Grand Canyon Education Inc (LOPE) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Grand Canyon Education's first quarter earnings call.

At this time, all participants are in a listen only mode. Later there will be a question and answer session, and instructions will follow at that time. (Operator instructions.) As a reminder, today's call is being recorded.

I would now like to turn the conference over to Brian Roberts, General Counsel. Sir, you may begin.

Thank you, operator. Good afternoon, and thank you for joining us today on this conference call to discuss Grand Canyon's 2015 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 risks and uncertainties.

Various factors could cause GCU's actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in GCU's SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31, 2014, our quarterly reports on 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 the forward-looking statements made during this conference call.

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

Good afternoon, and thank you for joining Grand Canyon University's first quarter fiscal year 2015 conference call.

In the first quarter of 2015, enrollments grew by 12.9% and net revenues grew by 15.9%. New enrollments grew in the mid single digits, and operating margins are at 28.8% for quarter one 2015.

Continuing to produce these results requires expertise, hard work, and especially teamwork. I want to thank our executive management team, our faculty, and our staff for working in a multitude of cross-functional ways across many colleges and departments to provide our students with a world-class educational experience.

The 2014/2015 traditional school year officially ended this past Saturday with its sixth and final commencement ceremony. Going forward, there are two numbers that will become increasingly important to the development of the traditional campus.

First, we started the fall of 2014 with approximately 11,000 campus students. After subtracting the students who graduated, approximately 85% of the total remaining are registered to return this coming fall. That means that we are now on track to graduate approximately 60% of our traditional campus students.

In the case of GCU, IPEDS data doesn't accurately portray the future with regards to graduation rates. The data looks back six years to 2008 and only includes first time full-time students, which GCU had less than 100 of those students.

Between 2004 and 2009, traditional campus student body had deteriorated in terms of quantity and quality. In fact, in 2008 there were less than 900 students on campus and the overall quality of the students was not good.

Beginning in 2010, the traditional campus student body began to grow in both the quality and quantity of students. Since 2010, each class has been stronger. The average incoming GPAs keep getting higher, retention rates continue to improve, and the graduation rate will reflect those improvements.

The other critical metric is that of the approximately 7,500 students who will return next year. Over 60% will live on campus, and over 70% of our new students will live on campus. As we grow the traditional student body to over 25,000 students, keeping the graduation rate at close to 60% or better and keeping 70% of students living on campus has a positive impact on both the top and bottom lines as well as the overall culture of the university.

Average revenue per student is $11,000 for commuter students but $14,000 for resident students, since residential students pay for room and board as well as tuition. Building and managing residence halls and not outsourcing it, as many universities have done, has become very important for two reasons.

First, at very low room rates the residence halls are very profitable, which allows us to keep reducing tuition. Second, it also allows us to create a vibrant campus in addition to keeping the campus very safe for students. We had another year with very low crime statistics. Given the recent publicity with regards to campus safety across the country, this has become a significant advantage for us.

Outsourcing residential housing takes away a significant profit center, but also takes away a university's ability to create a safe, positive, and productive environment for students. Campus life has become a major reason students are choosing Grand Canyon. Spiritual life activities, concerts, theater, dance, debate, clubs, intramurals and club sports, as well as NCAA athletics, keep the campus alive throughout the week.

This fall, in addition to the approximately 7,500 returning students, we are expecting 7,000 new students, which would bring the total to 14,500. We are building four new six story residence halls with 3,200 new beds, but will still have to turn hundreds of students away because of not having enough rooms.

Each new dorm will have its own academic excellence center that will provide high touch, one-on-one tutoring for freshman students. Our students are coming with excellent academic credentials. But, 60% will be studying in very rigorous science, technology, engineering, or math subject matter areas, and we want to provide them with a tremendous amount of support as they begin their college career.

The online campus has grown 10.6% to 57,450 students. The student mix continues to move in a strong direction. Our strongest online students by virtue of high graduation rates, low acquisition cost, low bad debt expense, and low student default rates are our doctoral students, all master's students, and RN to BSN students.

If you add our traditional ground students to those categories, they comprised 63.6% of the total student body in the first quarter of 2014 and are now 66.3% of our total student body. The strength of the student body, increased academic effectiveness across many objective measures, increased continued commitment to student academic support services, and continued operational excellence has caused the revenue and expense areas to improve as well.

There is a lot of discussion in higher education about how to lower costs in order for students to accumulate credits in their first two years, but not about the kind of educational setting and experience they need in their first and second years in order to gain the foundation necessary to get ready for demanding programs like science, technology, engineering, and math.

Many of the proposal solutions remove the high touch experience that many students require in order for vigorous academic study. Our model is producing low tuition rates but keeping the high touch model in place. Whether teaching on our campus to traditional students who are 18 to 22 years old or through our online delivery model to working adult students, we are moving in a much different direction.

We think that the full residential experience for 18 year old students, including on campus living, small class sizes, one-on-one tutoring and mentoring is more important than it ever has been, as long as it remains affordable.

Our classes on ground are taught with an average class size of 25, where professors know each student by name and a great deal about who they are as people. There are one-on-one tutoring services available throughout the campus, including in some residence halls, and every student is assigned a personal counselor who will assist them in finding the right program, in developing their class schedule, and in building the most efficient financial package.

In our online classroom, many classes are taught by full-time faculty where there is an average class size of 15. There is a focus on vibrant in-class discussions led by faculty, and students are required to complete a great deal of writing throughout the program.

There is a tremendous amount of research supporting the relationship of writing and the ability to develop critical thinking skills, which are highly valued by employers. Writing is an important part of all our programs, whether delivered in a classroom or online, but is best supported only when there are small class sizes.

We are applying a great deal of technology to curriculum, instruction, assessment, and counseling but not at the expense of small class instruction, one-on-one and tutoring, and mentoring.

Net revenues were $194.1 million in the first quarter of 2015, an increase of $26.7 million, or 15.9%, from $167.4 million in the prior year period. Operating margin for quarter one 2015 was 28.8% compared to 25.9% for the same period in 2014.

It is important to note that tuition and housing has been frozen for six years in our ground traditional campus, and there was no increase in tuition for the online campus the past two years.

Net income was $34.2 million for the first quarter of 2015 compared to $26.3 million in the prior year period. After-tax margin was 17.6% as compared to 15.7% for the same period in 2014.

Instructional costs and services grew from $70.7 million in the first quarter of 2014 to $78.7 million in the first quarter of 2015, an increase of $8 million or 11.3%.

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 well as increases in occupancy expenses and depreciation expense due to the additional ground campus buildings opened in the fall, and higher instructional supplies and related expenses.

As a percent of revenue, [IC&S] decreased 1.7% to 40.5% due to the decrease in our bad debt expense as a percentage of revenue from 2.3% of revenue in the first quarter of 2014 to 2% of revenue in the first quarter of 2015, as well as our ability to leverage our infrastructure over higher enrollment.

Admissions advisory and related expenses decreased 1.1% to 14.6%, primarily due to our ability to leverage our admissions advisory personnel across an increasing revenue base.

Advertising as a percent of net revenue increased 30 basis points from 10% in quarter one 2014 to 10.3% in quarter one of 2015. The slight increase is the result of continued focus on brand advertising in the Southwestern United States region. Marketing and promotional expenses at a percent of net revenue decreased 20 basis points from 1.1% in quarter one of 2014 to 0.9% in quarter one of 2015.

General and administrative costs as a percentage of revenue decreased from 5.1% in quarter one of 2014 to 4.8% in quarter one of 2015 primarily due to our ability to leverage the fixed cost structure of our general and administrative expenses across an increasing revenue base.

We are continuing to pursue a myriad of approaches to stimulating the economy and driving increased prosperity to west Phoenix. We continued our launch of the largest corporate Habitat for Humanity project in the country through this program, and plan to update and improve 700 homes in our neighborhood in the next four years. The first 30 homes were completed in the first quarter of 2015, involving over 300 students, faculty, and administrative volunteers.

I am also very pleased to report that our three year cohort default rate for our 2012 cohort has dropped to 11%, and our 2013 cohort is tracking to be even lower. Our two year default rate for 2013 cohort, which is no longer officially reported but we can calculate it based upon information we receive from our lenders, was 6.5%. This reflects the quality of our student body and the rising graduation rates across all sectors of our student body.

As a result of the above, net income increased from $26.3 million in the first quarter of 2014 to $34.2 million in the first quarter of 2015.

I want to give you an update on what has happened since the last call regarding our back to nonprofit status. The work of transitioning from a for-profit to a not-for-profit entity is ongoing. The model that management initially pursued is not likely to happen for a variety of reasons.

However, management is continuing to look at other possibilities that we think could have potential. We don't have any details to discuss at this point, but we believe we should know more one way or the other at the time of our second quarter conference call.

As we move through this process, I want to continue to emphasize that nothing about our strategic plan will change whether we stay as a for-profit publicly traded university or become a not-for-profit university, although if our tax burden is lifted it increases our capacity to continue to invest in educational infrastructure and to lower tuition.

With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2015 first quarter and talk about changes in the income statement, balance sheet, and other items.

Thanks, Brian. Revenue and income from operations exceeded our expectations in the first quarter, primarily due to higher enrollment.

Revenue per student was up year-over-year due to our residential traditional campus enrollment growing at a rate higher than our working adult enrollment. When factoring in room, board, and fees, the revenue per student is higher for these students than for our working adult students.

Online revenue per student was down slightly due to students taking more breaks than in the previous year and a mix shift of programs that earn less revenue per student per day. We believe this trend of slightly lower online revenue per student will continue.

Scholarships as a percentage of revenue increased from 18.4% in Q1 2014 to 19.3% in Q1 2015, due primarily to the growth in our ground traditional student enrollment between years. Online scholarships as a percentage of related revenue was flat year-over-year.

Bad debt expense as a percentage of revenue decreased to 2% in Q1 2015 as compared to 2.3% in Q1 2014. This decrease is primarily the result of continued improvements in processes and the quality of our student body, as well as a change in accounting for withdrawn students made in the third quarter of 2014, which has had the effect of reducing our bad debt expense and revenue.

Our effective tax rate for the first quarter 2015 was 38.8% as compared to 38.9% in the first quarter of 2014.

We did not repurchase any shares of our common stock during the first quarter of 2015. We have $25.9 million available under our share repurchase authorization as of March 31st, 2015.

Turning to the balance sheet and cash flows, total cash, unrestricted and restricted, and short term investments at March 31st, 2015 was $245 million. Accounts receivable, net of the allowance for doubtful accounts, is $6.7 million at March 31st, 2015, which represents 3.4 days sales outstanding compared to $7.4 million, or 4.3 days sales outstanding, at the end of first quarter of 2014.

CapEx in the first quarter of 2015 was approximately $45.7 million, or 23.6% of net revenue. This was consistent with our expectation. All of the major construction occurring on campus is currently on time and on budget.

Last, I would like to provide some color on the updated guidance we have provided for 2015. We have raised our full year guidance due to the first quarter beat, but have left the remaining guidance in place.

Our financial results continue to become more seasonal due to the significant growth of our ground traditional campus. A large percentage of these students only attend class between the end of August and the end of April. However, a large percentage of the ground traditional campus costs are fixed, and these costs continue to grow due to the anticipated growth.

We must hire additional support staff to service the increasing student body in the spring or summer of each year so that they are trained and can start working with the soon to be students when these students are ready to be registered for the fall semester.

Some of the hiring we anticipated to occur in the first quarter of 2015 did not happen as early as expected, which helped increase the first quarter margin. However, most of that hiring has now occurred or will occur in the next few weeks.

As a reminder, our revenue per student will be slightly impacted by one additional day of revenue in the first and third quarters of this year and one less day of revenue in the second and fourth quarters than in 2014.

In addition, as I mentioned earlier, we are seeing a mix shift in our online programs to programs that generate slightly less revenue per day due to either lower tuition rates or longer program length. This trend has been factored into our guidance.

On the expense side, instructional cost and services and admission advisory expenses as a percentage of revenue were lower in the first quarter than expected, primarily due to lower employee compensation related expenses than anticipated, as discussed earlier. In addition, benefit costs were lower than we expected.

We anticipate that Q2 expenses will be in line with our original expectations. Our effective tax rate and diluted weighted average shares outstanding were in line with our expectations in the first quarter, and no changes were made to our expectations for the rest of the year.

Last, our current guidance does not include any potential write-offs for campus assets that might have to be disposed of in the next six months as we start construction for the 2016/2017 school year. There are a number of options that are being considered for the next phase of construction, and some of those options would result in write-offs that would exceed $1 million.

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

Thank you. (Operator instructions.) Adrienne Colby, Deutsche Bank.

Thanks for taking my question. I was wondering if you could update us with how many students are registered for fall 2015 and remind us if you require a deposit, and maybe what percent of your incoming class you expect will be from Arizona and California.

Yes, we don't give those registration numbers out, although we are on track to hit the 14,500 number and are on track probably to exceed the 7,000 new student number. And so, we feel very good about we're growing from that standpoint.

Secondly, we feel very good about the average incoming GPAs. Last year it was right at 3.5. This year it will exceed that for fully admissible students. We're very excited about that.

The third thing is we will have approximately 1,000 students studying in computer science, information technology, and our three engineering programs, mechanical, biomedical, and electrical engineering. And so, we're very excited about the incoming class from that standpoint.

50% of the students will still be studying in the natural sciences, many of them in all of the biology programs that we have. Our placement rate continues to almost double the national average per placement rate into medical school. We're excited about that.

And then, from Arizona we will probably have somewhere between -- around 55% of the new students will be from Arizona. 20% to 25% will be from California.

That number recently is really starting to go up as they are experiencing the -- they're getting their award letters and they're looking at what they are going to have to pay in, after scholarships, tuition, room and board. They're comparing it and they're really very surprised that they can study in the natural sciences, engineering, and technology for those tuition rates.

And so, California is really growing. And then, the other 15% or so will come from mainly the Southwest, although we are starting to grow a little bit in the Midwest now.

Great. And as a follow up, could you just update us on your expectations for summer school enrollment?

Yes.

Yeah, I think it'll be pretty comparable to last year. We're not seeing a big jump year-over-year like we saw last year. So, it'll be just under 3,000.

Great. Thank you.

Sara Gubins, Merrill Lynch.

Hey, this is David Chu for Sara. So, can you just I guess speak a little bit more about the nonprofit conversion? And I guess you mentioned that the initial structure is not likely to happen. Can you just elaborate on that?

I think the four or five largest investors that we have are looking at their models and saying a 10% or 15% premium is way below what they would expect, given the performance of the university. And so, that's probably the major reason, the amount of debt that would have been required is not -- it just didn't fit with what we were willing to do from a debt standpoint.

But, we are continuing to pursue other avenues. We don't want to talk about any of the details of that, but there are some things out there that have some amount of potential. And we're going to keep going down those roads.

We hope that we'll have more information or more detail to share about that in the second quarter conference call. But, we don't want to release any details at this point.

Okay. So, just a follow up on that. So, in terms of like the 10% to 15% like premium, is that kind of maximum leverage that you could have taken on?

No, David. Once we got all the information from the rating agencies, I think we would have had a difficult time raising even the amount of debt to give even a slightly premium over the existing stock price. And that's -- given what we believe of the value of the company as a whole and what we heard from our investors, as Brian said, we just couldn't get to the debt levels that would be required to do that.

Although we do want to keep emphasizing that many of you have expressed dissatisfaction with the performance of the stock. And we agree, given the performance of the university or of the company. It continues to be a problem of overhang with the rest of the industry.

And so, that 10% or 15%, we believed that would have been really best -- could have been best for our shareholders, but we respectfully will honor their evaluation that that's not good enough. And we'd agree with them if something could get done about the overhang of the rest of the industry. That's the problem.

Got it. Okay. And just one last question. In terms of scholarships, what is your expectations for the year?

I thinks similar to what we talked about at the year-end. So, you'll see an overall increase in scholarships as a percentage of revenue, but that is if you split it out flat year-over-year from an online perspective and flat year-over-year from a ground perspective.

But, when you combine the two of them together, given that the ground is growing at a faster pace than online, you'll see an increase in scholarships as a percentage of revenue.

Got it. Okay. Thank you very much.

Peter Appert, Piper Jaffray.

Thanks. So, Brian, the momentum you guys have had in the online business has been really extraordinary relative to your peers. Can you call out any programs offerings that are driving it, or other factors that you think are particularly critical to the performance? And then, talk about how you think about the sustainability of that growth as the enrollments have gotten larger.

And that's the best question always to ask, and I've been saying that now for three or four years. I mean, if we can continue the online growth at this pace -- well, it's eventually going to go down. We've talked about that. But, if we can continue to grow the online campus, the advantage that we have from the ground campus perspective continues to grow.

And going past 25,000 students with high graduation rates, four year revenue streams, plus factor in what we're experiencing from a room and board standpoint, that part of it is really kind of ensured. It's the online part of it.

The programs, the doctoral program is growing at a very fast clip. And that is really helpful to us because the tuition rate is higher. The students have good retention rates, and there are four year revenue streams. And so, every time you recruit a doctoral student that stays in the program, that counts for a lot compared to students in other programs at other levels. So, doctoral program is growing fast.

We continue to do well in educational and nursing at both the baccalaureate and the master's degree level, although we are adding a minimum of 20 master's degree programs on an annual basis. And so, what we're starting to do is we're starting to leverage additional programs that we're adding.

In fact, today we have eight colleges and 160 programs. By the end of this calendar year, we'll have over 200 programs. And so, programmatic expansion is really helpful to us both in those core verticals but then in others as well.

One of the areas that is doing well for us is counseling and psychology. And when I say psychology, I really mean in the areas of counseling, addiction counseling. Those areas are growing because there's an increased need for that in a lot of different facets of society.

That's very helpful. Thank you. And one unrelated question. Dan, do you have an estimate of what the cap spending is going to be for 2015 and preliminary thoughts on what it could be in 2016?

We're leaving our expectation of 2015 the same. So, that's in the mid $190 million range.

We haven't come out with a 2016 estimate yet. I think we're still finalizing exactly what needs to be done for 2016. I know we're going to build at least 2,000 new beds from a residential standpoint. But, in terms of classroom needs and other needs, we haven't finalized that. So, we haven't come out with an estimate yet for 2016 CapEx.

But, probably not meaningfully lower than 2015 then, it sounds like.

It'll be lower, but not -- it won't be meaningfully lower, I don't think.

Got it. And can I ask one other thing? Brian, any comments on the competitive dynamic with ASU and what you're seeing there?

No. It's really competitive, and I think in a very good way. We've got four million people that live in the Valley. And if you go to a city like Chicago or Philadelphia, you've got six Division I institutions in a city like Chicago. There's just been -- there hasn't been anything meaningful here except ASU.

And so, we've lost thousands of students on an annual basis to California, especially to private universities, especially private Christian universities. We're now keeping those students home.

And there are a lot of students that are attracted by getting a private university education for very close to the same kind of tuition, room, and board rates, especially because our campus is very safe and there's a community feel here that is really attractive to families and to students.

And so, I think it's absolutely a good thing for Arizona that we've got another prominent player in the valley, that we've got a reason for people to stay here versus going out of state. And it's really helpful from an economic standpoint for us to be growing like we are in California.

Those students are coming to Arizona with tuition dollars, room and board dollars, other expenses. And if we can get them graduated in areas like engineering and keep them here, that's all good for Arizona. So, it is very competitive, but I think the competition is very good.

Great. Thank you.

Yes.

Phil Stiller, Citibank.

Hi, guys. Thanks for taking my questions. Can you talk about the mix of online growth geographically, how that's coming in?

Yes. We continue to grow in Arizona and in California primarily. Those are the biggest areas of growth. We still have pockets where we're very effective in the Northeast and the Southeast, not as much in Texas. There's a lot of competition in Texas.

But, it's first in Arizona, second in California, and then the other Southwestern states are going up, Colorado and Nevada, New Mexico. Interestingly enough, the retention rates of students are impacted the closer that you get to the home campus. The more people are familiar with our brand, the better students that we get and the higher retention and graduation rates we get.

But, our national advertising campaign is having a significant impact. I know there's some research done on Google searches, and some people are alarmed because they appear to be going down.

What's happening with our branded TV advertising is that people are going directly to our website in increasing numbers, and so they don't need to use a search engine to find us. And so, the Google searches have gone down but our overall contacts are going up because of that branded advertising, which is effective even nationally.

Okay. That's helpful. I mean, I guess with more and more of your students still coming from your geographic area, should that continue to have a positive impact on online retention, I guess? What's the upper limit on that?

It's very good and very helpful to be in a state that has 6.5 million people and is growing with not a lot of options. But, it's especially helpful to be within a one hour flight and five hour drive of 40-plus million people in California where the state university system is really under a lot of pressure.

I was talking to a university president just a day or two ago, who said that in this year they turned away 20,000 admissible students at one university. And that is traditional students, but it's also impacting nontraditional students because 33 and 34 year old students attending community colleges just can't get the classes that they're looking for.

And we're building relationships with those community colleges. And they're happy to build them with us because their first endeavor is to service the students. And if they can't and we can, it's a good thing.

From a retention standpoint, I know we've talked about this before, our sequential quarter retention rate is in the low 90%s. It was up again year-over-year. I think our plan is for that to continue to go up in the 50-ish basis points on a year-over-year basis.

So, we hope it will continue to go up. We expect it to continue to go up. But, you're not going to see the 150 to 300 basis point year-over-year improvements we've seen, because we are now in the low 90%s on that metric.

Okay, great. One last question for me. The revenue per student outlook for this year is kind of up a little bit, or it's similar to the last few years. It seems like most of the growth is just driven by mix, with the ground campus growing and more students living on campus. Are there longer term plans to drive that to a higher level? It seems like you have perhaps some untapped opportunity, particularly in the ground. Thanks.

Yes, absolutely. I mean, it's -- we are really -- there are companies that are coming up wanting to do residential housing for traditional universities, especially state universities. They're popping up everywhere and wanting to do your housing for you.

Well, what they know is it's extremely profitable. And so, that's become a big part of our plan, both financially but also from a campus cultural perspective. The students that stay on our campus, their retention rates are higher. Their average incoming GPAs are higher. And their overall experience level is just really, really good.

And so, we're going to -- probably the best investment we can make is to continue to build campus housing, both from the standpoint of how financially profitable it is but also from the standpoint of we are then in control.

One of the things that we're learning as we're growing to 25,000 plus students is we're not going to cede control over that environment to somebody else. We have a dry campus. We have an alcohol free campus. And so, our crime rates and our problems from a student behavior perspective are just really, really low.

And when families come on our campus, they feel that. And they comment frequently on the friendliness of the campus, how polite our students are, how involved our students are. And I think, to be honest with you, that's really -- it's important for the kids that come from Orange County and Paradise Valley and Scottsdale and those areas.

But, it's also important for those kids who come from first generation college goers, because if we can get them on campus and get them involved in campus life and they meet people and they develop friendships, their likelihood of staying with this thing is a lot greater.

And so, we're going to continue down the road of making this, from the standpoint of percentage of overall students living on campus, as high as anybody in the country, I hope.

Okay. Thank you.

Yes.

Jeff Meuler, Baird.

Yes, thank you. Just wanted to ask, on the ground enrollment fall 2015 guidance, I think there was a slight change. Did you used to say 7,500 new, 7,000 returning, and now you're changing it to 7,500 returning, 7,000 new? And if so, am I right in that, that the retention rate is better than you were previously expecting?

Retention rate is definitely better than we were saying, so we're extremely pleased and happy about that.

The new enrollment, we're going to have to turn a couple hundred students away, maybe as many as 300 students away because we just don't have housing. And that's unfortunate. These are students that meet the admissions requirements to a great extent, but we don't have housing for them. And so, to come from out of state and not have housing is a difficulty.

Okay. And then, on the -- I know you don't want to say a lot here on details, but I just want to make sure I'm understanding it correctly. On the evaluation of other ways to convert to a not-for-profit, I just wanted to verify that it's related to looking at other potential financial mechanisms. It would still legally have to involve you bringing an offer to shareholders that they would approve. Is that correct?

Jeff, again, I'm not sure we want -- we don't want to get into the details of it at this point. I think -- give us a few months and we'll share all those details with you.

Okay. And then, just given the comment, Brian, about the stock price and some frustration there, as part of this evaluation are you looking at any other strategic alternatives? Thank you.

Well, right now we're continuing to invest heavily in the infrastructure of our ground campus because the payoff for that is so great. Will we at some point look at buying back more stock? A couple years down the road, maybe. That's not as big a part of the plan right now because we're continuing to invest in the infrastructure on the campus.

Okay. Thank you.

Jason Anderson, Stifel.

Good evening, guys. Just a question about pricing and tuition pricing, and maybe you could speak to -- obviously it's competitive with ASU in the area there on the ground, but you also have quite a bit of demand. You also have -- I was intrigued by your comments about engineering and the price for engineering program. Do you feel you have some pricing opportunity or to take some pricing?

Absolutely. I mean, that's in our back pocket. And if ever we needed to use that, we could certainly do it. We have room both on the ground campus, we have room on the online campus, and we have room in terms of what we call Canyon Connect, which is materials, so instruction materials.

And so, we're doing well without that. But, if there comes a time where we needed to make very reasonable and modest tuition increases, we could certainly do that and still be in a very fair place.

And just one other. On the hospitality degree, have you talked about maybe what your plans are from an opportunity size or what that program could get to, and maybe also if the competition also will have a on-ground hotel they'll be managing, or if -- the uniqueness of that, I guess, if you could speak to that?

Yes, we're really excited about that simply because Arizona's got -- well, in the Valley here, there's four million people, but 6.5 million people. And hospitality is one of the big industries in Arizona.

Northern Arizona has a great program, but it's in Flagstaff. And so, for us to develop our own hotel, restaurant, convention center, golf course including clubhouse, restaurant, there's going to be lots of opportunities for the students.

We think we can grow that to 1,000 students at our ground campus simply because it's a very meaningful program for Arizona. And that industry continues to grow here.

So, being right in the middle of it like we are we can use our own facilities, but then we've got access to facilities all over the Valley, I mean high quality four and five star resort facilities that we can get our students involved in. And so, it made sense. It's just kind of overdue really.

Great. Thanks.

Yes.

Jeff Silber, BMO.

Hey, thanks a lot. It's Henry Chien calling in for Jeff. I just wanted to clarify the -- about your comments on the operating margin coming above guidance for 1Q. I know you mentioned there were more students seasonally and some expenses were lower than expected. I just wanted to clarify, is that something that is just a one-time thing, or should we expect that to maybe recur seasonally?

And related to that, what are you thoughts on where margins can go in 2016 and beyond with the new campuses? Thanks.

Well, I think if you're looking at it on a sequential quarter basis, obviously margins are going to drop significantly in the second quarter as we always predicted, because you're only getting one month of ground traditional campus revenue in that quarter. We do have summer school, but not very many students take it and they don't -- they're not necessarily full-time.

And so, your revenue drops significantly, but you got a fixed cost infrastructure that's in place. You're still paying all those people, etc., plus we're hiring people to gear up for the next fall.

So, if you look at next year and are trying to model fall -- or the first quarter of 2016, our hope would be that we could keep margins where they were or even raise them a little bit on a year-over-year basis.

I don't think there should be deterioration in the margin year-over-year if you're talking about first quarter 2016 versus first quarter of 2015. If you're talking about second quarter of 2015 versus first quarter of 2015, yes for the reasons I stated earlier.

Yes. Yes, I was just looking at first quarter 2016. And any thoughts on margin expansion for 2016 and maybe long term?

Flat to slight increase in margins year-over-year. But, we're really early, obviously haven't even looked at a budget for next year. But, that would be the goal.

Great. All right. Thanks a lot.

All right. So, 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 myself, Dan Bachus, or Bob Romantic. Thank you for your time.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.