Grand Canyon Education Inc (LOPE) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2016 Grand Canyon Education earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host for today's conference, Mr. 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 2016 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.

We would like to remind you that many of our comments today will contain forward-looking statements with respect to GCE's future performance that involve risks and uncertainties. Various factors could cause GCE's actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in GCE'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 any one 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 and thank you for joining Grand Canyon University's first-quarter fiscal year 2016 conference call.

In the first quarter of 2016, enrollments grew by 8%, and revenues grew by 16.9%. New online enrollments grew in the mid-single digits. Operating margins are at 30.3% for the quarter. We had another good quarter, and I want to thank our faculty and staff for the hard work they continue to put in to make this happen.

At this time, I want to briefly review our most important initiatives. The first initiative is to build a high quality student body. Our traditional campus growth is going as planned. We are on track to start fall with about 17,500 students. The average incoming GPA of our new students will be approximately 3.5. The Honors College is growing rapidly as well. We expect enrollment in the college to be approximately 1200, with average incoming GPAs of approximately 4.1.

Our online student body also continues to grow from a quality perspective. 48.5% of our working adult students are studying at the graduate level, which is 190 basis points up from a year ago. 67.4% of our students are studying in areas that provide the highest graduation rates, which is 110 basis point improvement from one year ago.

Our first-quarter online student persistence rate was 92.7%, which is up 30 basis points over first quarter of the prior year. We will continue to grow the online campus at between 6 and 8 percentage points per year.

The second initiative is to continue to improve the quality of instruction in the classroom, which is already very high. As our student body grows, it is important that the highly supportive, caring, community-oriented culture of GCU become even stronger. We are keeping our average class size to less than 25 on the traditional campus and less than 16 on the online campus. This stands in stark contrast to many universities that continue to raise tuition and fees and crowd students into large lecture halls or online classrooms of 500 or more. We have embedded academic excellence centers into almost every residence hall. Most students don't have to leave their dorm to get additional one-on-one academic support.

I want to thank our faculty for their total commitment to students' success. To give just one example, our entire math faculty on a traditional campus shows up twice a week in the evening to lead special group sessions.

We have continued to expand our early alert system and at virtual learning networks and special learning communities to provide ground and online students with additional support.

It is important to note that we are adding these support systems while freezing tuition on our traditional campus for the eighth consecutive year. This discussion is important because it is a demonstration of how the terms not-for-profit and for-profit and traditional and nontraditional are no longer terms that have very their historic meaning. We think it is very important in the future universities are evaluated based on the results they are producing with their students and not on completely unrelated items like tax status.

Third, last quarter I mentioned the new STEM programs that we have recently rolled out or are rolling out in the fall: programs in computer science, mechanical engineering, information technology, electrical engineering, biomedical engineering, computer programming, business information systems, biochemistry, molecular biology, environmental science, electronic engineering technology, and mechanical engineering technology. Students will return in the fall to a new 170,000 square foot STEM building full of state-of-the-art classrooms and laboratories.

By this fall start, we will have 200 academic programs across nine colleges, offered on a new and modern campus, with 150 of those programs offered online. The most unique asset aspect of this education model is that the economy does not have to take a hit in the short run in order to produce educated students that will make a contribution in the long run. We are educating students that will make a contribution to the economy in the long run, but we are doing it while making a significant economic contribution by growing our employee base, paying $97 million in taxes, and not requiring state subsidies.

Fourth, our co-curricular areas are going to reach new heights this coming year. Visitors frequently talk about the vibrancy of our campus. There are hundreds of activities that come out of our theater, music, dance, debate, a very large intramural and club sports program, as well as 21 Division 1 athletic programs that keep the campus alive and active. All these activities give our students an opportunity to get connected and become part of the community, which is why we believe we are exceeding our retention goals.

The quality and character of our students, the involvement of our faculty, having an alcohol free campus policy, the commitment we have made to our own 160-person police force, and the vibrancy of positive activity has led to having a very safe campus. This has become an attractive feature given the sexual assault and other crime problems many universities are experiencing.

I want to take a moment to discuss our attempt to move the university to a not-for-profit status, which would have been supported by a for-profit service company. The structure proposed was almost identical to the structure that exists between many not-for-profit universities and for-profit service companies. The HLC visiting team, we believe, did an outstanding job. We were appreciative of their professionalism and very thorough work. They recommended to the board that we be granted approval to move forward. We believe the IRS would also have granted us approval. The board turned down the visiting team's recommendation with no path forward. Again, we still have a hard time understanding the board's decision, given what we were proposing is common practice in higher education today. We understand that there have been bad actors in the for-profit space. We have absolutely nothing in common with most of the institutions in the for-profit space as the vast majority of them are nationally accredited vocational and technical institutions such as refrigeration, cosmetology, truck driving, etc.

In addition, Grand Canyon University has no problem with current or proposed rules to regulate for-profit institutions. Evaluating whether an institution provides for the public good should have nothing to do with tax status. Our work in the community is transforming the university neighborhoods, and I want to thank our students, faculty, and staff for their commitment to this mission.

In addition to educating students, property values are up 30% in our neighborhood, and crime is down 30%. Going forward, we hope to be evaluated based on the results we are achieving independent of our tax status.

Net revenues were $227 million in the first quarter of 2016, an increase of $32.9 million or 16.9% from the $194.1 million in the prior year period. Operating margin for quarter one 2016 was 30.3% compared to 28.8% for the same period in 2015.

Included in operating expenses during the first quarter of 2016 was $1.2 million in legal and other professional fees related to our proposed move back to a not-for-profit status. Excluding these expenses, our operating margin for quarter one 2016 would have been 30.8%.

Net income was $43.7 million for the first quarter of 2016 compared to $34.2 million in the prior year period. After-tax margin was 19.2% compared to 17.6% for the same period in 2015.

Instructional costs and services grew from $78.7 million in the first quarter of 2015 to $94.7 million in the first quarter of 2016, an increase of $16 million or 20.3%. This increase is primarily due to the increase in the number of faculty to 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 Grand's 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 120 basis points to 41.7% due to the factors described earlier.

Admissions advisory and related expenses as a percent of revenue decreased to 13%, primarily due to our ability to leverage our admissions advisory personnel across an increasing revenue base. Advertising expense as a percent of net revenue decreased 100 basis points from 10.3% in quarter one of 2015 to 9.3% in quarter one of 2016. Marketing and promotional expenses as a percent of net revenue increased 10 basis points from 0.9% in quarter one of 2015 to 1% in quarter one of 2016.

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

Thanks, Brian. Revenue per student was up year over year due to the 17% student growth in our ground enrollment, while online enrollment increased 6.1% 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 up this quarter, due to the extra day of revenue earned due to Leap Year and the 1% tuition price increase in September of 2015. Scholarships as a percentage of revenue decreased from 19.3% in Q1 2015 to 19.1% in Q1 2016, due primarily to a decrease in the traditional scholarship rate year over year as a percentage of total revenue due to increase in ancillary revenue. Online scholarships as a percentage of related revenue were flat year over year.

Bad debt expense as a percentage of revenue stayed flat at 2% year over year. Our effective tax rate for the first-quarter 2016 was 38% as compared to 38.8% in the first quarter of 2015. The lower tax rate in the first quarter of 2016 over the prior year was primarily due to the continued phase-in of market sourcing for an apportionment of Arizona sales and a slight decrease in the Arizona corporate tax rate.

As Brian mentioned earlier, we incurred $1.2 million in legal and other professional fees in the first quarter of 2016 related to the proposed not-for-profit conversion. These expenses are included in general and administrative expenses.

Included in interest and other income is $1.7 million related to the proportional share of equity income related to our ownership interest in LoudCloud. Excluding these one-time events, our diluted EPS would have been $0.92 per share.

We repurchased 396,000 shares of our common stock at an aggregate cost of $14.6 million during the first quarter of 2016, and we increased our share repurchase authorization by $100 million in March of this year and extended our authorization date for repurchases to December 31, 2017.

Turning to the balance sheet and cash flows, total cash unrestricted, restricted and short-term investments at March 31, 2016 was $195.4 million. Accounts receivable, net of allowance for doubtful accounts, was $7.5 million at March 31, 2016, which represents 3.4 days sales outstanding compared to $6.7 million or 3.4 days sales outstanding at the end of the first quarter of 2015.

CapEx in the first quarter of 2016, excluding our off-site development of $7.7 million, was approximately $49.8 million or 21.9% of net revenue. As we have discussed previously, this was greater than originally anticipated as we are able to acquire some large parcels of land east of our campus. Construction on three more apartment style residences 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 still 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. We have no further material land acquisitions planned, although if opportunities similar to those that occurred in Q1 2016 occur, we will strongly consider them.

Included in off-site development in 2016 is approximately $7.7 million related to an off-site office building and parking garage that is in close proximity to our ground traditional campus. Employees that work in two leased buildings office 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 has been marketing these, along with a recently refurbished office building in the same development, as part of a sale-leaseback transaction. Although we have received a number of offers, we still have not received an offer at an attractive enough cap rate for us to sell. Our cash flows from operations, along with the availability on our line of credit, gives us flexibility to continue to own these assets.

Last, I would like to provide updated 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 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 quarter-end online enrollment was slightly lower than what we expected. Graduates were up 16.5% between Q1 2015 and Q1 2016, and March online new starts were slightly below our expectation. Online new starts were at or above our expectations until the last week in March, and we believe the last week in March was significantly affected by the timing of Easter. April starts were in line with our expectation.

We have lowered our enrollment expectations for 600 students -- by 600 students for the second quarter, primarily due to us anticipating less ground traditional summer school students than originally expected. We have also reduced our enrollment estimates slightly as we are recruiting slightly less students into our non-degreed programs than originally planned as program changes were made that incorporated certain courses that had been prerequisites.

We have not adjusted revenue guidance, though, as ground traditional summer school and non-degree students do not generate significant revenues, and we anticipate the loss of revenues from these students will be made up by higher ancillary revenues than originally expected.

As a reminder, our revenue per student is being 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, $1.3 million less in revenue in Q2, $5.5 million less revenue in Q3, and $4.5 million additional revenue in Q4. The net change of $400,000 is revenue that will be pushed into 2016 -- or 2017, and the large movement of revenue between Q3 and Q4 is due to the fall semester beginning four days later in August this year.

On the expense side, expenses in the first quarter were slightly under our expectations in most categories, other than advertising where we are approximately $1 million under budget due to tining differences and spend. Expenses were in line with our expectations in April, and we expect them to be in line through the summer months. We have increased our estimate of weighted average shares outstanding slightly for the rest of the year, due to a higher average stock price and higher option exercises.

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

(Operator Instructions) Peter Appert, Piper Jaffray.

Brian, at the Investor Day hosted earlier this year, you outlined some numbers that implied really interesting inflection in free cash flow over the next couple of years. I am wondering how you are thinking about that in the context of the transformation of being off the table. Is the capital spending as a percent of revenue expected to stay at a much lower level going forward?

We really got a little bit out in front from a CapEx -- from a build standpoint this year. We spent more than we anticipated and especially with regards to residence hall and also classrooms. We got out a little bit in front. And so we are not changing our enrollment numbers going forward for next year at all on the campus, but we won't have near as much CapEx -- near the CapEx spend next year that we had this year because we just build out in advance.

And should we still look at those numbers you presented, though, a few months ago as operative for the next several years?

Yes. Yes.

Okay. Great. And then, just in terms of some of the really noise you are seeing in terms of the timing in enrollments, is some of it related to the fact that the advertising expense was lower this quarter?

No. There were the traditional campus students going in the summer is something that we are new at, and we made a guess and we overestimated it a little bit. So we got hurt a little bit that way, and the rest of it was just kind of schedule related -- mainly schedule related with a little bit of that single course problem that was mainly in our nursing area. That single course was impacted, but none of that is really material from a standpoint of guidance that we have given and numbers that we expect to hit going forward.

Sara Gubins, Bank of America Merrill Lynch.

In terms of demand, can you talk about how start trends looked for Bachelor's versus graduate degree students online?

The demand is as great as it has ever been, I think, and we have seen no decline into demand. The difference is the market is fragmented, and there is a lot more players. And so what we are happy about is that we have been able to stay true to our projections from a quality perspective. Graduate students as a percent of online students is up again, which is very difficult to do, we think, in this market, but we have been able to accomplish that again. And then, even in the undergrad undergraduate area, the students that we are recruiting are for the most part in the areas that we want to recruit them in. And so we have not seen a big shift other than from a competition standpoint.

Okay. And are you seeing any big changes from a competitive landscape in terms of approaches for student recruiting or anything else where you need to change your approach?

No, we experiment with stuff all the time. I mean we always have pilot projects going, and we are always looking at new and different ways to interact with the market and with our potential students. And so that is an ongoing thing, both on ground and online. But as far as us seeing something really different for online students, I can't say that we have. People are getting very aggressive with scholarship offers for ground students, and it happened at about this time last year, that same thing happened. We hold the line on that. We make offers to -- we are usually the first ones to make offers to students from a scholarship standpoint, and we stand by those offers. And if somebody else comes out and says, well, we are going to do this in order to beat your offer, we let that go.

We have to be realistic about -- we think, you have to be realistic about building confidence with families from different schools and in different markets so that they don't think that you are going to change from one year to the next or one month to the next what your offer is going to be and how you're going to go about things.

And so we have seen that change, though. People are -- you know, in a number of ways, this -- what we are doing here is very disruptive, and people are responding to it. But we are not going to respond to it in a way that we think will lessen the perception of who we are in the market.

Great. And then, just last question. Now that the nonprofit conversion process is over, should we expect something new from a strategic perspective, either online or on the ground and that could be geographic expansion or something else?

No. I don't think -- you can't expect -- you shouldn't expect anything different in the next couple of years. We were disappointed in some legislation that we tried to get through -- the Arizona legislature with regards to our property tax rate. If anything would change our plans, it would be that. But other than that, no. We are still expecting to grow this traditional campus out between 25,000 and 30,000 students, grow our online campus to 6 percentage points a year, and keep growing out new programs. That is the most important thing is to keep growing out new programs that we think will lead to good paying jobs, that will address economic needs for people.

Jeff Silber, BMO Capital Markets.

Just wanted to go back to the competition question. You mentioned some of the competitors getting more aggressive on the scholarship side. Are they focusing on any specific vertical? And I will ask the same question for online. Are you seeing any more intense competition in any of your online verticals? Thanks.

There is increased competition in the nursing online vertical, and there is increased competition in the education, especially at the graduate level, online vertical. So -- but that has been coming for a number of years, which is why we are continuing to grow out different programs in both those areas, but we are also really growing out programs in other areas that are more difficult to implement than education and nursing.

So there is absolutely increased competition in those two areas, but we are doing a good job of holding our own in addition to opening up new programmatic areas, which I think is going to be the most important thing to do from an online standpoint.

On ground, it is different because it is difficult to talk into education on ground. We have a large education program, 1200 students, but that is getting to be a more difficult thing to do, and schools are really suffering as a result of it. And we are really trying to help really that. The teachers (inaudible) in Arizona is really significant.

Nursing is another animal at the undergraduate level because the thing gets bottlenecked with clinical. We could take on more nurses and the hospitals have need, but you can't grow because of the bottleneck at the -- from a clinical perspective.

The area that we expect to really be good for us in the next three or four years are all the programs in science, technology, engineering, or math. Number one, because the jobs are really plentiful. Number two, because universities don't typically scale those programs, and we are trying to put in place the ability to scale those programs.

Okay. Appreciate the color. Moving on to a separate target, I have had this question from investors, so I am just going to post this to you. Would you consider doing any type of sales leaseback of any of your properties? And, if so, which ones might they be?

We have looked at it. We have been looking at it for the last couple of years. The number one would be this off-site development that we talked about, and we have been looking at that for over a year. The challenge is just finding a cap rate that makes sense. The university generates significant cash flow from operations. We have got $150 million line of credit that is LIBOR plus 175, and unfortunately we just haven't gotten a proposal to off balance sheet any assets at a cap rate below 7%.

And so when you look at that differential between what our own internal borrowing rate is and what those cap rates are, it just, to this point, hasn't made sense. So we will keep looking, and hopefully at some point we can find a deal. And if we can, a deal that makes sense financially, we will consider it. But at this point, we haven't found that.

Okay. Appreciate the color.

Jeff Meuler, Baird.

Maybe if I could start with a follow-up to what you said to Sara on the property tax legislation getting voted down that would have benefited the university. Brian, how does that impact your thinking in your rebuttal letter? I guess you talk about the vast investments you have made in the area, as well as the freezing of tuition rates. How does it potentially impact those two things.

And then, third, I guess I don't understand the tax law, but does that have any implications for how you are thinking about sale-leasebacks?

Well, the answer to the first question is that this is a very unique value proposition that we represent, we think, as an educational institution. Traditionally, in this country, universities are institutions that require you to invest in them, and in the short run, it costs you money, but in the long run, you are educating students that will participate in the economy and cause it to grow. And so people are accustomed to having to make that sacrifice. That is why state subsidized universities and those kind of things.

This is much different in that, while we are educating students, at a growing number, at a very low tuition cost and those students are expected to make really great contributions to the economy, as an institution, we are making a huge contribution. And so what we are asking the state to do is look at us from a unique partnership standpoint, because if we can come up with the right relationship, we can be a significant economic driver. Not just as an educational institution, but as an enterprise that is growing the number of jobs, paying taxes like most companies do. And so we are on track to pay 18%. If we keep investing and the value of our property keeps going up, that 18% is at some point potentially going to have us do one of two things. Either raise tuition, which we don't want to do. We want to continue to return dollars to investors through their value increase at the company without raising tuition. But the other thing is, it would force us to go and think about additional growth of traditional ground students at a satellite campus. There are four cities who have talked to us about building a campus because of the unique value proposition that the university represents.

So I am not -- I don't know that we are going to do anything. We would prefer not to do anything, but we have to keep working on having the legislature understand the unique value proposition this is and look for ways to incent us, encourage us to keep investing, especially in this neighborhood that we live in.

I was interviewed last week and, at the end, the guy said, well, if you are asking to go from an 18% rate to a 5% rate, which, by the way, we would be paying more after the first year at the 5% rate than we would be at the 18% rate, because we keep investing in the campus, I said, do you mean that if there was a company out there that was willing to move to Arizona and invest $1 billion on a piece of property, that they should be looked at as a -- I said, yes, we would like 10 of those. And I am pretty sure the state would look at it the same way. And so we will see where it -- we are really disappointed in the result, but we will see where we go -- what the -- where we go moving forward.

Okay. And then, in terms of online enrollment growth, I understand the impact that Easter timing can have on new enrollment and maybe because it is you are quoting a year-end number, but if you could just maybe address the deceleration of online enrollment growth to 6% in the first quarter, which is towards the lower end of your longer-term range, and how much was that impacted by just the timing of Easter?

Yes. It had an impact. We had kind of three things that impacted the quarter-end number. One, it was a slightly higher graduation number than we expected and, again, we knew these students were graduating, but they graduated slightly faster than we expected and not (inaudible) in the quarter-end number.

The second, as we talked about, was new starts were slightly lower than expected in March, and it was just the very last start in March. And it was because Easter was the last week in March this year where it was in April last year. And so that negatively impacted the quarter results ending enrollment results.

And then, lastly, we are seeing a little bit of pressure, year-over-year pressure on our single course students. That does get factored into our enrollment number as long as they are not also in a degree program, and some changes were made, as Brian said, in our nursing program that reduced the number of students that have to take these single courses before they start a degree program. And so we are seeing some year-over-year pressure on that number, both on the new start side and the total enrollment side. It is not up year over year nearly like it has been trending. And so none of those things, I think, are concerning to us right now from a long-term perspective, but they did impact the ending enrollment number.

Trace Urdan, Credit Suisse.

I am going to take you back to that question of Sara and Jeff's one more time and ask it in a slightly different way. So the dynamic between the Bachelor's and the graduate programs online, obviously, you are focused on growing the graduate programs and pleased about the growing percentage of graduate students in the mix. And I guess my question is, when we look at the shifting that is taking place in your enrollment, how much of that is due to deliberate efforts on your part in terms of how you are gearing your marketing and how you are thinking about leads and where you are making investments, and how much of it is the market itself irrespective of your own activity? Could you reverse that if you changed up what you were doing?

Yes. We could reverse that very quickly.

Okay.

It is almost totally due to us engineering it that way. And so we -- yes, it is through our marketing. It is through our enrollment practice. It is through our program creation. We are building a lot more graduate programs than we are undergraduate programs, and so really it is our own engineering. And it has put a little pressure on us because graduate students, they graduate at higher percentages and they graduate quicker. And so you have to be mindful of that as you continue to build this out.

But from a positive standpoint -- and we have to figure out a way to market this better -- is our undergraduate students on our ground campus grow as a percent of the total. We were thinking and most of our models has us graduating them in a four-year timeframe.

It is very difficult to find students on campus that graduate in four years. They are graduating at three and a half years, and sometimes they are graduating in three years. We have made it -- which is something we have to figure out how to market because the trend at other universities are going the opposite way. In California, it takes five or six years to graduate even at our state universities in Arizona. Students have trouble getting classes, getting access to classes and they are spending five or six years. And so -- and that is not a major challenge or problem at this time. We just have to be mindful of that as two things happen. Percent of all students that are graduate students go up. Percent of all students that are undergrad ground students go up. But it positively impacts those things that are important to people like the Department of Education and the Higher Learning Commission. There is a lot of focus on completion rates and graduation rates, which I think is a really good thing, but I also think that has got to be tempered because we have people take classes from other universities, especially other universities offering online programs. And we have to make sure as a university community that the right amount of rigor is built into programs and that they are not made easier so that graduation rates can go up. I can assure people that we won't do that, but there is a temptation there.

Okay. So just on a follow-up on that, this is really interesting, Brian, but the faster graduation rates that you are seeing in your ground students, is that because of the course loads that they are taking when they are there, or is it because they are coming into you with more -- with some credits already under their belt?

It is, one, because they're coming with credits. We have a huge and fast-growing consortium of schools across the country that are doing dual credit through us and then choosing us to come and do their program. But then, also, we have made summer school very accessible and very inexpensive. And so because we employ so many students on our campus, a lot of them are deciding to either stay here and work and keep going to school or, if they go home because they have a job, they go online. And so it is not really increasing the load while they are here. That is a very difficult thing to do given how difficult our programs are.

Okay. And then, just on the online dynamic that you were describing, do you guys have a target ratio in mind? Is there someplace where you sort of feel like, okay, this is the right mix? Do you see online becoming 100% graduate at some point in time?

I don't think so, but we have talked a lot about 70% of students studying at the graduate level, but we watch those things on a daily basis. We watch them very carefully, and very honestly, what used to be kind of a nemesis for us, which is 34-year-old students going back to school and wanting to complete degrees in business administration, for example, in the last number of months, we are seeing those graduation rates go up. And as those graduation rates go up or if they continue to, we will put more students in those kind of programs.

So the overall trend is that we would like it to be somewhere between 60% and 70%, but we watch it on a daily basis, and we keep looking for where programs add value to people's lives, and where they do, we offer those programs.

Okay. And then, I just also wanted to go back to a comment you made in response to one of Sara's questions. I think you said -- you made reference to sort of not doing anything for a couple of years, and I just wanted to make sure that I heard that right. Are you saying that, although you are looking at these geographic expansions and these people -- these different municipalities are approaching you, you really are tabling that for that period of time, or was that comment related to something else?

No, we are not tabling the discussions. We continue to talk to people about the potential. We don't expect to do anything in the next couple of years unless something significantly changes.

Okay. Great.

Alex Paris, Barrington Research.

This is [Chris House] sitting in for Alex Paris. How should we look at employee expenses for the remainder of the year versus last year in regards to the ramp of hiring? Do you expect it to be greater than it was last year as a percent of revenue to supplement the growth you are seeing on the ground?

I think it will be consistent with the hiring that we had in the last three quarters of last year. But as a percentage of revenue, what you are seeing is margin deterioration second and third quarter and margin expansion first and fourth quarter because, not only because of the hiring that is happening right now for this next fall, but obviously the hiring that has happened the last few years to support the growing ground enrollment.

When we get our ground enrollment -- ground campuses in session, basically all of the first quarter, all of the fourth quarter and only one month in both the second and third quarters, and so we have got this big infrastructure to support those students, and most of that is -- most of those costs are fixed and not variable. And so you are going to see deterioration in margins in the second and third quarter because of the ramp-up, not only for this next year, but over the last few years.

With that, 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 does conclude the program, and you may all disconnect. Everyone, have a great day.