Grand Canyon Education Inc (LOPE) 2012 Q2 法說會逐字稿

Good afternoon. My name is Hope and I'll be your conference Operator today. At this time, I would like to welcome, everyone to the second-quarter 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Question-and-Answer session.

(Operator Instructions)

I would now like to turn the call over to Mr. Brian Robert's, General Counsel for Grand Canyon Education.

Thank you, Operator. Good afternoon and thank you for joining us today on this conference call to discuss Grand Canyon's 2012 second-quarter results. Speaking on today's call is GCU's President and CEO, Brian Mueller, and GCU's CFO, Dan Bachus. This call is scheduled to last one hour. During the Q&A period we will try to answer all your questions and we apologize in advance if there are 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 GCU's future performance that involve risks and uncertainties. Various factors could cause GCU's actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the GCU's SEC filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, our subsequent quarterly reports on Form 10-Q, and our current reports on Form 8-K filed with the SEC. We recommend that all investors thoroughly review these reports before taking a financial position in GCU. And we do not undertake any obligation to update anyone with regard to the forward-looking statements made during this conference call. With that, I will turn the call over to Brian.

Good afternoon. Thank you for joining Grand Canyon University's second-quarter fiscal year 2012 conference call. We are pleased with the academic enrollment and financial results of the quarter. The very positive results continue to validate that GCU has created a differentiated model within the higher education landscape that is producing a win-win scenario for all stakeholders. Students are getting high-quality, low cost education. The programs we offer are focused in employment areas where there is good job growth. Hundreds of jobs are being created in higher education, technology, and construction, which is healthy for the economy in the Southwest. The model places a minimum burden on tax payers. In addition, as an investment supported institution, we continue to pay taxes at high levels. If we continue in this positive direction, and our shareholders get a good return on their investment, everybody will continue to win.

They are 5 main reasons this is happening. And all 5 offer insights as to why we believe this is likely to continue. The first is the growing strength of the traditional ground campus and its impact on the overall brand of the institution. We will start the fall semester with approximately 6,500 students on our campus in Phoenix. This is down slightly from the number we anticipated three months ago. We turned away over 500 ground traditional students that weren't as strong academically as we would've liked, or were not in a strong position from a financial perspective.

Even with the pull back we have a historic traditional class from a numbers perspective but also a very strong class from an academic perspective. Approximate 71% of our new traditional students are from Arizona. Arizona has a number of important needs that this class will help satisfy. Healthcare is a huge driver of the economy here. Our new class of freshmen will have 326 premed students, 42 pre-pharmacy students, 88 new pre-physical therapy students, 514 new pre-physician assistant students, and 148 new pre-licensure nurses. In the nursing program the NCLEX Examination pass rate is still running above 96% for the year. This was a quality metric very important to building the University's academic brand.

Arizona also has an aging group of K-12 educators and has been identified as a state in need of a new group of young teachers. We will help support this challenge with 212 new elementary ed majors and 139 in the new secondary ed majors. We also have 621 new business students in this class as well as many new students spread across a variety of additional majors.

Very high retention levels are helping support the overall growth of the traditional campus. We have an 84% retention rate between the spring semester of last year and the fall semester of this year. This is an extremely high retention rate even when compared to some of the best branded institutions in the country. Both new and continuing students will experience the approximately $200 million investment in new classrooms, dorms, eating facilities and performance centers as well as the approximately $80 million investment in technology we have made in the last three and half years. We look forward to record-setting performances in music, theater, dance, and athletics this year.

Last year our athletic teams won the Learfield Directors' Cup at the Division II level, which measures performance across all 21 athletic teams. Our athletic teams also won the award for having the highest average GPA in our conference. We expect to repeat this year in both categories, which should make us a strong candidate to move to the Division I level. Our Fine Arts department won many music, theater, and dance awards in Arizona. And we expect that to continue as well.

As a result of the many accomplishments of our ground campus, and the increased visibility that these accomplishments bring to the institution, the brand of GCU is really growing in the Southwest. Our total enrollment growth rate overall is 12.4%. But our growth rate in Arizona is 25%, in California, 21%, and in New Mexico, 22%. The second reason for the success is the high-quality composition of the online student body, which supports high retention and graduation rates. Of all online students who started our program between August and November of 2011, 70% completed their first 12 credits by July 2012. The long-term implications of this trend are very significant. In our working adult student body, 42% are studying at the graduate level, while 58% of our students are studying at the undergrad level. As many of you know, it is our goal to keep graduate students at greater than 40% of the total.

The College of Liberal Arts and Sciences stayed relatively flat as a percentage of the total students, going from 15.1% last year to 15.5% this year. The College of Business students went from 15.6% of the total, to 14.2% of the total. In our high retention colleges, the College of Education students went from 45.7% last year to 43.2% this year. But the raw number of education students actually went up. The College of Nursing and Health Sciences students went from 23.6% of the student body last year, to 27.1% of the student body this year.

The increased retention levels of our student body is caused partly by increased selectivity. This is true on both the ground and online campuses. However, the retention level of students is also supported by our increasing use of full-time faculty. On our traditional campus approximately 50% of core sections, are taught by full-time faculty and 50% by adjuncts. We are working towards making those numbers 70% full-time and 30% adjunct. Online students, which are taught almost entirely by adjuncts at many institutions are increasingly being taught by full-time faculty members at Grand Canyon. The first three courses of most of our programs delivered online are taught by full-time faculty. It is important to note that the retention percentages reported by the Harkin Report were based on students recruited between July 1, 2008, and June 30, 2009. The current management team did not take over running the University until the spring of 2009. There were many, many changes made academically and operationally during 2009 and 2010 that have put us in the very strong position that we are in today.

The third reason for the success is our very competitive pricing model. On our traditional campus our published tuition rate is $16,500 per year. We've not raised that for three years. After scholarships, our average student pays approximately $7,800 per year. Most private universities have published rates between $35,000 and $50,000 per year, and our state universities in Arizona are about $11,000 per year in addition to the tax subsidies that support each in-state student. Those institutions also offer scholarships. But our after scholarship averages are now very competitive with the tax-supported state institutions and as much as two thirds under many private institutions. In addition, our room and board rate for those students living on campus are extremely low. The students on our campus are paying about $6,500 for room and board for the entire year. Most universities have rates much higher than that, in fact some are almost double that amount.

Our online students have close to the lowest tuition rates in the industry. Our long-term growth targets are to grow enrollments by 8% to 10% each year, revenues from 12% to 15% per year, and increase our margin levels by 1% per year. We believe that we will be able to accomplish that margin improvement with very modest tuition increases in some programs. But our plan is to actually lower tuition levels in others. We have recently lowered tuition levels significantly in our theology programs and have seen a spike in enrollment as result. We've also lowered tuition levels in our education programs delivered in a cohort ground model and kept our undergraduate online education tuition level the same for three years. We remain committed to increasing student retention levels, lowering acquisition costs, and seeking other efficiencies that will allow us to continue to decrease tuition levels over time, but continue to increase earnings so our investors will get good returns.

The fourth reason for this success is a flat organizational model with very advance dashboard technology that gives us the ability to manage the progress of our students on a daily basis. Our academic counseling staff can monitor the attendance and participation trends of students as well as track closely their academic progress. This allows them to work cooperatively with faculty to break any intervention necessary to keep students moving in a positive direction. We're also working hard on advanced analytics component of our LoudCloud learning management system which will provide another large amount of data on academic work for both the students and faculty.

The fifth reason for success is the growing experience levels of our faculty management and staff. Or employee turnover rate has improved eight basis points year over year ago decreasing to 12% in 2012. During that same period come our operations management turnover rate has dropped to under 4%. Under full-time faculty turnover rate has dropped to under 2%. Construction and service our students get as result is reaching very high levels.

Many of you know the Grand Canyon University has become a finalist to receive the gift of the Northfield Mount Hermon campus located in Northfield, Massachusetts. The Green family who owns Hobby Lobby wants to give this Property to an organization that would run it as a private Christian university. The original purpose of the Northfield Mount Herman school was to provide private Christian high school Education to students that came from the lower socioeconomic strata of that area. A number of years ago Northfield Mount Hermon merged with another private boarding school leaving the Property vacant. The Green family has been impressed with our model of providing very high-quality low cost higher Education is made available to all classes of Americans, have very little cost to the taxpayer. If we are offered this opportunity, it would tie us closer to online students and the 12 northeast states, will provide high-quality low cost higher Education to traditional age students, and because of the more than $100 million investment we would make on the campus and because of the hundreds of jobs we would create in the area for local residents it would provide an economic stimulus to the poorest county in Massachusetts. We have had meetings with local residents, the State Department of Education, the Department of Economic Security, and we'll be meeting with the Higher Learning Commission later this month to discuss this opportunity. If this becomes a reality, we would probably start new students on the campus is in the fall of 2014.

Turning to the results of operations for the second quarter of 2012, net revenues were $119.3 million in the second quarter of 2012, an increase of $16.2 million, or 15.7% from the $103.1 million in the prior-year period. Operating margin for quarter two, 2012, was 21.3%, compared to 21.4% for the same period in 2011. Net income was $15.6 million for the second quarter of 2012, compared to $12.9 million in the prior-year period. After-tax margin was 13.1%, compared to 12.5% for the same period in 2011. It should be noted that the difference between a 21.3% margin and the after-tax margin of 13.1% is money that we paid in taxes that goes back to the tax payers. Given our relatively low default rates, our low Pell usage, and the high tax amounts we pay, our net cost to the taxpayer is extremely low.

Instructional costs and services grew from $46.4 million in the second quarter of 2011, to $53.4 million and the second quarter of 2012. As a percent of revenue, IC&S remained relatively flat going from 45% to 44.8%. Bad debt expense as a percent of revenue decreased 490 basis points between years to 3.1%. This major improvement is the result of 4 things. 1) The increasing quality of our online students, 2) The growth of our traditional ground student body, 3) The flat organizational structure and the innovative dashboard that allows us to manage the progress of each student to a greater extent than we ever have before, 4) The increased experience level of our staff.

Faculty compensation as a percent of revenue stayed flat between years. Employee compensation and related expenses increased 60 basis points. Instructional supplies increased 90 basis points. Arena costs increased 40 basis points. And depreciation increased 40 basis points.

Additionally, in connection with the University's review of student files for the period from July 1, 2008, to June 30, 2010, in accordance with the pending program review with the Department of Education, the University determined that Pell Grants received by the University for students that later unofficially withdrew primarily from, during 2008, 2009 school year should have been returned. The current management system fixed this problem shortly after we arrived. Although the student is obligated to repay the University for these amounts, the University has decided that it will not seek reimbursement from the students once the returns are made. The University estimates the total amount to be returned is approximately $3 million and accordingly has reserved this amount during the second quarter of 2012 resulting in a 250 basis point increase as compared to the second quarter of 2011.

Selling and promotional expense increased from $27.7 million in the second quarter of 2011 to $32.8 million in the second quarter of '12. Selling and promotional expense as a percent of net revenue increased 60 basis points from 26.9% in Q2 2011, to 27.5% in Q2 2012. Enrollment advising and promotional salaries and related expenses as a percent of revenue increased 160 basis points between periods, while advertising as a percentage of net revenue decreased 80 basis points between the second quarter of '11 and the second quarter of '12. As a reminder, during the second quarter of '11, the University 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 retention bonuses were to be paid when those students completed 24 credits. Due to the compensation rule changes effective July 1, 2011, those amounts could no longer be paid. $1.5 million of the accrual reversal last year was recorded in selling and promotional expense and $700,000 was recorded in instructional costs and services.

General and Administrative costs increased from $7 million in the second quarter of 2011, to $7.7 million in the second quarter of '12 and as a percentage of revenue, decreased from 6.8% in quarter two to 6.5% in quarter two, 2012. As a result of the above, net income increased from $12.9 million in the second quarter of 2011, to $15.6 million in the second quarter of '12. With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2012 second quarter, talk about changes in the income statement, balance sheet and other write ups.

Thanks, Brian. Scholarships as a percentage of revenue increased from 12.8% in Q2 2011, to 14.5% in Q2 2012, primarily due to the growth in the ground traditional campus. Bad debt expense as a percentage of revenue decreased to 3.1% in the second quarter of 2012. We are extremely pleased that the trends that we began 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. Our effective tax rate for the second quarter of 2012 was 38.5% as compared to 41.5% in the second quarter of 2011. The lower than anticipated rate is primarily due to certain nonrecurring tax items which had the effect of decreasing our effective tax rate in the second quarter of 2012. We still anticipate our effective tax rate for the second half of 2012 will be 40.5%.

We purchased 120,000 shares of our common stock during the second quarter of 2012 at a cost of $2 million. And have repurchased another 177,000 to date in the third quarter of 2012 under 10b5-1 plans that had been put in place. We've also extended term of our stock repurchase program through September 2013. Turning to the balance sheet and cash flows, total cash unrestricted and restricted at June 30, 2012, was $105.6 million. We have a revolving line of credit for $50 million. No amounts have been drawn as of June 30, 2012. Accounts receivable net of the allowance for doubtful accounts is $8.4 million at June 30, 2012, which represents 6.7 days sales outstanding, compared to $13.1 million or 11.8 days sales outstanding at the end of the second quarter of 2011.

CapEx in the second quarter of 2012 was approximate $33.6 million, or 28.2% of net revenue. This month we will be completing construction of our fifth residence hall and sixth residence hall, a new arts and health sciences classroom building to meet the demand for our health sciences programs and our first parking garage. These buildings are on schedule and on budget. CapEx as a percentage of revenue was higher in the second quarter of 2011 than what we had anticipated due to timing of payments and seasonality. We still 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 certain aspects of the University. We are also having discussions with our bank about increasing our mortgage on the campus. Given the extremely low interest rate environment, both are attractive options.

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

We had significantly increased our estimates for Q3 2012, primarily due to an increase in our projected enrollments and projected revenue per student, due to better than anticipated retention rates 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 fourth quarter of 2012. Our guidance assumes an effective tax rate of 40.5% for the remainder of the year. 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 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 over to the moderator so that we can answer questions.

(Operator Instructions)

Sara Gubins; Bank of America.

I'm sorry if I missed it, but could you talk about how new student start trends looked in the quarter?

Yes, thank you. They were in the mid-double-digits. So, significantly up. We expect that to continue.

Okay, great. You increased the third quarter guidance, but not the fourth. I'm wondering is that the question of visibility or are there more conservative assumptions in the fourth?

No, I think we have good visibility and things, as we've said, are going really well. I think we had some pretty aggressive expectations for the fourth quarter when the year began and things seem to be trending in the way we thought they would. So we felt at this time it was best to keep those expectations where they were previously set.

Okay, great. That last one, Brian, you laid out the longer-term targets and I think that those are somewhat lower than your previous targets. Before you'd talked about 8% to 12% enrollment, 11% to 15% revenue, and 100 basis points to 200 basis points of margin expansion. And now it looks like it is 10% enrollment, but 12% to 15% revenue, and a 100 basis points of margin expansion. Could you help us better understand what's driving those changes? Is it really more the strategy around the lower tuition pricing overtime or is it some combination of that and something else?

When we talk about 100 basis points to 200 basis point margin expansion, our expectation on bad debt was to see a slight decrease in bad debt expense on an annual basis. There was never an assumption that we would see such huge improvement in bad debt all within this year. So given this year's margins are going to be significantly higher than we anticipated at the beginning of the year, to increase our margins 100 basis points a year on a go forward basis I think would be very reasonable. Brian has always talked about target margins for the University and that gets us into those target margins.

I guess the only other thing I would add is the enrollment number, we're exceeding that by a lot right now. We have no reason to believe that there's going to be a slowdown there. We are just taking a conservative approach, that's all.

Adrienne Colby; Deutsche Bank.

I was hoping you could comment on the trends you're seeing in conversion rates. If you've seen any changes in the trends you're seeing in Arizona and also in the Southwest?

They are staying very, very strong in Arizona. 25% year-over-year growth in Arizona even exceeded what we thought we would get. New Mexico is very strong. Nevada is pretty strong. Where we were really surprised is California is gaining a lot of strength. That's true for both traditional students and nontraditional students. It is a reflection of the difficult time people are having out there finding a place local universities. So we are going to put additional efforts out there as a result.

Great, and if I can ask one more. I think the past two years you're average tuition increase in the online program has been about 3.5%. In your prepared comments you mentioned that there would be some selective increases and some decreases. Is it fair to think about that as staying in the 3.5% average range going forward?

It will probably be lower than that. We are not focused on that as nearly much as was historical in this space. We want earnings to be strong. We want the returns to investors to be strong. But we want to get there through enrollment increases and operational efficiencies so that we continue in our very competitive mode from a pricing perspective. There will be some programs competitively selected that will be 3% or 4%, but there will be others who will actually go down.

So, right now we are in the middle of that process. And it couldn't be going better from an enrollment standpoint or from an earnings standpoint. And I think if people are living under the impression that this is going to go back to what it was from a pricing standpoint, that's not going to happen. This thing is just going to get more and more competitive and we feel we're in a really, really strong position.

One other data point for you. This year, and I think it was in April where tuition prices went into effect, our average across all programs was 2.1%. We think that's probably a pretty good assumption of where they'll be, or maybe a little under that. But we haven't raised tuition prices on average in the 3.5% level in a couple years.

Jeff [Bulstin]; JPMorgan.

I know it is probably a little too early talk about the Northeastern opportunity, but can you generally tell us the demographics of the area? How does it compare to the Phoenix area in general?

The interesting thing about the Northeast is that aside from the Southwest that's the best place for us from an online enrollment standpoint. Our growth rates there are already better than they are in other areas of the world. And it is because of our competitive pricing advantage. For online students and also we've got a decent brand in some school districts and hospitals in the Northeast.

The four times conversion rates that we get in Arizona because of the presence of our ground student body here, we just take a look at what we'd get in the Northeast if the conversion rates were doubled there. It is obviously a very good number. So we are already doing well from an online student body perspective. And we think we could do considerably better. For traditional students, people say the Northeast has a lot of tradition. There's been universities there for a long period of time. We have visited many of those. They are $40,000, $50,000, $60,000 a year for tuition, room, and board. The same play that works here is the play would be made out there. High-quality, low-cost tuition levels for all classes of Americans. We would still put a focus on good students. We are not a community college. We're not remediation. But we believe based upon what our investigations of the current point. The average student here pays about $7,800 a year. The average student there would probably pay $11,000 or $12,000 a year. But that would be so much under what they are going to have to pay at other universities that we think we can be very successful there.

Okay. I have a couple of housekeeping questions. On the new enrollments you said middle double digits, did you mean mid teen level?

Yes.

Okay. And the charge of $3 million, what line would it be in the income statement?

Instructional costs and services.

Bob Craig; Stifel Nicolaus.

First question, following up on Jeff's question, on the Northeast opportunity. When do you expect the decision there? And I take it by your comments that it would be branded under Grand Canyon, is that accurate?

Yes. We have to work through some issues with the name and that not fitting in the Northeast and we will work through that kind of stuff and figure out to do it. There are two finalists. The decisions will be made by the Greens, we think in the next couple weeks and probably announced towards the end of September.

Okay. You mentioned I think in your earlier comments that the grounds school enrollment, 6,500, is a little bit less than what you had earlier planned for. Was that simply due to the rejection rate?

Absolutely. The same strategy that's working online with us being more selective by virtue of where we put our marketing dollars in enrollment counselors and really working hard to recruit the students in the high retention programs. On the ground it is just basically grade point average. And we don't follow-up and don't courage and don't accept students if they don't fit. And we are in a very strong position to be able to do that.

Any early thoughts, Brian, on what your objective would be for next year in terms of ground enrollment?

Yes, new starts would be somewhere between 3,500 and 4,000 students. And that would take our total ground enrollment to about 9,500, around 9,000.

Okay. One last one and I will turn it over. Where does that program review stand? Have you provided all necessary information now and are just waiting for the final termination letter?

Bob, if you recall there were 3 significant findings they had. One was on enrollment counselor compensation. They asked for a lot of documents. We've been providing rolling document requests to them. And so we continue to do that. And we assume they are looking through the documents that we provided. The second was on the [interput] disciplinary studies program and whether that really led to gainful employment. We've provided them the information that they requested on that. We feel very good that that program did lead to gainful employment, especially given the fact that it was a program requested by some of our employer partners.

The third and one that's cause the most amount of work was this issue around the unofficial withdrawal of students. Clearly, the Department of Ed has taken a position as it relates to unofficial withdrawals for students in a term based rule on all universities that they've been going on in doing program reviews. So we are clearly not the only ones. Both for-profit and not-for-profit have gotten a similar finding to us. We've been going to the file review that they've requested of us. Early on in that file review we found this Pell issue. So we really spent the last few months going through the whole two years and looking at Pell refunds for students that unofficially withdrew. That's where we've come up with this reserve. We are also going through the Title IV calculations for students that unofficially withdrew as well. We are only on in the process around that piece.

James Samford; Citigroup.

Great. Thank you. Good quarter. I wanted to touch on the accreditation side of things and it appears that the accreditors are taking a fresh look at the online model, particularly adjunct faculty and part-time faculty side. Brian, have you been getting a lot of feedback, are you working with HLC to make sure that the online model is not under particular stress or risk? And is that part of the decision to shift a little bit more to full-time faculty at this point?

Absolutely not. We started making the shift from an online standpoint two years ago. So this is not in response to any of that. Online students are making a big investment and make a big commitment from a time perspective and they are very sensitive to how quickly they get feedback and how much feedback they get. So the first couple courses are really important. Our online full-time faculty work between 12 noon and 8 in the evening so they are right there on site and ready to respond to assignment submission and to questions and to discussion posts.

It is the ability to increase retention rates, increase student learning, increase student satisfaction rates that overcome the added investment that we are making in salary and benefits. That's why we did and we will continue to do it that way. The characteristics that make you an effective teacher online versus in a classroom, sometimes they are the same but many times they are different. People that are experienced online instructors and very good at it have a way of working. They learned over time so that's why we are doing it.

I guess a follow up on the competition side. A lot of your competitors are pointed to a deteriorating consumer confidence is a big factor for declining enrollment that they are seeing. Price is one thing that's working in your favor. I was wondering if you're getting any feedback or any hints that consumers are delaying their signing up to go back? Or any other dynamics that we should know about?

No. We're not getting that. There's a lot of things we're doing that combat that problem. Because this clearly is a problem but not for us. I can tell you that for example, the online students who express interest in Grand Canyon that live in the Southwest. Many of them, we are absolutely sending a plane ticket to and flying them in to spend time on our campus. Before they even start our program. The confidence that we are building as result of that is huge. So there is some loss of confidence and there is some skepticism, but we do a lot of things to fight that.

When we bring people in from the Southwest who for example may be thinking about doing a doctoral program and they meet the Dean and the President. They sit down and get all the people work done in person and they spend time on our ground campus. They go back and tell people in their school district. And go back and tell people in the hospitals that that's a place to go. You have to see their campus. You have to meet with their Deans. You have to see the confidence they have in what they are doing and their future. So you cannot do that nationwide, but you could certainly do it in the Southwest where we are putting the focus on growth. That's why we're thinking about the Northeast. Because when you can connect those people to your ground campus, the sense of confidence they have in your permanence and what you're doing just goes up.

Kelly Flynn; Credit Suisse.

Thanks for taking my questions. I have a bunch of short questions. Just on the new student growth, do you expect to maintain the mid teens growth in the back half?

Yes, probably. That is higher than what we anticipated. Very honestly things are going better than even we thought so. At this point, as we look into the second half, yes.

Okay, great. Then just back to the question about the Higher Learning Commission. I understand you did not make any of those faculty mix changes in response to any criticism from HLC. But can you just talk about the current environment on the heels of some of the news you've seen in the sector? Are there any other areas besides for adjunct faculty mix that you expect you will need to make changes in? And are you, in fact, getting any new feedback from HLC on anything on the heels of some of the news that's hit the sector recently?

No. We are not. And certainly, we pay close attention to where higher education is going and what the thoughts on higher education from the Higher Learning Commission would be. But honestly, we are focused on number 1, the learning outcomes that our students are achieving. And number 2, the retention levels of our students. Being selective on the front end, providing good programs and instruction that lead to high retention and high learning outcomes is what we're focused on. Full-time online faculty just produce better learning. They produce better retention levels early on in the program as students are gaining confidence in their ability to do this.

On ground, full-time crowd faculty, if they are teaching a load that's significant can be hugely impactful, both to student learning and from a financial perspective. But they have to teach. The average faculty member on our campus teaches 4 classes a semester. In what we are experiencing as result of that is number 1, financially it works really well in terms of keeping tuition levels low. Number 2, they're full-time engaged with our students and it is producing good learning outcomes and high retention. Those are the things we're focused on.

Okay, great. Just lastly can we go back to CapEx? I think I might have asked a similar question last quarter, but you said you expected that CapEx to be close to what it was last year and last year it was close to $80 million. But I thought on the last call you said it was going to be $90 million for the year. I guess the question is, is it $80 million or $90 million. And then how should we think about it going forward? I think you said you'd spend $100 million on a Massachusetts campus if you got that. Can we expect CapEx to come down over time in the next two to three years?

To answer your question, yes, as a percentage of revenue is what I said would stay flat year-over-year. So we do believe it will be up a little bit on a raw dollar amount over last year. Maybe not to the level that we thought a quarter go because things are coming in on budget or slightly under budget. But we are going to spend on CapEx because we believe it is the best return on investment that we can do.

In terms of the ground campus here, next year should be down a little bit over this year. We are not going to be building a classroom building next year like we did this year. So the focuses next year will be on dorms and a parking garage. In terms of Northfield, if we were to take on that project you would not see any significant CapEx there until the 2014 time period. We would have some CapEx we would spend the very first year to get the campus up to our requirements, especially around fixing up the existing dorms and food service and that sort of thing. We would not build our first dorm there until probably 2014 year.

Right, probably second half of 2014. We won't start students there until fall 2014 if we are gifted this. We would put about $10 million into that campus in the second half of 2013 to get the campus ready and then 2014, 2015, is when we would start building dorms. There's probably enough classrooms there. There's 40 buildings on that campus. There's 220-acres. So we are really further ahead there than we were even here. When we started this.

Peter Appert; Piper Jaffray.

So, Brian, do you have a sense of what the decision criteria in Northfield are for the Greens?

Yes, they want somebody that's fiscally strong enough to carry the project off. And secondly, they want somebody who as much as possible can guarantee them that the private Christian mission of the institution will stay in effect long-term. In fact, that second one is equally as important as the first one. So we think we are in a pretty good spot. The final decision has not been made but we think we are in pretty good strong spot.

Are they specifically looking for post secondary institutions, is that correct or not?

Yes, they are. The reason that they have selected a second finalist was just that they really didn't feel like they found an institution that could carry it out. That could pull it off. So that's why the second one is not.

The second one is not a post secondary institution, right?

Correct. It's the Southern Baptist Church they would build a training center for. They really didn't find another one that they thought from a fiscal standpoint could pull it off.

Which is why you think the odds are reasonably good that you could win?

Yes, I do you think they are pretty good.

Okay. Am I doing these calculations right? It looks like the online persistence might be down a little bit on a year-to-year basis, can you talk to that?

Actually, it is up about 100 basis points.

Okay.

Obviously, you have to look at the ground campus effect really makes our June numbers look strange. But if you look on a year-over-year basis, our retention rates, our persistence rates are up about 100 basis points.

Great, thank you. I think you said something about trimming ad spending in the current quarter, can you give us any more color on the strategy there?

No, I don't think we talk about trimming ad spending. We are actually down year-over-year in advertising as a percentage of revenue. But I think that had more to do with the growth in our revenue per student than it really did in any of our spending.

So we are actually down from 10.9% to 9.6% and most of that is the additional revenue.

Got it. Okay. Last thing, you mentioned also than that you've got some particular benefit from things that won't recur. What should we think about as reasonable sustainable level of bad debt expenses as percent of revenues?

I would say the way we are trending in the months, the second and third quarters probably low 4s, and in the first and fourth something more in the 3s. Although clearly we were better than that this quarter and we are hopeful that will continue.

Jeff Mueller; Baird's

Questions on the quarter. Did you guys give the starts number for the ground campus this fall?

I don't think Brian did, but it is roughly 3,500.

Okay. So you're not going to require a significant investment in terms of recruiting resources on campus to hit 3,500 to 4,000 type number for next fall, correct?

That's a very important point. We made the investments on the enrollment side and on the academic and financial counseling side so we are ready to go for the next year.

Great. Then if you would receive Northfield Mount Hermon and accept it, what would that do to your intermediate term margin guidance? Would you still expect to achieve margins expansion? Or shall we think about margins flattish with faster enrollment and revenue growth in that scenario?

We've talked about this a little bit. I think the expectation is for Northfield Mount Hermon is for the first year or so we would probably lose $1 million or so dollars. That second year, leading up to the fall of 2014 start, that loss would be higher than that as we hired employees. At this point we're not quite prepared to state what that is because there's a lot of work still to be done. But the carrying cost of the property alone is about $1 million a year, so not real material.

Paul Condra; BMO.

You've given some previous guidance for the ground enrollment by fall of 2015 that it was like 12,000 on the ground in 2,000 to 3,000 graduate students. Is that still ballpark where you expect to be?

Very close. We might be a little under that. We've been a little bit more selective next year and maybe more selective next year, but we will be close to that 12,000 and 3,000 number.

Okay, thanks. I just wanted to ask, you gave detail about the percent of ground students from the Southwest, I think you said 71%. How does that compare to your online students?

Online students are more about 25% of our online students are from Arizona. About 70% of our ground students are from Arizona. But the ground students are as a percent from Arizona is going down. Online students from Arizona as a percent is going up. So they are moving in opposite directions.

I suppose the remaining 75%, how is that dispersed in terms of the online students?

Southeast and Northeast are pretty good areas for us. So it is pretty evenly distributed between the Southeast and Northeast. We don't do quite as well in the Midwest.

Big in the Southwest so as Brian talked about, California through Texas really strong.

Has your marketing strategy changed at all? Are you still focused primarily on the Southwest or are you changing focus geographically?

No, increasingly it's in the Southwest and it is increasingly with branded advertisement focusing on our traditional campus. It is interesting 32-year-old and 34-year-old working adults absolutely love the ad campaign that is directed around our ground campus. They want to be able to say that's where they go to school. They want to be able to tell people that's what they are attached to.

Great. We don't see many of those around here.

Brendan Dobell; William Blair.

One thing about the program review. Any sense of timing on when you might get a prelim exit interview or final determination?

No. We have no idea. Our commitment to the Department of Ed is part of this was to give them monthly updates as we progress through the file review and that is what we've been doing. At this point, it's us providing information to them. We have not heard much in response.

Okay. Thinking about second half of the year in terms of scholarships, should current trends continue? Or should there be an outsized bump in the third quarter given the ground start?

Yes, it will go up as a percentage of revenue as the ground campus goes. As Brian laid out the numbers, greater than 50% of our ground campus revenue as a percentage of revenue is scholarship. Given that the average student pays about $7,800 and our rack rate is $16,500. The bigger the ground campus gets, the bigger that scholarships as a percentage of revenue will be.

Okay. Final one for me, you mentioned a number of stats or anecdotes around conversion rates and things like that. I guess I'm trying to get a sense of the conversion rates, are those being driven more by just the incoming quality, somebody has already decided they are going to go so it is more a question of how fast you can service that interest? Or are you seeing a significant uptick in productivity from the enrollment reps? And if so, is that within a particular program or do you think you've got the right mix of people in the right programs now?

Yes, we do think we have the right mix of people and in the right programs. The uptick is that the students that always were the most difficult for us from a retention standpoint, and where we keep putting fewer and fewer dollars from a marketing and enrollment standpoint, are actually now their retention rates are going up. So that's having a positive impact on our advertising as a percent of revenue. Our student body online, we are happy with the composition of it. We will keep reinforcing that with our marketing mix. But the real outlier is in increased retention levels. That's the thing that's driving it more than anything. Before we take the last question, one thing about the program review I should have mentioned for those investors that are new to Grand Canyon is the issues around this unofficial withdrawal issue that was raised by the Department of Ed. It had to do with when the University operated in a term-based environment. Since the Summer of 2010, the University has operated in a bar-based environment so the issues raised in that program review are not issues that are a concern with the way the University operates today. This was an issue related to the way the University operated prior to the Summer of 2010.

With that, we can take the last question.

Trace Urdan; Wells Fargo Securities.

I understand the comment about scholarship as a percentage of revenue in total. But I'm wondering about scholarships on average for your ground campus students. Is that number up, down, flat?

It is probably up a little bit. As we talked in the past, our scholarships as percentage of revenue for online campuses run about 10% as a percentage of revenue. It is been pretty consistent. The biggest scholarship in that is the discount that we give to our military students. We discount that down as a lot of universities do to $250 per credit hour for undergraduate students and a little higher rate than that. But pretty close to that for graduate students. So that is by far the largest discount we do for online students. The other discounts are pretty minimal given our very low tuition rates.

Okay. So if it is going up a little bit is that because military is becoming a bigger piece of the total?

Military has gone up a little bit, not hugely. But it has gone up a little bit over the last couple of years, primarily driven by retention rate improvements, and then secondarily, we believe word-of-mouth. When you do a good job of educating military students you tend to get a viral effect and so I think we have seen our new starts of our military students go up a little bit.

Just so I understand the dynamic, obviously there is more demand for the ground campus this year than there was last year. And perhaps next year versus this year. It sounds like from your prepared remarks that you're actively making the choice to use GPA as a way to refine who comes and who doesn't come. In other words, you're using that extra demand to bring up you're average GPA rather than using that extra demand to peel back the amount of scholarships that you are awarding, is that fair statement?

I'm not sure. As you know, we have academic scholarships for our ground students based on GPA. So the higher the GPA the higher the scholarship. I think what one of the things that happened this fall and this is probably normal, but the ground campus is a new thing for us in some respects. But students that had registered based on their junior GPA, came in with their final transcripts after their senior year and their GPA might have gone down a little bit. And thus their scholarship would've gone down a little bit. For some students that caused them to say, I don't know if this works. And in some respects, caused us to say we don't think Grand Canyon is the right school for you. So I'm not sure what you said is exactly correct. It has a lot to do with the GPA and thus the scholarship that they are entitled to at Grand Canyon.

All right, if you mentioned this already I apologize, but can you give a little bit more color on the strength in graduate degrees this quarter? I'm curious whether there were specific strengths by program offering? And then, whether you're seeing any kind of acceleration in your ability to enroll grad students in the on ground campus?

The most competitive area is education. And we did a little bit better than we thought we were going to do there in terms of Masters Degrees in Education. But the biggest gain for us was in the doctoral area. We put a lot of resources there. We got a good return. So the biggest thing is the doctoral students. Our ground student graduate program got off to a little bit slower start than we thought. But we're going to put quite a bit of an effort into it this year.

Brian, where the doctoral students? What program area are they focused in?

Still a lot in Education. But also in business. And one that's really growing is the PhD program in Psychology.

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

This concludes today's conference call. You may now disconnect.