Grand Canyon Education Inc (LOPE) 2012 Q1 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 first-quarter Grand Canyon Education 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). Thank you. Mr. Brian Roberts, General Counsel for Grand Canyon Education, you may begin your conference.

Thank you, Operator. Good afternoon and thank you for joining us today on this conference call to discuss Grand Canyon Education's 2012 first-quarter results. My name is Brian Roberts, I'm the new General Counsel here at Grand Canyon, and very excited to join the team. Speaking on today's call are our CEO, Brian Mueller, and our CFO, Dan Bachus. This call is scheduled to last one hour. During the Q&A period we will try to answer all questions. 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. 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.

Thank you, Brian. Good afternoon. Thank you for joining Grand Canyon University's first-quarter fiscal year 2012 conference call. We are again pleased with the academic enrollment and financial results of the quarter. Our new starts for the quarter are up again, with new enrollments growing double digits on a year-over-year basis and we expect the trend of year-over-year new enrollment growth to continue.

Our total enrollment count is up 8.9% at March 31, 2012 compared to March 31, 2011. As result, revenue grew by 15.2% and adjusted EBITDA grew by 45.3%. It continues to be clear that adult students are choosing universities that have a brand that is rooted in a significant traditional campus environment. It also continues to be 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, especially for good students. Grand Canyon is uniquely positioned to benefit from this market shift. As a result, I'm going to take a minute to give you an update on the strategy to build the university's brand.

First, our traditional campus enrollment strategy is ahead of expectations. For the fall of 2012, we currently have 11,287 applications. We expect to top out somewhere over 12,000 applications, which we anticipate will produce slightly over 4,000 new traditional students, bringing our total student number, total number of traditional students to approximately 7,000. As we have said previously, we expect our ground enrollment by fall of 2015 to be 12,000 undergrad students and between 2,000 and 3,000 graduate students. Our average incoming GPA this fall is 3.4.

We have a higher than expected number of students wanting to live on campus. The two new dormitories we are building this year are on target to be finished by August and will be at capacity. In fact, in 500 rooms the students have agreed to triple up. The new arts and science classroom building and a parking garage are also on schedule and will be ready for the fall semester. A new 1,200 student residential complex will be started in August and completed by the fall of 2013. This complex will include some new and innovative concepts, including individual studio apartments for seniors.

Traditional campus students are critical to our strategy for three reasons. First, the size and success of the campus continues to help build the brand. We are attracting a great deal of attention in Arizona and the Southwest for the following reasons. First, the academic accomplishments of our faculty. Second, our NCAA division II athletic program is currently ranked second among all division II universities in the Learfield Sports Directors Cup, awarded to the best overall collegiate sports program, although our spring sports success may push us to first place. Third, the numerous awards won by our theater and music programs this year. And fourth, the large crowds attracted to our arena.

We just finished this year's graduation ceremonies and had just over 20,000 students and visitors on campus. We expect a spike in applications as a result. Conversion rates on Arizona inquiries continue to be 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 are approximately 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 master's and doctoral students in working adult programs as a percentage of the total went down from 46.3% in the first quarter of last year to 42.5% this year, although sequentially these students are up first quarter over fourth quarter. Our College of Education students went down from 47% to 43.5%. This decline was offset by our College of Nursing, the students with the highest retention rates, going from 22.2% last year to 26.7% this year. And our traditional ground students going from approximately 2,700 total students last year to approximately 4,000 total students this year and then to approximately 7,000 students this September. Our College of Business online students, who have the lowest retention percentages and highest default rates, continue to decline going from 16.2% to 14.4%. As I said earlier, the toughest aspect of the new competitive environment is for good students.

Our 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 than the overall average in 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 have approximately 40% of our students on the system and are getting very positive feedback on the system as compared to Angel. 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 continue to get interest from K-12 school districts across the country.

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 continue to be 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 97.8% this past year. The family nurse practitioner examination, which is a national survey certification that is necessary to practice at an advanced level, was at a 100% pass rate. Anything above 80% is acceptable, but 97.8% and 100% -- anything above 80% is acceptable, but 97.8% and 100% are exceptional.

Fifth, we continue to publish two scholarly journals. The first is the 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 education. This journal has open 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 first quarter of 2012, net revenues were $117.1 million in the first quarter of 2012, an increase of $15.4 million, or 15.2% from the $101.7 million in the prior-year period. Operating margin for quarter one 2012 was 20.7%, compared to 15.9% for the same period in 2011. Net income was $14.5 million for the first quarter of 2012, compared to $9.5 million in the prior-year period. After tax margin was 12.4%, compared to 9.3% for the same period in 2011. Instructional costs and services grew from $48.9 million in the first quarter of 2011 to $50.8 million in the first quarter of 2012. As a percent of revenue, IC&S decreased from 48.1% to 43.4%. Bad debt expense as a percent of revenue decreased 640 basis points between years to 3.5%.

This major improvement is a result of four things. One, the increasing quality of our online students. Two, the growth of our traditional ground student body. Three, the flat organizational structure and innovative dashboard that allows us to manage the progress of each student to a greater extent than we ever had before. Four, the increased experience level of our staff.

Faculty compensation as a percent of revenue decreased 50 basis points between years. Employee compensation and related expenses increased 80 basis points, instructional supplies increased 90 basis points, arena costs increased 50 basis points and depreciation increased 60 basis points. Selling and promotional expense increased from $29.8 million in the first quarter of 2011 to $34.6 million first quarter of 2012. Selling and promotional expense as a percent of net revenue remained relatively flat between years, increasing 20 basis points from 29.3% in quarter one 2011 to 29.5% in quarter one 2012. Enrollment advising and promotional salaries and related expenses as a percent of revenue decreased 30 basis points between periods, while advertising as a percentage of net revenue increased 120 basis points between the first quarter of 2011 and the first quarter of 2012.

Overall, our advertising costs have increased slightly due to a new branding campaign launched in the Southwest and increased expenses associated with our new Mind Streams contract. The impact of this campaign will eventually cause our advertising expenses to decline. General administrative costs increased from $6.8 million in the first quarter of 2011 to $7.5 million in the first quarter of 2012. And as a percentage of revenue decreased from 6.7% in quarter one 2011 to 6.4% in quarter one 2012. As a result of the above, net income increased from $9.5 million in the first quarter of 2011 to $14.5 million in the first quarter of 2012. The accelerated growth of our traditional ground campus student body is causing enrollment and financial results to become more seasonal. As a result, we have provided not only full year 2012 guidance, but guidance for each of the quarters in 2012. Dan will discuss some of the major assumptions used in our guidelines later in the presentation.

I want to remind investors that our three year goals are to grow enrollments 8% to 12% per year, revenue 11% to 15% per year, and expand margins 100 to 200 basis points on an annual basis. Although given our greater than originally anticipated margins in 2012, primarily due to reduced bad debt, it is more likely that we achieve 100 basis point margin expansion in future years. With that, I'd like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2012 first quarter, talk about changes in the income statement, balance sheet and other items.

Thanks, Brian. Scholarships as a percentage of revenue increased from 16.3% in Q1 2011 to 16.9% in Q1 2012, primarily due to the growth in the ground traditional campus. Bad debt expense as a percentage of revenue decreased to 3.5% in the first quarter 2012. We are extremely pleased that the trends that we begin to see in late 2011 have continued, and again want to thank our operational staff for their efforts. We estimate that approximately 100 basis points of this improvement was the result of increased collections of previously written off receivables and do not believe that collection efforts for previously written off receivables in that magnitude will continue. As in the fourth quarter of 2011, seasonality also had an impact on this. Based on this, we've lowered our forecast of bad debt expense to 6% in the second quarter of 2012. We believe it is too early to adjust our initial estimates for the remainder of the year.

Our effective tax rate for the first quarter 2012 was 39.7% as compared to 41.1% in the first quarter of 2011. The lower than anticipated rate is primarily due to certain non-recurring tax items which had the effect of decreasing our effective tax rate in the first quarter 2012. We still anticipate our effective tax rate in 2012 will be 40.5%. We did not repurchase any shares of our common stock during the first quarter of 2012. However, we did repurchase a small amount during the second quarter 2012 under a 10b5-1 plan that had been put in place.

Turning to the balance sheet and cash flows, total cash, unrestricted and restricted, at March 31, 2012, was $107.7 million. We had a revolving line of credit for $50 million. No amounts have been drawn as of March 31, 2012. Accounts receivable net of allowance for doubtful accounts is $7.8 million at March 31, 2012, which represents 6.5 days sales outstanding, compared to $14.0 million, or 12.8 days sales outstanding at the end of the first quarter 2011.

CapEx in the first quarter 2012 was approximately $16.9 million or 14.4% of net revenue. In late 2011 we began construction on our fifth and sixth residence halls and a new arts and health sciences classroom building to meet the demand of our health sciences programs. These three buildings are on schedule and on budget. We have also recently began construction on our first parking garage on campus. CapEx as a percentage of revenue was lower in the first quarter 2011 than what we had anticipated due to timing of payments. We anticipate CapEx in 2012 as a percentage of revenue to be similar to 2011. As we have mentioned previously, we continue to have discussions with outside investors about selling and leasing back the parking garage and/or residence halls. Although there is a great deal of interest, we still have not found a sale-lease back option that makes sense financially to us.

I'd like to touch on a couple of regulatory items. Our draft cohort default rate, 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, was 12.2% which is consistent with what we communicated as our expected rate on our last conference call. As a reminder, 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 in the put loans, and the growth in our undergraduate business and liberal arts student population prior to our conversion to borrow based in mid-2010. We're hopeful that our cohort default rates in future years will return to much lower levels given the significant change in our student mix that has occured.

Last, in case you missed it last quarter's conference call, I'd like to provide similar color on the guidance we have provided for 2012. We have provided a range of estimates for each quarter 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 hired additional support staff to service the increasing traditional campus student body in the spring of this year so that they are trained and can start working with the soon to be students when these students were ready to be registered for the fall semester.

Second, I wanted to remind our investors again about an unusual and one-time item in 2011 that will not recur in 2012. Specifically in the second quarter of 2011, we reversed the remaining accrued but unpaid annuity accruals which had the effect of reducing instructional costs and services and selling and promotional expenses by $0.7 million and $1.5 million, respectively. We have increased our estimates for Q2 2012 for revenue by $1 million due to an increase in our projected enrollment and have increased our anticipated margins by 100 basis points due to lower than expected bad debt expense.

We remain comfortable with our previously provided guidance for the third and fourth quarters of 2012. As I mentioned previously, our guidance assumes an effective tax rate of 40.5%. We've also provided our estimates of diluted weighted share average shares outstanding by quarter. Although we might repurchase shares during 2012, these estimates do not assume material 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 back over to the moderator so that we can answer questions.

(Operator Instructions). Jerry Herman, Stifel Nicolaus.

First question, Brian, just to be clear, the start number of plus double digit that relates to online only? Is that correct?

Yes, that's correct.

Then with regard to the applications, it sounds like you guys are pretty strong there and you expect additional strength after graduation. When you look at the 12,000 number and a projected intake of 4000, how do you think about the students that cannot get in and is there any opportunity for them to serve as a future pipeline, even including the possibility of going online to start?

There's been a little bit of that going online to start in some cases. Not a lot of it. It is certainly something that we communicate to students and as we move forward, the biggest barrier is living for outside of Arizona students. There are students who won't be able to get into a dorm this year to live in Arizona who will commute. They will take some of their courses online and we will push that and reserve spots for them in the future years. It is more difficult for an out-of-state student to, obviously, commute or to try to find an apartment in town. Some of them will take online courses and hope to get in as sophomores, but we haven't seen a lot of that yet.

Much of the audience is anticipating the gainful employment release and the last time it was released you guys showed up pretty well at a 52% repayment rate. The numbers were smaller then. I'm assuming your expectations are similar to what's happened with CDR, i.e. repayment rates would go down when reported. Comment on that please?

Yes, I think that could be the case although I think we're going to be in very good place vis-a-vis our major competitors. If you recall last time we were just a couple percentage points below Arizona State and University of Arizona, we were above Northern Arizona. Significantly above the Liberty University and so if there's a little bit of a decline for all of us given the current economic conditions, I think we will be right there in that same position with our major competitors.

Jeff Silber, BMO Capital Markets.

Brian, I believe it was you in your prepared remarks talked about the conversion rate for students outside Arizona going down a bit. It is something that you are doing differently maybe not focusing on that target market as much? Or, is something going on in the market dynamics that you could let us know about?

No, those leads that are being generated from the lead generating companies that have dominated this industry, those conversion rates are going down for everybody, or nearly everybody. I think we experienced a little bit of that outside of the Southwest. Where you cannot build your brand and when your brand is not competitive and local environment, there are local competitors that are eating up some of the market share, which is why we are moving higher percentage of our overall marketing spend to the Southwest and taking advantage of where our brand is growing.

Fortunately for us, our SNP is not going up much other than a little bit of branding initiative because what's going on in Arizona, and in Nevada, and in Colorado, New Mexico, southern California. We are doing so well that it has offset the little bit of decline we have had outside the southwest.

You mentioned selling and promotional going up slightly as a percentage of revenue. Is that something we should expect to continue for the remainder of the year or will we be getting leverage on that line item as well?

I think it may be up just slightly the rest of the year, but not more than it is today. It will stay where it is so up a little bit, but you don't have to expected to go up much more than it is right now. Interestingly, we got an interesting reaction from the Provost at University of Nevada Las Vegas who is not happy with our competitiveness inside the state of Nevada, and we also got some calls from the people in El Paso. They both admitted that are at is very good and have an impact, but they are not sure why we are taking market share away from them. We are still in a democratic and free society as far as I can remember.

What should we'd be modeling for stock-based comp for the rest of the year?

Let's take it off-line.

Adrienne Colby, Deutsche Bank.

I was hoping to ask you a question about bad debt expense. I know you commented before that you expected your expense would be higher in the first and fourth -- in the second and third quarters, lower in the first and fourth, I know you are not going to talk about full year basis, but should we expect a similar trend?

Yes, that won't change. With the ground campus out of session for the most part in the four month period in the second and third quarters, and with bad debt historically being lower on the ground campus than with our online students, it will be lower in the first and fourth, higher in the second and third. What we are expecting is roughly 6% in the second and third quarters, which is down about 100 basis points in the second quarter from our original expectation, and in the fourth quarter it should be lower than that.

I know that you commented in the past about the number of new registered students you had for fall. Clearly the application rate is really high, but would you comment on the new registered students who have committed?

Yes, they are at 3,601 as of right now. We are very close to our goal.

Jeff Volshteyn, JPMorgan.

Let me follow-up on the bad debt expense improvement. You mentioned four reasons in your prepared remarks. Can you give us a sense of which ones were more important and more importantly, which ones are more sustainable going forward?

The increase -- the quality of our ground student body is one of -- probably the most influential one. Bad debt expense as a percent of revenue for ground student's is very low. As our ground students as a percent of the total get greater, those gains are very sustainable. I would say the second one is the increased quality of our online student body. As we continue to maintain our percentages at the graduate level and increase the number of nursing students that we have, nursing students are second to ground students in terms of having very little bad debt expense. As we continue to be strong in that area, that is sustainable.

What was the third thing I listed? The quality of the student body is always the most important thing. Then yes, we have benefited tremendously from the experience level of our staff. When we got here four years ago we had very inexperienced people in the area of finance and over the course of the last few years, that has improved dramatically and so that's another reason. That is also sustainable going forward.

I think the one thing -- I think they are all sustainable. The one thing, as I said in my prepared remarks, we got about a 100 basis point margin or improvement from previously written off -- collections of previously written off receivables. I think there was a lot of low hanging fruit there that was collected, although I think it is typically a first quarter benefit because of tax refunds, et cetera, that there's more money there to repay previous amounts. That is probably the one piece that we don't think will be as sustainable in previous quarters as it necessarily was this quarter.

Maybe another way of answering that is to say that us being at 6% in the second quarter is the result of what Dan just said, plus the ground students will not be here for those four months. That's a little bit of probably a conservative number. Long-term, do we think it is possible for us to be in a 3.5 range in terms of the debt expense? That's what we think we can be.

As a follow-up, let me ask about your student persistence trends in the online student population. Directionally.

They've improved. They improved about 100 basis points year-over-year.

To answer Jeff's question on stock-based comp, we are estimating $7.5 million for the full year. It will be highest in the third and fourth quarter. We did a stock grant near the middle of March, I think, and we haven't been a public company. Our options and restricted stock vests over five years. We haven't been a public company for five years, so that number goes up every year with additional grant. Third and fourth quarter will be slightly up over first and second quarter.

Sara Gubins, Bank of America Merrill Lynch.

Last quarter you had talked about expecting mid to high single digit growth. I'm wondering what came out as a positive surprise?

The productivity of our enrollment counts is increasing. The conversion rate of our leads inside the Southwest is increasing. Those two things in combination were very nice surprises for us. Where we are currently as we look forward, we think we're going to be able to maintain that.

And by program area?

It is pretty much across the board. Our conversion rates for undergraduate business students actually did go up. It is just that we've got fewer enrollment counts and fewer marketing dollars going to support those programs, so it was pretty much an across-the-board improvement.

Could you remind us where you are on the percent of students that are coming from Arizona and maybe the Southwest as a whole?

We are a little under 25% for Arizona. I don't have the number right here for the rest of the state, but we can get those for you and cover that over a phone call.

The LoudCloud implementation for online, I think you're planning on having it done by this summer and I'm wondering if that's on track?

September, October, in the timeframe. We should have a fully rolled out. We're really pleased with what's going on and the response of the students and faculty.

Peter Appert, Piper Jaffray.

Can you give us a little bit more color on your starts being up double digits? Does that imply growth in the teens or should we expect growth in the 20s?

Teens.

Could you also give us some color on grounds starts performance?

We believe we will be slightly ahead of the 4,000, which will take is to just under or right about 7,000 total for the fall.

Going back to the margin question, margins are up over 450 basis points year-over-year this past quarter. You said about 100 basis points is not sustainable, basically low hanging fruit from right off of receivables. Can you segment how the other increase in margins breaks out specifically whether it is timing related or whether it is bad debt related?

Almost all of that improvement is bad debt related in some form. Our bad debt as a percentage of revenue in the first quarter of 2011 was 9.9%. We had 640 basis point of margin expansion just within bad debt this quarter on a year-over-year basis.

James Samford, Citigroup.

I just wanted to talk a little bit about the competitive dynamics. It looks like online Bachelor's came in pretty nicely ahead, but I'm assuming that the competition is really in that Master's program area. I was wondering if you could just comment on that dynamic right now?

It is most competitive in the Master's degrees in the area of education, which was a really strong program for us and so we've seen a little bit of deterioration there, although quarter-over-quarter our numbers are up, which is a good sign. The place where we have a lot of possibilities is with our doctoral program.

We've gone from 1,000 students to 2,200 students in a very short time period and we think we've got huge room over and above that, especially because of all the high-quality students that you are trying to get, that's the area where traditional universities don't appear wanting to want to compete. They are competing a lot at the Master's level, but they are not competing very much at the doctoral and PhD level. We don't think that's inside their mission so we are placing a lot of priority on that. We've increased the number of enrollment counts here significantly. We are increasing the marketing dollars and we have such a big advantage there. Like ground students, those students have four year revenue streams and their retention rates are pretty high. We've got a tremendous pricing advantage over against our competition in the for profit sector.

If my math is correct, it looks like liberal arts actually accelerated this quarter to the double-digit growth? What's going on there? I thought that was an area that you were trying to deemphasize a little bit or was I wrong there?

No, a couple of areas to picked up a little bit. Criminal justice has picked up and so has Christian studies. In liberal arts we are still getting -- it has gone up some, but we are getting students in areas that we want to so it is not a concern for us.

Kelly Flynn, Credit Suisse.

First on CapEx, Dan, I think you said you thought it would be the same as a percentage of revenues it was last year, which implies I think over $90 million of CapEx where previously you were saying $80 million. Just want to clarify, are you increasing your CapEx guidance and if so, why?

Yes, I think a little bit. I don't know if it will be $90 million, but as Brian said in his prepared remarks, we're going to end up starting a dorm -- the next dorm a little earlier than we had in the past. Typically, we've gotten really good at starting dorms in November, December and having them ready for delivery in September. This dorm that we are building for next September, so September of '13, is a much bigger dorm and thus, they're probably going to have to start construction in August or so. That will increase CapEx a little bit more. Push a little bit more of CapEx into 2012 than what we had originally thought. There's really nothing else other than that.

We did acquire some additional property this quarter that we hadn't initially planned to. It wasn't extremely expensive, but it was great opportunity and adjacent to the campus that we acquired. We will continue to be looking for opportunities like that and if they come up we are going to jump on them. I think versus the $80 million we thought previously, it might be slightly higher than that.

On that note, how should we think about the CapEx over time? Should it taper off over the next, let's say, two to five years or are you expecting it to remain at these elevated levels as you invest in your competitive position?

I think the next three years you will see some slight decline, although it will be fairly substantial like it is now as we build out towards that 15,000 students. At that point, you'll start to go into significant decline and get back closer to the 5% to 7% of revenues that is typical in this industry with most of that going to technology.

Then switching gears back to the gainful employment topic. For your repayment rate, you said it may come down slightly which makes sense, but are you comfortable it should remain over 35?

Yes.

On the bad debt, Dan, I think you said you weren't going to increase -- rather decrease the guidance officially for the full year. I think the guidance was 6.5, but then in later remarks you said the high watermark for the year should be 6. I'm just try to figure out, are you guys just kind of sand bagging get there? Or, how should we think about that?

No, we brought down our guidance for the full year. We just have not adjusted third or fourth quarter. We brought -- obviously first quarter is what it is. Second quarter we brought down 100 basis points. Third and fourth quarter we had projected it to come down over the course of the year and so at this point, we are leaving the third and fourth quarter where we had originally guided at. The full year has come down significantly.

Jeff Meuler, Baird.

Congratulations on the quarter. With the online working adults starts accelerating to double digits and things continuing to trend well for fall of 2012 on ground, is there any reason why you want to be taking up the revenue guidance for the back half of the year other than being conservative because it is still early in the year? I just wanted to make sure I'm not missing something on increased scholarships or something like that?

No, there's nothing you are missing. We had some pretty decent growth assumptions in our model that we gave in our original guidance for the third and fourth quarter. We feel that those are still achievable, but don't feel quite ready to make them more aggressive than they currently are. Maybe it is a little bit of conservatism given that we are still three, four, five months out.

Then you touched on Christian studies in doctoral, but how is the initiative in IT ramping?

It is okay. I think it is meeting our expectations. We're not getting that accelerated growth because of that program. I think there's upside there for us, but that's not where it is coming from currently.

What was the timing of the roll out of the lost in the Southwest brand campaign? Did you have it for most of this current quarter or are you rolling it out to the beginning of Q2?

No, we had it for most of -- we had it for all of this quarter.

Brandon Dobell, William Blair.

First, for enrollment count, you mentioned productivity, should we expect that within that you are continuing to see or relocate people away from business students and also how about enrollment rep activity within the education department also?

For business we won't probably go -- we won't move anybody else. We will go with the current numbers that we have, but as a percentage of total they will go down again. As we add. In education it is pretty flat. We're keeping that about where it is, maybe a slight increase in terms of counselors. We are tending to add them in the area of doctoral studies, nursing, health sciences, ground.

In terms of students moving from finishing a Bachelor's degree and re-enrolling in a Master's level or Master's re-enrolling at doctoral, how much success are you having there and more importantly, your expectations for how that should play out the next couple of years?

We are doing what we have typically done in the online student body. It is picked up a little bit. Where we really hope to see an increase is on the ground. We want to build that ground graduate student base to at least 3,000 students. That's where we have to spend some marketing and some time working the next three years.

With all the hubbub around the Pell running and that kind of thing these days with the new (nig rig) process starting up with the DoE, have you guys noticed any or have you incidented any changes internally? Has it impacted start growth, retention or anything like that? You talked about this a couple years ago so you are out there in front of it, but more recently, have you done anything differently that should change how we think about the enrollment or quality of enrollments?

No. We have really put in place lots of safeguards against that. We had our little bad period about three years ago and our cohort default rates currently being at 12% is the result of that. We have worked hard at that the last three years and we are in pretty good shape from that standpoint. That shouldn't even negatively or positively impact our new enrollments moving forward.

We are always on the look out for that. We have implemented a lot of things, as Brian said, that are internal audit department focuses on. Looking for those type of issues and since our move to borrower based, it is really, really declined in terms of issues that they come across.

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 very much.

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