Grand Canyon Education Inc (LOPE) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Grand Canyon Education fourth-quarter 2015 conference call. 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) And as a reminder, this call is being recorded.

I would now like to turn the conference over to Brian Roberts, General Counsel. 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 fourth-quarter results. Speaking on today's call is our President and CEO, Brian Mueller; and our CFO, Dan Bachus. This call is scheduled to last one hour. During the Q&A period, we will try to answer all of your questions, 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 of 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, 2015; 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 with to the forward-looking statements made during this conference call.

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

Good afternoon and thank you for joining Grand Canyon University's fourth-quarter fiscal-year 2015 conference call. In the fourth quarter of 2015 enrollments grew by 9.9%, and net revenues grew by 13.7%. New online enrollments grew in the mid-single digits.

Operating margins are at 29.2% for the quarter. This is our 21st consecutive quarter of beating consensus and raising expectations. And I want to give an update on the key differentiated strategies that guide our decision-making as we move forward. First is the commitment to building the highest-quality student body. On our traditional campus, our admission requirement is a high school GPA of 3.0, and our academic institutional scholarships begin at that level. Over 90% of our traditional students are on some level of academic scholarship.

The scholarship program is weighted towards the highest GPA students and is helping to produce an average incoming GPA of approximately 3.5. Almost 70% of the students are studying in science, technology, engineering, math, or business. We started this fall with approximately 15,500 students attending the Phoenix campus. Our target next fall is 7,200 new traditional students, with the average incoming GPAs again being approximately 3.5.

That would bring total enrollment on campus to somewhere between 17,500 and 18,000. Our goal in five years is to have over 25,000 students on campus. We have already acquired more land than we need to accommodate that number.

Our online student body continues to grow from a quality perspective as well. 47.8% of our working adult students are studying at the graduate level, which is 180 basis points up from a year ago. 67.7% of our students are studying in areas that produce the highest graduation rates. That is a 130 basis point improvement from one year ago.

Our fourth-quarter online student persistence rate was 90.5%, which is consistent with the fourth quarter of prior year. We will continue to grow the online campus at between 6% and 8% per year with high-quality students.

Second, it is important to build a high level of excellence and stability in the personnel that work with our students on an everyday basis. Our full-time teaching faculty, both on-ground and online, have been critical to our success. I am very pleased to report that we have less than a 6% turnover rate on an annual basis with that group.

In addition, our student counseling group, who plays a vital role in keeping students on track and progressing towards graduation, has less than an 8% annual turnover rate. Our graduates, through end-of-program and alumni surveys, have rated their overall experience at GCU either a 4 or 5 on a Likert scale at a greater than 90% rate. Building experience in teaching and counseling services is an important aspect of our strategy.

Third, it is critical to build academic programs that are relevant to today's economy and lead to good-paying jobs. In 2015 we rolled out Bachelor of Science programs in computer science, information technology, mechanical engineering, electrical engineering, biomedical engineering, computer programming, and business information systems. In 2016 we will roll out programs in biochemistry, molecular biology, environmental science, electrical engineering technology, and mechanical engineering technology.

This is not a complete list, but I wanted to give you an idea of GCU's commitment to providing rigorous academic programs in the STEM areas that lead to jobs that are in high demand. The University, as a result, has taken on a more high-profile role in both the Greater Phoenix Economic Council and the Arizona Commerce Authority.

Fourth, we remain committed to the hybrid campus strategy. Our traditional ground campus and our online campus for working adult students are leveraging the same administrative infrastructure that continues to produce leverage in operating margins without raising tuition. There is a financial crisis going on in higher education that makes our pricing an attractive value proposition to students and families. We have frozen tuition on our ground campus for eight years and had only a 1% increase online this year but were still able to expand margins. Not outsourcing key university profitable functions, like online learning and student residence halls, have played a key role in allowing us to hold the line on tuition.

Fifth, the performance areas of GCU extend our reach into the community and contribute to building the brand of the institution. Our theater and music programs continue to win awards, both locally and nationally. Our debate team is now ranked 19th in the country; just this past weekend our team performed at a tournament on the West Coast. We took second place overall out of 25 schools, losing only to last year's national champion, and beat out top programs like UCLA, USC, Notre Dame, and Pepperdine. We set a team record for a three-day tournament by taking home a combined 18 top-five finishes.

In athletics, our swim team is ranked in the top 20. Our baseball team had a top-35 recruiting class. Our softball team is off to a 6-and-zero start. Our men's volleyball team is 9 and 3 so far this season. And our men's basketball team currently stands at 22 and 4, is ranked 15th in the men's mid-major top 25 poll by collegeinsider.com, and received a top-25 vote in the AP poll.

We continue to pursue a return to a not-for-profit status for the University. I think it is important to note that when the University was on the verge of bankruptcy, going to a for-profit status in order to gain access to capital from the public markets was the best thing for our students, faculty, and staff; the community; and has worked out well for our investors. We now have an organization and economic model that is sustainable for years into the future.

We now believe it is in the best interest of our students, faculty, and staff; the community; and our investors that we pursue a not-for-profit model. I also think it is important to note that all universities who look like us, having a large and vibrant traditional campus as well as having online students, have a not-for-profit status. It is also true that hundreds of not-for-profit universities are outsourcing services like residence halls, online delivery, food services, et cetera, to service companies, many of whom are for-profit and publicly traded.

We believe we have identified a potential structure that would accomplish this conversion and allow the University to operate in a manner that is consistent with the hundreds of other public and private universities. The University has a strong financial position and a strong record of regulatory compliance. The University has no problem with any of the current or proposed regulations placed on for-profit universities by the Department of Education.

This includes the 90/10 rule, the gainful employment rule, and cohort default rate limits. With regard to the 90/10 rule, we are at 74.8% and continue to decline, and this is without any state subsidies. With regard to the loan default rates, our three-year rate for the 2013 cohort will be under 10% when the maximum allowable is 40%.

Because of our low tuition rate, especially the actual tuition paid by students after scholarships, we do not anticipate any material issues with gainful employment rule. Although this is still a fluid process, what has been proposed is that a 501(c)(3) would acquire certain assets of the University from Grand Canyon Education, Inc. We have provided extensive information to the IRS and HLC about this type of structure and are hopeful that we will receive the necessary approvals.

Once the required regulatory approvals are received, the 501(3)(c)(sic - 501(c)(3)) would attempt to raise the financing necessary to fund the purchase of the assets as well as required cash reserves. Upon successful completion of the transaction, which we are hopeful will occur in the first half of 2016, Grand Canyon University would become not-for-profit university, governed by an independent Board of Trustees; and GCE would become a service technology company, similar to companies like 2U and Pearson Embanet, providing services to Grand Canyon University -- including technology, marketing, enrollment, and student support services under a long-term contract.

This would also give GCE the ability to provide these services in the future to other universities. The amount paid to GCE for the services provided as part of the Master Services Agreement will be negotiated between GCE and a nonprofit university. GCE and a nonprofit university are in the process of conducting due diligence which will influence the negotiated amounts. Because negotiations are ongoing, we cannot give any further color on revenue or profitability.

Please keep in mind that there is a great deal of work yet to be done, so no definitive agreements have been signed. And significant regulatory approvals remain to be obtained. Therefore, no assurance can be given that the transaction will be completed. We will continue to provide updates if and when material developments occur.

Net revenues were $216 million in the fourth quarter of 2015, an increase of $26 million or 13.7% from the $190 million in the prior-year period. Operating margin for quarter-four 2015 was 29.2% compared to 28.2% for the same period in 2014.

Net income was $38.1 million for the fourth quarter of 2015 compared to $33.1 million in the prior-year period. After-tax margin was 17.6% compared to 17.4% for the same period in 2014.

Instructional costs and services grew from $78.6 million in the fourth quarter of 2014 to $92.4 million in the fourth quarter of 2015, an increase of $13.8 million or 17.7%. 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 and increased benefit costs between years.

In addition, we continue to see an increase in occupancy costs, including depreciation and amortization as a result of us placing into service additional buildings to support the growing number of ground traditional students and an increase in dues, fees, and subscriptions and other instructional supplies, primarily due to increased licensing fees related to educational resources and increased food costs associated with a higher number of residential students. As a percent of revenue, IC&S increased 1.5% to 42.8% due to the factors described earlier.

Admissions advisory and related expenses decreased 1.5% to 13.6%, primarily due to our ability to leverage our admissions advisory personnel across the increasing revenue base. Advertising expenses as a percent of net revenue decreased 40 basis points from 8.9% in quarter-four 2014 to 8.5% in quarter-four of 2015. Marketing and promotional expenses as a percent of net revenue decreased 10 basis points from 1% in quarter-four 2014 to 0.9% in quarter-four 2015.

With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2015 fourth quarter; talk about changes in the income statement, balance sheet, and other items as well to provide detailed information on our 2016 guidance.

Thanks, Brian. Revenue per student was up year-over-year due to the 19.2% student growth in our ground enrollment, while online enrollment increased 7.7% over the prior year. When factoring in room, board, and fees, the revenue per student is higher for ground students than for our online students. Online revenue per student was down again this quarter due to the continued mix shift to programs that earn less revenue per student per day, although the decrease was much more moderate than in prior quarters due to the small tuition increase implemented in September. We believe this trend of slightly lower online revenue per student will continue.

Scholarships as a percentage of revenue decreased from 18.7% in Q4 2014 to 18.6% in Q4 2015, due primarily to a decrease in the traditional scholarship rate year-over-year as a percentage of total revenue, due to an increase in ancillary revenues. Online scholarships as a percentage of related revenue were flat year-over-year. Bad debt expense as a percentage of revenue increased to 2.4% in Q4 2015 as compared to 2.2% in Q4 2014.

Our effective tax rate for the fourth quarter of 2015 was 38.6% as compared to 38.1% in the fourth quarter of 2014. The fourth quarter of 2015 was slightly higher than prior year due to the timing of nonrecurring items.

We repurchased 288,000 shares of our common stock and an aggregate cost of $11.3 million during the fourth quarter of 2015 and have purchased another 396,000 shares in 2016, such that our current share purchase authorization has been exhausted. Turning to the balance sheet and cash flows, total cash, unrestricted and restricted, and short-term investments at December 31, 2015, was $181.8 million.

Accounts receivable, net of the allowance for doubtful accounts, is $8.3 million at December 31, 2015, which represents 3.9 days sales outstanding compared to $7.6 million or 4 days sales outstanding at the end of the fourth quarter of 2014. CapEx in the fourth quarter of 2015, excluding our off-site development of $13.6 million, was approximately $35 million or 16.2% of net revenue. This was greater than anticipated, as we were able to acquire some large parcels of land east of our campus.

Construction on three more apartment-style residence halls; a 170,000 square foot classroom building for our College of Science, Engineering, and Technology; a student service center; and a fourth parking structure for the fall 2016-2017 school year continues. We currently estimate that 2016 CapEx will be approximately $180 million, excluding the off-site office building and parking garage that I will discuss in a second.

The increase of $30 million from our previous estimates is primarily due to first-quarter 2016 land acquisitions. We have no further material land acquisitions planned; although, if opportunities similar to those that occurred in the fourth quarter of 2015 and the first quarter of 2016 occur, we will consider them. Included in off-site development in 2015 is approximately $10 million we spent to revitalize what was formerly known as the Maryvale Golf Course under an initial 30-year partnership agreement with the City of Phoenix. The golf course is now known as Grand Canyon University Championship Golf Course.

Additionally, in late 2015, we commenced construction on an office building and a parking garage that is approximately 1 mile from our ground traditional campus. Employees that work in two leased office buildings in the Phoenix area will be consolidated into this new building when it is completed in late 2016. Although the University is currently funding the construction of the building and parking garage, the University is marking these along with a recently refurbished office building in the same development as part of a sale-leaseback transaction. We are hopeful that we will be able to sell these properties once construction is completed at an attractive cap rate.

Our cash basis 90/10 amount for 2015 was 74.8%, down from 76.5% in 2014. We believe that this decrease is primarily due to the continued growth in our ground traditional student body, which has a much lower 90/10 ratio than does our working adult students.

Last, I would like to provide color on guidance we have provided for 2016. As you probably noticed, we have again provided estimates for each quarter of 2016. We do this because 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 our 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. Thus, we anticipate that our margins will be up year-over-year in the first and fourth quarters and down in the second and third quarters.

Our enrollment guidance assumes mid single-digit online new start growth depending on quarter. It also assumes a slight increase in retention and an increase in graduates between years of approximately 15%. The significant retention gains we have seen in recent years and a continued shift to a higher percentage of graduate students continues to result in year-over-year increases in graduates that exceed our total enrollment growth rate, although this delta should start to stabilize in the second half of 2016.

This results in an online year-over-year growth base that slows slightly from 7.7% at the beginning of the year to 7% at the end of the first quarter of 2016 and remains at 7% for the rest of 2016. We estimate our total ground enrollment, which includes both ground traditional and professional studies students, to be 14,000 in the spring, 5,500 in the summer, 17,500 in the fall, and 17,400 at year-end.

We are starting to experience larger numbers of graduates at our ground campus. And although we anticipate our term-to-term retention rates to be flat to slightly better between years, the larger enrollment causes bigger fluctuations between fall and spring semesters. Our revenue guidance assumes no tuition increase for our ground campus or our online campus. We anticipate that revenue per student will continue to grow year-over-year as a result of the growth of our ground traditional student body as a percentage of our total student body.

In addition, our revenue per student will be slightly impacted by changes between 2015 and 2016, when the traditional campus semesters begin and end and when the online breaks occur. We estimate the effects of these changes are $1.9 million of additional revenue in Q1 versus the prior year; $1.3 million less in revenue in Q2 versus the prior year; $5.5 million less revenue in Q3; and $4.5 million additional revenue in Q4.

The net change of $400,000 in revenue is that which will be pushed into 2017. And the large movement of revenue between Q3 and Q4 is due to the fall semester beginning five days later in August this year.

On the expense side, we had forecasted instructional cost of services as a percentage of revenue to be up again year-over-year. This is being caused by the investments we continue to make, significant increases in depreciation and occupancy expenses, as well as growth in ancillary revenues that have forecasted margins in the mid-single digits. This includes food and merchandise sales and revenues earned at the new Grand Canyon University Golf Course and Grand Canyon University Hotel.

Although the revenues are small, we estimate that in total these revenues will grow at just under 50% this year. As a result, we anticipate IC&S as a percentage of revenue to be up 160 basis points year-over-year, with the primary drivers being employee compensation related expenses, which we expect will be up as a percentage of revenue 50 basis points; depreciation, which we expect to be up 90 basis points; and occupancy costs to be up 60 basis points year-over-year.

We plan to continue to invest in new program development and various community projects. Bad debt expense is projected to be flat year-over-year. We anticipate that advertising will be up slightly as a percentage of revenue year-over-year. We estimate that we will get leverage in admissions advisory and related expenses and general administrative expenses between years of approximately 80 basis points each.

Interest expense, net of interest and other income, will be approximately $1 million. Our guidance this year assumes an effective tax rate, excluding the contribution made in lieu of state income taxes, of 38.2%.

We have also provided our estimates of diluted weighted average shares outstanding by quarter. Share repurchases made in the fourth-quarter 2015 and the first quarter of 2016 have been factored into these estimates. Although we might repurchase additional shares during 2016, these estimates do not assume repurchases. They do assume increased dilution from stock options and restricted stock granted in previous years and from a potential 2016 stock grant.

Last, it is important to note the guidance provided does not factor in costs associated with the not-for-profit transaction. To date we have spent an insignificant amount in legal and accounting costs but have incurred and expected to continue to incur significant costs in the first two quarters of 2016 as we work through the anticipated final stages of this potential transaction, including obtaining valuations and a fairness opinion for the assets that are contemplated to be sold. We plan to report these expenses in 2016 separately from our ongoing operations.

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

(Operator Instructions) Paul Ginocchio, Deutsche Bank.

Great set of results. Not to nitpick, but I think your guidance was for a couple hundred more students at the year-end, 74,700 versus 74,506. What was the differential? Where was that slight difference? Thanks.

We were a little bit under on the ground campus than we initially thought we would be.

Okay. Great. And can you just talk about what assets would stay within the 501(c)(3)? You talked about technology, marketing, enrollment, and services being in GCE; but is it the real estate, the academics, and the athletics that sit in the 501(c)(3)?

Yes. If you go out and look at the contracts that are with these other companies, like 2U, this is not going to be that much different than that. Kind of the things that we mentioned are the things that will be in the service company.

And then the academic programs, and the campus, and those things will be in the University. So it hasn't been completely finalized yet, so we don't want to say exactly what it is. But it will be very typical of how these transactions take place.

Great. And if I can just sneak one more in: you have submitted it to -- can you repeat that again? I think it was HLC and the IRS?

The IRS.

Was that just submitted? Is it the response time -- when do you expect to hear something from them both?

Well, HLC -- they do a site visit, which they did a couple months ago. And then that site visit team puts together a report and a recommendation to the Board of HLC, which will be occurring here in the next couple of weeks. When we will actually find out the response of that, we don't know. But that is how that works.

The IRS is an ongoing dialogue, based on a couple of different things that we are requesting approval from the IRS on.

But like we said in the script, we expect either for this to happen or not happen in the first half of this year. So that gives you a little bit of time frame.

Peter Appert, Piper Jaffray.

Brian, is it possible to talk a little bit more about the process by which you determine the value of the assets that will be purchased?

Yes. I mean, both Boards -- the potential 501(c)(3) Board and our GCE Board both hired very well-respected valuation firms to come in and do that work. And so they are both in the process of doing that work. And we are hopeful that there will be some overlap between what each side values those assets at so that they could come to an agreed-upon purchase price.

Okay. So should we think about it in terms of just tangible book value of these assets? Or are they imputing some value relative to the earnings power and cash-generative nature of these businesses -- assets?

I don't know if we want to get into the specifics. I don't think it is fair to them, probably, to do that. I think they will come up with their valuation, and then the 501(c)(3) will have to take what -- that agreed-upon purchase price and allocate it to the assets under purchase accounting rules once that occurs. But how they are actually coming up with their valuations -- I don't think we should probably speak to that.

Is it possible to talk about how the 501(c)(3) would then fund the purchase?

Yes. The 501(c)(3) would go out and raise tax-exempt bond financing to fund the purchase of those assets.

And is there a leverage ratio that you have a sense is acceptable or doable in this transaction?

Again, I would leave that to the bankers who are responsible for putting that together. So I think they have some ideas of the amount of debt that can be raised, which would include both -- as I said in my prepared remarks -- both the cost to acquire the assets and then some required reserves, you know, cash reserves so that the 501(c)(3) can start with some assets.

Got it. And you mentioned the IRS and HLC approvals. I assume a DOE approval is required as well. Is that correct?

That is correct. But typically the DOE looks at the transactions post-closing, not prior to closing.

Okay. And then, last thing. The -- Brian, you said if it happens or it doesn't happen, you will know in the first half. In terms of it not happening, it would be, I guess, for some reason not getting regulatory approval; or not being able to come to terms on financing. Are there other specific stumbling blocks we should be thinking about?

No. Those are the two. If either the HLC or IRS would put some road blocks in place, that would be one thing. And then the second thing would be if and we just can't get the bonds sold. And that is not going to be an easy thing to do, but obviously it is much easier than the way we were talking about previously, which was -- which would have required us to buy everything out at double the rate. So it is certainly more doable than what we were talking about a number of months ago.

Got it. Thank you.

Sara Gubins, Bank of America Merrill Lynch.

This is David Chu for Sara. So if the conversion takes place, do you know who would run the not-for-profit campus at this point?

Yes, we are not going to release any information about that at this point. But, yes, it is just -- you know, we are in a sensitive time and really can't release that stuff at this point.

Understood. And can you speak to the site visit at all from the HLC? I mean, what specifically were they looking into? Have you received the staff report yet?

Yes, we have received the staff report. We are not going to disclose the contents of the staff report. But a site team did come out and visit; and, you know, I think their primary focus is to look at the business plan that the University is putting forth, because the worst thing that could happen is the transaction occurs and you, in effect, set up the University to fail.

And so they want to look at the business plan and ensure that both University management and University Board as well as their experts, are comfortable with the financial viability of the new 501(c)(3). And so that was their primary focus, but they met with a lot of different people at the University from all parts of the university -- students, faculty, staff, executive management, et cetera -- to learn about the reasons behind the transaction and what is trying to be accomplished, et cetera.

The fact that we had five years of pretty strong success and we are able to do what we said we could do made a positive impact. It is not something that we are hoping maybe to do, but don't have a proven track record of having to be able to do. So I think that really helped.

I also think that the amount of positive feeling that exists with our faculty and staff about this process and about this move had a significant impact on them. Our people are really behind this. They really believe in this. They believe it will be the best thing for the University and for their futures. And so we think it went well from those standpoints.

Okay, great. That's very helpful. And just lastly, it sounds like it has been largely business as usual; but if you can just comment on what you are seeing in terms of lead flow and conversion rates trends for the online?

You know, it is a very competitive environment, and it is very fragmented as compared to what it used to be. There are obviously new players getting in that are private and state universities with traditional brands. But that is being offset by a huge decline in the for-profit space and the number of students they are serving.

There has been a big pullout in the lead-buying space, and that has impacted that space significantly. We are in a better position this year than we were last year from the standpoint of actually buying leads. Although we buy less of them than we used to, we are getting higher-quality leads than we used to. So it is pretty much business as usual.

Jeff Meuler, Baird.

I didn't catch -- what time are the tee times tomorrow at the investor day?

(laughter) You know what, I have got to tell you -- since the course opened, we have been booked from 7 in the morning until 3 o'clock in the afternoon. We did more rounds in the first weekend that we were open by 100 in any golf course in Arizona. But what was really significant -- in the site where golfers can go and rate their golf experience, I'm sorry -- golfadvisor.com -- in the first week of operation, we were ranked from a service perspective as the number one course, not just in the state, but the number one course in the country. We were really excited about that.

It is already not just producing record numbers -- we are doing more than 200 rounds a day. And which -- it's hugely profitable. And we just got started. So it is -- very excited about it. Expect to win a national championship in golf in the next couple years. (laughter)

Excellent. I understand not wanting to answer David's question broadly, but can you just confirm, Brian, since you are President of both the University currently and the CEO of Grand Canyon the Company -- are you planning on staying with the service provider, GCE?

Yes, we can't --.

we are continuing to work through those specifics with our accrediting body and the IRS. So we don't want to give any information that could turn out to be different than what we give. So I think as soon as we complete the process with both the IRS and HLC, we will gladly give that information. And we hope that will be relatively shortly.

Okay. In terms of the proceeds of that you would receive in the transaction for the assets -- the return to shareholders, would that be a return of capital tax-efficient dividend? Would it be a tender for shares? Some combination? What is envisioned?

I think the things that you mentioned are all options. I think ultimately it will be up to our Board, along with the advice that they give from the investment advisors that they have hired, to make that decision. But I am pretty confident that there would be some form of return in one of the manners that you -- or a combination of the manners that you just mentioned.

Okay. And then it was referenced that you will be able to enter into a long-term contract. Are you just using long-term under, I guess, the accounting technicality of that is more than one year? Or will you be able to strike an initial contract length that is consistent with some of the other industry standards at certain other providers, more in the 10-year-plus time frame?

Our hope is the latter. But, again, that's discussions they are currently having with the IRS and HLC.

Trace Urdan, Credit Suisse.

I understand this is like a multi-variant equation you are trying to solve for, and you're not ready to share all the details, but I do -- I am pretty certain that the valuation conversation is one that the IRS is interested in. And it is probably not one that can take place without some kind of basic understanding of how you are anticipating revenue would be shared between the service company and the University.

So I wondered if you could speak to that. I know you sort of made an oblique reference to other companies that are out there, but it may be that your investors are not as familiar with the terms that these companies are commanding. So I wondered if -- can you talk in terms of a range? Are we certainly talking about revenue share here? Can you just flesh that out a little bit?

Yes. You know, I think -- just like the answer to the last question, I think we are better off holding off until we get final approval from HLC and the IRS on what has been proposed. Because if it is different than what has been proposed, I think that would -- we wouldn't like that. So again, I think we are going to hopefully have those specific -- that specific information to share with shareholders within -- we are hopeful within a very short period of time.

Maybe a way to answer that is to say that if this transaction happens, we are not going to change our long-term goals. And so the University is going to have what it needs to build out to between 25,000 and 30,000 students; and the service company is going to have what it needs to be successful, so that there is a good return to investors. And we have got -- I think we have got enough of a track record in the last five years, especially, to make sure that we get to the right amount so that both those things happen.

Okay. Fair enough. Let me just ask a question about the operations. It looks like the instructional costs are growing at a rate that is slightly faster than revenue. And I wondered if you could -- I am assuming that had something to do with the investments that you are making. But maybe -- could you just speak more specifically about what is driving instructional costs, where those dollars are going?

Yes. The instructional costs in the short run are higher on our ground campus. There are personnel that are necessary in the initial -- and we are in a faster growth rate on the ground campus than we are online. And so that is really what it is.

But what is interesting about that is that is being offset by lower S&P costs. The ground students are a lot less expensive to acquire, both of the advertising side and on the sales side. And so the instructional costs are going up because of the ground campus, but the overall margin is fine, because we are acquiring the students for less; and they have a between three- and four-year revenue stream, which is -- our best students on the online side are graduate students who spend 18 to 24 months with us. Our ground students we acquire for a less amount, but then we -- they take 30 credits, and they come back the second year and take 30 credits for no acquisition costs, and then come back the third year for no acquisition costs. So there was just an offset there that is positive.

Okay. Thank you.

Jeff Silber, BMO.

It's Henry Chien calling for Jeff. I just had a question on the conversion. So I just wanted to clarify -- so you will be managing the technology, marketing, and student services; so the decision is related to campus programs or the campus strategy. So will that be part of a different team, or is that right now being discussed with the HLC?

The final in (c)(3) will be responsible for those decisions, if that is what you are asking.

Got it. Okay. But it is unclear whether the current management team will be part of that.

That is still being worked on.

Still being worked on. Okay. Great.

And a different question related to the golf course and the University building: just wondering what the rationale -- or, sorry, the new office building -- just wondering what the rationale was behind those investments.

Well, the office building is a good investment in that we have now about 1,500 or 1,600 employees -- 700 to 800 in Tempe, and 700 to 800 in Peoria; and we have significant lease expenses tied to those employees. We are consolidating them in a new office complex, basically on our campus, which ties them more tightly to the campus, brings them all together. And we will just be swapping the expenses. And so that really is a long-term good investment for us and not something that is dilutive at all.

The golf course, the hotel, and the restaurant -- we have big aspirations around hotel and restaurant management. That program could be very, very, very big in Arizona. There is a program in northern Arizona, but it is in Flagstaff, which is three hours away. This is a huge hospitality resort/convention center place. And we as a state could be producing a lot more of those professionals.

And so the hotel was something that was giving us a problem in the neighborhood. It helped clean the neighborhood up. Now we have it to be used. We're adding a restaurant to it. And the golf course -- we have a golf management program, and our hospitality management program will also -- so we could get as many as 1,000 students between those two programs that are utilizing those two places, which would more than pay for itself if we can do that.

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

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.