Grand Canyon Education Inc (LOPE) 2012 Q3 法說會逐字稿

Good afternoon. My name is Hope and I will be your conference operator today. At this time, I would like to welcome everyone to the third 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). 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's 2012 third quarter results. Speaking on today's call is our President and 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 of 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 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.

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

Good afternoon. Thank you for joining Grand Canyon University's third quarter fiscal year 2012 conference call.

We are pleased with the results of the quarter. Our restated long-term goals are to grow enrollment 8% to 10% per year, revenues of 10% to 12% per year, and achieve pre-tax margins of 23% to 24%. We are restating these goals at this time as a result of the much better-than-expected growth we experienced this year and the fact that we are off to another good start in the fourth quarter.

In the third quarter we grew enrollment 17.5%; revenues, 22.6%; pre-tax margins are at 23.4%; and new enrollments were up approximately 20% year over year. We believe this success is the result of a truly differentiate model within the higher education landscape. The model provides high quality, low-cost education whose brand is rooted in a strong, vibrant traditional campus.

The model places a minimum burden on taxpayers because of a relatively low reliance on Pell grants; because of relatively low default rates on student loans; and the fact that we pay in the 40% tax bracket. The model continues to provide positive benefits to the economy and to the improvement of higher education in the Southwest, given that we have invested $200 million in high-tech classrooms and dormitories and $80 million in technology in the last three years. We are also currently one of the fastest-growing employers in Arizona.

Last quarter I listed five reasons why we are getting these results and I want to update you on those today. The first is the growing strength of a traditional campus and its overall impact on the brand of the Institution. We started the fall with approximately 6,500 students on our campus in Phoenix. We will grow the ground campus to 15,000 students by the fall of 2015. 79% of these students are from Arizona. Their average incoming GPAs are just under 3.4. This year we raised the minimum GPA requirement for admissions to 3.0. The retention level of these students between the spring and fall semester is 87%.

49% of the ground students are studying in the health sciences. Arizona has become a state known for health science innovation. As a result, we are having ongoing discussions with significant Arizona organizations to begin both bench and applied health since research on our campus sometime in 2013. The goal of becoming a research institution is to further cement the growing reputation of GCU as a serious, comprehensive and well-rounded academic institution.

We are off to a good start in the performance areas on campus. We have already had two major theater productions with many sold-out performances. Our various music groups are performing all over the Southwest. We have two major Christian concerns this weekend in our arena that will bring approximately 9,000 people to campus. Because of these concerns, we will have over 600 high school seniors visiting the campus this weekend.

In athletics we won the Director's Cup at the Division II level last year and expect to win it again this year. Our fall sports are off to record-setting performances. In a dual meet last weekend our men's swimming team defeated Division I Arizona State University. Our men's and women's soccer teams and women's volley ball team are all expected to make post-season play in the fall season. We are having ongoing discussions with conference commissioners and university presidents and hope to be competing at the Division I level as early as next year. NCAA President Mark Emmert visited our campus three weeks ago and is recommending GCU to commissioners and presidents.

The second reason for this success is the high-quality composition of our online student body. In our working adult student body 42% are studying at the graduate level. These students have high graduation rates, low default rates and low bad debt expense.

Our College of Nursing and Health Science students produce the highest retention rates and they went from 24.8% of our student body last year to 28.2% this year. This year our College of Education students, who also produce high retention rates, dropped from 44.6% to 42.6% of the total students, but the raw number of those students went up again. The College of Liberal Arts students stayed flat at 15.3%. The College of Business students attending online, our lowest retention category, again declined from 15.3% to 13.9% of the total.

A great deal of the enrollment success has to do with increasing retention and graduation rates. This continues to be driven by four major factors; one, increasing selectivity because of higher admissions requirements; two, bending the marketing spin towards high-quality students; three, an increasing number of our online classes taught by full-time faculty; four, the implementation of technology, which allows us to closely track student attendance, participation and the quality of their academic work.

The third reason for this success is our very competitive pricing model. On our traditional campus, our published tuition rate is $16,500 per year. We have not raised that for three years. After scholarships, our average student pays approximately $7,800 per year. Most private universities have published rates between $25,000 and $40,000 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 tax-supported state institutions and well under most private institutions.

In addition, our room-and-board rates for those students living on campus are extremely low. Most 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. As we reach our margin targets, we will continue to lower tuition in selected programs.

The fourth reason for this success is a flat organizational model with very advanced dashboard technology that gives us the ability to manage the progress of our students on a daily basis. As I mentioned earlier, we have invested $80 million in technology advancements over the last 3.5 years. 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 provide any intervention necessary to keep students moving in a positive direction. We are also working hard in the advanced analytics component of our LoudCloud Learning Management System, which will provide another large amount of data on the academic work of both our students and faculty.

The fifth reason for this success is the growing experience levels of our faculty, management and staff. Our employee turnover rate has improved 800 basis points year over year, decreasing to 12% in 2012. During that same period, our operations management turnover rate has dropped to under 4% and our full-time faculty turnover rate has dropped to under 2%. The instruction and service our students get as a result is reaching very high levels.

As many of you know, we were selected to receive a campus in Northfield, Massachusetts that would have been gifted to us by the Green family. The goal was to replicate the traditional ground campus in Phoenix in the Northeast in order to grow our online student body in that area at higher rates. When we were selected to receive the gift, we were clear that we needed to do additional due diligence in a number of areas.

In the last six weeks we have made five trips to Northfield, conducted meetings with many groups and hired consultants to take a close look at the physical infrastructure. Because of the geographical remoteness of the campus and the rising cost of upgrading the basic infrastructure on the campus and in the city, we have decided this does not make financial sense. Things are going so well in Arizona and the Greater Southwest that we will continue to invest in this regional strategy.

As I said earlier, our overall enrollments are up 17.5% for the year. However, our enrollment growth year over year in Arizona is 30%; California, 33%; New Mexico, 25%; and Nevada, 20%. It is clear that having a physical presence with a traditional vibrant campus has an impact on the growth rate of our working adult student body. It is possible that a better location would emerge in the Northeast in the future which we would take a look at. There is no reason to expand with another physical campus at this point unless the location and conditions are optimal.

Turning to the results of operations for the third quarter of 2012, net revenues were $133.6 million in the third quarter of 2012, an increase of $24.7 million or 22.6% from $108.9 million in the prior-year period.

Operating margin for Q3 2012 was 23.4% compared to 19% for the same period in 2011.

Net income was $18.5 million for the third quarter of 2012 compared to $12.9 million in the prior-year period.

After-tax margin was 13.8% compared to 11.8% in the same period 2011. It should be noted that the difference between the 23.4% margin and the after-tax margin of 13.8% is money that we pay in taxes that go back to the taxpayer. Given our relatively low default rates our relatively Pell usage and the high tax amounts we pay, our net cost to the taxpayer is extremely low.

Instructional costs and services grew from $48.9 million in the third quarter of 2011 to $57.4 million and the third quarter of 2012. As a percent of revenue, IC&S decreased 2% to 42.9% from 44.9%.

Bad debt expense as a percent of revenue decreased 460 basis points between years to 4.2%. This major improvement is a result of 4 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 have before; four, the increased experience level of our staff.

Employee compensation and related expenses increased 30 basis points. Dues, fees and subscriptions and other instructional supplies increased 30 basis points, arena costs increased 20 basis points and depreciation increased 40 basis points.

Selling and promotional expense increased from $31.2 million in the third quarter of 2011 to $36.5 million in the third quarter of 2012. Selling and promotional expense as a percent of net revenue decreased 140 basis points from 28.7% in Q3 of 2011 to 27.3% in Q3 of 2012.

Enrollment advising and promotional salaries and related expenses as a percentage of revenue decreased 30 basis points between periods, while advertising as a percent of net revenue decreased 110 basis points between the third quarter of 2011 and the third quarter of '12.

General and administrative costs increased from $7.1 million in the third quarter of 2011 to $8.6 million in the third quarter of 2012 and, as a percentage of revenue, decreased from 6.6% in Q3 of 2011 to 6.4% in Q3 of 2012.

As a result of the above, net income increased from $12.9 million in the third quarter of 2011 to $18.5 million in the third quarter of 2012.

With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2012 third quarter and talk about changes in the income statement, balance sheet and other items.

Thanks, Brian.

Scholarships as a percentage of revenue increased from 13.5% in Q3 2011 to 13.8% in Q3 2012, primarily due to the growth in the ground traditional campus.

Bad debt expense, as Brian mentioned, decreased to 4.2% in the third 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. As we mentioned previously, we anticipate bad debt expense as a percentage of revenue to be slightly higher in the second and third quarters due to the ground campus being out of session during two out of the three months of these quarters. We anticipate bad debt expense as a percentage of revenue to be approximately 50 basis points lower in the first and fourth quarters.

Our effective tax rate for the third quarter of 2012 was 40.5% as compared to 37.3% in the third quarter of 2011. The lower-than-anticipated rate in the prior year is primarily due to certain nonrecurring tax items which had the effect of decreasing our effective tax rate in the third quarter of 2011.

We purchased 177,200 shares of our common stock during the third quarter of 2012 at a cost of $2.9 million and have repurchased another 235,000 shares to date in the fourth quarter of 2012 under 10b5-1 plans that had been put in place.

Turning to the balance sheet and cash flows, total cash, unrestricted and restricted, at September 30, 2012 was $127 million. Accounts receivable net of the allowance for doubtful accounts is $8.9 million at September 30, 2012, which represents 6.7 days sales outstanding compared to $16.3 million or 14.4 days sales outstanding at the end of the third quarter of 2011.

CapEx in the third quarter of 2012 was approximate $23.2 million or 17.3% of net revenue. This quarter we completed construction of our fifth residence hall and sixth residence halls, a new arts and health sciences classroom building to meet the demand of our health sciences programs, and our first parking garage. We anticipate CapEx in 2012, exclusive of the transaction I will discuss in a minute, to be approximately $85 million to $90 million which, as a percentage of revenue, is down from 2011. We anticipate that 2013 CapEx will be down slightly to approximately $80 million and will include two more dorms and an expansion of our student union to service the increasing student body.

I now want to give you some color on two fourth quarter events. In the fourth quarter of 2012 we will finalize the purchase of approximately 25 acres of land and a 131,000 square foot building approximately one mile east of our Arizona campus. We intend to convert the existing building into office space for employees that primary work at least offsite locations in the Arizona area as it is our desire that these employees are as close to campus as possible. These employees will move to this new location beginning in mid-2013 as these leases expire.

We are currently in discussions with various parties to sell a portion of this property, the existing building and the future improvements and we would then lease this property back under a long-term lease. Any potential gain on the sale will be deferred and recognized as reduced rental expense over the term of the lease in accordance with current sale/leaseback accounting. We anticipate that this transaction will reduce our rental costs in future years and helps our composite score. The costs associated with purchasing and developing this property will be broken out separate from CapEx on our cash flow statement under the caption Purchase of Land and Buildings for Future Development.

In addition, during the next week to 10 days we anticipate that we will close on a new loan agreement with Bank of America NA as administrative agent and other lenders which will refinance the university's prior indebtedness. The new loan will, A, increase the term loan to $100 million with a maturity date of November 2019 and decrease the interest rate on the outstanding balance from Libor plus 200 basis points to Libor plus 175 basis points, with monthly principal and interest payments; and B, extend the university's revolving line of credit in the amount of $50 million. No amounts have been drawn on our current line as of September 30, 2012.

The new loan will contain standard covenants that are substantially consistent with those in the prior loan agreement. Indebtedness on the agreement will be secured by the assets located at the university's Phoenix, Arizona traditional ground campus. The university anticipates hedging a substantial portion of the loan amount to take advantage of the extremely low interest rates.

Last, in case you missed last quarter's conference call, I would like to provide similar color on the guidance we have provided for the fourth quarter of 2012 and some early thoughts on 2013.

We have increased our estimates for Q4 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, primarily due to lower-than-expected bad debt expense.

Our guidance takes into account the timing of the holiday break for both our ground and online students, which is having a more significant effect on our fourth quarter financial results in comparison to prior years, primarily due to the growth in the ground campus, which has a three-week holiday break and the fact that we have two less days of revenue for ground students in December of this year as compared to last year.

Our guidance assumes an effective tax rate of 40.5% for the fourth quarter, although it is likely that we will give a large contribution in lieu of state income taxes like we have done in the past. This will have the effect of increasing G&A operating expenses and reducing the income tax expense in the fourth quarter.

We have also provided our estimates of diluted weighted average shares outstanding. Although we might repurchase additional shares during the fourth quarter, these estimates do not assume material additional repurchases. They do assume increased dilution from stock options granted in previous years and from a 2012 stock grant.

As it relates to 2013, we have just begun our budgeting process. We anticipate providing detailed guidance for 2013 on our next earnings call. Our expectation is that our guidance will be consistent with our long-term goals, except that year-on-year enrollment should continue to exceed our long-term goals in the near term.

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 James Samford, Citigroup.

Just wanted to talk to you a little bit about the north -- or a question about Northfield a little bit in the context of your strategy over the long term. Obviously, you're retrenching on the western regional area. How are trends going as far as conversion rates outside of your region? And at what point will you rethink sort of expanding physically into -- beyond the Southwest?

Conversion rates on leads outside of the Southwest in most areas are slightly down and that's been consistent over the last year and a half, really. That's being offset by the huge increase in conversion rates in Arizona but, most recently, we are having a lot of success in California. In fact, we will be very aggressive in California beginning in January with advertising for both traditional ground students and online students.

When you think about how big the Southwest is, a relative small size comparatively speaking at this point, we've got a long run in the Southwest. Anything that we would do in the Northeast would be done for 5, 6, 7 years out. And to be honest with you, at this particular time we don't know whether we're going to do something out there or in a different region or not.

It's interesting, however, that since we announced that we are not going to move into Northfield because of its remoteness and infrastructure problems, we're getting a steady stream of calls from people who have properties in other parts of the country who would love Grand Canyon University to move in. And so, there'll be no shortage of opportunities if we decide to do it, it's the matter of finding an optimal opportunity and what -- understanding when the timing is right.

As a quick follow up on your revenue per search number -- per student number this quarter was up, like, 4%. Just wondering if you could break that down into sort of pricing versus retention. And I guess more broadly speaking, when you say you're going to plow back margin into pricing, how soon should we see that revenue per student potentially come down or is the offset there from the retention perspective?

The offset is definitely there from the retention percentage. We've done it in two programs already. We did in our theology program and we did it in our education program for the cohort model where students actually meet face to face in different locations. And in both cases we increased the number of students in both those programs and increased the retention rates of those students. And so, if we would lower tuition in selected programs, it would be with the calculated risk that we're going to be able to increase the number of students in those programs, decrease the number of students in programs where there's a lower retention rate, and therefore not affect the revenue per student number.

Yes. The majority of it, as Brian said, is in retention. Our average tuition price increase across the university this past year was around 2% and that wasn't across all programs. And so, we're getting the revenue per student growth off of improved retention and then, secondarily, the growth of the ground campus. Because for students that live on campus, room, board, tuition, the fees, revenue for that student on average is 15 -- $14,000 and $15,000. And so, that's obviously slightly higher than the revenue per student we get from a full-time online student.

But, those ground students are a very good example of what I was talking about. The retention rates are just so high that, in comparison to the retention rates of students at the lower end that any price reduction is offset by the increased retention rate. And so, we don't anticipate the revenue per student to go down.

Great. Thank you.

Your next question comes from the line of Sara Gubins, Bank of America.

Hi, Sara.

The first question, we are seeing some other institutions do price reductions and increasing scholarships. Are you seeing this show up at all in perspective student consideration?

No, we have not. We talk to our people on a very consistent basis and we have not heard a lot of discussion about that. But, I think it's indicative of us moving into a different category from an institutional perspective. We don't hear our people talk nearly as much about competing with the traditional for-profit, publicly-traded education companies. We're competing a lot more against now, for example, Arizona State, Northern Arizona State University, some of the students -- some of the universities in California and especially Liberty. So, we're not seeing a lot of that.

Okay. And then, Brian, I was thinking about your comment about maybe getting into the 23% to 24% pre-tax margin level and then potentially staying there and maybe plowing back incremental margin into lower tuition. Do you think that we could get there next year? I mean, it looks like you're probably going to end this year not too far away from that. And I'm wondering, at that point should we then think about your growth as being 10% to 12% revenue growth, margins kind of flat and so that flows down to EPS?

I think in the near term we'll grow faster than that but, in the long term, that is a good way to think about it. I think that people are talking about all the free courseware that's going to be provided by the high-end institutions and that that is going to be a threat. That's really not going to be a threat. But, what's going to happen is people are going to be forced to really look at the cost structures of what they do and figure out -- there's going to be a tremendous pressure on price in higher education in the next five years and I think we're in a very, very good position to keep our margins at 23% or 24% and compete very effectively on price.

Sara, again, we --.

Thank you. Oh --.

Haven't gotten really into the details of the budget process for 2013, but I'm pretty confident you'll see margin expansion in 2013 similar to what we've talked about in the past. And then, there should still be some margin expansion that following year. But, I do agree that after 2014 it's very likely we'll be at the high end of our margin thoughts.

Okay. Thanks.

Your next question comes from the line of Bob Craig, Stifel Nicolaus.

Just a first question. I think you've made some comment on this in prior quarters. Could you comment on online start growth and maybe some color related to growth both inside and outside the Southwest in that regard?

Yes. The numbers that we gave in terms of total enrollment in Arizona, California and New Mexico and Nevada really reflect the new start numbers -- reflect that. And so, three things, really. Number one, we are seeing a slight decline in enrollment growth in states outside the Southwest. Secondly, new enrollment growth is accelerated for online students in the four states I mentioned. And then, thirdly, that 20% number is absolutely being impacted by our success on the ground. And so, without the ground, that wouldn't be 20%. It would still be a significant number, but those are really the three trends from a new start growth perspective.

Okay. And then, Brian, relating to the Northfield situation, have you changed your thinking at all on the Phoenix campus and Southwest expansion plans, especially in light of this transaction in the fourth quarter of the 25 acres of land. That's an awful big parcel. Maybe you could shed some light on what you really do or what are looking for in terms of the most viable next leg of growth.

There are two or three things that we are going to be doing and we'll give you more -- shed more light on that in the future, that really involves the southwest. It particularly involves Phoenix and the Valley.

The thing that we've figured out in the last year is that, as good as we're doing in Phoenix and in Arizona and in the Southwest, we really haven't tapped our potential here yet. And so, when we looked at -- we were going to put $150 million into Northfield, another $30 million into infrastructure. You pencil all that out and you look at how long it's going to take you to get a return on that. And then, you think about the developments that are happening here and putting that $180 million into this location and how quickly we can get a return, it's the -- the answer is pretty easy. And so, we're not -- it's not that we're going to totally rule out another physical campus location, but we're in no hurry to do it because of the returns we can get by investing the money here.

Okay, great. I'll turn it over. Thanks.

Thanks.

Your next question comes from the line of Jeff Volshteyn, JPMorgan.

(Inaudible) a significant investment related to the research effort. What areas of study are you planning to research and is that going to be -- will students be involved in research or is that more of an academic publication research?

No. The research is going to be both bench research and it's going to be application-based research. It will probably involve basic research companies as well as hospitals from an applied prospects. We've got relationships with 30 hospitals in the Valley at this -- already. We have already built out probably the most advanced chemistry, biology, DNA and forensic science labs that exist in the state. And so, we've got the beginnings of this in place. We will involve our undergraduate students with whatever professional research groups we end up partnering with. And that -- our students will be an increasing part of that as we go to HLC and apply for a PhD in biology and those kind of programs.

We're going to make an investment. This is not going to be -- it's going to be our investment. It's not going to be material to the financials, but it will be a significant investment. And probably it's going -- it looks like there's going to be child cancer and those kind of areas that we'll probably start with.

Okay. Makes sense. Thank you.

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

In terms of the long-term growth rates that you articulated today, is there any reason that the enrollment and revenue growth rates couldn't be higher if you are taking down price, other than maybe just some conservatism and the continued evolution of the competitive set?

At this point the answer to that is probably yes. We are being conservative because, if you look at where -- our growth currently, we're growing at an accelerated rate against our plans and also against our advertising spend. And we're doing it with the kinds of students that we intend to do it with.

And so, the thing that we're excited about now is that the accelerated growth rate over and above what we planned is with the kind of students that we want to recruit. And so -- in the categories that we want to recruit them in. And so, in the near term it is going to be higher than those numbers and I would say near term means fourth quarter, probably first and second quarter of next year. But then, the comps get a little harder third and fourth quarter of next year because we've done very well.

Fair enough. And then just trying to think about how we should think about the ongoing cash flow generating capabilities of the organization. How much cumulative CapEx is required to build out the Phoenix ground campus to get to your targets of 12,000 undergrad and 3,000 grads? And then, once it's fully built out, what will the -- call it maintenance CapEx of the organization be on an annual basis going forward at that point?

We've always look at maintenance CapEx here as about 5% of revenue. That hasn't changed since we went public. And that obviously includes the IT, computers and internal-use software, along with the smaller projects that we're always doing on our grand campus. So, we view 5% of revenue as the baseline maintenance CapEx. And then the building projects are in addition to that and I gave you a sense of what we're doing this year in terms of the dorms.

I think once this next -- once the 2013 dorms are built, we probably have maybe two more dorms to build, at least one parking garage, but we're constantly looking at -- for ways to not build parking garages because they're expensive and can be done with service parking if possible. And one more classroom I think is on the agenda to get to 15,000 students. Those are the big pieces left and there'll be small things like we are doing this year, like expanding our student union for the increasing student body.

And does that t5% of revenue target for maintenance CapEx, does that include kind of the building upkeep for the ground campus?

Yes.

Okay. Thank you.

Your next question comes from the line of Paul Condra, BMO.

Hey, Paul.

(Inaudible) questions. Hey, how you doing? Somebody had asked a question a couple questions ago about enrollment growth outside of the Southwest and I just wanted to clarify. Was it that starts were just -- is it the growth was slowing outside of the Southwest or was it actually negative?

Oh, no, it's slowing. We're still doing -- we're still growing in the Northeast. We're still growing in the Southeast; to a little bit smaller extent, the Midwest. The Northeast and the Southeast are still good for us. It's not growing at the rate we're growing in the Southwest, but it's still growing.

Dan --.

Every single one of our --.

I'm sorry, Dan.

Paul, every single one of our regional divisions are growing year over year. We don't have any divisions that are not growing.

I wondered if you could talk about that a little more. I mean, I know you focus a lot more in the Southwest, but is there something different about the economy or the demand environment in those other regions, or is it just that you're not focusing there?

Well, it's -- it costs us more to get students there. And the conversion rate is so much greater in the Southwest. That's why you're seeing us put more money there and why you're seeing S&P come down as a percent of revenue. But, we're not going to put all of our eggs in that basket and think that we can get all of what we need from the Southwest. It's just that it's a lot more cost efficient to get the students from the Southwest.

And interestingly enough, the closer to our campus we recruit online students, the higher the retention rate of those students. We simply -- we seem to get a higher quality of student the closer they are to our campus. It's -- they're selecting us more than we're selling them. Although, in the Northeast especially we do well because of price.

We're certainly not a household name in the Northeast, but when we take students to our website and talk to them about who we are, our ground campus resonates with that and then they still select us because the quality of our programs are high and because we're priced very, very competitively compared to other Northeast institutions.

Alright, great. Thanks, guys. Great quarter.

Thank you.

Thank you.

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

Good afternoon.

Hey, Brandon.

Hi. Last year around this time, or maybe a little bit later, you guys talked about a pretty good ramp and hiring in advance of the upcoming fall enrollment season for the ground operations. And I think you guys talked about earlier this year you felt like you had enough people to kind of keep going with the enrollment trend without having to kind of re-up on enrollment advisors, counselors, that kind of thing for the ground operations. Maybe a little bit of color on what we should expect next -- call it three, four, five months in terms of support staff in advance of next fall.

Yes. The trend is that we are ramping, but we ramp at a rate lower than our growth rate, and so it's not a one-to-one thing like it used to be. And so, we will -- we're in good shape now for the fourth quarter and the first and second quarter of next year. We really have to make sure that we're where we need to be for the third and fourth quarters of next year in terms of enrollment staff.

We're really excited about the possibility of the support staff and that number in certain categories being able to go down because of the technology we're applying to things. But -- so --.

I think, again, from an enrollment counselors perspective for the ground campus, you won't see us add many like we did last year because our goals are roughly the same.

Okay.

But, as we get into the summertime, the June time period, even maybe a little bit earlier this year, we will be adding academic and finance counselors to get the higher number of students in term so financially cleared and their schedules built out and that sort of thing. So, there'll be some, but not nearly to what happened this year heading into this fall that had.

Fair enough. And then, as we think about the enrollment counselor kind of headcount and workforce for the online operations, any shifts in terms of how you've allocated those people? Are you happy with how the productivity is going wit those people and maybe address turnover as well, especially on kind of the managerial level. Thanks.

Manager level, very low. Counselor level, very low. Really unprecedented and it's a big part of our success, having experienced people. Obviously, we're gravitating hiring in the -- we're maxed out at the ground area, but doctoral students, RN to BSN students, masters degrees in nursing students, other masters degrees. We're putting as many counselors and as many dollars behind those higher-quality programs with high retention rates as we can. You notice that every quarter our undergraduate business students that are attending online, which are our highest at-risk students, that number as a percent of the total keeps going down.

Okay, great. Thanks a lot, guys.

Yes.

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

(Inaudible) short questions. First of all, just following from Bob's question, last quarter you told us that the online starts grew mid-teens. I just want to clarify. I mean, can we say that they grew mid-teens again or did they grow high-teens? I think you said they grew below 20. So, maybe you could be a little more specific there just to be consistent.

It's right at about 20%.

Total she's asking about.

No, but I'm talking about online.

Online would be lower, yes.

I know, but can you be more specific on -- like mid-teens or--? I'm trying to figure out if online accelerated also from mid-teens.

Well, yes and no. I mean, they -- in terms of the number of students we recruited, it accelerated in terms of the percent over last quarter. It's down a little bit, but that's just a lot -- a function of a lot of large numbers. We recruit such a large number of students in the third quarter given it's the back-to-school time. And so, it's down a little bit from the mid-teens, but it was -- it's still very, very good and above our expectations.

Okay, great. And then for the fourth quarter can -- are you looking for 20% starts growth again?

We don't have a ground start during the fourth quarter. And so, again, we would hope for somewhere in the 10 to 15% level of new start growth.

Okay, great. And then did CapEx targets -- sorry, can you just clarify or repeat if that 85 to 90 includes the purchased land?

It doesn't.

And what's the total on the purchased land?

The total is going to be around I think $10 million for the land and the buildings. And like I said, we're breaking it out separately on our cash flow statement so you can see it. In the third quarter we had made a deposit on the land so you see a small -- I think like roughly a $900,000 amount in a category that's underneath CapEx. But, the reason we're breaking it out is that our intention is to sell that land and lease it back within the next 6 months. And so, it's really just a short-term investment that we're making.

Okay, great. And then on bad debt, I was a little confused by the 50 basis point decline comment you made. Or basically, is it supposed to be 50% -- 50 basis points lower than the Q3 rate in the fourth quarter or --?

Yes.

Okay.

That's correct. That's correct.

Alright. Got it.

First and fourth will be about 50 basis points lower than second and third because of the effect of the ground campus.

But, wasn't the second 3.1? That's what I --?

Yes, but if you'll recall, that was an extremely low amount based on a high amount of collections of previously written-off receivables.

Okay, got it. And then the Northeast campus, I think, Brian, you said something about it's 5, 6, 7 years out. Is that what you -- you're basically saying you don't expect to do anything for 5, 6, 7 years, or you just don't think it will get significant until that point?

No. What I intended to say was that this Southwest strategy is going to going to run itself. We're very confident for 5, 6, 7 years if we don't do anything in the Northeast. If there's a chance, we would do something before that, but only if it's optimal. We would not do it because we were having trouble growing in the Southwest.

Okay, great. And then a last question, and hopefully this doesn't make me look like a sports moron, but for the Division I status thing, is that just for basketball or would you be looking to do that for all teams?

No, that would be for all sports.

Okay, got it. Thanks so much.

Alright.

Your next question comes from the line of Joe Janssen, Barrington Research.

Hey, Joe.

A question regarding total and start outside of the Southwest. I heard your prepared remarks. I heard in the Q&A. Is there anything you can do specifically in the marketing mix to start to reverse those trends or -- I know what you have going on in the Southwest is good, but anything specifically that you're trying to do?

Well, we could do what other universities are -- what other universities in our space are doing which is spend more money. But, most people are experiencing a lot of efficiency in that spend and we think we -- as long as we can keep getting increased efficiencies in the Southwest and get -- hit our targeted growth number, there's no reason to accelerate it past that.

I guess another way of answering that question is, could we grow at higher rates right now if we would spend more money? The answer is absolutely we could do that. But, we are happy with the growth rate that we have because we're recruiting really high-quality students. We think the closer we can get those students to our ground campus, the higher their retention rate, the closer we can keep them to the university and the greater the overall brand of the Institution is. And so, it's not that we couldn't grow faster right now if we spent more money in different parts of the country, bit it won't be nearly as efficient as it is spending it in this part of the country.

Okay. Understood.

It's kind of interesting everyone is kind of focused on this because we've been saying for the last 18 months the conversion rates outside the Southwest have been going down given increased competition. And that's what we've been saying pretty consistently. So, this quarter nothing changed in that. That's just what it's been for the last 18 months. We are hitting our internal expectations in regions outside of Arizona and the Southwest, so we're pleased with where our conversion rates are outside the Southwest.

I don't want anyone to read into this there's been some big surprise that's happened outside the Southwest. We're doing exactly as we had hoped we would outside the Southwest, which is we're happy with it.

Are you seeing any success up in the Northwest give -- I just think like the Pac-10, Oregon, Washington, things like that. Are you seeing some success out there?

We're seeing good success up there with our ground campus and we're seeing some success up there with our online campus. It would be better than, for example, in other parts of the country, but certainly not as good as --.

One of the things we haven't talked about but -- or a little bit, but we'll just lay it out there. The opportunity in California is huge. And I'm not saying anything other people don't know. The CU system and UC system is really hurting. The community college system is really hurting. They're turning people away. And we really haven't started advertising there yet.

And so, one of the things that's happening is that, rather than put money into Ohio or Indiana or someplace like that, putting it in California, which is in very close proximity to where we are, we can build off of our grand campus and take advantage of a very weak market there. Just makes a lot of sense to do.

Great. Thank you. A great quarter, guys.

Thank you.

Your next question comes from the line of Trace Urdan, Wells Fargo.

Hey, Trace.

Hey. Could you repeat what you told us about the GPA -- the average GPA for the incoming students in the ground campus? And do you have any idea if you had not -- if you were sort of admitting students with the same GPA what that might have meant in terms of enrollment, just to gauge the increased demand? Does that make sense?

Yes. Yes, the average incoming GPA is a little bit less than 3.4. We raised the admissions requirements to get in from 2.75 to 3.0. And if we had aggressively pursued students that were at 2.75 or between 2.75 and 3.0, we could have recruited -- I can't tell you an exact number, but it would have been 500 at least more students into this incoming class, but it just doesn't make sense for us to do that.

Yes, understood. And then are all the 7,400 students accommodated on campus or are there increasing numbers that are commuting or doing something else with housing?

About -- the 6,500 students that we have on campus this year, a little less than half are living on campus. The other ones commute. Which was -- we didn't talk about it, but a big reason for the problem in Northfield. We weren't going to get that commuter population in Northfield like we're getting it here.

I see. And then is the number of masters students on ground becoming a meaningful number yet or are we still in the nescient stages there?

Yes, we are. And if you look at traditional universities of 10,000 to 15,000 undergraduate students, and a lot of them have 3,000 or 4,000 graduate students, a lot of that is in medical students and law students and we don't have those two programs.

Right.

And so it's probably going to be a little bit more difficult for us to grow that number to maybe 25% of our total ground students than we initially thought. But, it's still -- if we miss that number, it's a small number and it's not going to have a material impact.

Okay. So, will -- I mean, are you going to sort of turn specific attention to it or is it more just sort of an organic process that you grow?

It's more organic. We're paying some attention to it. We have different faculty models on our campus now that require graduate assistance. And we're experiencing the same thing here as a lot of universities are.

Our graduates of our traditional ground campus, if they're nurses they're getting jobs, if they're teachers they're getting jobs. If they're business majors it's more difficult. Fortunately for us, we're hiring a lot of those people. And we want to hire them into our traditional roles on our campus, but we're going to try to talk a lot of them into staying here for a fifth year and doing their masters degree program and working for us as a graduate assistant.

Got it. Okay. Thank you.

Yes.

Your next question comes from the line of Peter [Adder], Piper Jaffray.

Peter Appert% Peter Adder.

Hey, Peter Adder.

Peter Appert% Thanks. So, Brian, I just want to make sure I understand the arithmetic of your 8% to 10% longer-term enrollment growth forecast. And I'm thinking, to the extent that the campus growth rate over the next -- for another three years should be considerably higher than that, presumably, would the implication be that we should be looking for online growth maybe sort of mid-single-digit kind of growth rate? Is that the idea?

I think it will be more than that in the fourth quarter and it will be more than that in the first and second quarters. And so, we are being a bit conservative and seeing how things unfold, recognizing that in the third and fourth quarter of this year those are going to be tough comparables.

Peter Appert% Right, right. I wasn't thinking actually so much about the next three quarters. I was just trying to understand sort of the three to five-year expectation.

Brian's been pretty consistent that long term he'd like to see our online student body grow 6% to 8%, Peter. And so, that's what -- that takes that into consideration.

Peter Appert% Okay, got it. Thank you. And then Arizona State, I think, has been making maybe incrementally more noise, or it seems like they're making more noise, in terms of growing their online program. What do you guys see from them?

We're seeing what we see all over the country. It's harder to do than what people think it is. You can get to a certain number, but when you don't centralize processes and don't have technology and don't have experience scaling things in a very systematic way, it's more difficult than you think. And so, they're having some success, although I -- I talk to our people consistently and we still don't run into them a lot. I think they have in the vicinity of 2,500 to 3,000 in their MBA program. They have some in their undergraduate program. But, we're not running into them to a significant amount and it really is not impacting our ability to grow in Arizona at all.

Peter Appert% Great. Thank you.

One more thing I'd like to add to that, which is, I mean, a very, very, important point. They're actually charging more than we are for their online students. Their tuition actually is above ours, so there is not a -- they don't have a price advantage in that area.

Peter Appert% Thank you.

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

Out of queue, but I'll take advantage of this. We've talked a lot about the entry, sort of, of the funnel piece. Can you make any comments about graduation rates or -- and/or any kind of a job placement rate? I know most of your students are working adults, but any changes there or positives or negatives on those?

Not from the stand -- the more we move our online starts to those upper categories, the more we don't have to worry about placing those students because you're talking about doctoral students and masters students in nursing and master students in education and business. They all have jobs. The fewer of those undergraduate online students that we have in business, the better we are in that category because the less we have to worry about placing them in a job, which is very difficult.

What we really have to focus on and make sure we're doing a good job of is our traditional ground students because those graduating classes are going to start to get larger in the next two or three years. The students that are in nursing will get jobs. The students in education will get jobs. The students that are in those other areas, it's more difficult. But, fortunately for us, a lot of them love being here. They want to work for us and we want them here so we're hiring a lot of those students.

Okay. Thanks.

Yes.

Your next question comes from the line of Adrienne Colby, Deutsche Bank.

Hey, Adrienne. I'm glad to hear your cell phone has hung one.

Thanks. It's been challenging. I was just wondering if you could update us on the conversion rates you're seeing in Arizona, if that's still around 4 times your national rate or if that's actually increasing.

It's about the same.

Okay. And could you tell us how much of your total enrollment is coming from the four states that you highlighted, California, New Mexico, Arizona and Nevada?

You know, I should know that number. To be honest with you, we don't have that number here. We can get that.

Great. And then just --.

We (inaudible) provide that in the past.

One last question, then. Is it too soon to start asking what the trends are looking for for the (inaudible) 2013 class? What kind of applications are you seeing? What kind of interest levels you're seeing?

We are running slightly ahead of where we need to be from a pace prospects to hit 4,000 new students. And so we think that we're not way ahead, but we think we're on target to hit 4,000 news in all of 2013.

Great. Thank you.

And there are no further questions at this time. I would now like to turn the call back to Brian Roberts.

We've reached the end of our third 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.

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