Grand Canyon Education Inc (LOPE) 2012 Q4 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 fourth 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, 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 fourth-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. We apologize in advance if there are questions that we are unable to address due to time constraints.

We 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, 2012, and our current reports on Form 8-K filed with the SEC. We recommend that all investors clearly review these reports before taking a financial position in GCU and we do not undertake any obligation to update anyone with regard to these 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 fourth quarter fiscal year 2012 conference call. We are pleased with the results of the quarter.

Our long-term goals are to grow enrollments 8% to 10% a year, revenues 10% to 12% a year and achieve pre-tax margins of between 23% and 24%. As we will discuss in greater detail later in the call, our 2013 guidance is for enrollments to grow 9% to 10.5%, revenues 11.5% to 13.5%, and for pre-tax margins to be 23.2%. We are currently achieving these results, in spite of growing much faster than expected in 2012. In the fourth quarter of 2012, enrollments grew by 19.1%, revenues 25%, pre-tax margins, excluding contributions made in lieu of state income taxes, are at 24.9%, and new enrollments were up in the high single-digits year-over-year. We believe that this success is a result of a truly differentiated model within higher education. This new hybrid model, which combines a traditional campus and an online campus leveraging a common infrastructure, produces high-quality, low-cost education whose brand is rooted in a strong, growing, vibrant traditional campus. This educational model actually makes a very positive contribution to the taxpayers.

If you add the interest paid by students on Title IV loans, plus the savings of $7,200 per student for all in-state students attending our private university that would've attended a state university, plus the University's tax contributions, and the University's employees tax contributions and then subtract Pell grants and defaults on student loans, we estimate a net grain to the taxpayers in 2012 of approximately $107.8 million. In addition, we have invested $220 million in high-tech classrooms and dormitories, and $85 million in technology in the last 3.5 years.

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 the traditional campus and it's overall impact on the brand of the institution. We started in the fall of 2012 with approximately 6,500 students on our campus in Phoenix. We expect to start fall of 2013 with approximately 8,500 students on our ground campus. We expect to grow this campus to 15,000 students by the fall of 2015. Of those registered so far, 73% are from Arizona. They are average incoming GPAs are approximately 3.4. This year we raised the minimum GPA requirement for admission to 3.0. The retention level of traditional students between the spring and fall semester is 87%. 49% of the ground students are studying in health sciences. This is significant because Arizona has become a state known for health science innovation.

We continue to have a great year in the performance areas on campus. We have already had three major theater productions with nearly 100% sold-out performances. Our various music groups are performing all over the Southwest. We continue to have major Christian and secular concerts in our arena that bring thousands of people to campus on a monthly basis.

In athletics, we won the Director's Cup at Division II level last year and expect to win this year as well. As many of you know, we have been accepted into the Western Athletic Conference and will compete at a Division I level in all sports beginning fall 2013. Currently our coaches are busy building Division I schedules and recruiting Division I athletes. Our media people are negotiating television and radio broadcast deals and our Athletic Director is negotiating contracts with major shoe, apparel, and equipment companies. The Division I move will obviously raise the visibility and brand strength of the University. A fall 2013 highlight will be a soccer match versus Stanford University, likely televised by the PAC 12 network.

The second reason for the success of 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. By college, our College of Nursing and Health Sciences produced the highest retention rate, and they went from 25.6% of our student body last year, to 28.5% this year. This year, our College of Education students, who also produced high retention rates, dropped from 44.6% to 42.4% of the total students, but the raw number of those students went up again. The College of Liberal Arts students went up slightly from 15% to 15.1%. The College of Business students attending online, our lowest retention category, again declined from 14.8% to 14% 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, the increasing selectivity because of higher admissions requirements. Two, continuing to focus on attracting high-quality students. Three, an increasing number of our online students taught by full-time faculty. In the fourth quarter 2011, 20.6% of students in online courses were taught by full-time faculty. This increased to 23.2% in the fourth quarter of 2012. On ground, greater than 50% of our students are taught by full-time faculty, and our goal is that 70% will be taught by full-time faculty in two years. The implementation of technology, which allows us to closely track student attendance, participation and quality of their academic work.

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. This fall will be the fourth year we have not raised tuition. 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-year, in addition to the tax subsidies that support each in-state student. Those institutions also offer scholarships but our active scholarship averages are now very competitive with the tax supported state institutions and well under most private universities. In addition, our room and board rates for those students living on our 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. This year we are budgeting a 5% increase in new online starts and are not budgeting any increased tuition for our online programs. We believe the demand that exists due to our brand strength and price point would allow us to grow faster and raise our tuition price. Similar to prior-year's, that as we discussed previously, we did not believe this was in the long-term best interest of the University, our students, or our investors. We expect to reach our targeted total enrollment, revenue and margin goals because of the continued shift towards higher-quality students at higher retention rates.

The fourth reason for this success is a flat organizational model at a 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 $85 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 on 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 500 basis points year-over-year, decreasing to 15% in 2012. During that same period, our operations management turnover rate has dropped to under 4%. Our full-time faculty turnover rate has dropped to under 2%. Instruction and service our students get as a result is reaching very high levels.

A big part of our growth on the ground campus is growth with Arizona students, because of the lack of private Christian universities in Arizona. For the fall of 2013, 73% of our registered students are from Arizona and 77% of that are from the west side of Phoenix. We are tracking the high-growth East Valley students who want to live on our campus but missing out on East Valley commuter students. As a result, we are entertaining the possibility of building a traditional campus in one of four East Valley cities, as well as putting a campus in Tucson. The earliest we would start students at one of these campus would be in the fall of 2014. I should also note that because of our media campaign in California, interest levels of both traditional students and working adult students has picked up significantly in the last 45 days.

Turning to the results of operations for fourth-quarter 2012, net revenues were $141.3 million in fourth quarter 2012, an increase of $28.3 million, or 25% from $113 million in the prior-year period. Operating margin for Quarter 4 2012 was 23.5%, compared to 20.6% for the same period in 2011. Excluding contributions made in lieu of state income taxes of $2 million in fourth quarter 2012 and $1 million in fourth quarter 2011, operating margins for fourth quarter 2012 was 24.9%, compared to 21.5% for the same period in 2011.

Net income was $20.9 million for the fourth quarter 2012, compared to $15.3 million in the prior-year period. After-tax margin was 14.8%, compared to 13.6% for the same period in 2011. It should be noted that the difference between the 23.5% margin and the after-tax margin of 14.8% is money that we pay in taxes that goes back to the taxpayer. Given our relatively low default rate and our relatively low Pell usage and the high tax amounts we pay, we are a net plus to the taxpayer as we discussed in the beginning of the call.

Instructional costs and services grew from $50.6 million in the fourth quarter 2011 to $58.8 million in the fourth quarter 2012. As a percent of revenue, IC&S decreased 3.2% to 41.6%, from 44.8%. The majority of that decrease was bad debt expense. Bad debt expense as a percent of revenue decreased 250 basis points between years to 3.2%. This major improvement is the result of four things -- one, the increasing quality of our online students. Two, the growth of our traditional ground student body. Three, the flat organizational structure and innovative dashboard that allows us to manage the progress of each student to a greater extent than ever before. And four, the increased experience levels of our staff.

Employee compensation and related expenses increased 80 basis points between years, primarily due to higher employee benefit costs. Occupancy costs decreased 80 basis points, primarily due to our purchase of an on campus dormitory in the fourth quarter that was previously leased. Dues, fees and subscriptions, and other instructional supplies decreased 50 basis points between years. Advertising expense increased from $11.5 million in the fourth quarter 2011 to $13.6 million in the fourth quarter of 2012. Advertising expenses as a percent of net revenue decreased 50 basis points from 10.2% in fourth quarter 2011, to 9.7% in fourth quarter 2012.

General and administrative costs increased from $7.9 million in the fourth quarter 2011, to $11.7 million in the fourth quarter of 2012, and as a percentage of revenue, increased from 7% in fourth quarter 2011 to 8.3% in fourth quarter 2012. Excluding the contributions made in lieu of state income taxes, G&A expenses as a percentage of revenue increased to 6.9% in the fourth quarter 2012, from 6.1% in the fourth quarter 2011. As a result of the above, net income increased from $15.3 million in the fourth quarter 2011 to $20.9 million in the fourth quarter 2012.

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

Thanks, Brian. Scholarships as a percentage of revenue increased from 16.1% in Q4 2011 to 16.9% in Q4 2012, primarily due to the growth in the ground traditional campus which uses scholarships, especially academic scholarships, to attract high-performing students. Bad debt expense as a percentage of revenue decreased to 3.2% in the fourth quarter 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.

Our effective tax rate for the fourth quarter 2012 was 36.7%, as compared to 33.1% in the fourth quarter 2011. The low rate is primarily due to the $2 million of contributions made in lieu of state income taxes during the fourth quarter 2012, as compared to $1 million in the same period in 2011. Excluding these contributions, our effective tax rate would have been 40.3% in Q4 2012 and 39.8% for the full year 2012. We anticipate our effective tax rate in 2013 will be 40.5%. We repurchased 455,000 shares of our common stock during the fourth quarter 2012 at a cost of $10.3 million, and have repurchased another 64,000 shares to date in the first quarter 2013, under 10b5-1 plans that had been put in place.

Turning to the balance sheet and cash flows, total cash unrestricted and restricted at December 31, 2012 was $161.3 million. Accounts receivable net of allowance for doubtful accounts is $8.0 million at December 31, 2012, which represents 5.7 days sales outstanding, compared to $11.8 million or 10.1 days sales outstanding at the end of fourth quarter 2011.

CapEx in the fourth quarter 2012 was approximately $24 million, or 17% of net revenue. CapEx for 2012 was $97.7 million. During the fourth quarter 2012, we took the opportunity to purchase the one on campus dormitory that we previously leased at what we believe was a favorable price. Excluding that purchase, total CapEx for 2012 met our expectations. We anticipate that 2013 CapEx will be down slightly to approximately $80 million, and will include two more dorms and an expansion of or student union and library to service the increasing student body.

As an update to two fourth quarter events that I discussed previously on last quarter's call, in the fourth quarter 2012, we finalized the purchase of approximately 25 acres of land and 131,000 square foot building approximately 1 mile east of our Phoenix campus. We intend to convert the existing building into office space for employees that primarily work at leased offsite locations in the Phoenix area, as it is our desire that these employees are as close to campus as possible. These employees will move to this location beginning in mid-2013 as these leases expire. We have a deal in place to sell a portion of this property, the existing building and the future improvements, for $20 million, and we will 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 lease back accounting. We anticipate that this transaction will reduce our rental costs in future years. The costs associated with purchasing and developing this property will continue to be broken out separate from CapEx and our cash flow statement under the caption purchase of land and buildings for future development.

In addition, in December 2012, we closed on a new loan agreement with Bank of America, as administrative agent and other lenders, which refinances the University's prior indebtedness. The new loan, A, increased the term on to $100 million with a maturity date of November 2019 and decreased 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, extends the University's revolving line of credit in the amount of $50 million. No amounts have been drawn on our revolving line of credit as of December 31, 2012. The new loan contains standard covenants that are substantially consistent with those in the prior loan agreement. Indebtedness under the agreement is secured by the assets located at our Phoenix, Arizona traditional ground campus.

I would like to now touch on a couple of regulatory items. Our cash basis 90/10 amount for 2012 was 80.3%, which is up slightly from 80.2% in 2011. We estimate that the slight increase is due to an increase in the 90/10 ratio for our ground traditional campus students from approximately 53% in 2011 to approximately 59% in 2013. We believe this amount remains similar to other public and private universities that serve traditional age students. Although we have not yet received our draft cohort default rates related to student loans that went into repayment between October 2010 and September 2011, for students whose last day of attendance in the University was between April 1, 2010 and March 31, 2011, we anticipate based on information provided to us, that our rate will be approximately 12%. We are pleased that our cohort default rate remains fairly consistent with the 2010 two year default rates, as our transition to BBAY occurred during the summer fall 2010, which is during this period.

We are hopeful that our cohort default rates in future years will return to much lower levels given the significant change in our student mix that has occurred. However, we want to remind you that currently 88% of students are paying back their loans with interest, which combined with our tax contribution and that of our growing work forces tax contribution, and the high savings of state tax dollars because in-state students are attending a private university, the net effect to taxpayers of GCU's contribution is very positive.

Last, I would like to provide some additional color on the guidance we have provided for 2013. As you probably noticed, we have again provided a range of estimates for each quarter of 2013. Our revenue guidance assumes no net tuition increase for our ground campus, or our online campus. We anticipate revenue per student will continue to grow year-over-year in the first half of 2013, due primarily to retention gains we have experienced over the past couple quarters and last year's working adult tuition price increase. This should level off in the second half of 2013 as we anticipate revenue per student will be down slightly year-over-year in the third quarter, due to the ground campus growth and only earning one month of revenue in that quarter. Quarter 4, we should see a small gain in revenue per student.

On the expense side, bad debt is projected to be up approximately 50 basis points year-over-year, as we do not anticipate collecting as much previously written off receivables as we did in 2012, as the amount of write offs had decreased significantly over the past year. Excluding recoveries, bad debt should be fairly flat year-over-year. Division I costs include $2 million of one-time payments that are not included in our current estimates as we are still working with our auditors regarding the accounting for these payments. Included in the amounts is an increase in annualized cost of approximately $1 million, beginning in the summer of 2013.

Advertising as a percentage of revenue is budgeted to be up 50 basis points year-over-year, due to the effect of the Mind Streams revenue share arrangement and increased television advertising. Stock-based compensation and depreciation will be up 30 basis points and 20 basis points over year-over-year, respectively. Our stock options and restricted stock awards vest over a 5-year period. Our fifth year anniversary of going public is November 2013. Thus, beginning in 2014, stock-based compensation will be flat to down year-over-year.

We have forecasted employee compensation related expenses to be flat year-over-year, even though our budgeted headcount would suggest these costs should be going down. We saw a spike in our medical benefit costs in the second half of 2012, which we have forecasted will continue and we expect that Obamacare will further increase costs. We anticipate that we will get leverage in other expense line items, primarily G&A between years. Interest expense will increase to approximately $2 million, due to the increase in our term loan from approximately $20 million to approximately $100 million.

As I mentioned previously, our guidance assumes an effective tax rate of 40.5%. We have also provided our estimates of diluted weighted average shares outstanding by quarter. Although we might repurchase shares during 2013, these estimates do not assume repurchases. They do assume increased dilution from stock options and restricted stock granted in previous years, and from a 2013 stock grant.

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

(Operator Instructions) Adrienne Colby, Deutsche Bank.

Let's try again. I think this time last year you had commented you had about 2,700 registered students for the fall semester? Can you update us where we are now?

Yes. It's somewhere under -- just under 5,500.

Great.

The goal is that there will be 8,500 by the fall.

Okay. If think you had said, too, in the past that you thought your staffing was probably adequate and we would start to see somewhat of a ramp may be in the summer, coming out of the summer months. Is that still your expectation?

Yes. Not on the enrollment side for the ground campus, that on the academic and finance counselors side. As we get closer to that fall, there might be a little bit of a ramp. But, probably but not significant.

Okay. Great. If I could ask one more. I know that last year, you saw an increase in students attending, ground campus students doing summer school. I was just wondering if you have any expectations at this point. If we will see similar levels or if you expect that to grow?

Yes. Probably somewhere between 2,000 and 2,500 students taking classes this summer.

Great. Thanks very much.

Jeff Volshteyn, JPMorgan.

Could you give us a little more color on starts, starts and different verticals, as well as a clarification, the number you gave, was it rural starts or online starts only?

The 5% number was online starts.

Yes.

We expect to start about 4,000 new students on our ground campus. So, the total start number will be above the 5% number, because of the 4,000 ground students. But, online about 5% and the ground will take us up a little bit above that.

And how do they perform on the different verticals?

Different verticals on the ground or online?

Online.

Online, the priority is the doctoral students will be quite a bit above 5%. Masters students in nursing will be above 5%. Masters students in education will be about that. RN to BSN students will be above 5%. The verticals that will actually experience a decline, are the online students in the areas of liberal arts and business, which is very consistent with the direction we've been going for the last two years.

Make sense. If I could just ask one more. In the 90, 10 number, what percentage do you estimate comes from Pell versus loans?

I believe that about 20% or less of our cash basis revenue comes from Pell here so, it probably was roughly that amount.

Thank you so much.

James Samford, Citigroup.

Great quarter guys, just a few quick questions. In the past you talked about conversion rates within and outside the region. It sounds like you are still very much Phoenix focused and Arizona focused. What's the mix, right now, in terms of online, in terms of Phoenix or Arizona versus outside that region. How are those convergent been beyond that region, particularly as you announced some pretty interesting announcements on the NCAA Division I, et cetera?

30% of our online students are now from Arizona, that's up from 10% between two and three years ago. That continues to grow. However, both on ground and online students, we are seeing big increases in inquiries from the Southwest. California and especially Southern California, also Colorado, New Mexico, Nevada, continue to be areas that are growing at -- are outpacing the rest of the country.

So, I would say that the answer is the same that we've given in previous quarters. If you look outside the Southwest, we are down a little bit where we've been traditionally in terms of conversion rates, with a couple of exceptions, New Jersey for example being one of them. But, we are so far exceeding what we've done in the past in the Southwest that, that accounts for the positive growth that we are getting.

One quick follow-up. You mentioned that the ground campus went from 50% to 59% of title IV. Are you worried about that trend? I know that was part of the reason for your ability to lower or at least keep tuition low on the online side. Are you worried about that continuing to go higher from here?

No. It really can't. There's a shortfall, especially for residential students. I explain this to regulators all the time. It's their own rules that is why somebody like in Arizona State has a lower 90, 10 than a working adult focused university.

So, if you're a residential student, even with our low tuition prices, you just can't get title IV to approximate 80% or 90%. We kicked up a little bit, primarily because of the growth of our commuter population where they can get a lot of their aid. And, as Brian talked about earlier, it shows kind of our demographic a little bit. Focus on the West side of Phoenix and so, no, we're not concerned that, that's going to get much higher than where it is now.

If you look at the Phoenix demographically, the East side of Phoenix has much higher -- much higher socioeconomic region of the city. The Westside is lower. So, we do have more students from the West side, because of its convenience. But, the average incoming GPA of those students are 3.4 or greater. We're not concerned at all. The number of students we are getting from the Westside is a very positive thing for us because their grades are so good. When we open the East Valley campus, if we do that in 2014, it will just enable us to capture a bigger percentage of the total students in the Valley.

Great. Thanks a lot.

Jeff Meuler, Baird.

Congratulations on the strong results in the quarter and the year. First a question on the online starts growth. I know you guys are coming up against tougher comps in the growth. I think you said high single-digits in the quarter. It remains strong, but it is decelerating a bit and you are budgeting 5% for next year.

Where are you seeing the signs of the incremental softening? You mentioned declines in liberal arts and business, but given your allocation of resources, I think those areas have been softer. Where are you seeing incremental softening? Maybe it's some conservatism?

No. Really, it's self-induced. We are really focused on the quality of the online student body and we look at it really scientifically in terms of how we spend our outreach or advertising dollars. So, could we grow at greater than 5%, new starts online? Absolutely. We could probably grow close to 10%. But, we would be getting more students at that low end with the lower retention rates and we are just not -- we are not doing that. So, as we move -- as we mix shift our marketing dollars and we watch this transition, if we hit that 5% or 6% number in terms of online growth, if we hit it in the right categories, we are going to get a greater than that total enrollment growth which is exactly what we are after.

By geography, would that 5% assume a decline in terms of new student starts outside of the Southwest, or flat, or is it a little bit of growth there?

It would be a decline. Again, that is self-induced. We are spending an increasing percentage of our -- even though advertising percent of revenue is going down, we're spending an increasing percentage of our advertising dollars on branded advertising in the Southwest, which is more expensive, but it leads to generally a higher quality of student.

Okay. Finally, could you just help us with the math? I think you said you are planning on starting 4,000 new students for the ground campus this fall. Of the 7,600 or so that you just reported, how many of those are true ground students, versus on-site students at another location? Just trying to get to the math from what you just reported to the 8,500 with the 4,000 new that you are talking about.

Great question. So, as we've talked about previous quarters, included in our ground numbers are ground traditional students, which this fall/spring, we are around 6,500. At least in the fall, we were at 6,500. That will be down a little bit in the spring. We typically see that number shrink a little bit between graduation and drops. We don't typically tend to recruit enough new students in the spring to make up for that so that will be down a little bit when we report first-quarter results.

4,000 new, we are projecting would take that number to about 8,500. Then you layer on top of that about 1,000 professional studies students. So, we are project thing around 9,500, what we refer to as ground students come next fall.

Okay. Thanks guys.

Sara Gubins, Bank of America.

Can you talk about your scholarship expectations for 2013?

Sure. From an online perspective, we are going to continue doing what we've always done, focus. Included in that scholarship number is the military discount that we give and others, also give to the $250 credit rate. Then, from an online perspective, we will do some select scholarship programs in certain times during the year, as we've always done. But, those will be minimal amounts of scholarships and they are just a way we motivate students to start in non-traditional times, to spread out the workload for our counselors.

For the ground campus, we are going to continue doing what we're doing. The guaranteed academic scholarships based on GPA, with the hope that our average student will pay somewhere between $7,800 and $8,000 a year. So, yes, scholarships as a percentage of revenue will be going up -- or, scholarships as a raw dollar will be going up. But, it's almost all being driven by just the growth in the ground campus.

Okay. Then, separately, you mentioned potentially building a new traditional campus in Tucson and another one in Phoenix. Is there anything by way of expense built into your expectations for 2013 for this? When will you decide if you're going to go ahead and do would?

No. There's nothing built into 2013. It will be a 2014 event, especially from an income statement perspective. There might be some CapEx in the tail end of 2013 for our first classroom building that would be built for the fall 2014.

So, we would make a decision early in the summer. We would want to begin building, because the first -- the first part of the campus will take about 12 months to get up and so, if we get started by August or September, we should be ready by the following August or September.

Great. Just last question. Any change on the competitive dynamics? I know it's very early days, but there's been some discussion about traditional schools offering more free courses, kind of up front. Are you seeing this? Is this something that is being discussed in the market and among your not for profit peers? Thank you.

Yes. We are hearing that discussed. I think that the discussion is the result of escalating cost on both traditional campuses and at for-profit universities. So, our response is that [moots] will play some role in exposing people to online delivered education, especially in more technical areas and probably can do some good, leading to individual certifications perhaps. But, the truth is, as long as we figure out a way to make traditional education in classrooms, both online and on ground affordable, that is where the future will be.

People ask me about building, buildings because is this thing not going all electronic? My response always is at $50,000 a year, that's going away. But, for traditional students at our rate, it's not going away. In fact, it will increase. I think if we control the cost for online students who want to earn degrees that lead to jobs like nursing and that kind of thing, it won't go away either.

Okay. Thank you.

Kelly Flynn, Credit Suisse.

My first question relates to the starts growth. Sorry to make you repeat this. I'm a little confused about what the 5% is. Can you just talk about sort of the quarter you just reported? What was the online starts growth?

High single digits for the quarter we just finished. Our budgets that we provided guidance on factors in new start growth of 5% for the year.

Okay. Great. Then, also, a question going back to Sara's question about Tucson in East Valley. Can you just clarify, when you talk about an early summer decision, what does that relate to? Is that East Valley and can you just kind of elaborate on your decision-making process as it relates to East Valley versus what's going on in Tucson?

Yes. Both markets, the markets are remarkably similar. If you look at the East Valley, there's about 1 million people. The population is 1 million and it's growing rapidly. If you look at the city of Tucson, it's also about 1 million people and Tucson is growing. In both those markets, there is one major competitor. It is Arizona State in the East Valley and it's University of Arizona in Tucson. There's a remarkable lack of anything else for traditional ground students.

So, right now, there's four cities in the East Valley that are pulling together proposals for us. Land that would be available, what they could do in terms of infrastructure, what they could do in terms of easement of tax situations. So, there are four cities in East Valley that are pulling proposals together. Tucson is also putting a proposal together. Both of them are -- all five of those cities, although in the East Valley we choose only one of four, are very excited at the proposition of us having a campus of somewhere between 4,000 and 7,000 traditional students in those locations. I don't think it's necessarily an either or, it's which one comes first is probably what will happen.

Okay. Just to be clear, you think your decision this summer would be to go with either East Valley or Tucson? It would be kind of one initially and then eventually you may end up with both, is that fair?

Yes.

Okay. Great. Dan, I think you mentioned on the same topic, there may be a bit of CapEx related to a new campus in 2013. What's included in the $80 million target as it relates to either East Valley or Tucson?

Technically nothing. But, our goal would still be to drive to that 80 million CapEx. So, if the decision was made to do one of these additional locations, we would look at some of our other plans for the tail end of the year, to still try to drive toward that $80 million of CapEx.

Okay. Great. Lastly, on the land purchase, I know you talked about this last quarter as well, but can you just clarify was that exactly $10 million this quarter and did you say that was not in the total CapEx, that's a different line item?

It's actually a separate line item on the face of CapEx schedule and the total amount is $7.2 million. So, if you look of the statement of cash flows, it is the line directly underneath capital expenditures.

Okay. Great. Then, do you expect additional expenditures related to that over the next few quarters?

Yes. Yes, we will spend money building that out. Something probably in the neighborhood of about $10 million. Again, that's not in the $80 million that I talked about. But, we have entered into an agreement to turn around and then sell that property for $20 million. So, what you will see, is it will stay on our books and you will see it as a component of our statement of cash flows, even though we've entered into an agreement to sell it. Once the leasehold improvements are done, and it's ready to be occupied, then the sale will be reflected in our financial statements.

Okay. So, another $10 million in improvements, you are saying?

Yes.

Thank you very much.

Peter Appert, Piper Jaffray.

Brian, you've addressed some of these issues. Could you give a snapshot of what the economics of the new campus are in terms of how much capital cost in total to get to the 4,000 to 7,000 students? Does the phasing in of it allow you to be profitable from day one? Or, are there start up losses you'd anticipate in 2014?

No. We would be profitable quickly. East Valley and Tucson, just to give you a 40,000-foot view of that, if those things work out, we're talking about a five to six year build out of infrastructure. The total amount would probably be between $50 million and $60 million. Then, we expect that to support somewhere between 4,000 and 7,000 students. In addition to the traditional students, we expect those campuses with support another 1,000 non-traditional students attending in the evening. So -- and that doesn't then factor in the increased amount of working adult students attending online, because of the presence of those campuses, which we found that really happens.

From an income statement perspective, Peter, I think it will be very similar to what we've experienced every summer here. You will see some ramp-up in costs in the summer, preparing for the opening in the fall. But, then our hope is the profits in the fall will offset those costs.

Got it. Thanks. And, Brian, I think in your prepared remarks you commented something along the lines that interest levels had gone up significantly, I think was the word you used in the last 40 days. Could you just expand on that?

Yes. California, the people doing direct searches on Grand Canyon University as a result of our television ad campaign has gone up 300%. So -- versus people clicking on a banner ad, the amount of people going and directly searching on Grand Canyon University, which turns out to be much better inquiries than clicking on a banner ad, those are up significantly. 300%. Now, how much of that translates into ground students coming to Arizona and online students coming from Southern California, we will see. But, that campaign and its ability to build the brand of an institution that is on the rise have been significant. We will see how that pays off the rest of the year.

The interesting thing to me, you are seeing this positive momentum and obviously the numbers in '12 were great. But, you are setting the bar pretty conservatively for 2013. I know you've already addressed this, but it seems to contradict a little bit what you just said.

Well, we are conservative. We are taking a conservative approach in a couple ways. One, for our ground students, we upped the admissions requirement to 3.0. If you now look at the admissions requirements that Grand Canyon has from a grade-point average standpoint and an ACT and SAT standpoint, in many ways, it's different than what Arizona State University which is a PAC 12 institution.

We've really restricted the quality of student that can get in here. That's a self-imposed inhibiting factor. The second thing would be, if you look at the number of enrollment counselors and the amount of marketing spend that we are putting behind those lower end programs, we are really restricting that as well.

So, again, if we wanted to grow new enrollments by 10% instead of 5%, we can absolutely do that. What we are trying to do, is get to a total enrollment number with only a 5% increase in new enrollments. It's that total number that we are focused on. We think that we can get that, because if you take a look at ground students, doctoral students, masters students, and RN to BSN students, which are the highest quality students, and it's not close, any increase in those in new starts gets an incremental increase in total starts. That's what we're trying to do.

Got it. Thank you.

Jeff Silber, BMO Capital.

I wanted to shift the focus back to the ground campus. When you have a potential student that decides not to enroll, I'm just curious where they go? Is it another institution? Or, do they did decide not to enroll in school at all? Has that changed in recent quarters? Thanks.

No. It used to be that we would lose them to, in Arizona, would be a community college. We lose less now to a community college than -- if we lose them now, we typically lose them to Arizona State. The reason for that is that we've really kind of illuminated half the valley. Because, really, if you think about our ground students, 45% live on campus. 55% are commuting. If you look at the East Valley, Arizona State got 70,000, or whom less than 10% live on their campus, which means the rest of them, largely from Arizona are commuting.

It's really the -- we lose East Valley students to Arizona State because they can commit to Arizona State which is in the East Valley. They can't commit to Grand Canyon. We are losing many -- we are losing far less students who are looking for a private Christian university, that would, in the past have gone to Southern California. They would have gone to Asuza Pacific, California Baptist, University of San Diego, Pepperdine. We are losing very few that will leave the state to go there. In fact, that trend is reversing. Now people are leaving California that would have gone there that are coming here. Does that help?

It does. I appreciate that. And, you gave some specific guidance on CapEx and other issues related to that. I'm just wondering if you can kind of remind us what your focus is for priorities for future clash flow? Thanks.

Number one is CapEx. We believe the best investment that we can make right now is in the ground campus here and potentially additional ground campuses. Then, secondarily, would be buyback of stock, although we have never aggressively bought back stock and don't plan to. May be down the road, we will look at dividends. At this point, the number one priority is investments that will generate us revenue and income for the future.

Great. Thanks so much.

Jerry Herman, Stifel.

Question about the online start numbers, in particular, Brian, your comment about self induced limit on that. Are you doing something from a selectivity point of view on online? Or, I know earlier you referenced your focus on particular types of students, masters, doctoral and so on. Is there some selectivity migrating its way into online, as well?

Really, the selectivity mainly is caused by -- when you think about the marketing spend, you know where you get students. We know where we get our ground students. We know where we get our doctoral students, our masters students, and RN to BSN students. We also know the avenues that we spend to get the undergraduate students in the business and liberal arts areas. They are not all the same places.

We just take money out of those other areas, out of those low end areas. We reduced the number of counselors significantly in those areas. We moved the counselors to the upper end. We moved the marketing spend to the upper end. Then really, the only game is how big are those markets?

So, we are looking at ways to expand those upper end markets for the ground, that is more locations, Tucson, East Valley, maybe Albuquerque, maybe Las Vegas. For the doctoral students, we have a lot of room. We are looking at where we can spend more to get them. It's really a matter of understanding where we get inquiries that lead to students and moving money towards those upper ends.

Great. And with regard to the new campus, or campuses in particular, you said you thought that 4,000 to 7,000 students would cost you about $50 million to $60 million in CapEx. That seems proportionately lower than what you are spending now. I'm wondering if the cities that are gathering proposals to you are enticing you in anyway that will lower your CapEx requirement to move into those areas?

Maybe a little bit. But, here's the exciting thing. I'm from Wisconsin. If you look at the Wisconsin State University system, you see eight or nine colleges, universities. Lacrosse, Stevens Point, Oshkosh, et cetera. What they do at those places is they replicate every single service. So, you've got admissions at every single, you've got financial aid, you've got technical support, you've accounting, you've got athletics.

Well, if we go to a multi-campus thing, we won't replicate all those services. All the back end services would just be done here. So, you need less CapEx. You need less office space and those kind of things, but you have a lot less personnel costs. Really the exciting thing for us, is to see, if we make the East Valley campus go and if we make the Tucson campus go, could we make a couple of others go? You would be in a situation where versus $7,800, you might make the 23% or 24% margin at less tuition than that. The gain comes in seeing yourself as a system and not replicating every single one of those back end services, or even athletics at every one of the places. That's where the cost-saving comes from.

On the CapEx side, at this point the thought is that these would not be residential campuses, which is a lot of where our CapEx has been on this ground campus is building dorms. The numbers that Brian talked about would be primarily classrooms and support service type locations for the students. Ultimately, if we decide to build dorms, that would take that $50 million to $60 million number up. As we've talked about in the past, dorms are extremely profitable. So, that would be a good thing if we decide that there is a need for residential students.

In saying that though, another exciting thing is that these -- these would be campuses other than residential that would look like our campus here. It would include a very high end chemistry, biology labs, DNA, forensic science, and then we are looking very aggressively at moving into the other stem areas, especially the math, engineering and technology. So, the amount of backend -- back office spend that we can eliminate, the amount of CapEx in terms of dormitories we can eliminate allows us to spend in very high tech classroom amenities that we think are going to attract a lot of very good students.

Great. Thanks guys. Appreciate the color.

Alex Paris, Barrington Research.

(Inaudible) filling in for Alex Paris. Given that we are late in the call, I'll keep this short. Brian, maybe just regarding WAC, could you refresh my memory? I heard your comments, it can start fall of 2013, you can start participating in DI. What about NCAA tournaments? And secondly, are there any marketing restrictions associated with this? Or, are you able to advertise to potential students right now?

Yes, there is no marketing restrictions. In fact, we are building as high profile schedule we can for next year. I talked about the Stanford game with our soccer team. I think the University of Hawaii will be our first home basketball game. They are Division I. We start all 22 sports at the Division I level in the fall. There's no restrictions on marketing. So, we will bill the best schedules that we can get.

We cannot participate in NCAA championships for four years, until the fifth year. But, we can participate, compete for Western Athletic Conference championships. We can compete to be in the NIT in basketball and so, there is a tremendous amount to compete for and a tremendous amount to leverage. It's just -- the more you think about athletics and universities from a business standpoint, you either want to be Division I and get all the press and coverage and PR that results from that, or you want to be Division III and not give scholarships. It doesn't make much sense to spend a lot of money on scholarships to be at the Division II in any eye level, other than us, unfortunately, nobody cares.

I'm just curious why -- why not being able to participate in NCAA championships for a lengthy period, what's the thought process behind that?

They want you to pay your dues. They want to make sure you are capable. So, they make you pay -- they make you pay your dues, literally. And, figuratively. They make you pay your dues and then they make you prove that you are capable of executing and, very honestly, it's just a way for those conferences to get dues and not have to worry about -- it's just one of those things that we don't think necessarily make sense, but those are the rules. It applies to everybody, not just us. It applies to everybody that becomes Division I.

Okay that helps. I heard your comments, Dan, on stock based comp. Did you mention anything about D&A for 2013?

I did. That it would be up -- I want to make sure I get the right number for you -- 20 basis points year-over-year.

Great. Great quarter. Thanks guys.

Trace Urdan, Wells Fargo.

Okay. That's definitely something going on with the service provider because I did nothing on my end. Sorry. Two things. So, in December there was a write up in the Arizona Republic on your exploration of additional campuses. In that piece, they made mention that you are actually contemplating perhaps going outside of the state. I think they mentioned maybe Nevada and New Mexico. I wondered if you could comment on that.

Then, the second question I had, was RN to BSN has been such an important driver for you guys. It strikes me that at some point, we might start to deplete the number of RNs out there that can participate in that program online. I wonder if you could comment on sort of what sort of a tale you feel like that market has for you?

That's a significant tale that we don't see an end in sight there in the short term. More and more states are passing rules around the number of BSN nurses that have to be at a hospital. There's huge encouragement there. In fact, we just signed an agreement, beating out Arizona State and Chamberlain, for a new pre-licensure program in the West Valley, which will give us even more exposure into banner healthcare to get more RN to BSN students. We feel good about that.

Albuquerque and Las Vegas, they are both very interested. In fact, large contingents from both of those places came out and visited and they are going to go back and they are going to make a number of proposals to us, because they really want a private Christian university in both of those places. It's remarkable how similar those two places are to Arizona, to the Valley.

In Las Vegas, there's one major player. It's UNLV and there's not much else in terms of traditional university offerings. The same is true for Albuquerque. It's UNM. I don't know that we are going to move on those in the short run. But, there is a possibility that we will be moving on those in the long run.

Excellent. Thank you.

Operator, we will take one more call because we are past time. We will take one more.

Brandon Dobell, William Blair.

All right. Sneak in one last one in here. Any comments or color around what you have planned hiring wise for enrollment counselors and faculty looking out the next 12 or 18 months? Then, kind of a follow up would be, any efforts around the growing the certificate or continuing ed level programs, especially between bachelors and masters and the education or in the healthcare space? Thanks.

Enrollment counselors are going to be very flat in the first half of the year. We might uptick just a little bit at the end of the year. So, that's for enrollment counselors online. On ground, we are about where we need to be for the entire year. We won't uptick there not much there at all. And then the other question was on the full-time faculty.

We are going to go from 50% to 70% in the next two years on ground. Online, we have a plan to keep growing that out. We are doing it methodically. We are doing it in classes where we believe we can get the most gain. Where it will end, I'm not sure. Do I think it's going to be over 50%? Yes, I do. In classes like graduate level statistics, we are teaching more graduate students all the time, those are classes where you're going to get a big uptick in retention.

As you know, our whole thing around full-time faculty online is increasing the quality of instruction students get, making it more consistent, but also building a faculty culture. It's counterintuitive, but our full-time online faculty all work on our campus. They all work in the same area. So, we are really getting real time improvements from a curriculum instruction standpoint on-the-fly. We are building a faculty culture that you could never get with people dispersed all over the country in their homes. So, we're really getting two things that we think, in the long-run, will build the academic brand of the institution and build graduation rates.

Then, the follow-up around the certificate or continuing that programs in education or healthcare between the bachelors and masters a little degree area? Any bigger picture opportunity there or is it just taking students as they come?

We are doing some things in education. We are doing continuing ed things in education where we see certificate programs where there are things that are of immediate need, the school districts have. We're doing some things in nursing. But, we don't have that as a major part of our growth strategy at all. We are trying to meet needs, especially in education and healthcare, where hospitals and school districts have them. But, it's not becoming a major part of our growth plan.

Okay. I appreciate it. Thanks.

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

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