Grand Canyon Education Inc (LOPE) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Grand Canyon Education first quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Brian Roberts, General Counsel. Please go ahead.

Thank you Operator. Good afternoon, and thank you for joining us today on this conference call to discuss Grand Canyon's 2014 first 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 risk 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, 2013, our quarterly reports on Form 10-Q, and our current reports on Form 8-K.

We recommend that all investors thoroughly review these report before taking a financial portion in GCU, and we do not undertake any obligation to update anyone with regard to the forward-looking statements made during this conference call. And with that, I will turn the call over to Brian.

Good afternoon. Thank you for joining Grand Canyon University's first quarter fiscal year 2014 conference call. In the first quarter of 2014, enrollments grew by 15%, and net revenues grew by 17.9%. New enrollments grew in the low double-digits and operating margins are at 25.9% for Quarter 1 2014. We had another successful quarter, andI want to thank our faculty and staff for their hard work, continued commitment to innovation, and for driving high levels of student achievement.

Now that the 2013/14 school year is nearly complete, we want to give you some important updates regarding our traditional campus. Retention levels reached a new high with 90% of students who didn't graduate transitioning from the fall to the spring semester. This is impressive because nearly 50% of our students are studying in very challenging science programs. We are still waiting for final grades from the spring semester. But given the very high demand for student housing, we expect the percentage of students transitioning from spring to fall will be very high as well. The most recent graduating class of nurses passed the NCLEX exam at a rate of 94.2%. In 2013, 75% of our premed students were accepted into graduate school with the national average being only 42%. This included prestigious units such as Harvard, University of Michigan, and University of Washington. We expect similar results this year.

For the most recent reporting year, pass rates for our college of education students on their professional knowledge exam was, elementary education students passed at 92% rate, secondary education students 97% rate, and special education students 93%. Based on the current trend, 90% of our business graduates will have secured jobs within six months of graduation. We have all of the approvals necessary to begin teaching in the Information Technology and Computer Information Systems for the fall of 2014. And we are in the process of seeking approval for Engineering programs beginning the fall of 2015.

Our students level of achievement in the performance areas exceeded expectations. Our Theater and Music department put on five major productions, and over 200 total performances in front of over 125,000 patrons. They won many local awards and appeared on local news shows numerous times. Our student debate team competed in venues across the country, and experienced significant success in their first year of competition. Our athletic teams performed exceptionally well in the first year at the Division 1 level. Most of our teams were predicted to finish at the bottom of the Western Athletic Conference, but did considerably better than expected. Our women won the WAC Indoor Track championship, and our men finished second. Womens Tennis finished with a 13-6 record, and the men were 11-8. Womens Golf finished third in the conference tournament, and the men compete this weekend and are expected to do well. Womens Softball won the WAC regular season Championship, and the Mens Baseball team is currently in second place. Mens and Womens Basketball both finished third in the Conference. Our students, faculty, and staff and alumni and growing fan base, are obviously looking forward to our second year of competition.

Next year we are expecting over 5,500 new students, which would bring the total to over 11,000. The average incoming GPAs of new students for next year is currently above 3.5. With the completion of two new dormitories, 6,000 students will be living on campus. We will break ground on the East Valley Campus in July of this year, and it will open in the Fall of 2015. Our plan is to grow our online campus at 6% to 8% per year, but we continue to exceed that in the short run. Over time, our online campus will be primarily a graduate campus. The students continue to be attracted to the full-time faculty, small class size, interactive and collaborative academic environment, and the highly service oriented counseling teams.

Doctoral students, Masters students, RN to BSN students, and our traditional campus students now make up 63% of our total student body. The quality of the student body continues to grow, and has resulted in projected three-year financial aid default rates to be 12%, unofficial two-year default rates to 7%, and actual bad debt expense of under 3%.

As many of you know, we will be going through a Department of Education program review beginning May 5. We are being look forward to the experience. It will be an opportunity to showcase a very experienced leadership team, and to demonstrate very advanced academic and operational work flows, which are supported by high levels of technology and automation. Our ability to monitor the progress of each student on an every day basis as they move through the program has become a hallmark of the institution. We have spent over $100 million in technology in the last four years. Much of it to support the systems that we will show. These include our online learning system, 24-hour transcript evaluation, a net price calculator that provide students a quick and totally transparent financial plan, automated attendance taking, and an early alert system for students who may need additional academic help. This review and eventual report will provide third-party validation for very strong academic and operational processes to support our students.

Now turning to the results of our operations. Net revenues were $167.4 million in the first quarter of 2014. An increase of $25.4 million, or 17.9%. From $142 million in the prior year period. Operating margin for Quarter 1 2014 was 25.9% compared to 23.7% for the same period in 2013. It's important to note that tuition, room and board has been frozen for five years in our ground traditional campus and there's no increase in tuition for the online campus this past year.

Net income was $26.3 million for the first quarter of 2014, compared to $20.9 million in the prior year. Aftertax margin was 15.7% compared to 14.7% for the same period in 2013. It should be noted that the difference between the operating margin before income taxes, and the aftertax margin of 15.7% is primarily money that we pay in taxes that goes back to the taxpayer. Given our relatively low default rates, 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 $60 million in the first quarter of 2013 to $70.7 million in the first quarter of 2014, an increase of $10.7 million, or 17.8%. This increase is primarily due to the increase in the number of faculty and staff to support the increasing number of students attending the University. As a percent of revenue, IC&S stayed flat at 42.2%. We are extremely pleased that bad debt expense as a percent of revenue decreased to 2.3% from 3.5% in the prior year quarter.

Employee and faculty compensation and related expenses including share-based compensation decreased 80 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, dues, fees and subscriptions increased 20 basis points. Occupancy and depreciation and amortization expense increased 20 basis points.

Admissions and Advisory and related expenses as a percent of net revenue decreased 50 basis points from 16.2 in Quarter 1 of 2013 to 15.7 in quarter 1 of 2014.. 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.

Advertising expenses. As a percent of net revenue decreased 120 basis points from 11.2% in Quarter 1 of 2013 to 10% in Quarter 1 of 2014, primarily due to us leveraging our increased brand advertising focus on the southwestern United States region over higher revenues. Marketing and promotional expense as percent of net revenue increased 10 basis points, from 1% in Quarter 1 of 2013 to 1.1% in Quarter 1 of 2014. General and Administrative costs as percentage of revenue decreased from 5.7% in Quarter 1 2013 to 5.1% in Q1 2014, primarily due to employee compensation and related expenses including share-based compensation decreasing between years.

Interest expense decreased $0.2 million over Quarter 1 of 2013 as a result of the decrease in the average balance of our credit facility between periods, due to scheduled monthly principal payments. As a result of the above, net income increased from $20.9 million in the first quarter of 2013 to $26.3 million in the first quarter of 2014.

With that I would like to turn it over to Dan Bachus, our CFO, to give a little more color on 2014 first quarter, talk about changes in the income statement, balance sheet, and other items.

Thanks Brian. Scholarships as a percentage of revenue increased from 16.6% in Q1 2013 to 18.4% in Q1 2014. Due primarily to the growth in our ground traditional student enrollment between years. Online scholarships as a percentage of related revenue is up slightly year-over-year, due to an increase in students from organizational partners. Bad debt expense as a percentage of revenue decreased 2.3% in Q1 2014, as compared to 3.5% in Q1 2013. This decrease is primarily due to a significant amount of collections of previously fully reserved for Receivables, and improved retention for our online students. Excluding the increased Receivable recoveries, our bad debt expense would have been 2.9%.

Our effective tax rate for the first quarter 2014 was 38.9% as compared to 40.4% in the first quarter of 2013. The low effective tax rate in the first quarter of 2014 was primarily due to state tax rate changes that are gradually being phased in beginning in the first quarter of 2014. We repurchased 14,000 shares of our common stock during the first quarter of 2014 at a cost of $0.6 million, and have $26.9 million available under our share repurchase authorization as of March 31, 2014. An additional approximately 24,000 shares at a cost $1 million have been repurchased subsequent to quarter end.

Turning to the balance sheet and cash flows, total cash unrestricted, restricted and short-term investments at March 31, 2014 was $247.4 million. Accounts Receivable net of the allowance for doubtful accounts is $7.4 million at March 31st, 2014, which represents 5.2 days sales outstanding, compared to $7.7 million, or 5.2 days sales outstanding at the end of the first quarter of 2013. CapEx in the first quarter of 2014 was approximately $27.2 million, or 16.3% of net revenue.

I would like to touch on one regulatory item. As was announced a few weeks ago, and as Brian just mentioned, the Department of Education will be conducting a program review of Grand Canyon University covering the period July 1, 2012 to June 30, 2014. We have been informed that the primary reason for the review is the University's growth since the last program review, which was for the period July 1, 2008 to June 30, 2010. The program review team will be onsite in early May.

Last I would like to provide some color on the updated guidance for 2014. As a reminder the growth in our ground traditional student body as a percentage of our total student body continues to make year-over-year comparisons more challenging, as these students are much more seasonal than our working adult students, and there can be differences between years and the start and end date of our semesters. For example, due to the differences in the start and end date of our spring semester, approximately $2.3 million of additional revenue was earned in the first quarter of 2014 and $2.3 million less revenue will be earned in the second quarter than would have if the start and end dates of our spring semester were the same as 2013.

Our initial enrollment guidance assumed mid single-digit online new start growth, a slight increase in retention, and an increase in graduates between years in excess of 30%. We exceeded both our new start and retention rate improvement assumptions in the first quarter of 2014, while graduates were in line with our initial assumptions. We did have one extra start date in March which had a positive impact on our year-over-year comparisons. We have made tweaks to our assumptions for the reminder of the year, which has resulted in increased enrollment, revenue and net income guidance. We have brought down our revenue per student slightly to reflect current trends in the breaks student are taking, the growth in programs such as doctoral, which earns less revenue per day, and the slight increase in online scholarships as a percentage of revenue.

On the expense side we have brought down our estimated bad debt expense for the rest of 2014 to reflect the lower bad debt trends. We anticipate that advertising expense as percentage of revenue will be higher in the second and third quarters of 2014 than in the first quarter of 2014, as our spend should be similar but revenue will be lower. We have also adjusted down our effective tax rate for the remainder of the year to 39.5% based on the reduced state tax rate. We remain comfortable with our previous estimates of diluted weighted average shares out standing by quarter, although we might repurchase shares during 2014, these estimate does not assume repurchases. They do assume increased dilution from stock options and restricted stock granted in previous years, and from the 2014 stock grant.

Our previous estimated CapEx for 2014 and 2015 was $145 million and $155 million respectively. We're now estimating those amounts to be $175 million and $185 million respectively. With the increase primarily due to additional residence halls needed to meet the student demand. Historically approximately 50% of our students lived on campus in our residence halls, but given the increased demand from our continuing students, we now estimate that this will increase to between 55% and 60% of our students living on campus, to meet our previously provided total enrollment goals. Given the strong return on invested capital for resident halls, we believe this is a good investment for the University.

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

Certainly. (Operator Instructions). Our first question comes from the line of Jeff Meuler from Baird. Your question, please.

Assuming from spring to fall retention for the on-ground students to get to the ground guidance that you're giving for Q3?

Was that a question? I'm sorry, I didn't understand the question?

What are you assuming from spring to fall retention for the on-ground students that do not graduate?

We are assuming it will be at its historical rate which is a little bit less than 90%, and so we haven't baked in any increase which there could be.

Okay. And do you have a sense for how is varies by students that live on campus and the commuters versus the commuters, I guess?

It is slightly higher for students that live on campus, although the mace place where there is meaningful indicators is the difficulty of the program. So one of the things that we like to talk about is about 50% of our students on our ground campus are currently studying in science areas, especially biology and preparing for medical careers. Those are difficult programs and not all of the kids can make it through those programs.

When we have fully built out our campus and we have 18,000 students, and another 10,000 in our East Valley Campus, our goal is that 70% of them will be studying in the science areas, and then including Engineering and Information Technology and Computer Information Systems. Those are tough challenges. Those are tough goals. But the rates we've been able to achieve in biology and science, we think we can achieve those also in engineering and technology, which would speak well in terms of employability, because that's what we're most after which is getting kids involved in programs that will lead to jobs and good paying jobs, and if we can graduate them at the current rates, we'll make a significant contribution to Arizona.

Okay. Then during the first year oral two that it's open, what is the program offering in terms of the degree levels and majors going to look like at East Mark versus what it's at on the traditional campus today?

Most of the programs that we're going to be offering at our traditional campus will be offered at the East Valley campus. But we will start with 90% will be freshmen. There will be a few sophomores that we'll let in but 90% of the students as we start in the fall of 2015 with about 2,500 students will be freshmen, and they will be studying in pretty much the same areas that people are studying in on this campus, with the exception of we plan to open that campus with Engineering.

Thank you.

Our next question, comes from the line of Jeff Silber from BMO Capital Markets.

Thank you very much. I think you gave start dates. I wonder if would you of you to give that for the online programs?

The numbers Brian gave were just for the online programs.

Because the ground campus enrollments for spring are very small.

Small, okay great. And the 5m500 new students that you're anticipating for the fall, I'm just wondering, has that been finalized? Are you still taking applications, or is that class pretty much set?

It's a lot more set than it has been in the past, that's for sure. We are still taking applications, and there are students who will still be admitted. Our problem is going to be space. We are building the two new dorms and every bed is accounted for, and we're just not going to have enough beds. This will really be the first year that we're going to have to turn away highly, highly qualified students that are from out of state, and need to live on campus in order to be admitted here.

Alright. That's good to hear. Not for them but I guess for you. And then finally you mentioned program review. The fact that the Department of Education I guess was looking at you because of the growth since they last came on. Did they point to anything specific that precipitated this review?

No, not really. I think indirectly, there still is a lack of understanding around the difference between being a borrower-based environment and being in a term environment, and we're really looking forward to the review because it's going to give us a chance to demonstrate some really advanced technology that we've applied to students who are working full-time and going to class online, taking one class at a time, and how really the best way to provide financial aid to those students is not in a term environment, it's in a borrower-based environment. And the ability to work with working adult students who come in and out of programs because of life's challenges, it's so much better when you can do it in a borrower-based environment, that we're kind of anxious for the review because really we think it should be a model for, there are so many universities now that want to get into the business of teaching working adult students, and they want to deliver online.

And the academic part of that is one part of it. But the operational part of it and the financial aid part of it is a whole other game, and when you try to manage a body of those students in a term-based environment you are going to run into significant difficulties. We think we can turn this into a very positive thing, and we think that the Department of Ed can walk away with a understanding of how universities should be doing this going forward if they're really going to team working adult students and do it online.

Alright. Thanks so much.

Thank you. Our next question comes from the line of Sara Gubins from Bank of America Merrill Lynch.

Hi, thanks, good afternoon. There has been some news in the press that some schools are beginning to make a push to expand in Arizona. Is that something that you have been seeing, or you would expect to see?

Well, no, not really. There was the Mayor of Mesa brought in four or five private, small private colleges a couple of years ago, and put them in a kind of a store front situation in downtown Mesa. Those enrollments are not doing well. One of them has already closed down. So we know of those four that still remain. I don't think any of them yet at this point has 200 students in them. And then there is a university that has a technical program that's coming in in the northwest part of town. I don't think they're here yet, but other than that we don't know of anything.

okay. There's also been some news about the President focusing on teacher education and teacher training. Are you expecting any of that to impact your activities?

No. In fact if anything, that I think will reinforce our activities. Whether it's teacher education or whether it's just delivering education online in different programs, people are getting into it, and not really applying the resources to it that they need to in order to do a good job. An example of that is many universities who are doing this are offering programs to students in states where they haven't received authorization to do that. We have put millions of dollars in place to make sure that we are authorized in every state where we are teaching students online.

We are also put millions of dollars into making sure that every place we do teacher education, we have put every student teaching, every internship, every observation that's required and necessary to prepare teachers in those states, all of that is in place. And so if there's any further regulation around those kind of issues, actually that would be a very competitive advantage to us, because the people that are trying to get into it now, have really gotten into it without investing in all of those areas.

Thank you.

Yes.

Thank you. Our next question comes from the line of Jerry Herman from Stifel,your question please.

Thanks, good afternoon everybody. Brian, I'm wondering if you can give us a feel for what the ramp rate will look like in the technology and engineering programs, sort of the first class sizes, and then what it will take to get to your goals there of what those goals might be?

The information system, Information Technology and Computer Information Systems will not be large, because we don't have a big ramp-up time for fall of 2014 so we're anticipating maybe 100 students in each of those programs. We'll have a much bigger ramp-up time for Engineering for fall of 2015, and so those classes will be significantly higher than that. We are building out major laboratories and classroom facilities in advance in anticipation that those programs, once we get our feet on the ground will grow significantly.

So we're not prepared to give you specific numbers at this point, it's our objective to do those two areas just like we've done biology, nursing, premed and those areas, which is not to limit enrollments based upon lack of funding to put in place laboratories, and those kind of things. We're going to build out well in advance and the exciting thing for those areas right now is there's been a shutdown of some aerospace industries and companies and industries in Arizona, which is not a good thing, but the positive result of that is there's a lot of very smart Ph. D.-prepared people around looking for faculty positions. So we won't be limited in terms of our growth in those areas by faculty.

And then just a question about Mesa. You guys have obviously displayed good ability to build facilities, but as we understand it, that campus will be in sort of a larger planned community, if you will. Is the rest of that project to your knowledge on track?

Yes, to our knowledge it's on track. This is a very, very experienced group. DMB is a company, they've built major master planned communities throughout the Southwest. Then and very well funded. They're very experienced. And we have confidence that they will deliver. If it wouldn't go as well as planned which we don't anticipate that to be true, but if it wouldn't, that's not a concern for us. Where this place is located is very convenient from an intersection of freeway locations perspective. It's going to be very easy for commuter students that come to campus during the day to access it, and we also are excited about the potential of it for evening classes for working adult students. And so if it doesn't go as fast as they're anticipating, that should not be a negative drag on what we do at all.

Great, thanks very much. I'll turn it over.

Our next question comes from the line of Peter Appert from Piper Jaffrey. You were question please.

So Brian, can you give any additional color on the breakdown of the current online enrollments by program area? I'm specifically interested in what's driving these really robust numbers you're seeing?

Yes, healthcare and nursing had another significant gain. And so there is tremendous potentials in both the RN to BSN program, the MN program, and now our Doctorate of Nursing program. So those gains were significant year-over-year.

The College of Education is flat to a little bit down, and as you know that's our largest area as a percentage. The raw number is up, but as a percentage that's a little bit down. The Business School is up in terms of raw number, but as a percentage it's a little bit down, because most of those student are undergrad online students, and we're purposely deemphasizing those. The Doctoral programs are way up. And the nursing and healthcare programs are way up. And those things are driving the majority of the growth at the online level.

A rough breakdown of the percentage between the various four programs that you broke out?

In terms of total students, College of Liberal Arts and Sciences is at almost 17% of the total. College of Education is 37.5%. Nursing Health Science is 32%, and the College of Business students is at 13.8%.

Brian, you've been talking forever about the 6% to 8% online growth rate. Obviously you're doing substantially better than this. The growth actually accelerated here in the most recent quarter. Are you just being excessively cautious, or do you want to dial back the growth rate, and when do you think that 6% or 8% becomes relevant?

We're engineering it so that the percentage of students that come into the program are in those upper categories that have high graduation rates, high retention rates, low default rates, and those kind of things. And so the first part of that story is if we wanted to grow faster in this short term, we couldn't grow faster. But we're pulling back in areas where we know the students aren't going to graduate as high a percentage. Can I give you a specific quarter as to which we're going to get down to 6% or 8%? I can't. I think you can expect it will happen over the next four quarters, over the next year or so. It will start getting down to 7% or 8%.

I do think you'll see it decelerate on a sequential basis this next quarter. So everyone should expect that. We have a lot of graduates coming up in the next few months, and our start periods in this second quarter are not as high as they obviously are in the first. And so on a sequential quarter basis, it should decelerate in the second quarter from the first.

That sounds, Brian, like you basically are choosing to grow potentially choosing to grow this lower rate rather than being demand constrained?

Definitely. If you look at our S&P as a percentage of revenue, we gained almost 2 percentage points. I mean it went down almost two percentage points. So we're obviously not spending on either advertising or enrollment counselor salaries to get additional growth. In fact we're dialing that back and we aren't still getting growth, which we've been saying all along, this is going to be more about brand in the future, than it is going to be about counselors and advertising dollars, and those kind of things. And so that absolutely is happening in the short run.

Peter, one other thing. When you asked about growth by programs that we've seen as I'm sure you've seen is the acceleration of the Masters as well. So this is a big focus of ours, so we have seen some pretty good year-over-year growth rates in some of the Masters programs that we've rolled out over the last couple of years.

Thank you very much.

Thank you. Our next question, comes from the line of Phil Stiller from Citi.

I wanted to ask about the margins. They're obviously very strong in the first quarter up over 200 basis points year-over-year. The guidance implies a pretty significant slow down in year-over-year improvement. I'm just wondering where the increased expense investments should fall, what line items are you guys investing in later in the year?

It's mainly a matter of revenues being down in the second and third quarter because of the absence of the traditional ground students, which are becoming a bigger percentage of the overall total. That's really the main reason. The other reason would be that we are at 2.3% in bad debt expense, which was really 2.9%, and so that's really going to be closer to 3% in that category, so that's 50 basis points there as well. It's really those two things.

Okay. That's helpful. And then Brian, I think you mentioned in response to one of the questions, 18,000 student at Phoenix which I think is higher than what you've talked about in the past. Is that part of the increased CapEx budget that you talked about earlier?

Yes. Definitely, it is. The last 12 months has demonstrated to us that there really is not a limit to families in this country that are looking for high-quality private Christian higher education that's affordable. I mean, there is a huge demand for families that are looking for a higher-quality private education that has a focus on spiritual development, on character formation that provides a very, very safe campus, that provides a very strong sense of community, where there are very low class sizes, and where there's a focus on the vibrancy of the campus and getting students involved.

Our student clubs are growing exponentially. The attendance at major events on campus are growing. There just really just is not a limit to parents that are looking for that for their kids. And so honestly if we would have built another 1,000-person dorm for this year, we may have filled it, in addition to the two dorms that we already filled.

And so yes, our plan is to build this campus out now to 18,000 students. And the CapEx plan is put in place to do that. Most of those are investments. We've done the heavy lifting now in terms of infrastructure. The student union, the rec center, the arena, and so now we're adding things that just not only allow us to take more tuition dollars, but we make money on dorms, even though our rates are very low. And as we continue to build these dorms out, those things are going to produce revenues and profits for us for the next 20 years.

And if you think about the I guess $360 million of spend over this year and next year, where would that take your total ground capacity to by 2016?

By 2016, it will probably be somewhere around 17,000 to 18,000 between this campus and the East Valley campus. And then we hope to peak out between the two campuses at about 28,000. So I would say 17,000 or 18,000 and in the next number of years it will grow to 28,000, which would really put us in a category of a mid-sized state university from a numbers standpoint.

And then what is the assumption in terms of on-campus living versus off-campus for both of the campuses on a steady state basis?

It's really going up. It was about 50% and what it's going to be next year is somewhere between 55% and 60%. We're doing very, very well in California. This is going to become a major economic driver for the state of Arizona. Arizona used to lose thousands of kids on an annual basis that would leave the state, take their brain power and their tuition dollars to especially southern California to access private Christian higher education.

What's happening now is that those kids are staying home and they're coming here, but California kids are leaving California and coming here in droves. Of our 5,500 new students next year, 1,700 or 1,800 are going to be from California, which will bring our total from California to close to 2,800 which represents nearly $50 million in revenues in addition to the brain power, but that doesn't account for the amount of gas they buy, groceries they buy, and those kind of things. And so wet we end up at 28,000 ground students, and we end up with 7,000 or 8,000 from California, that's going to be a major economic driver for the state of Arizona which the state is excited about.

That's exciting. Thank you.

Real quick on the East Valley campus. I think that's still yet to be determined. We're building 1,000 beds for the very first year, and then I think that's something we'll evaluate on an annual basis from that perspective.

Are there only 1,000 beds contemplated in the current CapEx budget for this year and next year?

For the East Valley campus, that's correct.

Alright, okay, thank you.

Not for obviously the West Valley. We've got a lot more than that planned.

Alright.

Thank you. Our next question comes from the line of Adrienne Colby from Deutsche Bank.

Hi. Thanks for taking my question. Could you update us on what your assumptions are for summer school enrollment on your ground campus?

Approximately 2,000 students.

Great. And this quarter, how many of your new students, or what percentage would you say were sourced from third party leads? I know the last quarter you talked about taking that down to about 25%.

Ground students or online students or both?

just for the online, the new online students?

Yes, it's less than 25%. In fact it's quite a bit less than 25% year-to-date.

And then lastly I was wondering what guided the decision not to participant in the US News and World Report's Online Bachelor's programs rankings this year. Just wondering if you're anticipating some competitive pressure from ASU's program being ranked 9th? I think it was something like 40th last year. If that changes your decisions going forward about participating in the survey?

No, the US News and World Report, number one, there's a lot of historical to it. We've been at this thing for five years. Really kind of a miracle where we are, in terms of what we're doing academically in a five-year time period. What we care about and where we are placing our emphasis on, is what the hospitals say about our nurses, and they want them, and we're placing them at the rate of 100%. What the school districts say about our teachers, and they're in huge demand. And they're wanted, and we'll place them at almost 100% rate. What the professional business community is saying about our business graduates, and they will be getting jobs at a rate greater than 90%. We want to accomplish those same things in terms of engineering and information technology. And so much of what goes into the US News and World Report is based upon inputs, and we're not focused on inputs nearly as much as we are focused on outputs, and producing people that are going to get jobs, and they're going to get high-paying jobs and they're going to do well in the business community. That is what is important to us.

Thank you.

Thank you. Our next question comes from the line of Tim Connor from William Blair.

Thank you. It sound like you're seeing some strength in the corporate business. How meaningful is corporate for the online segment, and where do you see this going and what's driving the growth there?

It's very, very important from a healthcare standpoint. Our relationships with hospitals continue to grow, and it's because hospitals are desperately in need of highly qualified nurses, pre licensure nurses. It is growing in terms of our premed students, and them getting into prestigious medical schools and coming out as doctors and returning to the state.

It's really growing in terms of school districts. Schools and school districts. We're signing partnerships, a couple literally every day with schools, and with school districts because they want our student teachers, they want our teachers, and they want our faculty who are participating in in-service training in many, many schools and school districts. We just had an advisory committee of 18 prominent business professionals on our campus today, who are providing tremendous feedback for us as we continue to develop our business program. These are very high-profile business professionals that are running companies in the Valley, because they're anxious to get a hold of our business graduates, because of the focus that we have on integrity, character formation, and all of those things, in addition to them being involved in our business program academically.

We have an advisory committee that has significant people on it that are helping us build our engineering programs. And then we continue to get traction with the military, because they love the transparency with which we do financial aid and program scheduling, and those kind of things. So really it's those partnerships that continue to grow, mainly in the southwest that are sending us students, sending students our way versus us having to use lead-generating activities to drive business.

Okay. And how are you thinking about prices over the next couple of years both ground and online given that you do seem to have access demand? Is it simply continuing to raised admission standards, or is there a point at which you might consider passing through some form of a price increase, either room and board or tuition?

We're going out to meet with some people in Washington the last part of the June, and we're taking seriously the agenda that President Obama has put out with regards to the goals for higher education. And we are doing everything that we can to hold the line on tuition, both on the ground and online. And we're going to try very hard to do that. We are continuing to make gains in two ways. The quality of our student body keeps going up, retention levels keep going up so the ability, the need to get new students at a certain level to get the total growth, that's working in our favor, and you can see we gained two additional percentage points in terms of S&P spending this quarter.

So the strength of our student body is going up, which means there are higher graduation rates, higher retention rates, less need for new students to get the growth. We're also getting an increase percentage of students, our doctoral students and ground students which is really important and really impacts us positively, because both of those groups have four-year revenue streams. And so you pay less to acquire those students, especially the ground students but when they have four-year revenue streams versus an 18-month graduate Masters degree student, those things all play in your favor in terms of pushing up the margins a bit, so that investors get a good return, but not having to do it at the expense of students meaning higher tuition. And so I'm not telling you that we're not going to raise tuition, but we're trying very hard not to do it. We're trying to get the returns to investors based upon our increased efficiencies, not based on increasing tuition for students.

Okay. Thank you. And then final question from me. Given the out of state interest in attending the on-ground campuses, does that sort of lessen your interest in building a school or campus outside of Arizona, and would you potentially think about just basing the operations exclusively in Arizona, whether it's expanding the current campuses, or even adding another one in Arizona?

Yes, the answer is yes. We're not really focused at this point at all in terms of a new campus other than the East Valley campus. We have a five or six years run here to get to the 28,000 student goal. We're excited about the average incoming GPAs, the increased admissions requirements, the adding of the STEM programs. And so at this point there are no plans to build a campus outside of the state of Arizona.

Thank you.

Thank you. Our next question comes from the line of Jeff Volshteyn from JPMorgan.

I apologize I joined the call late. Can we talk about your aspirations for a longer term margin as a balance of tuition and profitability?

We were talking about 24% margins and they have become 26% margins. They've become 26% margins without raising tuition. They've become 26% margins mainly as a result of us becoming more efficient. We have taken about as much efficiency as we're going to be able to get out of bad debt expense. Getting it under 3% is tremendous, and it's a tremendous credit to our staff. Just a huge credit to our staff, both for bringing good students and also for all of the procedures that are in place to make that happen. Where it can still come, 50 basis points or so a year maybe is in the S&P area. The stronger our brand gets, the easier it is to get students without having to spend the same amount of money in admissions advisor salaries mainly. So being at 25% or 26% is above where we initially intended. Another 50 basis points or so a year in those other areas is probably where it would come from.

Alright. Would you be able to quantify percentage of S&P spending that goes toward branding as opposed to direct advertising?

It's way up in terms of branding. If you notice an increased amount of our spending is the branded television advertising that we do, which is not direct response. And so the goal is to have less inquiries and more students, not more inquiries and less students, and we're on a good track to do that. And it just demonstrates that as the brand grows, all of those search areas, and all of those areas grow, which puts less demand or need to do anything with the lead generating companies, and we're moving in a strong direction from that point, standpoint, and not only do you get better students, but you build the brand of the institution and it's interesting that people talk about, well, 10% of revenue spent on advertising.

The point is that we have a model, a financial model that allows us to grow at a certain rate that produces an end game which is very low tuition at no expense to the taxpayer, and that's really the only thing that should matter as people evaluate this model. The financial modelis very effective because it spreads the administrative structure across two student bodies, two growing student bodies in a way that produces efficiencies, and the advertising spend allows us to get the growth rate we need which have allows us to keep tuition low, which is the thing that ultimately that should be the thing that's most important to people.

Great. One last question from me. What percentage of your students are military students, and going forward is military or potentially veteran students, are they a large focus for your marketing efforts?

They're not a large focus. I would tell you that about 5% of our student now are active duty military students. It is growing some. But it's not something we're placing a huge focus on. We've got a really strong student body, in terms of those military students, their graduation rates are good. And our brand is growing in the military, but it's not something that we're putting a lot of resources towards making happen.

Thank you very much.

Thank you. Our next question comes from the line of Trace Urdan from Wells Fargo Securities. Your question please.

Brian, I wonder if you could talk about, you guys have been putting up some pretty strong numbers with doctoral degrees, and they're starting to rise to be kind of a material piece of the enrollment. Can you just speak for a moment about what's driving that in your view, and whether you're putting special attention on trying to boost that population?

Two things. The traditional ground campus and the credibility of the traditional ground campus and our faculty, that's a big driver. Doctoral students, a lot of them come out of a traditional academic environment, and if they can be affiliated or associated with a traditional campus as they're doing their doctoral program, and as they come to do their residencies, that's a major and important feature to doctoral students.

A second thing that's driving it is low tuition. Our tuition rates for doctoral students are huge percentage points below most of our competition, and so when you take into account low tuition, and the fact that we have a traditional ground campus whose credibility is really growing, and then you add that to the fact that we just have some very strong academic programs. The work that we're putting into those programs is really good work, and they're growing in their academic reputation, and when you accompany that with the fact that we have low tuition, and then students love to come on this campus. And so when they do their residency if they come on our campus and they spend a week here, and that association and knowing that this is going to be here 50 years from now, and that they're joining a university and earning a doctorate or earning a PhD, and they will become part of that University, which they know is going to be here 50 years from now, is a big part of the advantage that we have.

Great. Thanks. That make as lot of sense. And the second question I had was just at the risk of being a little built esoteric here, I wonder if you could comment on the fact, you guys and American Public I believe are the only two among the publicly traded university companies, that has their CEO is also the President of the University. And you both have I think very strong regulatory profiles. And I just wondered if you could comment on that briefly, what advantages you think it brings the fact that you are both that you're the University President and CEO of the Company?

I think it's very helpful. If you look around at where we're spending our money, and we're making significant investments, you can come on our campus and you're not going to see a major administrative building. Almost 100% of monies that we're investing are to improve what goes on academically at the institution for students. And so you're going to see brand new classrooms and state-of-the-art laboratories, and you're going to see low class sizes and you are going to city an increasingly qualified faculty, and you're going to see lot of students support systems in place to ensure that students have all of the academic assistance they need to be very successful in the classroom, given that they're studying in difficult programatic areas. So I think having no division between the President and CEO, so there's no question about what is most important, and that is the academic experience that our students have.

I think that's important but I will tell you there's something that's more important than that, and that is that if you look around at the top 25 people in the university, probably 90% of us have been working together for 20 years or more. And so from the academic perspective, from the operational perspective, from a financial perspective, we have a very experienced team, and we have a very integrated and tight team, and I think that has more to do with our current level of success, even than the fact that I have both titles. I think what a lot of people are finding out is that this is not a very easy thing to do.

With the downturn in the economy, a lot of people jumped into wanting to have a hybrid campus, so they had a traditional campus and now they want to have an online campus, because they like the potential of the profits that they can get from that. But the investments are significant. We have put $100 million in technology in just the last four years.

The services you have to provide students are greater than what you provide for them on campus. You can't get away with shorting students in terms of electronic library, and advanced curriculum, and delivery and a lot of strength operationally in terms of how much you do financial aid, and how you do student scheduling, and all of those things. We had the very good fortune of having 22 years of experience at that at the Apollo Group before we came here. I would tell you I think that's the most important thing, is that the experience level and the team that's doing it.

Alright. Thank you.

Thanks.

Thank you. Our next question is a follow-up from the line of Jeff Meuler from Baird. Your question please.

A follow-up, do you have a sense for how long you expect the program review to take?

Well, they'll be on site for probably just about a week, but then after that, you just don't know. They might ask for follow-up information after. It might take weeks if not months to get a preliminary report. A lot of it just happens to do with how busy they are with what's on their plate. They might go immediately from Grand Canyon to a different school, and so we just don't know. But our hope, we're hopeful that it goes smooth, and we're able to get a preliminary report quickly.

I think it's under one OPA eID. Presumably they're also reviewing the ground campus operations?

It is all of the university. We don't really have an online and ground operations per se. I mean it's one university, so they'll be looking at all things university.

Okay. And then when you're talking now about 18,000 ground students at the original ground campus, how are you guys doing with land constraints, and the land, all of the residential buildings just north of your athletic fields, who owns those and is there optionality on that land?

Yes, the 19 acres, almost 20 acres that's north of those athletic facilities was a condominium complex that we now own, and those buildings are coming down in about 30 days. So that gives us an additional 20 acres. We also are working on, well, the way it's going currently within three years or so, we'll probably have close to 200 acres. And we started out with about 100 or 110 acres. We will be close to 200 acres in three to four years.

Okay. Thank you.

Thank you.

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

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.