Grand Canyon Education Inc (LOPE) 2011 Q2 法說會逐字稿

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

I will now turn the conference (technical difficulty). I will now turn the conference over to Lyn Bickle , Director of Financial

Thank you, operator.

Good afternoon and thank you for joining us today on this conference call to discuss Grand Canyon Education's 2011 first second quarter results. Speaking on today's call are Brian Mueller, our Chief Executive Officer, and Dan Bachus, our Chief Financial Officer. This call is scheduled to last 1 hour. During the Q&A we will try to answer all questions, but we apologize in advance for any questions that we are unable to address 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 its 10-K report for its fiscal year ended December 31, 2010; 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 second quarter fiscal year 2011 conference call. I'd like to accomplish four goals on today's call; first, comment on the changing environment within higher education; second, articulate the direction we are taking to respond to the new environment; third, review the enrollment and financial results of the second quarter; and fourth, give guidance for the remainder of the year.

In spite of the negative enrollment trends in most publicly traded education companies, working adults continue to access higher education in large numbers. The options for working adult students have increased dramatically, especially in the last three years. Mid-tier state universities and mid-tier private four-year universities are entering the market to make up for the revenue shortfalls in tax subsidies and endowments. Students can now choose a local university with a strong brand whose tuition is often less expensive.

We believe it is going to be hard to operate on a national basis without a brand rooted in a traditional campus, especially if you can't compete on price. This actually puts Grand Canyon in a strong position going forward because our brand is gaining strength and our price point is very competitive.

As I have been saying for almost a year, we have been tweaking our strategy to address the new reality and it is paying off nicely. I want to make five important points about this strategy.

First, we are committed to building our traditional campus to 12,000 students in the next four years. It is our intent to create a dominant brand in Arizona and throughout the Southwest. Our traditional students will come with average in-coming GPAs between 3.3 and 3.5. These students are rapidly becoming our most profitable students, despite their low tuition and room and board rates. Their acquisition costs are low, most are staying for four years, and their year-over-year retention rates are very high.

Second, our recruitment of working adult students attending online is increasingly focused in Arizona and the Southwest where our brand is growing. Our conversion rate on inquiries in Arizona is almost three times what it is outside Arizona, and we currently have less than 5% of the Arizona market. Our conversion rate of inquires in other cities in the Southwest is also growing.

Third, we continue to focus on building a high-quality online student body. Our overall new student starts are down, but new student starts in high-retention programs are up and our total enrollment growth is up 9%. Graduate students as a percent of the total online student body again remained relatively flat between years, going from 44.1% at June 30, 2010 to 43.6% at June 30, 2011.

Students in business and liberal arts, most of whom are undergraduates and who, as a group, have the lowest graduation rates and highest default rate on loans, have again decreased as a percent of the total online student body. Between June 30, 2010 and June 30, 2011, business students decreased from 18.7% to 15.5% and liberal arts students decreased from 15.5% to 15.4%.

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 15.7% at June 30, 2010 to 22.3% at June 30th of 2011. Education students went down from 50% to 47%. However, the total number of education students grew slightly year over year.

Fourth, the cost to acquire students on a national basis is definitely going up. Conversion rates are going down as the supply of universities offering online programs increases. Our overall student acquisition costs, however, are not changing. The increased costs on a national basis are being offset by the low acquisition cost of traditional students and the high conversion rate of inquiries in Arizona and other parts of the Southwest.

Fifth, we have worked hard in the last three years to improve our academic and operational effectiveness. We have hired key executives with a tremendous amount of experience to lead the organization. The experience of our staff, the process improvement and developing new technologies to support the process is now manifesting itself in improved retention rates of students in every program. Despite being down in overall new student starts, we continue to grow our total enrollment number and believe that we will be able to maintain this momentum.

Turning to the results of operations for the second quarter of 2011, net revenues were $103.1 million in the second quarter of 2011, an increase of $5.6 million or 5.7% from $97.5 million in the prior-year period. Operating margin for quarter one 2011 was 22% compared to 21% for the same period in 2010. Net income was $13.3 million for the second quarter of 2011, compared to $12.4 million in the prior-year period. And after-tax margin was 12.9% compared to 12.7% for the same period in 2010.

Instructional costs and services grew from $41.7 million in the second quarter of 2010 to $45.7 million in the second quarter of 2011. As a percent of revenue, IC&S increased from 42.8% to 44.3%. Employee compensation and related expenses increased 181 basis points; faculty compensation increased 75 basis points; and bad debt expense as a percent of revenue increased 173 basis points between second quarter of 2010 and the second quarter of 2011, primarily due to the continuing down economic -- the continuing economic downturn in the United States, as well as our change to borrower based.

We continue to anticipate bad debt expense as a percentage of revenue will remain at current levels until the fourth quarter of 2011. In spite of the fact that instructional costs and services as a percent of revenue have gone up in the last two quarters, without our move to the borrower-based financial aid environment and the revenue we forfeited as a result, the instructional costs and services as a percentage of revenue would have actually gone down.

Selling and promotional expense decreased from $29 million in the second quarter of 2010 to $27.7 million in the second quarter of 2011. As Dan will discuss in more detail later in this call, this decrease is primarily due to the reversal in the second quarter of 2011 of $1.5 million of previously accrued annuity amounts. Excluding this reversal, selling and promotional expenses as a percent of net revenue decreased 140 basis points from 29.7% in the second quarter to 28.3% in the second quarter of 2011.

Enrollment, advising and promotional salaries and related expenses as a percentage of revenue decreased 21 basis points between the periods. Advertising as a percent of net revenue decreased 90 basis points between the second quarter of 2011 and the second quarter of 2010, primarily due to the termination of the revenue share arrangement with MindStreams. Our overall advertising costs have remained stable.

General and administrative costs increased from $6.2 million in the second quarter of 2010 to $7 million in the second quarter of 2011. And as a percentage of revenue, decreased from 6.3% in quarter two of 2010 to 6.8 -- increased, I'm sorry, from 6.3% in quarter two of 2010 to 6.8% in quarter two of 2011.

As a result of the above, net income increased from $12.4 million in the second quarter of 2010 to $13.3 million in the second quarter of 2011.

We are reiterating our previously-issued guidance for the second half of fiscal year 2011. On a year-over-year basis, revenue will grow 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.

With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2011 second 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 general and administrative expenses to instructional costs and services 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.

During the second quarter of 2011 we reversed $2.2 million of amounts accrued in previous periods that were to be paid to employees for students they previously recruited, and for which bonuses were to be paid when those students completed 24 credit hours. We had historically accrued the amounts that were anticipated to be paid as a student progressed to 24 credit hours. Due to the elimination of the Safe Harbors effective July 1, 2011, these payments are no longer permitted. Thus, amounts previously accrued for students that had not reached 24 credits had to be reversed as of June 30, 2011.

$0.7 million was reversed in instructional costs and services as these amounts were to be paid to academic and finance counselors, and $1.5 million was reversed in selling and promotional expense as these amounts were to be paid to enrollment counselors.

Scholarships as a percentage of revenue increased from 10.4% in Q2 2010 to 12.8% in Q2 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.

Our effective tax rate for the second quarter of 2011 was 41.5%. Excluding certain non-recurring tax items that had the effect of increasing our effective tax rate during the quarter, our effective tax rate would have been 40.3%.

Turing to the balance sheet and cash flows. Total cash, unrestricted and restricted, at June 30, 2011 was $60.6 million. We have a revolving line of credit for $50 million. No amounts have been drawn as of June 30, 2011.

Accounts receivable, net of allowance for doubtful accounts, is $32.1 million at June 30, 2011, which represents 29 days sales outstanding, compared to $32.4 million or 29.7 days sales outstanding at the end of the first quarter of [2011].

CapEx in the second quarter of 2011 was approximately $23.6 million, or 22.9% of net revenue. CapEx in the second quarter of 2011 was higher than we anticipated, primarily due to the timing of payments. As you might recall, CapEx as a percentage of revenue was lower than we anticipated in the first quarter of 2011 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%. During the next month, we will complete the 5,000 seat arena and a third dorm and, in late 2011, we will begin construction on a fourth dorm and a new Nursing and Health Sciences classroom building to meet the demand for our Nursing and Health Sciences programs.

We repurchased 612,000 shares of our common stock during the second quarter of 2011 at an average price of $13.33 per share under our initial $25 million repurchase authorization. Our Board of Directors has recently approved an additional $25 million repurchase authorization. Thus, we have $26.8 million available under these authorizations.

During the second quarter of 2011 we paid the $5.2 million that had been previously accrued in accordance with the settlement of the qui tam lawsuit that had been filed against the University in August, 2007.

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

Thank you. (Operator instructions.) Bob Wetenhall, RBC.

Hey, good afternoon. This is very strong results. Just wanted to get an update on what you're seeing in the ground campus. And what's the normalized level of scholarships as a percentage of revenue as more ground students come in?

With regards to enrollment for the ground campus in the fall of 2010, things are doing well. They're going as planned. The new student starts should be about where we had planned them. What's really interesting, however, is that the retention rate of students, those students that haven't graduated but coming back is just really, really high and even better than we expected. So, that's going well.

A normalized rate of scholarships would be --

Yes. Scholarships as a percentage of revenue for the ground campus has historically run between 40% and 50% of gross revenue. And so, as the ground campus has grown, that's why as a percentage of our total students. That's why you've seen scholarships as a percentage of revenue tick up a little bit.

We anticipate remaining in that kind of 40% to 50% level. And so, you might see a 100 basis point increase again in scholarships as a percentage of revenue for the University as a whole given the larger ground campus enrollment.

Bob, to give just a little bit more color on that, you know that for a traditional student at a private university, that's a much different situation, for example, than an online student. Most private universities have a published tuition rate and then begin discounting from there. Our students currently -- our published tuition rate for our ground students is $16,500, which is about half what it is at a typical private university.

What we're trying to do is get students in that $8,000 to $10,000 a year category on an annual basis. That's about what it costs to go the three state universities inside Arizona. And so, being at that level causes us to be tremendously competitive, which obviously then gives us the confidence that we're going to do what we say we do -- are going to do in terms of that 12,000 students in the next four years.

That makes a lot of sense. And just one quick follow-up. How should we think of a normalized level of S&P spending as a percent of revenues in the future?

Yes, that's -- I mean, I think that's a very, very important question. We have definitely seen our cost per lead, which is really not -- that's a fluid number. We've seen our cost per acquisition from an advertising perspective go up for students outside the Southwest. And so, we're experiencing from that perspective what a lot of people are.

Most of the students that we get outside of the Southwest are generated as a result of Internet advertising. The positive thing from our standpoint is that our traditional ground students, which are becoming an increasingly important part of what we do from the enrollment standpoint because, not only are their numbers going up, but the fact that they stay for four years makes them worth somewhere between two and four times what a very good online graduate student is worth. Because they take 30 credits in a year and they may come back three more times for no acquisition cost.

And so, what we're finding is that we've been around 30%. We've dipped down to 29% or 28% and we're very confident we can keep it in that range as we move forward because, increasingly, our students will come from the regional marketing efforts.

Glad the strategy switch is paying off. Good luck next quarter.

Thank you.

James Samford, Citigroup.

Great. Thank you. Just wanted to focus a little bit on the CapEx side of the business. I guess you spent about $80 million over the last 12 months. Where should we think about CapEx going and what percentage of that is really ground-based versus investments in technology for the online business?

We estimate that the recurring CapEx is in the 4% to 5% range. So, that includes some level of CapEx for the ground campus, but a very small amount. The majority of it is internal-use software. It's computers for new employees and other equipment. So, 4% to 5% is kind of the base level.

Once we get through this current effort, which will end here in the next month or so, what we believe -- from a CapEx in addition to 4% or 5% would be $30 million in the next 12 months for the additional dorm and the additional classroom building. The following year we're projecting roughly $15 million for an additional dorm. And then the year after that, again, $30 million, which would be an additional dorm and additional classroom. So, additional classroom every other year for the next four years and additional dorm every year for the next four years.

But, even the dorm, there's a potential we could off-balance sheet that. There are individuals interested in building the dorms for us and we continue to look at that as a possibility every time we get ready to build a dorm. But, up to this point, it hasn't made financial sense to do that, but it is something we look at every time we get ready to build a dorm.

Great. And keeping on the ground campus side, just a quick question. At the reduced rate that you're talking about, sort of $8,000 to $10,000 sort of net revenue rate, can you still generate -- I think you've talked about greater than 20% or 23% operating margins on the ground campus over time.

Yes.

Yes.

Yes, definitely. It's just the -- and obviously, we're going to get a bump for these new students this year, but the big bump is what we get next year because we're -- we -- our goal is to recruit 4,000 new ground students three years in a row from 2012 through 2013 and '14. And the big gain that we're going to make there is, when those students come as a class of 4,000 and then 90% of them come back as sophomores, there's no acquisition costs.

So, if you just think about 29% or 30% acquisition costs and those going away for a significant part of our student population, you start to realize how profitable those students can become, even though there's a very low tuition rate. And so, we're probably a little bit under that now, but by this time next year, we'll be over that.

And just to clarify, that $8,000 to $10,000, that's actually moved up a little bit over the last couple of years. That hasn't declined. As the fully [scholarshipped] athletes become a smaller and smaller percentage of our total student body, that average revenue per student for our ground campus is actually moving up slightly, not going down.

And one more point about that just to clarify. That doesn't include room and board. There's an additional $7,000, approximately $7,000 that we collect for room and board from those students that stay on campus.

And that's margin accretive, the room and board?

Yes.

Yes.

Okay. Thank you.

Peter Appert, Piper Jaffray.

Thanks. Brian, can you tell us what portion of the online enrollment currently is students from Arizona and the Southwest?

We don't give that -- we haven't given that number out, although I can tell you it's growing. I think the last time we talked about that was three years ago. It was probably about 10%. I can tell you that it's quite a bit higher than that now.

And is your thought that it would be, I don't know, you want it to be two-thirds of the enrollment at some point, or --

No, I don't think it can be two-thirds of the enrollment, but I think it can be somewhere between 25% and 50% of the enrollment. There's about 350,000 students going to school, higher ed, regionally in accredited institutions within Arizona; probably a little bit more than that. And so, having less than 5% of that market and having a growing brand, very, very competitive tuition rates, and then -- and having no competition from a private traditional university perspective, it puts us in a very strong place. And Arizona is still growing.

The other thing that's important to note about that is that Southern California is a very, very fertile place for us to recruit traditional ground students. Our competition is more than twice the cost of us, sometimes as much as three times. And there's a strong possibility that the Cal Grant, which has been really responsible for a lot of the success of the private institutions in California, could go away. And so, there's a lot of potential for us between Texas and Southern California, Arizona, New Mexico, Colorado and Nevada, for us to meet our ground traditional goals.

Got it. And then I'm sorry, just to be clear, the 25% to 50% number, was that referencing just Arizona or was that the whole Southwest?

No, that's Arizona.

Just Arizona. Okay. And the -- how do we think about revenue per student given there's going to be some evolution in the mix here, ground versus online over the next couple of years?

It should improve some. It's interesting. I mean, our average student on our ground traditional campus, the revenues are between $8,000 and $10,000 a year. Interestingly enough, our online students, the best of -- our graduate online students, which are our best online students, our revenues for those students are between $8,000 and $10,000 a year.

The cost to acquire a ground student is about one-third the cost to acquire a -- I'm sorry, one-third less than to acquire an online student. Our best online students -- and we have high graduation rates -- stay with us between 30 and 39 credits. And those are good students. I mean, they're very profitable and, obviously, we want all of those students. But a traditional ground student comes to us and takes 30 credit hours in their first year and then, at a 90% rate, they come back three more times with no acquisition costs, which is why it's turning out to be a much better deal for us than we initially thought.

Yes. That's very helpful. Thanks, Brian.

You bet.

Ariel Sokol, UBS.

Hi. Good afternoon and congratulations. Two questions, the first one for Brian. You've been in this sector for a very long time and very much a pioneer. And it seems like, at least the market today is suggesting, that we could see a turn for the worse in the economy. And I know you're not an economist, but I'm curious to get your perspective on how you think that your business and perhaps the post-secondary space would be impacted from the starts in customer acquisition cost perspective if we do in fact have another downturn and (inaudible) manifests itself in the next six months.

Thanks for pointing out that I'm not an economist. You're absolutely right about that.

I think a couple things. Number one, I think it will make our value proposition in our traditional campus even stronger. There's a lot of middleclass and lower-middleclass families who want private education for their children, but they're going to look at the unbelievable value proposition that we have here and decide that this is their best bet. And so, I think it would really help from that -- our ground traditional students.

The second thing that I think is that the money that we're putting into our Nursing and Health Sciences programs will not be negatively impacted by any downturn in the economy at all. And we've been approved now to do pre-licensure programs in New Mexico and we're looking to do them in other states. And so, anything that we can do to invest monies to keep growing those -- that study body -- and we had a tremendous growth in those students this year, is going to be very helpful for us. I don't see any of that going away if there's a downturn in the economy.

I think we're still in a good place from a teacher education standpoint, although we have to watch that carefully. We have -- I just was at a big meeting yesterday with our Chairman of Gilbert School District. And if you -- teachers are still going to go back to school. But, I think probably more so than in any area, you've got to build personal relationships with those school districts and win their confidence. That's not going to be as easy as it was in the past, in my opinion. But again, our tuition is low and there are very -- going to be very cost conscious as we move forward here. And so, I think we're not in as good a position as we were in the past, but I think we're in still in a good position because of our tuition rates.

And then, we've got to be real cognizant of where the economy -- where it is going and making sure that we're there. There's an -- we're developing a new IT program that we're excited about. And so again, I think, as in the last downturn, I think we're going to be in as good a position as anybody from that standpoint. I don't know if that helps, but that's where we are.

Great. Your comments are helpful. And then the next question is you guys reiterated your guidance for the back half of the year, but I'm just curious about the mix. Is it fair to say that Q4 presumably would be a better quarter in terms of earnings per share given that you're getting a nice comparison from the prior-year Q4, where you saw a real steep decline in persistence?

Yes, I think that's fair. And also from a margin standpoint, given that we only get one month of revenue from our ground traditional student. And even our online students tend to take time off in the summer. I think what you should expect to see, our target margin, as we said, is 18% for the second half, but it should be slightly lower than that in the third quarter and higher than that in the fourth quarter. So, I think it's both things that you mentioned.

Thank you.

Sara Gubins, Bank of America.

Hi. Thank you. Can you talk about any -- whether or not you think the fact that the debt subsidy for graduate students is going away? Will it have any impact on your students?

It's a good question. I think it'll come down to whether the student views the value proposition is a good one given the increase in cost of the degree if the subsidy goes away. I think our value proposition is good with our low tuition rates and the programs that our students are in. And therefore, we're hopeful that they would still view it as a good value proposition even with the slightly higher cost if that subsidy goes away.

Okay. And then I don't know if you -- the way that we look at revenue per student, it looks like it was down year over year in the second quarter and I'm wondering if there was anything in particular driving that.

Yes. As we've been talking about for the last three quarters, this was really driven by our move to a bar-based academic year. We expected it to be down, the revenue per student to be down this quarter. It was down a little bit more than we had expected. But, it was really driven by the move to bar-based, primarily with just temporary outs.

As I said, given that 70% roughly of our students are teachers or nurses, they just tend to take more time off during the Christmastime and the summertime when most likely their families are out of school or off of work. And so, we saw that this quarter. We expected to see it this quarter, but that's what's really driving it.

And so, should we expect to see increasing year-over-year revenue per student in the second half?

Yes. I think it might be more flat in the third quarter than up in the third quarter, because I think there'll still be some effect of that shift. As you might recall, we moved to the bar-based academic year in the spring/summer of last year, but we really didn't start seeing the effects of it until later, more like in the early fall.

And so, I think third quarter, the hope is that revenue per student will be pretty flat and then, in the fourth quarter, we expect it to be up somewhere in the 3% to 4% range, which approximates our increased tuition level. We did a tuition price increase that averaged about 3.2% this year. And so, we'd expect, once that graduates into the fourth quarter, that's what you'll see.

Thank you. And then just a last question. Could you talk a bit about how you think your student starts and enrollment will trend in the second half of the year?

Student starts. I think they'll trend about the same as they have trended in the first half of the year. They will be overall down as compared to last year, but they will be up in the most important areas, especially Nursing and Health Sciences. And so, the overall impact on total enrollment will be about what it has been to this point in the year.

Okay. Thank you.

Jeff Silber, BMO Capital Markets.

Thank you so much. I was wondering if you can comment on retention trends. And if there's any color you can give by program that would be great.

Yes. The retention trends at the doctoral level, we're still pretty new at that and so they are about what we expect them to be. At the master's degree level with nursing and business and education, they are about what they've been, maybe slightly up.

Where we've really seen some significant retention trends is at the undergraduate level with that 20% of our students that are new students. And that's why you saw just a slight decline in our graduate versus undergraduate percentages. It's because we're making progress with those incoming undergraduate business and liberal art students. Even though we've got fewer enrollment counselors selling those programs and putting students in those programs, those that we are putting in there, the retention rates are going up and so that's impacting those percentages.

Alright, great. I'm not sure if you commented on this, forgive me if you did, but since the -- I guess the final gainful employment regulations have come out since your last conference call, do you expect to have to restructure any of your programs to comply?

No. No. Obviously, we don't have the program-by-program numbers yet, but our overall number, obviously, is very good. And with the average debt levels of our students being -- of our graduates being where they are, we don't anticipate that we would have to make any adjustment.

Okay, great. And just a quick numbers question. What tax rates should we be using for the rest of the year, Dan?

I'd use the effective tax rate at a 40.3%. That all seems to be changing on a quarterly basis given things that come up, but I would use the 40.3%.

And how about share count for the next couple of quarters?

We bought back a considerable amount of our stock recently. I would probably use a number that's pretty close, if not slightly down, to what our diluted share count was for the third -- or for the second quarter. We did buy back some additional stock after the quarter-end, but the dilution part of that is always a wildcard depending on the stock price. So, I'd probably use a pretty flat number over where we ended -- where we were for the second quarter.

Alright, fantastic. Thanks so much.

One comment before we go onto the next one. I think it was Sarah's question about start trends. I think -- we do think that the start trends will continue for the third quarter. But, as we get into even the fourth quarter, we think that starts could be flat to up by the time we get to the fourth quarter, as we get to year-over-year comps that are not nearly as challenging as the year before. So, I wanted just to clarify that -- what Sarah had asked and how Brian had answered it.

Amy Junker, Robert W. Baird.

Amy Junker. Hi, thanks. Brian, as you focus more on Southwest students, does that change kind of your long-term top-line growth targets that you laid out when you went public? Are you still looking to grow kind of top line in the 20% to 25% range, or do you think that's probably lower at this point?

No, that's lower and we've been talking about that for a while. We're 10% or so enrollment growth and we're trying to get 3 or 4 percentage points from a tuition standpoint. And so, between $0.14 and $0.16 from a revenue standpoint.

And Dan, in terms of margin, as we look out to 2012, I realize it's a little early, but obviously you're going to see some margin degradation in the back half of this year. Should we start to kind of reap the benefits of the ramp in ground students at some point and start to see that -- or when do you think you'll see the turning point and see margins start to turn back up?

We expect margins will be up in 2012 from where they are -- from the 18% we're projecting from 2011. So, how much up I think it's too early to tell, but we believe we have a number of levers that will help that. One, as you said, is the ground campus. We're also very focused on bad debt. It's been running in the 7% level and we're working really hard to bring that down at least 100 basis points. And so, there are probably three or four places that we're working hard that, if things come to fruition, we should be able to show a fairly good margin expansion in 2012.

And just a quick clarification. You've guided towards -- or you're targeting 18% EBIT margins. Is that in the back half of the year or for the full year of 2011?

That's for the back half, but that was also our guidance for the first half as well. So, our expectations obviously in the second quarter was -- it turned out better than we had thought from a margin perspective. But, our general thoughts going into this year was, in the first and fourth quarter, having margins slightly ahead of 18%. And in the second and third quarter, when the ground students are out of attendance, but a lot of those costs are still being incurred, being slightly under that 18%. Our thoughts around that haven't changed at all.

We did do some things in the second quarter of this year that helped us from a margin standpoint. We held off on some hires that need to be made around the ground campus and some other initiatives later into the quarter and even into July than we had anticipated. And so, we were able to drive a higher margin this quarter than we had projected. But, we still believe going into the back half of the year that margins should, for the whole half, should be 18%, slightly under 18% in the third quarter and slightly above 18% in the fourth.

Okay, thank you.

Kelly Flynn, Credit Suisse.

Thanks. Hey, Brian, can you talk in a bit more detail, although you already touched on it -- talk in a bit more detail about the competitive environment, particularly from the traditional schools. I think you've spent a lot more time on that in the past, so if you could just elaborate on your thoughts there that'd be great.

Well, I think you can just look for the examples locally. And then right here in Arizona, for example, Arizona State is down tremendously from the standpoint of tax revenues, and so they have some ambitious goals around online students. They would be an example. A school like Liberty University in the Southeast has almost 60,000 online students. While a lot of private for-profit publicly traded universities are losing students, they're growing rapidly. They have a significant brand in the Southeast. A school like Drexel University in Philadelphia has 20,000 online students. I think you'll see companies like Embanet and others at some point go public because they've got -- they're offering services to private and state universities.

And so, I don't think you're going to see lots of universities do 100,000 online students. It's not going to be that. It's going to be a lot of private and state universities who are going after 3, 4, 5, 6,000 students because it's a tremendous supplement to their lost tax revenues or endowments. But, I think that plays into our hands very favorably because we're in a very non-competitive environment and our -- we've got a brand that is gaining in strength.

Okay. Just on that note, I mean, those schools you mentioned, that's somewhat anecdotal. I mean, are you actually seeing any, I guess, quantifiable stats that make you really believe that the competition is actually influencing the economics of the model?

Well, the ASU projection's not anecdotal. That was actually on the front page of the Arizona Republic. And the Drexel and the Liberty University, that's not anecdotal. That's -- those are accurate numbers. I don't know exactly where Embanet is at currently, but I know they're gaining in clients. So, in terms of actual numbers across the entire landscape, no, I don't have any numbers with regards to that.

Okay. Fair enough. Thanks a lot, Brian.

Brandon Dobell, William Blair.

Thanks, guys. I wondered if you could touch on where you stand right now with enrollment advisors, both in terms of headcount and maybe what the change in the comp structure did the past couple quarters to the ranks in terms of tenure, attrition, that kind of thing. And as you've worked through July and the first part of August here, do you see attrition slowing down? Do you see productivity going the right direction? How do you think about all those issues?

Enrollment counts in number, we don't give that out, but I can tell you that we're growing that slightly. We're not in a position where we need to lay off counselors. We're growing those gradually as we move through the year. We're not going the other way on those.

We transitioned out of the annuity program in June and we made the appropriate adjustments and we have not seen any negativity with regards to people leaving. In fact, the attrition in all those positions, enrollment, academic and financial counseling, is in decline. Attrition is in decline and so we're getting better from that standpoint.

Obviously, people are making the adjustment. These are no longer going to be jobs where you can make significant differences in your -- it's more of a lifestyle job. The salary's good, the benefits are good. Being part of Grand Canyon is something people want to do. And so, we've got an overabundance right now of applications and people wanting to get in here.

So, attrition's actually getting better and there's no lack of really high quality candidates in case we would need them.

We were actually in a fortunate position given that we had the annuity program in place and that we had budgeted to continue to pay that annuity. We had money that we could then turn around and invest in our current enrollment academic and finance counselors and we did. And so, the reaction to our new plan that we rolled out was very, very favorable because we invested heavily in those people in other ways, primarily increases in their base salary, and they were very appreciative of that. Because clearly, the University could have just stopped paying annuities and not done anything with that money. We chose to invest that in our counselors.

Okay. And then I want to clear up something a couple questions ago. When you talked about starts potentially kind of flat to up in the fourth quarter, I'm assuming that would be a total number, but I wanted to make sure that we kind of disaggregate between ground and online given that the calendar's a bit noisy around August, September, October for the different modalities. How do we think about -- I mean, you could have up in the ground business but down in the online business. Are you guys expecting both of the modalities to be up in the fourth quarter?

Yes. Yes, thank you for clarifying that. Obviously, yes, they'll be up in the fourth quarter because -- for ground because of the September start, but then they will also be up slightly in the fourth quarter online.

Okay. And the final one for me, the past couple quarters you've talked in decent detail about some of the technology initiatives, both the learning management platform, as well as their kind of potential service offerings. Maybe an update where you are. If you're satisfied with the technology investments and how they're playing out from return perspective or what it's doing for student access and retention. Thanks.

No, thanks. Yes, we're very, very satisfied with that. We were behind the eight ball three years ago and we brought some very talented people in. We've worked very hard. We didn't see a lot of gain there in the first 18 months, but we are now.

The LoudCloud System, which would be our learning management system, is now being piloted with some of our current students and that's going well. We hope to start to roll that out to an expanding group of people in September and October. And then probably sometime in the first quarter of next year, February or March, roll that out to a majority of our students. We're very excited about that and the impact it's going to have on our faculty and our students.

From the standpoint of administration, CampusVue was a very, very tough thing for us, that conversion, but we've created a tremendous amount of software now that is being integrated into the CampusVue System. It's making it much easier for our financial and academic counselors to use that system and service students. That was admittedly a big problem for us. And we're able to get back to students in terms of schedule questions and financial account questions, and we're a lot more efficient there than we were even 6 or 12 months ago. So, we're very satisfied with that progress as well.

Okay. Thanks a lot guys.

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

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