Good afternoon. My name is Misty, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Grand Canyon Education Earnings Conference Call. [Operator Instructions] Thank you. Mr. Brian Roberts, General Counsel for Grand Canyon Education, you may begin your conference.

Thank you, operator. Good afternoon, and thank you for joining us today on this conference call to discuss Grand Canyon Education's 2012 first quarter results. My name is Brian Roberts. I'm the new General Counsel here at Grand Canyon and very excited to join the team. Speaking on today's call are CEO, Brian Mueller; and our CFO, Dan Bachus. The call is scheduled to last 1 hour. During the Q&A, we will try to answer all questions, but we apologize in advance for 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 the future performance of Grand Canyon Education that involve risks and uncertainties. Various factors could cause the actual results of the company to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, including the 10-K report for fiscal year ended December 31, 2011, its subsequent 10-Q reports and its current reports on Form 8-K filed with the Securities and Exchange Commission. The company does not undertake any obligation to update anyone with regard to the forward-looking statements made during this conference call, and we recommend that all investors thoroughly review our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K filed with the SEC before taking a financial position in our company. And with that, I'll turn the call over to Brian.

Thank you, Brian. Good afternoon. Thank you for joining Grand Canyon University's First Quarter Fiscal Year 2012 Conference Call. We are, again, pleased with the academic enrollment and financial results for the quarter. Our new starts for the quarter are up again, with new enrollments growing double-digits on a year-over-year basis and we expect the trend of year-over-year new enrollment growth to continue. Our total enrollment count is up 8.9% at March 31, 2012, compared to March 31, 2011. As a result, revenue grew by 15.2% and adjusted EBITDA grew by 45.3%. It continues to be clear that adult students are choosing universities to have a brand that is rooted in a significant traditional campus environment. It also continues to be clear that many traditional universities are replacing lost tax revenues and declining donations with adult student tuition revenues, making the overall higher education environment more competitive, especially for good students. Grand Canyon is uniquely positioned to benefit from this market shift. As a result, I'm going to take a minute to give you an update on the strategy to build the university's brand. First, our traditional campus enrollment strategy is ahead of expectations. For the fall of 2012, we currently have 11,287 applications. We expect to top out somewhere over 12,000 applications, which we anticipate will produce slightly over 4,000 new traditional students, bringing our total student number -- total number of traditional students to approximately 7,000. As we have said previously, we expect our ground enrollment by fall of 2015 to be 12,000 undergrad students and between 2,000 and 3,000 graduate students. Our average incoming GPA this fall is 3.4. We have a higher-than-expected number of students wanting to live on campus. The 2 new dormitories we are building this year are on target to be finished by…

Thanks, Brian. Scholarships, as a percentage of revenue, increased from 16.3% in Q1 2011 to 16.9% in Q1 2012, primarily due to the growth in ground traditional campus. Bad debt expense, as a percentage of revenue, decreased to 3.5% in the first quarter 2012. We are extremely pleased that the trends that we began to see in late 2011 have continued, and again, want to thank our operational staff for their efforts. We estimate that approximately 100 basis points of this improvement was the result of increased collections of previously written-off receivables and do not believe that collection efforts for previously written-off receivables in that magnitude will continue. As in the fourth quarter of 2011, seasonality also had an impact on this. Based on this, we have lowered our forecast of bad debt expense to 6% in the second quarter of 2012. We believe it is too early to adjust our initial estimates for the remainder of the year. Our effective tax rate for the first quarter of 2012 was 39.7% as compared to 41.1% in the first quarter of 2011. The lower-than-anticipated rate is primarily due to certain nonrecurring tax items, which had the effect of decreasing our effective tax rate in the first quarter 2012. We still anticipate our effective tax rate in 2012 will be 40.5%. We did not repurchase any shares of our common stock during the first quarter of 2012. However, we did repurchase a small amount during the second quarter 2012 under a 10b5-1 plan that had been put in place. Turning to the balance sheet and cash flows. Total cash unrestricted and restricted at March 31, 2012, was $107.7 million. We have a revolving line of credit for $50 million. No amounts have been drawn as of March 31, 2012. Accounts receivable net…

[Operator Instructions] Your first question comes from the line of Jerry Herman with Stifel, Nicolaus.

The first question, Brian, just to be clear, the start number of plus double digit, that relates to online only? Is that correct?

Yes, that's correct.

And then with regard to the applications, it sounds like you guys are pretty strong there and your expect additional strength after graduation, when you look at that 12,000 number and a projected intake of 4,000, how do you think about the students that can't get in and is there any opportunity for them to serve as a future pipeline even including the possibility of going online to start?

There's been a little bit of that going online to start. In some cases, not a lot of it. It's, certainly, something we communicate to students as we move forward. The biggest barrier is just living for outside of Arizona students. There are students who won't be able to get into a dorm this year who live in Arizona who will commute. And they'll take some of their courses online and we'll push that, and reserve spots for them in the future years. It's more difficult for an out-of-state student to, obviously, commute or to try to find an apartment in town. Some of them will take online courses and hope to get in as sophomores, but we haven't seen a lot of that yet.

Great. And much of the audience is anticipating the gainful employment release and last time it was released you guys showed up pretty well at the 52% repayment rate, the numbers were smaller then. I'm assuming your expectations are similar to what's happened with CDR, i.e., they would go -- repayment rates would go down when reported. Comment on that please.

Yes. I think that could be the case. Although I think we're going to be in a very good place vis-à-vis our major competitors. If you recall last time, we were just a couple percentage points below Arizona State and University of Arizona, we were above Northern Arizona significantly above Liberty University and so if there's a little bit of a decline for all of us given the current economic conditions, I think we'll be right there in that same position with our major competitors.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Brian, I believe it was you in your prepared remarks talked about the conversion rate for students outside Arizona going down a bit. Is it something that you're doing differently maybe not focusing on that target market as much or is there something going on in the market dynamics that you could let us know about?

No, it's really -- those leads that are being generated from the lead-generating companies that have kind of dominated this industry. Those conversion rates are going down for everybody or nearly everybody. And I think we experienced a little bit of that outside the Southwest, where you can't build your brand. And when your brand is not competitive in a local environment, there are just local competitors that are eating up some of that market share, which is why we're moving a higher percentage of our overall marketing spend in the Southwest and taking advantage of where our brand is growing. Fortunately for us, our S&P is not going up much under than a little bit of branding initiative because what's going on in Arizona and in Nevada and in Colorado, New Mexico, Southern California, we are doing so well there that it offset the little bit of the decline we've had outside the Southwest.

All right. That's great. And that was actually a segue to my next question. You mentioned selling and promotional going up slightly as a percentage of revenue. Is that something we should expect to continue for the remainder of the year or will we be getting leverage on that line item as well?

I think it maybe up just slightly the rest of the year, but not more than it is today. So yes, I think it will stay where it is, so up a little bit but you don't have to expect it to go up much more than it is right now. Interesting we got interesting reaction from the Provost at University of Nevada Las Vegas, who is not happy with our competitiveness inside the state of Nevada and we also got some calls from the people in El Paso. They both admitted that our ad is very good and have an impact, but they're just not sure why we're taking market share away from them. Well, were still in our democratic and free society as far as I can remember, so anyway.

All right, that's good to hear. And just one quick numbers question. What should we be modeling for stock-based comp for the rest of the year?

I have that. Hold on one second. I apologize.

It's okay. We can take it offline.

Okay. Yes, let's take it offline.

Your next question comes from the line of Adrienne Colby with Deutsche Bank.

I was hoping I could ask you a question about bad debt expense. I know that you commented before that you expected your expense would be higher in the first and fourth -- sorry, in the second and third quarter, is lower in the first and fourth. I know you're not going to talk about full year basis, but should we expect a similar trend?

Yes. That won't change with the ground campus out of session for the most part in the 4-month period, in the second and third quarters, it will end with bad debt, historically, being lower on the ground campus and with our online students it will be lower in the first and fourth, higher in the second and third. And so what we are expecting is roughly 6% in the second and third quarters, which is down about 100 basis points in the second quarter from our original expectation. And then in the fourth quarter, it should be lower than that.

Great, that's helpful. And if I could just ask one follow-up question. I know that you commented in the past about the number of new registered new students that you had from fall. Clearly the application rates are really high, but would you comment on the new registered students who have committed?

Yes. We are at 3,601 as of right now. So we are very close to our goal.

Your next question comes from the line of Jeff Volshteyn with JPMorgan.

Let me follow up on the bad debt expense improvement. You mentioned 4 reasons in your prepared remarks. Can you give us a sense of which ones were more important and more importantly, which ones are more sustainable going forward?

The increase -- the quality of our ground student body is one of the -- is probably the most influential one. Bad debt expense, as a percentage of revenue for ground students, is very low. As our ground students, as a percentage of the total, get greater, that is -- those gains are very sustainable. I would say the second one is the increased quality of our online student body. As we continue to maintain our percentages at the graduate level and increase the number of nursing students that we have, nursing students, are second to ground students in terms of having very low bad debt expense. And so as we continue to be strong in that area, that is sustainable. The quality of the quality of the student body is always the most important thing. And then yes, we have benefited tremendously from the experience level of our staff. When we got here 4 years ago, we had very inexperienced people in the area of finance and over the course of the last few years, that has improved dramatically and so that's another reason that -- and so that is also sustainable going forward.

I think the one thing -- so I think, they are all sustainable. The one thing, as I said in my prepared remarks, we got about 100 basis point margin or improvement from previously written-off -- collections of previously written-off receivables. I think there was a lot of low-hanging fruit there that was collected. Although I think it's typically a first quarter benefit because of tax refunds, et cetera, that there's just more money there to repay previous amounts. So that is probably the one piece that we don't think will be sustainable in previous quarters as it necessarily was this quarter.

Maybe another way of answering that is to say that us being at 6% in the second quarter is the result of what Dan just said plus the ground students will not be here for those 4 months. So that's a little bit of probably a conservative number. But long-term, do we think it's possible for us to be in the 3.5 range in terms of bad debt expense? That's what we think we can be.

It makes sense. As a follow-up, let me ask you about your student persistence trends in the online student population, directionally.

They've improved about 100 basis points year-over-year. And to answer Jeff's question on stock-based comp, we're estimating $7.5 million for the full year. It will be highest in the third and fourth quarter. We did a stock grant near the end of April, I think. And so and we haven't been a public company. Our options and restricted stock vests [ph] over 5 years. We haven't been a public company for 5 years, so that number goes up every year with an additional grant. So third and fourth quarter will be slightly up over first and second quarter.

Your next question comes from the line of Sara Gubins with Bank of America Merrill Lynch.

I wanted to follow up on the double-digit starts. Last quarter, you had talked about expecting mid to high single-digit growth, and so I'm wondering what came out as the positive surprise?

The productivity of our enrollment counselors is increasing. The conversion rate of our lead inside the Southwest is increasing. And those 2 things in combination were very nice surprises for us, but where we are currently as we look forward, we think we're going to be able to maintain that.

And by program area?

It's pretty much across the board. Our conversion rates, really, for undergraduate business students actually did go up. It's just that we've got fewer enrollment counselors and fewer marketing dollars going to support those programs. And so it was pretty much in across the board improvement.

Okay. And could you remind us where you are on the percent of -- sorry, percent of students that are coming from Arizona and maybe the Southwest, as a whole?

We're a little under 25% for Arizona. I don't have the numbers right here for the rest of the states, but we can get those for you and cover that over a phone call.

Great. And then just last quick question, the LoudCloud implementation for online. I think you were planning on having it done by this summer and I'm wondering if that's on track.

September, October. Yes, in that timeframe, we should have it fully rolled out. We're really, really pleased with what's going on and the response of the students and faculty.

Your next question comes from the line of Peter Appert with Piper Jaffray.

This is George Tong for Peter Appert. Could you give us a little bit more color on your starts being up with double-digits? Does that imply growth in the teens or should we expect growth in the 20s?

Teens.

Yes, teens.

Teens. Okay. And could you also give us some color on ground starts performance?

Well, we're going to be slightly -- we believe we will be slightly ahead of the 4,000, which will take us to just under or right about 7,000 total for the fall.

Got it. And going back to the margin question, margins are up over 450 basis points year-over-year this past quarter. You said about 100 basis points is not sustainable, basically, low-hanging fruit from write-off of receivables. Could you segment how the other increase in margins breaks out, specifically whether it's timing related or whether it's bad debt related?

Well, almost all of that improvement is bad debt related in some form, or bad debt as a percentage of revenue in the first quarter of 2011 was 9.9%. And so we got -- we had 640 basis point of margin expansion just within bad debt this quarter on a year-over-year basis.

Your next question comes from the line of James Samford with Citigroup.

I just wanted to talk a little bit about the competitive dynamics. It looks like online bachelors came in pretty nicely ahead. I'm assuming that the competition is really in that master's program area. I was wondering if you could just comment on that sort of dynamic right now.

Absolutely. It's most competitive in the master's degrees in the area of education, which was really a strong program for us and so we've seen just a little bit of deterioration there although quarter-over-quarter, our numbers are up, which is a good sign. The place where we have a lot of possibilities is with our doctoral program. We've gone from 1,000 students to 2,200 students in a very short time period, and we think we've got huge room over and above that, especially because of all the high-quality students that you're trying to get. That's the area where traditional universities don't appear, don't want to compete. There are competing a lot of the master's level, but they're not competing very much at the doctoral and PhD level. We don't think that's inside their mission and so we're placing a lot of priority on that. We've increased the number of enrollment counselors significantly, we are increasing the marketing dollars and we have such a big advantage there. Like ground students, those students have 4-year revenues streams and their retention rates are pretty high and we've got a tremendous pricing advantage over against our competition in the 4-profit sector.

And I guess, if my math is correct, it looks like Liberal Arts actually accelerated this quarter. It's like the double-digit growth. Is that -- what's going on there? I thought that was an area that you're trying to deemphasize a little bit or is that -- was I wrong there?

No. There a couple of areas that picked up a little bit. Criminal Justice has picked up and so has Christian Studies. And so in Liberal Arts, we are still getting -- it has gone up some but we're getting students in the areas that we want to. So it's not a concern for us.

Your next question comes from the line of Kelly Flynn with Crédit Suisse.

I have a few. First on CapEx. Dan, I think you said you thought it would be the same as a percentage of revenues that was last year which implies, I think, over $90 million of CapEx whereas previously you're saying 80, so I just want to clarify. Are you increasing your CapEx guidance? And if so, why?

Yes, I think a little bit. I don't know if it will be $90 million. But as Brian said in his prepared remarks, we're starting -- we're going to end up starting a dorm the next dorm a little earlier than we have in the past. Typically, we've gotten really good at starting dorms in November, December and having them ready for delivery in September. This dorm that we're building for next September, so September of '13, is a much bigger dorm and thus, they are probably going to have start construction in August or so. So that will increase CapEx a little bit more, push a little bit more of CapEx into 2012 than what we had originally thought. There's really nothing else other than that. We did acquire some additional property this quarter that we hadn't initially planned to. It wasn't extremely expensive, but it was a great opportunity, adjacent to the campus that we acquired. So we will continue to be looking for opportunities like that and if they come up, we're going to jump on them. So I think versus the 80, we thought previously it might be slightly higher than that.

Okay, great. And just on that note, I mean how should we think about the CapEx over time? I mean should it taper off over the next, let's say, 2 to 5 years or are you expecting it to kind of remain at these elevated levels as you invest in your competitive position?

I think the next 3 years, you'll see some slight decline although it will be fairly substantial like it is now as we built out towards that 15,000 students. At that point, you'll start to go into significant decline and get back closer to the 5% to 7% of revenues that is typical in this industry with most of that going to technology.

Okay, great. And then just switching gears, back to the gainful employment topic. For your repayment rate, I mean, you said it may come down slightly, which makes sense, but I mean are you comfortable it should remain over 35?

Yes.

Okay, perfect. And then just the last one, this is kind of a nitpicker, but on the bad debt, Dan, I think you said you weren't going to increase -- rather decrease the guidance officially for the full year. And I think the guidance was 6.5, but then in later remarks, you said the high watermark for the year should be 6. So I'm just trying to figure out are you guys just kind of sandbagging it there or how should we think about that?

No, we brought down our guidance for the full year, we just have not adjusted third or fourth quarter. We brought, obviously, first quarter is what it is. Second quarter we brought down 100 basis point. Third and fourth quarter, we had projected it to come down over the course of the year. And so at this point, we're leaving the third and fourth quarter where we had originally guided at. So the full year has come down significantly.

Your next question comes from the line of Jeff Meuler with Baird.

I guess just with the online working adult starts accelerating to double-digit and things continuing to trend well for fall of 2012 on ground. Is there any reason why you want to be taking up the revenue guidance for the back half of the year other than being conservative because it's still early in the year, I just wanted to make sure I'm not missing something on increased scholarships or something like that?

No, there's nothing you're missing. We had some pretty decent growth assumptions in our model that we gave in our original guidance for the third and fourth quarter. And we feel that those are still achievable, but just don't feel quite ready to make them more aggressive than they currently are. So maybe it's a little bit of conservatism given that we're still 3, 4, 5 months out.

Okay. And then you touched on Christian Studies and doctoral, but how is the kind of the initiative in IT ramping?

It's okay. I mean, I think it's meeting our expectations. We're not getting that accelerated growth because of that program, so I think there's upside there for us but that's not where it's coming from currently.

Okay. And then just one last one for you. What was the timing of the roll out of the lost [ph]in the Southwest brand campaign? Did you have it for most of this current quarter or are you just kind of rolling it out beginning of Q2?

No, we had it for most of this -- we had it for all of this quarter.

Your next question comes from the line of Brandon Dobell with William Blair.

Quick ones for you. First for enrollment count as you mentioned productivity, should we expect that within that you're continuing to see or reallocate people away from business, business students and also, how about enrollment rep, I guess, activity within the education department also?

For business, we won't probably go -- we won't move anybody else, we'll go with the current numbers that we have. But as a percentage of the total, they'll go down again, as we add. And in education, it's pretty flat. We're keeping that about where it is, maybe a slight increase in terms of counselors. We are attending to add them in the area of doctoral studies, nursing, health sciences, ground.

Okay. And then in terms of students moving from finishing a bachelors degree and then reenrolling in a master's level or master's reenrolling at doctoral, how much success are you having there and I guess more importantly your expectations for how that should play out the next couple of years?

We're doing what we have typically done in the online student body, it has picked up a little bit. Where we really hope to see an increase is on the ground. We want to build that ground graduate student base to a least 3,000 students and so that's where we have to spend some marketing and some time working the next 3 years.

Okay, and then final one for me. I may have missed it at the very outset of your comments, Brian, but all the hub bug [ph] around the Pell running and all that kind of thing these days with the new neg-rig [ph] process starting with the DOE, have you guys noticed any or have you instituted any changes internally and has it impacted start growth or retention or anything like that? And you guys talked about this a couple of years ago so you're kind of out there in front of it, but more recently have you done anything differently that should change how we think about the enrollments or quality of enrollments?

No. We have really put in place lots of safeguard against that. We had our little bad period about 3 years ago and our core default rates currently being at 12% is the result of that, but we've worked hard at that, the last 3 years and we're in pretty good shape from that standpoint. And so that shouldn't either negatively or positively impact our new enrollments going forward.

We're always on the lookout for that. We've implemented a lot of things, as Brian said, that our internal audit department focuses on. Looking for those type of issues and it's -- since our move to borrower based, it's really, really declined in terms of issues that they come across.

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

This concludes today's first quarter Grand Canyon Education Earnings Conference Call. You may now disconnect.