Grand Canyon Education Inc (LOPE) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Grand Canyon Education third-quarter 2013. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

I'd like to hand the conference over to Mr. Brian Roberts, General Counsel. Sir, please go ahead.

Thank you, operator. Good afternoon and thank you for joining us today on this conference call to discuss Grand Canyon's 2013 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 GCUs actual results to be materially different from any future results expressed or implied by such forward-looking statements.

These factors are discussed in GCU SEC filings including our annual report on form 10K for the fiscal year ended December 31, 2012, our quarterly reports on form 10 Q, and our current reports on form 8-K. 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 forward-looking statements made during this conference call. With that I'll turn the call over to Brian.

Thank you, good afternoon and thank you for joining Grand Canyon University's third-quarter fiscal year 2013 conference call. In the 3rd quarter of 2013, enrollments grew by 14.7%, and revenues by 14.1%. New enrollments grew in the low, double digits and pretax margins are at 24.5%.

We had another successful quarter and I want to thank our faculty and staff for their commitment to building a premier, private Christian university in the Southwest. Before I give you updates on the traditional campus, I want to talk about how we are going to classify students going forward.

We will discuss two types of students. We are going to define traditional campus students as those who are traditional age and attending the campus. That includes all students attending our campus in Phoenix, and the nursing students who are attending off-site campuses. The student count for that group is approximately 8200 this year.

We also have approximately 2000 working adult students that generally attend classes on the ground in the evening, including over 1000 that attend all of their ground courses at our Phoenix campus. These working adult students are classified as professional study students. However, their characteristics are identical to working adult students who attend online.

I went to give you a few updates on our traditional campus. We started the fall with approximately 8200 students. Approximately 4000 are new students to the University.

The average incoming GPAs of the fully admitted new students is approximately 3.4. Just over 50% of the new students are studying in the very strong science programs at the University. In order to serve this growing student body, we have added two new residence halls, three new restaurants, a greatly expanded central dining facility an expanded student union, a new intramural field and a new library.

The school year is off to a very strong start. Participation levels on campus are an all-time high. Classrooms and residence halls are at capacity.

Chapel services have 3500 students in attendance, soccer and volleyball matches are attracting over 1000 fans. Almost all of this year's theater performances have been sold out.

Our first Division I basketball game is this Friday and we are expecting a sell out. We had some very high-profile speakers at the arena in the 1st half of the semester and there are some exciting concerts and special speakers scheduled for the 2nd half of the semester.

For the 2014/15 school year we are targeting over 5000 new students, which would bring the total student body to somewhere between 10,000 and 10, 500. To accommodate this growth we are adding a new four-story classroom building, a 1000 bed apartment style residence hall, three new restaurants, and we are expanding the arena to 7200 seats.

We are in the planning stages for the East Valley campus. We are on schedule to open up in the fall of 2015, with approximately 2500 students, and we will eventually grow the campus to 10,000.

When we open up the campus there will be two 80,000 square feet classrooms and laboratories buildings, a large student union, with multiple dining facilities, and a new library. It will have a 65,000 square foot recreation center, that will accommodate the general student body, intramural sports, numerous club sports, as well as seat 4500 students for Chapel services and other events. The campus will also include additional outdoor athletic fields.

In addition, there will be a 1000 bed apartment style residence hall. We anticipate that this build out will support 5000 students.

We are adding two technology programs in the fall of 2014 and two engineering programs in the fall of 2015. These four new programs will be taught at both locations.

Turning to our online campus, as most of you know, our plan is to grow this campus at 6% to 8% per year. Over time, our online campus will be primarily a graduate campus with our traditional ground campus primarily an undergraduate campus. Currently 43% of our working adult students are studying at the graduate level. These students are attracted to the full-time faculty, small class size, the interactive and collaborative intellectual environment, and the highly service-oriented counseling teams.

The highest-quality students at the University our doctoral students, all students studying in Masters degree programs, our RN to BSN students, and our traditional campus students. The students have high graduation rates, low bad debt expense, and low default rates on student loans. These current lead students are 62% of our total student body, and 68% of our new students in the 3rd quarter.

This represents increases of 400 basis points and 570 basis points respectively. The growing number of high-quality students have had a tremendous impact on key metrics, including a reduction in our overall two-year cohort default rate. All of the two-year default rate for the period ended September 30, 2013 is no longer going to be released by the Department of Education, based on information that we received from the lenders our two-year default rate for this period is approximately 7%, which is down significantly from 12% in the prior year.

One of the trends in higher education is that traditional students want to stay closer to their homes. This is true for working adult students as well.

Our brand is grown in strength in the Southwest, which is where the majority of our growth is. In the past 12 months we have grown 27.8% in Arizona, 51. 5% in California, 34.1% in Colorado, 41.3% in Nevada, and 45.8% in New Mexico.

Now, turning to the results of operations. Net revenues were $152.4 million in the 3rd quarter of 2013, an increase of $18.8 million or 14.1% from the $133.6 million in the prior-year period. Operating margin for the 3rd quarter 2013 was 24.5% compared to 23.4% for the same period in 2012.

Net income was $22.5 million for the 3rd quarter of 2013, compared to $18.5 million in the prior-year period. After-tax margin was 14.8%, compared to 13.8% for the same period in 2012. It should be noted that the difference between a 24.5% operating margin before income taxes and the after-tax margin of 14.8% is primarily 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 significant net plus to the taxpayer on an annual basis.

Instructional costs and services grew from $57.4 million in the 3rd quarter of 2012 to $64.7 million in the 3rd quarter of 2013, an increase of $7.3 million or 12.8%. This increase is primarily due to the increase in staff and other services to support our students. As a percent of revenue, IC and S decreased 0.4% to 42.5%, from 42.9%. We are extremely pleased that bad debt expense as a percent of revenue decreased to 3.5% from 4.2% in the prior year.

Employee and faculty compensation and related expenses, including share-based compensation, decreased 50 basis points between years due to our ability to leverage our administrative personnel across an increasing revenue base, partially offset by increased use of full-time faculty and higher employee benefit costs between periods. Instructional supplies and other miscellaneous costs increased 40 basis points.

Depreciation and amortization expense increased 20 basis points as last fall we placed into service two additional residence halls, an arts and science classroom building, and a parking garage. And in the fall of 2013 we added two additional dormitories and a new administrative building, which were needed due to our traditional ground student growth.

Admissions, advisory, and related expenses as a percentage of net revenue decreased 60 basis points from 16.7% in Q3 2012, to 16.1% in Q3 2013. This decrease was primarily due to our ability to leverage our admissions advisory personnel across an increasing revenue base, which was partially offset by increased benefit costs between periods.

Advertisement expenses as a percent of net revenue increased 50 basis points from 9.7% in Q3 of 2012 to 10.2% in Q3 of 2013, primarily due to increased brand advertising. Marketing and promotional expense as a percent of revenue stayed relatively flat over the period at 0.9% in both Q3 of 2012 and 2013.

General and administrative costs as a percentage of revenue decreased from 6.4% in Q3 of 2012 to 5.9% in Q3 of 2013, primarily due to employee compensation and related expenses, including share -based compensation decreasing between years. Interest expense increased $0.4 million over Q3 of 2012 as a result of the expansion of our credit facility in December of 2012.

As a result of the above, net income increased from $18.5 million in the 3rd quarter of 2012 to $22.5 million in the 3rd quarter of 2013. With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2013 third-quarter talk about changes in the income statement, balance sheet, and other items.

Thanks, Brian. Scholarships as a percentage of revenue increased from 13.8% in Q3 2012 to 14.6% in Q3 2013, due to the growth in our ground traditional student enrollment between years. Online scholarships as a percentage of related revenue is down slightly year over year.

Bad-debt expense as a percentage of revenue decreased to 3.5% in Q3 2013, as compared to 4.2% in Q3 2012. This result was significantly better than we anticipated.

Our effective tax rate for the 3rd quarter of 2013 was 41.1%, as compared to 40.5% in the 3rd quarter of 2012. Our effective tax rate in the 3rd quarter of 2013 was higher than anticipated due primarily to non-recurring tax items. We repurchased 15,400 shares of our common stock during the 3rd quarter of 2013 at a cost of $0.5 million, and have $27.8 million available under our share repurchase authorization as of September 30, 2013.

Turning to the balance sheet and cash flow, the total cash unrestricted and restricted and short-term investments as of September 30, 2013, was $170.3 million. Accounts receivable net of the allowance for doubtful accounts is $8 million at September 30, 2013, which represents five days sales outstanding, compared to a $8.9 million or 6.7 day sales outstanding at the end of the 3rd quarter of 2012.

CapEx in the 3rd quarter of 2013, excluding the development of the off-site administrative office, was approximately $21.2 million or 13.9% of net revenue. We still anticipate that 2013 CapEx will be approximately $80 million, excluding the development costs associated with the off-site administrative office.

Earlier Brian discussed our development plans of both the Phoenix campus and the future Mesa campus. Our current expectation is that CapEx will be approximately $125 million in 2014 and $150 million in 2015. These amounts are higher than what was previously planned as we have decided to accelerate some of the construction and now plan to build residential housing on our Mesa campus.

We believe our cash flows from operations will be sufficient to fund our CapEx needs during this period. We will continue to look at options to offset balance sheet -- fixed assets but historically we have deemed the cost to do this as too high.

One other quick comment on our CapEx spend. I often get questions from investors regarding our return on invested capital related to the campus build outs. We believe the ROIC on these projects is in the low to mid teens.

I would like to touch on two regulatory items. As disclosed in our third-quarter 10 Q that was filed today, on September 27, 2013, the University and the Department of Ed entered into an agreement that fully resolves the findings in the preliminary program review report which closes the program review.

Since April 2011, we have been certified to participate in the title IV programs under a provisional program participation agreement. In accordance with the terms of the provisional certification, we were allowed to apply for recertification on a fall basis by submitting a complete application by no later than September 30, 2013. In July 2013 we submitted our complete application for full certification, and on October 28 2013 the University received a new program participation agreement with full certification for the Department of Ed, which gives the University the ability to participate in the title IV programs through September 30, 2017.

Last, I would like to discuss our fourth-quarter guidance. We have raised our enrollment and revenue guidance as a result of our higher than anticipated enrollment.

A large piece of the increase in the enrollment guidance is the result of non-residential ground students exceeding our expectations. These students have lower revenues per student than both our online students and our residential students. This, and the fact that we have one last day of revenue in the 4th quarter of 2013 compared to the 4th quarter 2012, for both our online and our ground traditional students, which equates to approximately $2 million, is why we are anticipating revenue per student to be down slightly year over year in the 4th quarter.

We've raised our margin guidance as we anticipate bad-debt expense and certain other costs will be slightly lower than previously expected. However, as we mentioned last quarter, we will be investing more than previously budgeted on new-program development and full-time faculty.

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 income-tax expense in the fourth quarter. Although none of this is contemplated in our guidance.

We've also provided updated estimates of diluted weighted average shares outstanding by quarter. Although we might repurchase shares during 2013, these estimates do not assume significant repurchases. They do assume increased dilution from stock options and restricted stock awards granted. I will now to the call over to the moderator so that we can answer questions.

(Operator Instructions)

Peter Appert, Piper Jaffray.

Brian, you guys have achieved impressive margin leverage. In the context of the enrollment growth you've been generating, you've cautioned us in the past that you want to sustain margins at current levels yet you continue to exceed those. So what is your thinking about the appropriate level of margin on a go-forward basis at this point?

Yes, what we've talked about is that, if the margin goes up significantly that we wanted to hold out the possibility that we would be able to lower tuition and key programs. We just haven't found the need to do that at this point.

We've frozen room and board tuition and fees at our ground campus for four years running, now. And we are going to continue to hold the line on all of those levels.

And then this year, we also held line on online tuition. And so, if the margin goes up 1% or 2% without us having to raise tuition, and not feeling the need to lower tuition that we will let it go up a point or two.

And beyond Mesa and the east Phoenix campus, anything to report in terms of further developments on physical expansion?

It continues to be a topic of discussion in the Tucson papers. And Las Vegas and Albuquerque would both like us to come and but we told them we went to get the East Valley campus up and running and continue to talk to them, and maybe at some point two years from now we would decide to move in that direction. But right now were just going to focus on building this campus out to 15,000 and the East Valley campus and get that thing up and running and that we will look at those other cities at some point.

Got it, and last thing, in terms of the -- much discussion in the marketplace about the competitive dynamics in the online education market the more intense. What you seeing in the marketplace?

I think that is definitely true and we believe that too be true for three years now or maybe four. And so, we expect that to continue. We also expect to continue -- that people are going to go to school online and they are going to do it at a school that is in their geography. That will increasingly be a trend. It is going to be more and more difficult to operate on a national basis, which is why we are happy with where our relatively low number is from an online student perspective.

Growing 6% to 8% of that number is not too difficult for us to do. And it also can be accomplished between Texas and California. You know, 40 million people in California and with Texas being as large a state as that is, we believe we have plenty of the population base to get our growth in that area, and keep those students connected to our campus the best we can.

Thanks, Brian.

Sara Gubins, BofA Merrill Lynch.

Could you give us some more detail on online starts in the quarter? I think you mentioned double digits overall.

Yes, it's above 10.

For online. Did it accelerate versus last quarter?

Yes, and so the answer to that is yes. And it is in the right categories, too, and so it's good. It's -- I guess yes, it is accelerated over the previous quarter, but the students are coming in the right categories and so that -- we're okay with that.

Actually, I want to hold on, let me -- Sarah, do you have another question? Let me look for some other stuff but go ahead.

Sure, okay. So the growth in the states that you mentioned is really very impressive.

Could you maybe talk about what you are seeing in the rest of the country? Are there regions that are declining, I know that is not as much of an area of focus but I'm wondering how that's trending.

I couldn't tell you overall for the rest of the country. What we do is look for pockets where there is not much competition, where we have programs that are in demand and the we focus on those areas.

And so, there are three or four states in the eastern part of the country that we do well in and we are continuing to do well in. And we are deemphasizing those states where we don't have a competitive advantage and where our programs are not in great demand.

And so, we are trying to be pretty strategic about how we spend our advertising dollars in every area of the country other than the Southwest. And in those states that we do target, we're doing fine.

Great, and then just last question from me ( inaudible) bad debt improved nicely, do you have a target level for that? Do you think we could stay at these levels are get even lower?

I think we are at where we need to be. The -- if we can keep it right where it is, I think that we're in a very strong position.

Okay, thank you.

Yes.

Jerry Herman, Stifel Nicholas.

I just wanted to follow up with regard to long-term growth. In the past you talked about 8% to 10% enrollment growth and maybe 10% to 12% revenue growth. In light of the possible capacity expansions have you revisited those in any way? Should they be increased?

The capacity expansions for the ground students?

Correct, correct.

No, I would keep them -- our long-term target is still 8% to 10%. If we exceed that a little bit in the short run we're okay with that, but I would still say long-term 8% to 10% is what were trying to get. And that includes the growth of both ground campuses.

And just a follow up with regard to differentiation. Help us if you can with some color on the impact of division one, both from a P&L perspective and from an inquiry or interest level perspective. And then also separately, have you guys updated the survey you did a couple years ago with regard to why students attended with some of the key metrics being the Christian orientation of having an on ground facility?

We haven't updated the survey, but we've got what we call a Canyon Christian Consortium of schools that is now over 200. Our first target was 100, now we have over 200 high schools that are in that consortium. A large percentage of our traditional ground-use students are coming from the consortium.

So, that is -- so the Christian status of the institution is really being helped on the ground campus. We have not updated a survey for our online students.

But I would tell you anecdotally, I believe it is at least where it was and probably even better than that at this point. That is becoming a very sticky thing for us.

And then, in terms of division one, that's tough for us to evaluate at this point. We are getting a lot of press in local newspapers. We are going to be playing in key cities in the Southwest this year.

And we have a great schedule for next year. So, I think we are getting a little bump for that, but I wouldn't say we would tell you that it's -- it's really significant at this point. I think three or four years from now, it could definitely be significant, but I don't think it is hugely significant at this point.

What about the expenses of that at this point?

It's not much. We already had an extensive budget at the division two level because we were playing in a conference that had four schools in Hawaii, and that was a killer for us expense wise. So, it's up some, but it's not material and we don't expect it to be going forward.

Thanks, I'll turn it over.

Adrienne Colby, Deutsche Bank.

Can you tell us what percent of your online students are now from Arizona?

We just had that. Were going to get it for you. Do you have a second question while he's getting that?

Yes, I do. Can you update us on the number of enrollment counselors you have currently and how we should think about that trending over the next year or so as your brand grows?

We don't give that number out, but I can tell you that it's relatively stable and we want to keep it relatively stable as we go forward. It will not go up more than 2% to 4% as our enrollments go up 10%, and that's the plan. And that's been working in the last 12 months.

The Arizona students online are--

Online is just under 20% of our total online students are from Arizona, and then what we've talked about in the past is our total Arizona students are roughly 28%. 28% of our total students are from Arizona.

Great, thank you.

Jeff Mueller, Baird.

Thanks and congrats on the quarter. Brian, you mentioned that you pretty much have enough runway, just if you look at the size of Texas and California to grow at your targeted growth rates for a long time. If you guys look today at the new enrollment growth, roughly what percentage is coming from those five states that you listed Arizona, California, et cetera?

It would be Arizona, Colorado, New Mexico, Nevada, California and Texas. And put Utah in there, so that is what we would define as the Southwest?

And that number is just under 60%.

New enrollment growth or the total online enrollment growth?

That's total new enrollment growth, total, so that includes both ground and online.

Got it. And then on the 5000 plants new ground students for next fall, what's the contribution to that in terms of grad students? And Brian, are you implicitly changing your longer-term targets in terms of how many students you're planning on having in the Phoenix campus, if you're planning on enrolling 5000 new in the fall?

No, were still going to -- we still plan to build this campus out to about 15, 000. There was a higher percentage in our initial plan of those 15,000 being grad students, were backing that off a little bit. Most of the graduate students in the programs where we have graduate students prefer to go online or (inaudible) cohort versus being a student who is going to be on our campus as a traditional grad student.

So that is why we back off of that initial number. But the total number is still 15,000 at the traditional campus, and then 10,000 at the divisional campus in the East Valley. There just won't be as many graduate students on those campuses as we initially talked about.

Jeff Volshteyn, JP Morgan.

What level of new enrollment growth online is implied in your fourth-quarter guidance? And then perhaps you could give us maybe an early look into the 2014 across different line items?

Did you ask what percentage of new start growth is in there?

[ Multiple Speakers ] in the fourth quarter guidance?

It's similar to what we've been talking about, mid to high-single digits. It's implied in there.

Okay, and then for 2014 maybe you can give us a little bit of color on your performance -- on your Outlook?

We have not spent any time or any significant time yet, putting together our budgets for next year. But, I think that when we do, they will be numbers that are very similar to what Brian has talked about for our long-term objectives.

He would like to get our online growth to that 6% to 8% level. And so, our expectation is that from an enrollment-counselor perspective and everything else, that will be driven based on that goal.

Could we outperform that a little bit, especially in the early part of the year? That's definitely possible, but that really is our goal is to drive total-enrollment growth online down to that 6% to 8% level.

That's helpful, if I could ask another one? When we look at your graduating cohorts, how should we think about the number of graduates, perhaps as a percentage of total enrollment online and on ground in 2013 and they going forward into 2014?

We typically have not given that number out. Jeff, I don't think we want to comment on that. Brian obviously has thoughts that we discussed amongst the management team on how we want to plan that out now into the future, but I don't think that's really something we want to discuss publicly at this time.

I'll give you one 40,000-foot view of that, there are two offsetting things. The -- our graduation percentage is going up because of the increased amount of graduate students that we have and so it's going up. But it's being offset by the fact that we have more students now that are in four year-revenue stream programs.

As ground students, as a percent of the overall student body gets bigger, and as doctoral students as the overall percentage gets bigger, those four year-revenue stream students will offset the increased Masters students that graduate at a faster rate. And so those two things are offsetting each other, so whatever you are guiding in your model this point is probably pretty good.

That's very helpful, thank you.

Jeffrey Silber, BMO Capital Markets.

You mentioned in your comments the decision to accelerate the construction of the East Valley campus. Can you just give us a little more color what was behind that reasoning? What has changed over the past couple of months?

The demand that we believe we are going to get out there. AT first, we were going to design the campus for initially maybe 1500 to 2000 students and kind of build it as we go. But we think over investing in the first year, so that we build it to accommodate 5000 students is going to give us the kind of presence that we want on that campus that should long-term accelerate us getting to the 10,000 students.

We've got the cash available to do that. Our margin expansion is good.

And so, we think right now making that investment is one of the best uses of capital that we could possibly put to use. Dormitories are very, very profitable, and our traditional ground students are achieving a level of profitability of our online students. And so it made sense to fast-forward that and have that campus appear as it's near capacity, just the psychology of that as people visit the campus is in our favor. [ Indiscernible -- Multiple Speakers ]

Is there any market research that you did to solidify that decision?

Yes, the research is the incoming leads from the East Valley campus that we have had over the last two years. And in our discussion with those with those leads and those families.

The socioeconomic and demographic characteristics of the East Valley from a college-going perspective are much better than the West Valley. And we've done very well in the West Valley, and so there isn't any reason for us to believe that the East Valley won't go equally that well, and possibly better, because of the college-going characteristics of that area -- of that part of the population. [ Indiscernible -- Multiple Speakers ]

I know you're not talking about 2014 yet but can you give us any color--are there any seasonal issues that we need to be aware of for the year?

Let me go back to the other question first and then I'll answer that one. The other major change is that when we had come out with our original expectations on CapEx on the East Valley, as you might recall, we had said that we weren't planning on building any residential dorms there.

That has changed. We are planning on building a 1000 beds for that very first year. And again as Brian said, we made that change, number one because we believe the demand is clearly there for those beds, and number two, it's extremely profitable and so we are doing that.

So, that is one of the more significant changes on the CapEx standpoint. If you'll recall, to build 1000 beds is somewhere in the $35 million-ish range.

On the question about seasonality, the seasonality that we've seen over the last couple of years will continue. We will become more and more seasonal as ground traditional students as a percentage of our total student body continues to grow.

It is currently our intention to give guidance at the end of next quarter for 2014. And as we did this year, our plan is to give quarterly guidance by quarter for each of the four quarters of 2014 at that time. Primarily because of the seasonality effects and how we see that seasonality playing out.

I also would say that from an online perspective and this is nothing different, but versus others, our online students are more seasonal as well, given the high percentage of teachers and nurses in our programs. Those students tend to take a little more time off in the summer than students studying in other programs. And so even online historically has been very seasonal here.

Trace Urdan, Wells Fargo Securities.

I wanted to go a little bit deeper on the East Valley question. Have you started talking to your market about that campus's imminent arrival, and maybe how are you thinking you are going to handle recruiting for the two campuses?

Are they going to be marketed separately or are you going to try to direct students to the campus that is close to them? How is that going to work?

Good question. We have an enrollment counselor base that isn't going to go up as a result of us adding the East Valley campus. And so, we are going to give the students absolutely an option, and it depends upon what -- how they want to do college.

Some will absolutely want to come to this campus and live on campus in the residence halls and participate in everything that we have on this campus. They will be attracted to, I think, the 15,000 students and the intercollegiate athletics, and all of that. There will be some East Valley students who, we believe will want to live on the campus in the East Valley, even though they are from the East Valley, because it's a little bit more suburban, it's a little bit smaller, and they will get to take a leadership position in the student body earlier.

So, but we also think it's going to be a large demand, a very large demand for commuter students. Those students who want to stay at home, move into an apartment with friends, and attend campus in the East Valley as a commuter student. That was the original purpose of the campus, it is just that the demand to live on campus was growing.

Our -- in terms of the network that we have, we've got substantial enrollment counselor base in those East Valley high schools. And our brand in those East Valley high schools is really growing. The service level that we provide to those high schools, the transparency that we provide in terms of the financial aid deal, is really becoming a competitive edge for us.

Parents love the fact that we can give them a very transparent amount of money that it is going to cost. We can give it to them in advance, and they love the fact that their son or daughter can stay closer to home. So, we are confident about the growth of the campus.

Fair enough, and then I know Brian you mentioned that the growth in online was in on the right places. Are there any trends by program offering that are worth mentioning? Anything speeding up, slowing down, relative to the different types of programs you are offering online?

I think one is that we have a very aggressive growth plan for our doctoral programs. And we are not exceeding that tremendously, but we are hitting that, which is a very, very good trend.

The percent of all students that are doctoral students is going up according to our plan, which high graduation rates and four year-revenue streams is -- not only helps academic credibility of the institution but also helps from a financial standpoint. That is one area that I wouldn't say we are not exceeding our plan but our plan was aggressive and we are hitting it, which is good.

Can you remind us quickly the disciplines which you are offering doctorates right now?

Education, we have a doctoral program in education, in leadership; we have a PhD program in psychology; we have a doctoral program in business, a DBA; and its just been approved and are very excited about the doctoral program of nurse practitioner, which we are going to start in a couple months in January.

Great, thank you.

Phil Siller, Citi.

I want to ask about the full-time faculty trend. It seems like you guys are investing more there.

Can you provide an update, where you are both from an online and ground perspective in percentage of full-time faculty? What the goals are? And what that means for expense leverage as that percentage goes up over time?

Yes, we are about 55% on ground, now. Courses taught by full-time faculty in our goal is for that to be over 70%. And we will get that, we will get there pretty quickly.

In terms of online classes taught by full-time faculty, we are about 30% and our goal is to grow that towards 70%. It will take us a little bit longer, but our goal is to grow that were at 70%. If you include both now, we are both online and on ground, we have about 300 full-time faculty.

I think you asked about the cost differential. The cost differential is roughly 20% or so higher for full-time faculty, primarily driven by benefits. And we obviously have that factored into our models in terms of instructional costs as a percentage of revenue et cetera.

But I'm glad you asked that question, because the two things that are really aiding us on from a growth standpoint is number one, our average class size on our ground campus is 25. And that's in very stark contrast to the state University system. And that is a strong and attractive feature of what we have to offer incoming college freshmen.

On the other side of it, the fact that we have -- for the most part the first three courses of every program are taught by full-time faculty. That also is a growing and attractive feature of what we have to offer, because as you're getting started as an online student, that steady presence, eight hours a day, and very quick response times, and many times immediate response times to questions and that kind of thing. The word spreads with that and that's become an attractive feature and one of the reasons it is growing.

So to clarify, would you actually view this as margin dilutive, so it is viewed as an investment that you are making to improve the quality of education and brand?

No, too this point, it's been neutral. Because we're getting increased retention rates. And so as we go forward, on ground we don't expect it to be material as we go to more full-time faculty.

Online, as we go from 30% to 70%, we need to go in the classes that have--the difficult classes, the ones that have the higher dropout rates. Graduate level statistics and those kind of courses is where we are moving first, expecting to get retention gains that offset the differential.

Okay that make sense. And then our last question on marketing budget.

You guys have done a bit more brand advertising recently. Can you talk about the returns that you are seeing from that, and what that implies for the market and budget as we move forward?

Well for the short-term, I think you can expect it to stay between 10% and 11%. Obviously the reason that we are doing it is that long term we want it to come down. And so, the stronger that the brand becomes, the less Internet-generated leads we have to buy, and the objective is to get out of that business completely, that's a long-term goal.

So, I would tell you the next couple of years, I would not expect there to be any movement. I think it will be between 10% and 11%, but hopefully as the brand grows in the Southwest over time, that is an area where we can reduce the cost, and therefore reduce tuition.

Tim Connor, William Blair.

With the retention gains you are seeing and then the mix shift towards doctoral and ground students, I guess can you help quantify how much longer the average student is staying now or you expect to stay versus a couple of years ago?

We don't have the ability to quantify that for you right now, although it a good question, and it is something that we will work on and try to provide to investors going forward.

Okay, and then is it safe to assume that the incremental margins, once you've acquired a student or significantly higher than the overall mix? And then maybe you could help us out with that as well.

Yes, they are. And that is -- so you start with the ground students, number one it is less dollars to acquire them when we first get them, and then they typically take 30 college credits in their first year.

The exciting thing and the reason that our model has got readjusted and we got very aggressive about the whole ground student phenomena was that they come back at a pretty high percentage and they come back with no acquisition costs and take another 30 credits and the same thing as juniors and seniors. As you go from 8200 ground students to 25,000, that should have a positive impact on acquisition costs going forward and the profitability level of those students.

Doctoral students also have a pretty high graduation rate. They also have, even though our doctoral tuition is much less than others, it is still a higher tuition level than our tuition rates. And so, over time, as they become a higher percentage of our overall student body, it will have a positive impact. We don't have the ability to quantify that for you right here, but we will.

Okay. Thank you. And then final one for me. You've talked about the brand spreading to some of the bordering states of Arizona. Are there any new geographies where you are seeing the brand spread or you are concentrating advertising dollars versus what you were seeing a couple of quarters ago?

Yes, on the ground, Washington and Oregon are areas that are increasing in the -- on the ground. Online, there is a couple of states that we are doing well in, just because of the unique characteristics of the competitive environment. New Jersey as an example of where we have a very good ground sales force and they are doing significant television and even outdoor advertising, because our programs are resonating well there and there's not a lot of competition for those students.

So that would be one example. And there are other examples in the East where we focus efforts because we are more competitive in that we just don't like to give all of that out to the general public.

We've reached the end of our third-quarter conference call. We appreciate your time and interest in Grand Canyon Education. Who still questions, please contact either myself Dan Bachus or Bob Romantic. Thank you, very much.

Ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.