.

Thanks very much.

Kelly Flynn, Credit Suisse.

Just a couple of questions. I know you don't disclose starts, but can you give us an idea of how they're trending? Are they still growing year over year? And maybe some color by category? Last time, you did give a little guidance that you thought they'd be flat to up for the year. Could you update that guidance?

The new starts in Nursing and Healthcare are way up. And, of course, that's reflected in the total enrollment of those students being way up as a percent of overall students. Obviously, the enrollment levels of our ground campus has more than doubled and will continue to do that. Education is pretty flat, a little bit down in terms of new starts. Total enrollment is up there. New starts in online Business and Liberal Arts are down significantly, and that's partly by virtue of competition, partly by virtue of design. We just have fewer enrollment counselors, and we're buying fewer leads for students in those areas. Our overall growth is up even though our overall new starts are down slightly because we're getting fewer starts in those categories of students that just don't retain very well.

Okay, see some new starts down slightly overall, and then what about for the year? Do you think they'll be down slightly for the year?

Slightly for the year. Again, up in Nursing and Healthcare; we hope flat or a little bit up in Education for the entire year. Down in Business and Liberal Arts, and up considerably on the ground campus.

Just on the overall enrollment numbers -- as you suggested, they seem to be holding up better than some of the other players in the industry. Brian, could you just talk about in more detail why you think that is. Obviously, you talked a lot about your brand. That's got a lot to do with it, but what else, in summary, would be the drivers of this difference that we're seeing?

Well, I think we talked about this in the past. I think that there is not more competition between the for-profit publicly traded companies. I don't think that's where the increased competition is. The increased competition is coming from brands in major and mid-sized markets throughout the country who are doing something in online education. That's why it's going to be difficult, in my opinion, to be a long-term national player in this business; because I think local brands are going to become more significant. And that's why we're putting a lot of our focus on Grand Canyon University, its traditional campus, and what we're doing in the Southwest.

Okay. So, you think it pretty much comes down to that branding?

I think it's going to be a very significant part of what happens in this industry in this next 4 or 5 years. Yes, we just have to look at the number of traditional universities that are doing something in online education as compared to what it even was 2 or 3 years ago, to know that it's going to be more and more difficult to compete on a national basis.

Okay. Perfect. Thank you very much.

James Samford, Citigroup.

Thank you. Just wanted to touch on your decision to accelerate the ground campus, and was wondering, how much of that has been more of a function of the increasing challenges that the traditional colleges are having? Or are you really seeing significant demand for your product or your school in particular?

No. It's absolutely the second one; and again, we're in a fortunate situation. You go to California where there are 70 private universities, and you go to Texas where there are, I don't know how many private universities. Then you include all the state universities. We sit here in Arizona, with certainly not the population of Texas or California, but still a growing population; and there's not really a single private traditional university in Arizona. When you add on to this fact, the state universities have upped their tuition now to where it's getting close.

We have a published tuition rate of $16,500, but the average student at Grand Canyon pays about $10,000 a year for tuition with the scholarships on our traditional campus. Arizona State now is at over $10,000 for tuition, and they're $8,000 to $10,000 for room and board, another $1500 for fees; where our room and board is $6500. And so, you're getting average class sizes of 20 versus 500 or 600 to one. You're getting a private school education in a pretty intimate environment for really, in many cases, less than you would pay for a major state university education; and there's a huge market for that, but not just in Arizona. California is really getting squeezed in terms of the state university system. Their private colleges are really getting really expensive from a tuition perspective. And then, if you go to Texas, you're finding the same thing.

We have a unique combination of our traditional campus and our non-traditional campus, working together in a way that we can be profitable, and we can be profitable at very low tuition rates. So, there's going to be a demand for that. We've strengthened the admission standards. We're not accepting any provisional students. So, we're doing it not just because there is a demand, but we're doing it with high quality students.

And just a quick follow-up. I think, last weekend, you had about 20,000 people attend your commencement, with over 8200 graduates, not all attending, but I think that's what you said. I think that was about 38% growth year over year? How should we think about the pool of graduates flowing through your business model over the next year? Is that 1 issue in terms of persistence or total enrollment headwind?

No, it is. It's a good thing. It's a good thing. Students are not dropping out, but they are graduating. So, we've got a process underway to double the length of our graduate program -- we don't. (Laughter). The number of graduate students as a percent of our overall students grows, as the number of Nursing students -- the graduation rate of our students is just going to go up. And so, that's a good thing. It's a bad thing in that there's a little bit of pressure on us, but it's another reason into traditional ground students. If you think out 4 years, and you say at our current growth rates, what will our total enrollment be? And then, let's say we have between 10,000 and 12,000 students on our ground campus, because that's how we think of it. So, if you've got 60,000 students and 10,000 are on your ground campus with 85% retention rates, and they are all staying for 4 years, that becomes almost 33% of your student body on a comparable basis, which put us in a strong position as compared to what it typically takes to run one of these things with mainly online students.

Great, thanks.

Sara Gubins, BofA.

Thank you. Could you talk about online student retention trends?

Yes. Really good, with Nursing and Healthcare programs. Good with Education programs. I would say, slightly improving with undergraduate Business and Liberal Arts students, and that's the biggest challenge that we have. And we're working on that. Now, we're not going to work on recruiting more students. We have got a number in mind as a percent of our total student body in terms of new starts, and we don't want to increase that, but we want to increase the percent of those that we can get to graduation. We've made slight improvements there, but we think we can do better in the next couple years in that area.

Okay, and then 2 quick questions on enrollment advisors. First, any disruption from changes in compensation structure? Second, can you talk about how much you're ramping up the enrollment advisors this year?

It's hard to say. We haven't had people leave in the last 12 months. Has the average productivity per enrollment counselor declined some? Yes, it has. Is that the result of us growing the number? Is the result of the increased competition? Or is it the result of the upper-end counselors being a little bit less motivated because you can't adjust their salary based upon their enrollments, potential or growth and the performance? We don't really know, but we haven't seen a major shift or problem as a result of that. We are going to grow our enrollment counselor force over the course of this year about 5%, between 5% and 7% on an annual basis.

Jeff Silber, BMO Capital Markets.

I just wanted to revisit the question at the beginning of the call regarding guidance. I understand why the operating margin guidance has changed a little bit, but your revenue growth guidance also ticked down just a little bit. Can you tell us what was underlying that decision to change that slightly? And also, I think in my notes you had about a 3.5% tuition increase slated for July. Is that still slated to continue?

Start with the last question first. Yes, we actually have implemented a 3.5% tuition price increase. It's effective now. So, that's what we did; on average it was 3.5%. Some a little higher; some a little lower than that. In terms of revenue, I think we're hitting our low end of our expectations, both from a total revenue for the first half, and for a total revenue for the second half based on current start trends, where the retention rates are trending.

And then lastly, and almost most importantly, what's happening in terms of student behavior around taking a week off or 2 weeks off between classes, et cetera. I think we're working really hard at improving the amount of time students are taking off. What we're seeing so far, and the fact that we're getting into the summer months with such a high percentage of teachers as students, we're being conservative in our assumptions around breaks. Because now, students in the borrower-based environment can take up to 4 weeks off without getting behind; whereas, obviously in the term-based environment, they were forced to stay in for the entire term, and then if they wanted to take some time off, they'd have to take an entire term off. So, we're working really hard, educating our students and convincing them to stay with it and not take time off, but we still see roughly 10% of our students taking a week off at any given time.

Is there any seasonality into that specific issue?

Yes, yes. In the summer, they are going to take more time off than they are in the fall and spring.

To give you the historical background in that, enrollments in this business always dipped. You reach a peak in March, and you start to get a decline into the summer, because working adult students are going to take a family vacation at some point. In the term-based environment, you kept more in because the penalty of taking a break was just so great. You had to be out for 16 weeks. Now, we'll have more people take a break. Hopefully, they'll take smaller breaks. They'll only be out for the time period that they're on their vacation, or just a little bit longer. One of the things that we really hope to do as we grow the traditional student body, is convince a lot of students that they should be in school during the summer because jobs are so hard to get. It doesn't make any sense to pay for 4 years of school in 4 years, and not have a significant job in the summer. You're better off staying in school in the summer, and finishing in 3, 3.5 years. That could help the seasonality to some extent in the future.

That's helpful. I appreciate that. Brian, you mentioned a couple times about your education vertical. While it's growing, it's growing at a slower rate. Is that where you're seeing more of the competition? Is there something specifically going on there?

There's a couple states where their people are making noise about maybe they're going to change how they compensate teachers. To us so far, that's overblown. We haven't seen much of that. I would tell you, I just think that's local brands. I think there's an increased competition for those students, and I think that you lose some to some of the local brands who don't want to be in online education. But it's something that they need to do to offset the revenue losses they're having because of a decreased tax base.

Great, and just a quick numbers question. What kind of share count should we be using for the second quarter?

45.75 to 46.

All right. Great. Thanks so much.

Brandon Dobell, William Blair.

This is actually Tom Dillon in for Brandon. Going back to part Sara and Kelly's question, for incoming online students, are you seeing any shifts in their profile relating to transfer credits, ages, et cetera?

No. Only in that we're buying more leads in the Healthcare areas. Those students aren't changing their demographic, and the demographic that we're bringing in at the undergraduate, Business and Liberal Arts area, I would tell you we're about the same as we were 12 months ago in terms of the number of credits that they're bringing on an average basis.

Okay, and then I want to focus on the marketing mix real quick. You mentioned that you're buying less leads, in particular, Education. I was just curious what the mix is now, and how we should expect it to change?

We're not buying less Education leads, we're buying less undergraduate Business and Liberal Arts leads. And if you look at the percent of our student body, each component comprises -- that's where we are, or we're a little bit to the side of the higher quality students. And we just try to keep moving in that direction. If you would have looked last year at this time, the percentage of leads that we buy that are undergraduate Business and Liberal Arts are significantly less today than they would've been 12 months ago. You can clearly see that had we just hired another 50 enrollment counselors, and kept buying undergrad Business and Liberal Arts leads, that we could be 2, 3, 4, 5 percentage points higher from a growth standpoint -- 2 or 3 percentage points higher from a growth standpoint. But we're trying to get it done in a different way, because ultimately, what you get stung with is high default rates, low graduation rates and all those things. So, there's a priority on trying to keep building the quality of our student body.

Got it. Thank you.

(Operator Instructions) Trace Urdan, Signal Hill.

I wanted to go back to Jeff's question, actually, and I had a different take on it. He was asking about why your Education business is slowing, and I'm more impressed by how well your Education business seems to be holding up relative to other players in the space. Would it be your contention that the national players that are seeing some actual declines in demand for Education are simply facing more competition from local brands? And that you guys are still drawing from your specific geography, and that's what's allowing you to not see those kinds of declines? Am I understanding it right, Brian?

I think so. We still have some pockets in the country where Grand Canyon University as a brand is not well known, but our Education program has some stickiness because of some relationships that were built many years ago. It's similar to our Healthcare industry here in Arizona. But yes, by and large, that is what I believe is happening. We are not having increased competition from the for-profit publicly traded companies, but it's those local brands, which is why we're continuing to invest in the Southwest, Arizona especially, but the Southwest, where we think we can grow our traditional campus brand.

When you're talking about those relationships, you're referring to relationships with specific school districts? Is that right?

Yes, yes. We just had a graduation here, and 3 years ago, there was a doctoral group started in a district in Pennsylvania. Those students just graduated, and we continue to do pretty well in that district. So, there are isolated examples of where we have some relationships. But by and large, it's tough for us to compete against a DePaul University in Chicago, for example. That brand is just a lot well known than ours is.

Are the relationships with the school districts something that you guys continue to maintain and invest in, or are they just legacy situations that exist?

No. We'll continue to invest in those that we have, but as we move forward, and we try to build new relationships, it will almost all be in the Southwest. It will start from Arizona, and then we'll do what we can in Texas, Colorado, New Mexico, Nevada and California.

Given that perspective on what's coming in online education, does it impact how you guys purchase leads and manage the growth of your business going forward? Do you guys have more of a geographic focus than, say, was the case when you were working at University of Phoenix?

Absolutely, and even different than what we were even 3 years ago. We were pretty much a national university from the standpoint of our online campus 3, 4 years ago, but the thing just is moving so fast in that direction, I think, that we're working very hard in Arizona, and then in the greater Southwest. More television and more outside salespeople, bringing people to campus, bringing people to the arena. We're working on church relationships; those kind of things. Yes.

Okay, great. Thank you very much.

James Samford, Citigroup.

Follow-up -- I believe you said your capacity at your existing ground campus right now is probably below the 12,000. Has that changed, or will you be looking for expanding into either new geographies or expanding your existing campus?

It would be expanding our existing campus. We can probably put about 6000 students on our campus today. Next year, we'll be building the new Health Sciences building, and a new dormitory, which will take us up to 8000 or beyond. And then there's adjacent land that we can move into that we're working on. We would not build another campus in a different location. If we did anything, we might build something on the east side of Phoenix, but most of it will be put into the traditional ground campus. We're kind of fortunate in that we sit right in the middle of the valley. We've got very convenient freeway access, and so 95% of what we do will be right on this campus or annexing land that is adjacent to us.

Great. Thanks.

There are no further questions.

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

Thank you. This will conclude today's conference call.