Grand Canyon Education Inc (LOPE) 2011 Q4 法說會逐字稿

Good afternoon. My name is Misty, and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter 2011 Grand Canyon Education's earnings conference call. (Operator Instructions).

This call will be available for replay beginning at 7.30 PM ET today through 11.59 PM ET on Tuesday, February 28, 2012. The conference ID number for the replay is 33803829. Again, the conference ID number for the replay is 33803829. The number to dial for the replay is 1-855-859-2056 or 1-404-537-3406.

At this time I would like to turn the conference over to Mr. Christopher Richardson, Director and General Counsel for Grand Canyon Education. You may begin, sir.

Thank you, Operator. Good afternoon, and thank you for joining us today on this conference call to discuss Grand Canyon Education's 2011 fourth quarter results. Speaking on today's call are Brian Mueller, our Chief Executive Officer and Dan Bachus, our Chief Financial Officer.

The call is scheduled to last one 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 it's fiscal year ended December 31, 2011 which will be filed later today, it's subsequent 10-Q reports and it's current reports on Form 8-K filed with the Securities and Exchange Commission. The Company does not undertake any obligation to update any one 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 will turn the call over to Brian.

Good afternoon. Thank you for joining Grand Canyon University's fourth quarter fiscal year 2011 conference call. We are pleased with the academic enrollment and financial results of the quarter.

Our new starts for the quarter are up again on a year-over-year basis in the mid single digits and we expect this trend to continue. Our total enrollment count is up 5.9% although this is misleading in that it was impacted significantly by the timing of graduates between years and increased retention between years. Our unique students attending class in November was up 7.1%, and in December, was up 14.7%.

As a result, revenue grew by 13% and adjusted EBITDA grew by 27.1%. It is becoming increasingly clear that adult students are choosing universities that have a brand that is rooted in a significant traditional campus environment. It is also clear that many traditional universities are replacing lost tax revenues and declining donations with adult student tuition revenues, making the overall higher education environment more competitive. Grand Canyon is uniquely positioned to benefit from this market shift.

As a result, I want to take a minute to give you an update on the strategy to build our brand. First, our traditional campus enrollment strategy is ahead of expectations. For fall of 2012 we currently have 9,000 applications. We expect to top out at 12,000 applications which we anticipate will produce slightly over 4,000 new traditional students. As we have said previously we expect our ground enrollment by the fall of 2015 to be 12,000 undergrad students and between 2,000 and 3,000 graduate students. Our average incoming GPAs next year will be about 3.4.

Because of the higher than expected number of students wanting to live on campus we are actually building two new dormitories this year instead of just one. We are also building a new arts and sciences classroom building and a parking garage. The arts and sciences building will have five new chemistry labs to accommodate the growth of our science related programs on campus. Next year over 35% of our new students will be studying in science related areas.

Traditional campus students are critical to our strategy for three reasons. First, the size and success of the campus continues to help us build a brand. We are attracting a great deal of attention in Arizona for the following reasons; the academic accomplishments of our faculty, the eight athletic programs ranked in the top 20 at the NCAA division two level. The many awards won by our theater program, and the large crowds attracted to our arena. Conversion rates on Arizona inquiries are now four times what they are outside of the Southwest.

Second, at very low annual tuition rates compared to both private and state universities, traditional students are very profitable. Their acquisition costs are low, their four year revenue streams more than double our online students and their retention rates approximate 90%.

Third, the Title IV percentages of our traditional students are about the same as other traditional universities which has lowered our overall 90/10 calculation to 80/20 this year. As our traditional campus students become greater as a percentage of our overall student body we anticipate the 90/10 calculation will continue to decrease in a favorable direction.

The quality of our online student body is also important to our brand. Our masters and doctoral students as a percentage of the total went down from 45.7% in the fourth quarter last year to 42.8% this year, and our college of education students went down from 48.4% to 44.6%. This decline was offset by our college of nursing. The students with the highest retention rates. Going from 20.7% last year to 25.6% this year. And our traditional ground students going from approximately 2,700 students last year to approximately 4,000 total students this year. Our College of Business online students who have the lowest retention percentages and highest default rates continue to decline going from 16.6% to 14.8%.

Our student acquisition costs have remained flat. Our conversion rate on inquiries outside Arizona and the Southwest have gone down. This has been offset by the conversion rate of inquiries being four times the rate inside Arizona and significantly higher in other cities in the Southwest. We believe this reflects the growing strength of our traditional campus brand. I would like to mention five things that continue to boost the growing academic brand of the University.

First, the average incoming GPAs of our traditional students continues to go up.

Second, we continue to roll out our LoudCloud Learning Management System to our online students. We believe this system has functionality and analytics that make it the best system in the industry today. This system has already been sold to one large K-12 school district and we are in discussions with other K-12 districts as well.

Third, we continue to hire full-time online faculty So that in most of our online programs, the first three courses, are taught by a full-time faculty member instead of an adjunct. The increased faculty costs up to this point have been offset by increased retention percentages.

Fourth, the pass rate of our pre licensure nurses on the NCLEX exam, which is a post graduate national exam nurses must pass to get their license, was a 97.8% pass rate this past year. The family nurse practitioner examination, which is a national certification that is necessary to practice at an advanced level, was at 100% pass rate. Anything above 80% is acceptable but we believe 97.8% and 100%, respectively, are exceptional.

Fifth, we have just started to publish two new scholarly journals. The first is a journal of instructional research that features theoretical and empirically based research articles, critical reflections pieces, case studies and classroom innovations relevant to best practices in post secondary instruction. This journal has opened application to external constituents. Second is the Canyon Journal of Interdisciplinary Studies which encourages the exchange of empirical and theoretical research among faculty and students at GCU, especially graduate students. This journal provides graduate students professional experience in the dissemination and publication of their work. This is an internal GCU journal.

Turning to the results of operations for the fourth quarter of 2011. Net revenues were $113 million in the fourth quarter of 2011, an increase of $13 million or 13% from $100 million in the prior year period. Excluding the effects of the contributions made in lieu of state income taxes in both 2011 and 2010 and the Mind Stream buy out in quarter four of 2010, operating margin for quarter four of 2011 was 21.5% compared to 19.3% for the same period in 2010.

Net income was $15.3 million for the fourth quarter of 2011 compared to $11.8 million in the prior year period. After tax margin was 13.6% compared to 11.8% for the same period in 2010.

Instructional costs and services grew from $45.4 million in the fourth quarter of 2010 to $50.6 million in the fourth quarter of 2011. As a percent of revenue, instructional costs and services decreased from 45.4% to 44.8%.

Bad debt expense as a percent of revenue decreased 350 basis points between years to 5.7%. Faculty compensation as a percent of revenue decreased 60 basis points between years. Employee compensation and related expenses increased 50 basis points, instructional supplies increased 110 basis points, and the arena costs and depreciation increased 70 basis points each.

Selling and promotional expense increased from $28.5 million in the fourth quarter of 2010 to $31.2 million in the fourth quarter of 2011. Selling and promotional expense as a percent of net revenue decreased 95 basis points from 28.5% in quarter four of 2010 to 27.6% in quarter four of 2011.

Enrollment advising and promotional salaries and related expenses as a percent of revenue decreased 40 basis points between periods while advertising as a percentage of net revenue increased 40 basis points between the fourth quarter of 2010 and the fourth quarter of 2011. Overall, our advertising costs have remained stable.

General and administrative costs excluding the contributions made in lieu of state income taxes in both 2010 and 2011 increased from $6.7 million in the fourth quarter of 2010 to $7 million in the fourth quarter of 2011. As a percentage of revenue it decreased from 6.7% in quarter four of 2010 to 6.2% in quarter four of 2011.

As a result of the above, net income excluding the effect of the Mind Stream buy out in the fourth quarter of 2010 increased from $11.8 million in the fourth quarter of 2010 to $15.3 million in the fourth quarter of 2011. The accelerated growth of our traditional ground campus student body is causing enrollment and financial results to become more seasonal.

As a result, we he have provided not only full year 2012 guidance but guidance for each of the four quarters of 2012. Dan will discuss some of the major assumptions used in our guidance later in this presentation. I want to remind investors that our three year goals are to grow enrollment 8% to 12% per year, revenue 11% to 15% per year and expand margins 100 to 200 basis points on an annual basis. With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2011 fourth quarter, talk about changes in the income statement, balance sheet and other items.

Thanks, Brian. Scholarships as a percentage of revenue increased from 14% in Q4 2010 to 16.1% in Q4 2011, primarily due you to the growth in the ground traditional campus. Bad debt expense as a percentage of revenue decreased to 5.7% in the fourth quarter of 2011. We are extremely pleased with the improvements that we have made and want to thank our operational staff for their efforts. We do believe that seasonality had some impact on this, though, and therefore have forecasted bad debt expense to be 6.5% for 2012 with amounts lower than that in the first and fourth quarter and higher than that in the second and third quarters.

Our effective tax rate for the fourth quarter of 2011 was 33.1%. The low rate is primarily due to the $1 million of contributions made in lieu of state income taxes during the fourth quarter of 2011 and certain nonrecurring tax items that had the effect of decreasing our effective tax rate during the quarter.

Excluding these effects, our effective tax rate would have been 39% for the fourth quarter of 2011 and 40% for full year 2011. We anticipate our effective tax rate in 2012 will be 40.5%.

We purchased 50,000 shares of our common stock during the fourth quarter of 2011. We still have $26.1 million available under our authorizations.

Turning to the balance sheet and cash flows. Total cash unrestricted and restricted at December 31, 2011 was $77.9 million. We have a revolving line of credit for $50 million. No amounts have been drawn as of December 31, 2011.

Accounts receivable net of the allowance for doubtful accounts, is $11.8 million at December 31, 2011 which represents 10.1 day sales outstanding compared to $18 million, or 17 day sales outstanding at the end of the fourth quarter of 2010.

CapEx in the fourth quarter of 2011 was approximately $19 million, or 16.8% of net revenue. As Brian mentioned earlier, in late 2011 we began construction on our fifth residence hall and sixth residence hall and a new arts and health sciences classroom building to meet the demand for our health sciences programs. We had planned on only building one additional residence hall this year, but the expressed interest for on campus housing for both our new fall 2012 students and continuing students has been greater than anticipated. Thus, after looking at a number of different options to meet our needs our Board approved plans to build the additional residence hall.

We will begin construction on our first parking garage on campus next month. We anticipate the dollars spent on CapEx in 2012 to be similar to what was spent in 2011 and thus the amount as a percentage of revenue will decrease between years. As we have mentioned previously, we are having discussions with outside investors about sell and leasing back the packing garage and or the residence halls.

I would like to touch on a couple of regulatory items. Our cash basis 90/10 amount for 2011 was 80.2% which is down from 84.9% in 2010. This amount does not include the temporary relief authorized in 2008 that is set to expire this year.

The decrease is primarily due to the growth in our ground campus and an increase in other cash payments including direct bill relationships with employers. We estimate our 90/10 ratio for our ground campus students is similar to other public and private universities that serve traditional age students. We estimate that our 90/10 amount for 2011 would have been approximately 82% had payments for the US military been included in the calculations.

Although we have not yet received our draft cohort default rates related to student loans that went into repayment between October 2009 and September 2010 for students whose last day of attendance at the University was between April 1, 2009 and March 31, 2010, we anticipate based on the information provided us that our rate will be approximately 12%. Although this is higher than we had hoped, we are not surprised that it increased from the prior year given economic conditions, the issues around the move to direct lending and the PUT loan and the growth in our undergraduate business and liberal arts student population prior to our conversion to BBAY in mid 2010. We are hopeful that are cohort default ratios will return to much lower levels given the significant change in our student mix that has occurred.

Last, I would like to provide some additional color on the guidance we have provided for 2012. As you probably noticed, we have provided a range of estimates for each quarter of 2012. Although this is something we might or might not do in the future, we did it this year for a couple of reasons.

First, our business is becoming more seasonal due to the significant growth of our ground traditional campus. A large percentage of these students only attend class between the end of August and the first week in May. However, a large percentage of the ground traditional campus costs are fixed. In addition, we must hire additional support staff to service the increasing student body in the spring of each year, so that they are trained and can start working with the soon to be students when these students are ready to be registered for the fall semester.

Second, we wanted to remind our investors about a couple of unusual or one time items in 2011 that will not reoccur in 2012. The most significant item was the reversal of the annuity accruals recorded in the second quarter of 2011 which had the effect of reducing instructional costs and services and selling and promotional expenses by $0.7 million and $1.5 million, respectively.

As I mentioned previously, our guidance assumes an effective tax rate of 40.5%. We have also provided our estimates of diluted weighted average shares outstanding by quarter. Although we might repurchase shares during 2012, these estimates do not assume repurchases. They do assume increased dilution from stock options granted in previous years and from a 2012 stock grant. I will now turn the call over to the moderator so that we can answer questions.

(Operator Instructions). Your first question comes from the line of Jeff Silber with BMO Capital Markets.

Thank you so much. In your prepared remarks you talked about the impact of an increase in graduates on your enrollment. One, I was wondering if you could quantify that for us. And two, should we be expecting something like that to continue in 2012? Thanks.

Yes, Jeff we are graduating somewhere around a thousand students a month. And in this year it has become more balanced at about that amount. But in previous years because of our move from the turn based environment to the borrow based environment we had students that tended to graduate in big blocks. It wasn't as consistent as what we are seeing now. So we are probably graduating roughly the same amount a year ago, but you might see 2,000 students graduate the week before the end of a month or something like that and that is what would throw off the year-over-year comparison give than we use the rolling 60 day count methodology.

Great. And Brian, I think in your prepared remarks you talked about your conversion rate outside of Arizona being down year-over-year. I was wondering if you could give us a little bit more color on that.

It is down slightly, yes, on purchased leads. On purchased leads outside of the Southwest it is down slightly. I think a lot of people are experiencing that. It is just extremely competitive out there with the number of traditional universities that have gotten into the marketplace. Fortunately it has been offset by what is going on in Arizona, and then also what is going on in Nevada, New Mexico, Colorado and Southern California, to some extent, and also parts of Texas.

Alright. And then just a quick numbers question. What should we be modelling for stock-based compensation in 2012?

I have that. For the full year 2012 about $6.5 million -- I'm sorry, no, $8.5 million.

Is that going to be relatively even by quarter?

It is a little lower in the first quarter and then consistent in the second, third and fourth. So it looks like a little less than $2 million in the first quarter and $2.25 million in the other three quarters. And that is because we do our stock grant after our fourth quarter earnings release every year.

Okay. Great. Thanks so much.

Your next question comes from the line of Peter Appert with Piper Jaffray.

Thanks. So Brian, I think you said something beginning about the unique students up 7% in November, and then up 14% in December. I actually apologize. I wasn't really following what the implication of that was.

Well it is fairly complicated, but I will try to make it as simple as I can. We talk a lot about the changing composition of our online student body and also the impact of the growth of our traditional campus students.

What happened in the last two years is that the retention rates of our students have improved which means that the churn rate of our students has gone the opposite direction. But when we talk about a student who is a churn student, it is one who takes one class, maybe two classes or doesn't even finish that first-class and then drops off, but it still counts as a student in that time frame even though the long-term benefits of that student from a revenue standpoint and profit standpoint are not good.

We are cycling through that in a very positive way now. And so the overall impact of the student body in relationship to the revenue number reflects the fact that our overall students are better and retaining at higher percentages.

The only thing I would add to that is if you recall the way we record or report enrollment is the 60 day rolling enrollment count, and so it is any student that posted into a class in the last 60 days of any quarter. And so as Brian said, as we get to a point where there is not as big of a difference between the 60 day count and let's say just a 30 day count, it is because we have less churn of the students between months.

So what you will see next year is that starting to even out and the relationship between enrollment and revenue will be more what you are used to.

Got it. But would that imply then that looking at the first quarter specifically, we would see sequentially some nice quarter to quarter increase in the reported enrollment number?

Well again, it depends heavily on the year-over-year comparison, and I think the first quarter of 2012 will be pretty similar. And we have given obviously our guidance on enrollment for the first quarter. But I think the first quarter, we have kind of that same anomaly that will probably occur in the first quarter but then that will start to wane as we go throughout 2012.

Okay. Then on just in terms of the calculation of average revenue per student based on the numbers you reported, it looks like it was up pretty nicely in the fourth quarter. Maybe this relates to just what you were talking about, but Dan, any incremental color on that?

No. That is exactly what Brian was talking about. And so, we are generating more revenue from the same number of students because they are actually staying with us longer.

And then the -- I'm sorry go ahead.

And then the -- That relates to that first question. The masters of education students which have been a staple here, great students because of their high retention rate, but the reality is they are only with you for about 18 months, or 30 to 36 credits which means there is a high graduation rate.

When the percentage of all students goes up in the doctoral and ground area that actually has a positive impact because they are four-year revenue streams.

Right. Of course. And one last thing, Brian. When you referenced the starts at mid single digit, I assume you were just referring to the online business alone, correct?

Yes.

Okay. Thank you.

Yes.

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

Thank you. Could you talk a bit more about what is driving the mix shift towards bachelor's degrees and how you would expect that to trend over time?

The mixed shift towards bachelor's degrees. Oh, yes, nursing. It's kind of the same thing.

The master's degree market in education, again which was a staple here. Those are great students, but that is very competitive. And so, what we have done is we have purposely lined up our enrollment counselors and our marketing spend to really drive nursing enrollments and we have had a lot of success obviously on campus in the pre licensure programs, but we have had even more success in RN to BSN students. And for us, an RN to BSN student looks very much like a master's degree student and even better. They take 60 credits instead of 30 credits to complete and their retention rates are very high. And so we kind of replaced what we have lost at the master's degree level in education with those RN to BSN students.

Okay. Great. And then in terms of the guidance for this year, I'm hoping to get some more color about your margin expectations. It doesn't look like you are expecting the 100 to 200 basis point increase that are part of the longer term goals?

I think our challenge for this year is the first half of the year. As I said in my prepared remarks, we are going to be doing a lot of investing, gear up for the ground campus start in September. And so you really only get four months of revenue from those students in 2012, but you have incurred a lot of costs prior to that.

In 2013, this will occur but not nearly to the same extent because our goals as you know is to recruit another 4,000 new, and so we won't have to increase our enrollment counselor headcount at all. We will have to add some additional financial counselors and academic counselors to service a higher number of ground students for 2013, but it is not nearly at the same proportion as 2012.

And so the guidance is really around the first half of this year and the investments that have to be made, but you will see in the second half of the year, especially in the fourth quarter, our margin expectations are to be up at least 150 basis points. And so our thought is although we might not get 100 basis points this year, we are still hopeful we might but if we don't, we are confident we will make that up in 2013.

I think that the important point is that with the hyper growth of the ground campus this will be the biggest year in terms of total enrollment growth. We will go from about 4,000 students to almost 7,000 students, and that won't be as much in the next years, and so the investment to prepare for that is what puts a little pressure on the margin this year.

Okay. Thank you.

Yes.

Your next question comes from the line of James Samford with Citigroup.

Great, thank you. Just wanted to touch on the outlook for pricing from a pricing perspective. As we mentioned, I think average revenue per student is probably going to be roughly in line with enrollment growth this year. Is that primarily due to more scholarshipping and discounting or should we start seeing some increasing in average revenue per student over time?

No, what you are seeing is, again, the effect of the ground campus and the fact we only get four months of revenue, but you are counting the student as a full student. What you will see in the first eight months of this year is, again, revenue will exceed enrollment by pricing, or a little bit more because of this anomaly we are talking about before. But then we go from approximately 4,000 to a little under 7,000 students and all the revenue that comes from it.

And so the revenue and enrollment if you just look at end of year enrollment and full year revenue just kind of looks a little out of whack. There is nothing else going there.

We are planning on a 2.5% tuition price increase for this year. Average 2.5%. Some programs are -- actually we are not raising at all. Some programs we are raising more than 2.5%.

So we expect that revenue per student for our online students will increase year-over-year by about that 2.5% level. And ground campus students we are expecting a slight increase in revenue per student given an increased number of students living on campus and other things. But right now we are budgeting conservative that tuition revenue per student will stay pretty flat year-over-year for our ground traditional campus.

A quick follow-up on the new enrollment trends. I think obviously you said they are up for the quarter. Any color between the segments. I assume business is still down year-over-year, but the nursing is up significantly year-over-year. Is that fair?

Yes. In fact, the new enrollment trends follow the total student trends pretty closely. So yes, the business students will probably be flat or are a little bit down, and the nursing students will be up.

Thank you.

Your next question comes from the line of Jeff Mueller with Baird.

Thank you for taking the question. I guess just a question on 2013 CapEx expectations given that 2012 is going to have the two dorms, plus the parking structure, plus the classroom. Why would that not come down in 2013? Or I guess is there one more year of elevated levels because you need to fully build out the dorms, and then we see a fairly material drop in 2014? How should we think about that?

Actually, there is two more years. We are going to top out at about 12,000 undergraduate students, which means we are going to need about 5,400 beds on the campus.

When we finish the two dorms that are being built this year, we are going to build a 1,200 person dorm the following year and another 1200 person dorm the following year after that, which would bring our total to about 5, 400 in terms of beds. And again, it is kind of a tough decision because those things could easily be kept off the balance sheet. There are people anxious to build those dorms because they see long-term revenues that look good.

If we can keep them on our balance sheet they make significant dollars going forward. So those decisions still have to be made.

In addition to that we need an additional parking garage in 2013 and an additional a parking garage in 2014. At this point, we think that we are pretty close on classrooms, and won't need to build another classroom building in either 2013 or 2014.

Because of that, Jeff, it should go down a little bit. Because as we talked about this year, we are building the classroom building, in effect dorms equal to about a thousand beds and a parking garage. So it should be down in 2013 from 2012 just because we are not going to be building a classroom building. So that Classroom building is in the $12 million to $13 million range.

Okay. And then it sounds like you guys -- obviously you had the payout under the old structure with Mind Stream. Can you talk about how the new Mind Stream relationship that -- the contract for that got switched over in Q3, how the contract differs?

Yes, a couple of things. One, the revenue that we are paying them, it is a revenue share similar to the old but it is a much lower percentage.

And secondarily, they are required to do a lot more than they were in the past. And so, in the past it was a lead generation responsibility and now under the new regs they are required to do a number of other things around the student in terms of provide support services, et cetera.

So more required of them at a lower revenue per share. And a number of students as part of it aren't going to be nearly as extensive as it was previously. They are only recruiting a small percentage of our overall students today.

Okay. Thank you.

Your next question comes from the line of Jeff [Fulshtin] with JPMorgan .

Thank you. Let me follow up on something you mentioned about graduate level and the competition at that level. Are you seeing increased competition from traditional schools, the for profits, is ACSU online having an impact? Can you give us a little more color on that?

The competition that we feel is mainly outside of the Southwest and mainly comes from traditional universities. There is one, two or three players in almost every major or mid sized market in this country that is doing something in online education. Fortunately for us there is not a lot going on in the Southwest with the exclusion of Southern California, and so that is where we experience that.

And there is a lot of competition for those teachers who want to earn masters degrees. Those are obviously good students, high retention rates, very profitable. We see the competition there.

ASU online is out there. We haven't seen a lot of competition from them yet. Our growth in Arizona both on ground and online is phenomenal.

So we are not experiencing a lot of competition from them yet although I know they are growing some. The good thing for us is that unlike their heavily subsidized traditional students on their campus, their tuition rates are very high, in fact higher than ours for online students which puts us in a good place.

Makes sense. Let me ask you about corporate relationships. You mentioned that as one of the reasons for improvement in the 90/10. Can you give us just a little more color there?

The corporate relationships we are referring to mainly are in nursing and in hospitals, and they are reimbursing people to go back and do RN to BSN degrees or MN degrees. Fortunately for us, that is a growing area of our business.

We are putting a lot of marketing dollars behind it. It's expanding which helps increase the number of are students who are getting tuition reimbursement.

Obviously that has positive impacts everywhere from retention, to bad debt, to graduation rates and all of that. That is mainly where we are seeing it.

Are you going to be disclosing the percentage of revenue that comes from corporate partners?

No, I don't think we historically disclosed that specific number. It is not what it used to be certainly in this business, but it is a decent number and going up for us.

Okay. Thanks.

Your next question comes from the line of Brandon Dobell with William Blair.

Thanks. Guys want to take the corporate question in a bit of a different direction. Given the focus on the regional marketing, how much success or how much effort are you putting into going out and talking to corporations in the region or community colleges in the region with an eye towards driving I guess more efficient online marketing channels? Not necessarily focused on 90/10, but just more marketing efficiency giving you are already focused on that regional approach?

No. I think that is an extremely important question. Hospitals, very focused on hospitals and helping them in every way that we can from nurses to physicians assistants, to RN to BSN students, to MN students, nurse practitioners. So very involved in healthcare and hospital community.

Pretty involved in the education community with school districts. In fact, very involved. We have two organizations right now. One is called the Canyon Christian Consortium and the other one is called Canyon High School Consortium. We are doing a lot with school districts in terms of recruiting their seniors, but also recruiting their teachers into our education programs.

From the community college standpoint very involved throughout the Southwest. Are establishing very close ties with the Maricopa Community College system which has upwards of 280,000 students. In fact, we have had a number of meetings just recently with them on our campus and that is moving forward. We are also looking into the community college systems in other Southwest cities;El Paso, Las Vegas, Denver, those cities.

Okay.

Not a lot in business.

Okay. And then historically, you've talked about -- I guess it is called reallocating or moving enrollment advisors around based on where you think you want to have the enrollment mix go in the next six to 12 to 24 months. Maybe an update on what the rep force looks like these days relative to what the enrollment trends would be, and if you think there is any areas where you want to reallocate or even hire people to take advantage of that market?

Yes, the overall rep trends are that we are running a little bit behind in terms of percentage increase. So the amount of rep increase compared to number of enrollment increase, it's lagging, which is a good sign. A couple of reasons for that.

Number one, Arizona is just helping us immeasurably. From the online standpoint the conversion rates are very high and the percentage of overall students from Arizona is going up. So that is helping.

The other thing that is really helping and will help going forward is that the percentage of all students that are ground traditional students is really going to go up in the next three years, and we believe we can do that by keeping the enrollment counselor work force in that area stagnant. So we had a little bit of improvement in terms of S&P as a percentage of revenue, but as we go forward maybe 50 basis points to 100 basis points a year is possible because of that.

Okay. And then one final one. Dan, I may have missed it, if you talked about it, I apologize. But your expectations for D&A for this year, and if you have one, for 2013 as we try to figure out how the CapEx is going to flow through on the P&L. That would be helpful. Thanks.

I don't have 2013 but our estimates for 2012 is a little over $20 million. And that is pretty flat over the course of the year. It is a little bit higher in the third, and especially in the fourth quarter as we put these additional buildings into service.

Right.

So it starts at $5 million, and it goes to a little over $5 million, like $5.25 million, $5.5 million by the fourth quarter.

Thanks, guys.

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

Thanks. I have a bunch of questions about the CDR. Dan, I think you said you anticipated based on what you are seeing that it will be close to 12%, the two-year CDR. Could you go into a bit more detail on that? How much of that is stipend chasers versus just the natural mix shift towards online that you have been talking about for a couple of years? And then do you think it peaks at 12%, or goes higher before it goes lower? And then where do you think it can settle at a lower level?

I mean the increase I would say it is because of the mix shift. If you think about what was going on at Grand Canyon in 2009 and early 2010 which is the year that this is really looking at. We had significant online growth and a lot of that growth was coming from business and liberal arts undergraduate programs, and so that is what really drove that rate up. So to answer the second part of your question, we are hopeful that it peaks at 12%.

This next year's two-year rate will be interesting in that it encompasses a lot of the year where we actually made the move to borrower based, so it might be higher in part of the year because of that move and losing students that were here not necessarily to get a degree.

But then the second half of that year will be with a much cleaner student body. And so are hope is that it peaked at 12% and that it will trend down even in the next two-year rate that we will know a year from now. So does that answer all parts of your question?

Yes, that's great. Yes. And then just a follow-up. Do you have a read on the preliminary three-year CDR?

We do. I expect that the rate that is coming out that would be associated with the 9.2%, I mean generally what we all saw was that it was your three-year rate was almost double what your two-year rate is. I don't think ours will be double.

That one of the, I guess positives, is some of these students that never intended to pay back their loans default within that first year, and so you don't see nearly that spike in the second year. So in effect for the three-year rate. So that 9.2% will probably be something in the 14% to 15% range for the three-year rate.

Okay. Great. I will leave it at that. Thanks a lot.

Okay.

Your next question comes from the line of Trace Urdan with Wunderlich Securities.

Thanks, guys. Brian, I was hoping you could comment maybe in a little bit more color about the shape of the competition from traditional schools. Is that what we can attribute some of the weakness in the business degree programs to? Is that where the competition is most fierce? And is it more focused on graduate or undergraduate or evenly spread between the two?

Our take on it is definitely more focused on the graduate level, not doctoral level. There is not a lot of traditional universities doing much in the doctoral area, but they are in the master's degree level.

Our weakness in the undergraduate business student online is very much our own self-induced weakness. We could easily hire more enrollment counselors to sell that program and we could easily buy more leads for that program and grow it. It is just that it doesn't build the kind of student body that we are trying to build.

There are still students out there that want to be in those programs, but the graduation rates are just low and default rates are high. And even those that have the best of intentions are starting with low numbers of credits, weren't good students in high school and so they are just at-risk students. And we are purposely staying away from them.

Now on ground it is different. The undergraduate business students on ground are really good students, and we will take all those that we can get.

Does the competition specifically at the graduate level online make you -- are you thinking about other programs that you might move into to diversify there, or is it just a matter of working harder at the programs that you have?

No. We are going to be rolling out IT programs at the graduate level. We are rolling out additional doctoral programs, MPHD programs, and so we will work hard at those that have, but we will continue to roll out programs in both of those areas.

Okay. Great. Thank you.

You bet.

We have 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 Dan Bachus or Bill Jenkins. Thank you very much.

This concludes today's fourth quarter 2011 Grand Canyon Education's earnings conference call. You may now disconnect.