Grand Canyon Education, Inc. (LOPE) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Hope, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] After the speakers remarks, there will be a question and answer session. [Operator Instructions]. Thank you. Mr. Brian Roberts, General Counsel, 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's 2012 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 1 hour. During the Q&A period, we will try to answer all of your questions, and we apologize in advance if there are questions that we are unable to address due to time constraints. I would like to remind you that many of our comments today will contain forward-looking statements with respect to GCU's future performance that involve risks and uncertainties. Various factors could cause GCU's actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in GCU's SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31, 2012, and our current reports on form 8-K filed with the SEC. We recommend that all investors thoroughly review these reports before taking a financial position in GCU, and we do not undertake any obligation to update anyone with regard to these forward-looking statements made during this conference call. And with that, I will turn the call over to Brian.

Good afternoon. Thank you for joining Grand Canyon University's Fourth Quarter Fiscal Year 2012 Conference Call. We are pleased with the results of the quarter. Our long-term goals are to grow enrollments 8% to 10% a year, revenues 10% to 12% per year and achieve pretax margins of between 23% and 24%. As we will discuss in greater detail later in the call, our 2013 guidance is for enrollments to grow 9% to 10.5%, revenues 11.5% to 13.5% and for pretax margins to be 23.2%. We are currently achieving these results in spite of growing much faster than expected in 2012. In the fourth quarter of 2012, enrollments grew by 19.1%; revenues 25%; pretax margins, excluding contributions made in lieu of state income taxes, are at 24.9% and new enrollments were up in the high-single digits year-over-year. We believe that this success is the result of a truly differentiated model within higher education. This new hybrid model, which combines a traditional campus and an online campus, leveraging a common infrastructure, produces high-quality, low-cost education whose brand is rooted in a strong, growing, vibrant traditional campus. This educational model actually makes a very positive contribution to the taxpayers. If you add the interest paid by students on Title IV loans, plus the savings of $7,200 per student for all in-state students attending our private university that would have attended a state university, plus the university's tax contributions and the university's employees tax contributions and then subtract Pell grants and defaults on student loans. We estimate a net gain to the taxpayers in 2012 of approximately $107.8 million. In addition, we have invested $220 million in high-tech classrooms and dormitories and $85 million in technology in the last 3.5 years. Last quarter, I listed 5 reasons why we are getting these results, and I want to update you on those today. The first is the growing strength of the traditional campus and its overall impact on the brand of the institution. We started the fall of 2012 with approximately 6,500 students on our campus in Phoenix. We expect to start fall of 2013 with approximately 8,500 students on our ground campus. We expect to grow this campus to 15,000 students by the fall of 2015. Of those registered so far, 73% are from Arizona. Their average incoming GPAs are approximately 3.4. This year, we raised the minimum GPA requirement for admission to 3.0. The retention level of traditional students between the spring and fall semester is 87%. 49% of the ground students are studying in health sciences. This is significant because Arizona has become a state known for health science innovation. We continue to have a great year in the performance areas on campus. We have already had 3 major theater productions with nearly 100% sold out performances. Our various music groups are performing all over the Southwest. We continue to have major Christian and secular concerts in our arena that bring thousands of people to campus on a monthly basis. In athletics, we won the Director's Cup at the Division II level last year and expect to win this year as well. As many of you know, we have been accepted into the Western Athletic Conference and will compete at the Division I level in all sports beginning the fall of 2013. Currently, our coaches are busy building Division I schedules and are recruiting Division I athletes. Our media people are negotiating television and radio broadcast deals, and our Athletic Director is negotiating contracts with major shoe, apparel and equipment companies. The Division I move will obviously raise the visibility and brand strength of the university. A fall 2013 highlight will be a soccer match versus Stanford University, likely televised by the Pac-12 Network. The second reason for this success is the high-quality composition of our online student body. In our working adult student body, 42% are studying at the graduate level. These students have high graduation rates, low default rates and low bad debt expense. By college, our College of Nursing and Health Sciences produced the highest retention rate, and they went from 25.6% of our student body last year to 28.5% this year. This year, our College of Education students, who also produce high retention rates, dropped from 44.6% to 42.4% of the total students, but the raw number of those students went up again. The College of Liberal Arts students went up slightly from 15% to 15.1%. The College of Business students attending online, our lowest retention category, again declined, from 14.8% to 14% of the total. A great deal of enrollment success has to do with increasing retention and graduation rates. This continues to be driven by 4 major factors. One, the increasing selectivity because of higher admissions requirements. Two, continuing to focus on attracting high-quality students. Three, an increasing number of our online students taught by full-time faculty. In the fourth quarter 2011, 20.6% of students in online courses were taught by full-time faculty. This increased to 23.2% in the fourth quarter of 2012. On ground, greater than 50% of our students are taught by full-time faculty, and our goal is that 70% will be taught by full-time faculty in 2 years. The implementation of technology, which allows us to closely track student attendance, participation and the quality of their academic work. The third reason for this success is our very competitive pricing model. On our traditional campus, our published tuition rate is $16,500 per year. This fall will be the fourth year we have not raised tuition. After scholarships, our average student pays approximately $7,800 per year. Most private universities have published rates between $25,000 and $40,000 per year, and our state universities in Arizona are about $11,000 per year in addition to the tax subsidies that support each in-state student. Those institutions also offer scholarships, but our after-scholarship averages are now very competitive with the tax-supported state institutions and well under most private universities. In addition, our room and board rates for those students living on our campus are extremely low. Most students in our campus are paying about $6,500 for room and board for the entire year. Most universities have rates much higher than that, in fact, some are almost double that amount. Our online students have close to the lowest tuition rates in the industry. This year, we are budgeting a 5% increase in new online starts and are not budgeting any increased tuition for our online programs. We believe the demand that exists due to our brand strength and price point would allow us to grow faster and raise are tuition price similar to prior years. But as we have discussed previously, we do not believe this is in the long-term best interest of the university, our students or our investors. We expect to reach our targeted total enrollment, revenue and margin goals because of the continued shift towards higher-quality students that have higher retention rates. The fourth reason for this success is a flat organizational model with very advanced dashboard technology that gives us the ability to manage the progress of our students on a daily basis. As I mentioned earlier, we have invested $85 million in technology advancements over the last 3.5 years. Our academic counseling staff can monitor the attendance and participation trends of students, as well as track closely their academic progress. This allows them to work cooperatively with faculty to provide any intervention necessary to keep students moving in a positive direction. We are also working hard on the advanced analytics component of our LoudCloud learning management system, which will provide another large amount of data on the academic work of both our students and faculty. The fifth reason for this success is the growing experience levels of our faculty, management and staff. Our employee turnover rate has improved 500 basis points year-over-year, decreasing to 15% in 2012. During that same period, our operations management turnover rate has dropped to under 4%, and our full-time faculty turnover rate has dropped to under 2%. The instruction and service our students get as a result is reaching very high levels. A big part of our growth on the ground campus is growth with Arizona students because of the lack of private Christian universities in Arizona. For the fall of 2013, 73% of our registered students are from Arizona and 77% of that are from the west side of Phoenix. We are attracting the high-growth East Valley students who want to live on our campus, but missing out on East Valley commuter students. As a result, we are entertaining the possibility of building a traditional campus in 1 of 4 East Valley cities, as well as putting a campus in Tucson. The earliest we would start students at one of these campuses would be in the fall of 2014. I should also note that because of our media campaign in California, interest levels of both traditional students and working adult students has picked up significantly in the last 45 days. Turning to the results of operations for fourth quarter of 2012. Net revenues were $141.3 million in the fourth quarter of 2012, an increase of $28.3 million or 25% from $113 million in the prior year period. Operating margin for quarter 4 2012 was 23.5% compared to 20.6% for the same period in 2011. Excluding contributions made in lieu of state income taxes of $2 million in fourth quarter of 2012, and $1 million in the fourth quarter of 2011, operating margins for fourth quarter 2012 was 24.9% compared to 21.5% for the same period in 2011. Net income was $20.9 million for the fourth quarter of 2012 compared to $15.3 million in the prior year period. After-tax margin was 14.8% compared to 13.6% for the same period in 2011. It should be noted that the difference between the 23.5% margin and the after-tax margin of 14.8% is money that we pay in taxes that goes back to the taxpayer. Given our relatively low default rates and our relatively low Pell usage and the high tax amounts we pay, we are a net plus to the taxpayer as we discussed in the beginning of the call. Instructional costs and services grew from $50.6 million in the fourth quarter of 2011 to $58.8 million in the fourth quarter of 2012. As a percent of revenue, IC&S decreased 3.2% to 41.6% from 44.8%. The majority of that decrease was bad debt expense. Bad debt expense as a percent of revenue decreased 250 basis points between years to 3.2%. This major improvement is a result of 4 things. One, the increasing quality of our online students. Two, the growth of our traditional ground student body. Three, the flat organizational structure and innovative dashboard that allows us to manage the progress of each student to a greater extent than ever before. And four, the increased experience levels of our staff. Employee compensation and related expenses increased 80 basis points between years primarily due to higher employee benefit costs. Occupancy cost decreased 80 basis points, primarily due to our purchase of an on-campus dormitory in the fourth quarter that was previously leased. Dues, fees and subscriptions and other instructional supplies decreased 50 basis points between years. Advertising expense increased from $11.5 million in the fourth quarter of 2011 to $13.6 million in the fourth quarter of 2012. Advertising expenses as a percent of net revenue decreased 50 basis points from 10.2% in fourth quarter of 2011 to 9.7% in fourth quarter of 2012. General and administrative cost increased from $7.9 million in the fourth quarter of 2011 to $11.7 million in the fourth quarter of 2012. And as a percentage of revenue, increased from 7% in fourth quarter of 2011 to 8.3% in fourth quarter of 2012. Excluding the contributions made in lieu of state income taxes, G&A expenses as a percentage of revenue increased to 6.9% in the fourth quarter of 2012 from 6.1% in the fourth quarter of 2011. As a result of the above, net income increased from $15.3 million in the fourth quarter of 2011 to $20.9 million in the fourth quarter of 2012. With that, I'd like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2004 (sic) fourth quarter and talk about changes in the income statement, balance sheet and other items.

Thanks, Brian. Scholarships as a percentage of revenue increased from 16.1% in Q4 2011 to 16.9% in Q4 2012, primarily due to the growth in the ground traditional campus, which uses scholarships, especially academic scholarships, to attract high-performing students. Bad debt expense as a percentage of revenue decreased to 3.2% in the fourth quarter of 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. Our effective tax rate for the fourth quarter of 2012 was 36.7% as compared to 33.1% in the fourth quarter of 2011. The low rate is primarily due to the $2 million of contributions made in lieu of state income taxes during the fourth quarter of 2012 as compared to $1 million in the same period in 2011. Excluding these contributions, our effective tax rate would have been 40.3% in Q4 2012 and 39.8% for the full year of 2012. We anticipate our effective tax rate in 2013 will be 40.5%. We repurchased 455,000 shares of our common stock during the fourth quarter of 2012 at a cost of $10.3 million and have repurchased another 64,000 shares to date in the first quarter of 2013 under 10b5-1 plans that had been put in place. Turning to the balance sheet and cash flows. Total cash, unrestricted and restricted, at December 31, 2012 was $161.3 million. Accounts receivable, net of allowance for doubtful accounts, is $8.0 million at December 31, 2012, which represents 5.7 day sales outstanding compared to $11.8 million or 10.1 day sales outstanding at the end of the fourth quarter of 2011. CapEx in the fourth quarter of 2012 was approximately $24 million or 17% of net revenue. CapEx for 2012 was $97.7 million. During the fourth quarter of 2012, we took the opportunity to purchase the one on-campus dormitory that we previously leased at what we believe was a favorable price. Excluding that purchase, total CapEx for 2012 met our expectations. We anticipate that 2013 CapEx will be down slightly to approximately $80 million and will include 2 more dorms and an expansion of our student union and library to service the increasing student body. As an update to 2 fourth quarter events that I discussed previously on last quarter's call, in the fourth quarter of 2012, we finalized the purchase of approximately 25 acres of land and a 131,000 square-foot building approximately 1 mile east of our Phoenix campus. We intend to convert the existing building into office space for employees that primarily work at leased off-site locations in the Phoenix area as it is our desire that these employees are as close to campus as possible. These employees will move to this location beginning in mid-2013 as these leases expire. We have a deal in place to sell a portion of this property, the existing building and the future improvements for $20 million, and we will then lease this property back under a long-term lease. Any potential gain on the sale will be deferred and recognized as reduced rental expense over the term of the lease in accordance with current sale leaseback accounting. We anticipate that this transaction will reduce our rental cost in future years. The cost associated with purchasing and developing this property will continue to be broken out separate from CapEx on our cash flow statement under the caption, Purchase of land and buildings for future development. In addition, in December 2012, we closed on a new loan agreement with Bank of America as administrative agent and other lenders, which refinances the university's prior indebtedness. The new loan: A, increased the term loan to $100 million, with a maturity date of November 2019 and decreased the interest rate on the outstanding balance from LIBOR plus 200 basis points to LIBOR plus 175 basis points, with monthly principal and interest payments; and B, extends the university's revolving line of credit in the amount of $50 million. No amounts have been drawn on our revolving line of credit as of December 31, 2012. The new loan contains standard covenants that are substantially consistent with those in the prior loan agreement. Indebtedness under the agreement is secured by the assets located at our Phoenix, Arizona traditional ground campus. I would like to now touch on a couple of regulatory items. Our cash basis 90/10 amount for 2012 was 80.3%, which is up slightly from 80.2% in 2011. We estimate that the slight increase is due to an increase in the 90/10 ratio for our ground traditional campus students from approximately 53% in 2011 to approximately 59% in 2013. We believe this amount remains similar to other public and private universities that serve traditional age students. Although we have not yet received our draft cohort default rates related to student loans that went into repayment between October 2010 and September 2011 for students whose last day of attendance in the university was between April 1, 2010 and March 31, 2011, we anticipate based on information provided to us that our rate will be approximately 12%. We are pleased that our cohort default rate remained fairly consistent with the 2010 2-year default rate as our transition to BBAY occurred during the summer fall of 2010, which is during this period. We are hopeful that our cohort default rates in future years will return to much lower levels given the significant change in our student mix that has occurred. However, we want to remind you that currently 88% of students are paying back their loans with interest, which combined with our tax contribution and that of our growing workforce's tax contribution and the high savings of state tax dollars because in-state students are attending a private university, the net effect to taxpayers of GCU's contribution is very positive. Last, I would like to provide some additional color on the guidance we have provided for 2013. As you probably noticed, we have again provided a range of estimates for each quarter of 2013. Our revenue guidance assumes no net tuition increase for our ground campus or our online campus. We anticipate revenue per student will continue to grow year-over-year in the first half of 2013 due primarily to retention gains we have experienced over the past couple of quarters and last year's working adult tuition price increase. This should level off in the second half of 2013 as we anticipate revenue per student will be down slightly year-over-year in the third quarter due to the ground campus growth and only earning 1 month of revenue in that quarter. Quarter 4, we should see a small gain in revenue per student. On the expense side, bad debt is projected to be up approximately 50 basis points year-over-year, as we do not anticipate collecting as much previously written-off receivables as we did in 2012 as the amount of writeoffs had decreased significantly over the past year. Excluding recoveries, bad debt should be fairly flat year-over-year. Division I costs include $2 million of onetime payment that are not included on our current estimates as we are still working with our auditors regarding the accounting for these payments. Included in the amount is an increase in annualized cost of approximately $1 million beginning in the summer of 2013. Advertising as a percentage of revenue is budgeted to be up 50 basis points year-over-year due to the effect of the Mind Streams revenue share arrangement and increased television advertising. Stock-based compensation, the depreciation will be up 30 basis points and 20 basis points year-over-year, respectively. Our stock options and restricted stock awards vest over a 5-year period. Our fifth year anniversary of going public is November 2013. Thus, beginning in 2014, stock-based compensation will be flat to down year-over-year. We have forecast employee compensation related expenses to be flat year-over-year even though our budgeted headcount would suggest these costs should be going down. We saw a spike in our medical benefit cost in the second half of 2012, which we have forecasted will continue, and we expect that Obamacare will further increase cost. We anticipate that we will get leverage in other expense line items, primarily G&A between years. Interest expense will increase to approximately $2 million due to the increase in our term loan from approximately $20 million to approximately $100 million. As I mentioned previously, our guidance assumes an effective tax rate of 40.5%. We have also provided our estimates of diluted weighted average shares outstanding by quarter. Although we might repurchase shares during 2013, these estimates do not assume repurchases. They do assume increased dilution from stock options and restricted stock granted in previous years and from a 2013 stock grant. I will now turn the call over to the moderator so we can answer questions.

[Operator Instructions] Your first question comes from the line of Adrienne Colby, Deutsche Bank.

I think this time last year you had commented you had about 2,700 registered students for this fall semester. Can you update us where we are now?

Yes. It's somewhere under -- just under 5,500, and the goal is that there'll be 8,500 by the fall.

Okay. And I think you had said too in the past that you thought your staffing was probably adequate and we would start to see somewhat of a ramp maybe in the summer -- coming out of the summer months, is that still your expectation?

Yes. Not on the enrollment side for the ground campus, but on the academic and finance counselor side. As we get closer to that fall, there might be a little bit of a ramp, but probably not significant.

Okay, great. And if I can ask one more. I know that last year you saw an increase in students attending -- ground campus students doing summer school, and I was just wondering if you have any expectations at this point if we'll see similar levels or if you expect that to grow?

Yes. It's probably somewhere between 2,000 and 2,500 students taking classes this summer.

Your next question comes from the line of Jeff Volshteyn, JPMorgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Could you give us a little more color on starts on different verticals and as well as a clarification on the number you gave, was it overall starts or online starts only?

The 5% number was online starts, and we expect to start about 4,000 new students on our ground campus. And so the total start number will be above the 5% number because of the 4,000 ground students. But -- so online about 5% and then the ground will take us up a little bit above that. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: And how do they perform on different verticals?

On different verticals, on the ground or online? Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Online.

Online. The priority is doctoral students will be quite a bit above 5%. Master students in nursing will be above 5%. Master students in education will be about that. RN to BSN students will be above 5%. And then the verticals that will actually experience a decline are the online students in the areas of liberal arts and business, which is very consistent with the direction that we've been going for the last 2 years. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Makes sense. If I could just ask one more. In the 90/10 number, what percentage do you estimate comes from Pell versus loans?

I believe that about 20% or less of our cash basis revenue comes from Pell. So it probably is roughly that amount.

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

Just a few quick questions. In the past, you've talked about sort of conversion rates within and outside the region, sounds like you're still very much Phoenix-focused and Arizona-focused. What's the mix right now in terms of online, in terms of Phoenix or Arizona versus outside that region and how have those conversion rates been beyond that region, particularly as you've announced some pretty interesting announcements on the NCAA Division I, et cetera?

About 30% of our online students are now from Arizona. That's up from 10% between 2 and 3 years ago. And that continues to grow. However, both on ground and online students, we are seeing big increases in inquiries from the Southwest. California and especially Southern California, also Colorado and New Mexico, Nevada, continue to be areas that are growing at -- are outpacing the rest of the country. So I would say that the answer is the same that we've been giving the previous quarters that, if you look outside the Southwest, we're down a little bit where we've been traditionally in terms of conversion rates, with a couple of exceptions, New Jersey, for example, being one of them. But we're so far exceeding what we've done in the past in the Southwest that, that accounts for the positive growth that we're getting.

One quick follow-up on the -- you mentioned I think the ground campus went from 50% to 59% of Title IV. Are you worried about that trend? I know that was part of the reason for your ability to lower or at least keep tuition low on the online side. Any worry about them that continuing to go higher from here?

No. It really can't. There's a shortfall, especially for residential students, I explain this to regulators all the time, it's their own rule that is why somebody like an Arizona State has a lower 90/10 than a working adult-focused university. And so if you're a residential student even with our low tuition prices, you just can't get Title IV to even approximate 80% or 90%. We ticked up a little bit primarily because of the growth of our commuter population, where they can get a lot of their aid. And I think it's -- as Brian talked about earlier, it shows kind of our demographic a little bit, focused on the west side of Phoenix and so, no, we're not concerned that, that's going to get much higher than where it is now.

If you look at the Phoenix demographically, the east side of Phoenix has much higher -- is a much higher socioeconomic region of the city. The west side is lower. And so we do have more students from the west side because of its convenience, but the average incoming GPAs of those students are 3.4 or greater. And so we're not concerned at all. The number of students we're getting from west side is a very positive thing for us because their grades are so good. When we open the East Valley campus, if we do that in 2014, they'll just enable us to capture a bigger percentage of the total students in the Valley.

Your next question comes from the line of Jeff Meuler with Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: First, a question on the online starts growth. And I know you guys are coming up against tougher comps and the growth. I think you said high single digits in the quarter remains strong. But it is decelerating a bit, and you're budgeting 5% for next year. I guess where are you seeing the signs of the incremental softening? You mentioned declines in liberal arts and business, but given your allocation of resources, I think those areas have been softer. So where are you seeing incremental softening? Or maybe there's just a conservativism?

No. Really, it's self-induced. We're really focused on the quality of the online student body, and we look at it really scientifically in terms of how we spend our outreach or our advertising dollars. And so could we grow it greater than 5%, new starts online? Absolutely. We could probably grow close to 10%. But we would be getting more students at that low end with the lower retention rates, and we're just not -- we're not doing that. And so as we move -- as we mix shift our marketing dollars and we watch this transition, if we hit that 5% or 6% number in terms of online growth, if we hit it in the right categories, we're going to get a greater than that total enrollment growth, which is exactly what we're after. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Great. And by geography, would that 5% assume a decline in terms of new students starts outside of the Southwest or flat or a little bit of growth there?

No. It would be a decline. But again, that's self-induced. We're just spending an increasing percentage of our -- even though advertising as a percentage of revenue is going down, we're spending an increasing percentage of our advertising dollars on branded advertising in the Southwest, which is more expensive, but it leads to generally a higher-quality student. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: And then just finally, could you help us with the math? I think you said you're planning on starting 4,000 new students for the ground campus this fall. Of the, I think, 7,600 or so that you just reported, how many of those are true ground students versus on-site students at another location? Just trying to get to the math, from what you just reported to the 8,500, what the 4,000 new that you're talking about.

Yes. Great question. So as we've talked about, previous quarters, including our ground numbers are ground traditional students which this fall/spring, were around 6,500. At least in the fall, we were at 6,500. That will be down a little bit in the spring. We typically see that number shrink a little bit between graduation and drop. We don't typically tend to recruit enough new students in the spring to make up for that. So that'll be down a little bit when we report first quarter results. 4,000 new, we're projecting we'll take that number to about 8,500. Then you'd layer on top of that about 1,000 professional study students. So we're projecting around 9,500 what we refer to as ground students come next fall.

Your next question comes from the line of Sara Gubins, Bank of America.

Could you talk about your scholarship expectations for 2013?

Sure. From an online perspective, we're going to continue doing what we've always done, focus -- included in that scholarship number is the military discount that we give and others also give to the $250 credit rate. And then from an online perspective, we'll do some select scholarship programs in certain times during the year as we've always done. But those will be minimal amount of scholarship, and they're just a way that we motivate students to start in nontraditional time to spread out the workload for our counselors. For the ground campus, we're going to continue doing what we're doing, the guaranteed academic scholarships based on GPA with the hope that our average student will pay somewhere between $7,800 and $8,000 a year. And so yes, scholarships as a percentage of revenue will be going up -- or scholarships as a raw dollar will be going up, but it's almost all being driven by just the growth in the ground campus.

Okay. And then separately, you mentioned potentially building a new traditional campus in Tucson and another one in Phoenix. Is there anything by way of expense built into your expectations for 2013 for this? And when will you decide if you are going to go ahead and do it?

No. There's nothing built into 2013. It will be a 2014 event, especially from an income statement perspective. There might be some CapEx in the tail end of 2013 for our first classroom building that would be built for the fall of 2014.

So we would make a decision early in the summer, and we would want to begin building because the first part of the campus would take about 12 months to get up. And so if we get started by August or September, we should be ready by the following August or September.

Great. And then just last question, any change in the competitive dynamics? And I know it's very early days, but there's been some discussion about traditional schools offering more free courses kind of upfront. Are you seeing this? Is it something that's being discussed in the market and among your not-for-profit peers?

Yes. We're hearing that discussed. And I think that the discussion is the result of escalating costs on both traditional campuses and at for-profit universities. And so our response is that moves will play some role in exposing people to online delivery of education, especially in more technical areas, and probably can do some good, leading to individual certifications perhaps, but that the truth is that as long as we figure out a way to make traditional education in classrooms, both online and on-ground, affordable, that, that is where the future will be. People ask me about building buildings because if -- is this thing not going all electronic, and my response always is, at $50,000 a year, that's going away. But for traditional students at our rate, it's not going away, in fact, it will increase and I think if we control the cost for online students who want to earn degrees that lead to jobs like nursing and that kind of thing, it won't go away either.

Your next question comes from the line of Kelly Flynn, Crédit Suisse. Kelly A. Flynn - Crédit Suisse AG, Research Division: Sorry to make you repeat this, but I'm a little confused about what the 5% is. Can you just talk about for the quarter you just reported what was the online search growth? And am I right...

High single digits for the quarter we just finished. Our budget that we provided guidance on factors in new start growth of 5% for the year. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay, great. And then also, a question going back to Sara's question about Tucson and East Valley, can you just clarify, when you talk about an early summer decision, what does that relate to? Is that East Valley? And then I guess can you just kind of elaborate on your decision-making process as it relates to East Valley versus what's going on in Tucson?

Yes. I mean, both markets -- I mean, the markets are remarkably similar. If you look at the East Valley, there's about 1 million people. The population is 1 million, and it's growing rapidly. If you look at the city of Tucson, it's also about 1 million people, and Tucson is growing. In both those markets, there is one major competitor. It's Arizona State in the East Valley and it's University of Arizona in Tucson. And there's a remarkable lack of anything else for traditional ground students. And so right now, there's 4 cities in the East Valley that are pulling together proposals for us: land that will be available, what they could do in terms of infrastructure, what they could do in terms of easement of tax situations. And so there are 4 cities in the East Valley. They're pulling proposals together. Tucson is also putting a proposal together. Both of them are very -- all 5 of those cities, although in the East Valley, we choose only 1 of 4, are very excited at the proposition of us having a campus of somewhere between 4,000 and 7,000 traditional students in those locations. I don't think it's necessarily an either/or, it's which one comes first. It's probably what will happen. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. But just to be clear, you think your decision this summer was to be -- would be to go with either East Valley or Tucson, so it would be kind of one initially and then eventually you may end up with both, is that fair?

Yes. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay, great. And then, Dan, I think you mentioned on the same topic that there might be a bit of CapEx related to a new campus in 2013. What's included in the $80 million target as it relates to either East Valley or Tucson?

Technically nothing. But I mean, our goal would still be to drive to that $80 million CapEx. And so if the decision was made to do one of these additional locations, we would look at some of our other plans for the tail end of the year to still try to drive towards that $80 million of CapEx. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay, great. And then lastly on the land purchase, I know you talked about this last quarter as well, but can you just clarify, was that exactly $10 million this quarter? And did you say that was not in the total CapEx, that's in a different line item?

It's actually a separate line item on the phased CapEx schedule, and the total amount is $7.2 million. So if you look at the statement of cash flows, it's the line directly underneath capital expenditures. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay, great. And then do you expect additional expenditures related to that over the next few quarters?

Yes. Yes, we will spend money building that out. Something probably in the neighborhood of about $10 million. Again, that's not in the $80 million that I talked about. But we have entered into an agreement to turn around and then sell that property for $20 million. So what you'd see is they'll stay on our books and you'll see it as a component of our statement of cash flows, even though we've entered into an agreement to sell it. And then once the leasehold improvements are done and it's ready to be occupied, then the sale will be reflected in our financial statements. Kelly A. Flynn - Crédit Suisse AG, Research Division: Okay. So another $10 million in improvement, you're saying?

Yes, yes.

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

Brian, you addressed some of these issues, but I was hoping you just might give a sort of the snapshot of what the economics of the new campus are in terms of how much capital cost in total to get to the 4,000 to 7,000 students. And does the phasing in of it allow you to be profitable from day 1? Or are there start-up losses you do anticipate in 2014?

No. We would be profitable quickly. East Valley and Tucson, just to give you a very -- 40,000-foot view of that, if those things work out, we're talking about a 5- to 6-year build out of infrastructure. The total amount would probably be between $50 million and $60 million. And then we expect that to support somewhere between 4,000 and 7,000 students. And then in addition to the traditional students, we expect those campus would support another 1,000 nontraditional students attending in the evening. And so the -- and then that doesn't then factor in the increased amount of working adult students attending online because of the presence of those campuses, which we found that really happens.

And from an income statement perspective, Peter, I think it will be very similar to what we experience every summer here. So you'll see some ramp-up in cost in the summer preparing for the opening in the fall. But then our hope is the profits in the fall will offset those costs.

Got it. And Brian, I think in your prepared remarks, you commented something along the lines that interest levels had gone up significantly, I think was the word you used, in the last 40 days. Can you just expand on that?

Yes, California. The people doing direct searches on Grand Canyon University as a result of our television ad campaign had gone up 300%. And so the -- versus people clicking on a banner ad, the amount of people going and directly searching on Grand Canyon University, which turns out to be much better inquiries than clicking on a banner ad, those are up significantly, I mean, 300%. Now how much of that translates into ground students coming to Arizona and online students starting from Southern California? We'll see. But that campaign and its ability to build the brand of an institution that is on the rise has been significant, and we'll see how that pays off the rest of the year.

I guess the interesting thing to me is that you're seeing this positive momentum. And obviously, the numbers in '12 were great, but you're setting the bar pretty conservatively for 2013. And I know you've already addressed this, but it seems to contradict a little bit what you just said.

Well, yes, we're conservative -- or taking a conservative approach in a couple of ways. One, for our ground students, we upped the admissions requirement to 3.0. And if you now look at the admissions requirement that Grand Canyon has from a grade point average standpoint and an ACT and SAT standpoint, in many ways, we're stiffer than what they are versus some state universities, which is a Pac-12 institution. And so we've really restricted the quality of student that can get in here. And so that's a self-imposed inhibiting factor. And then the second thing would be if you look at the number of enrollment counselors and the amount of marketing spend that we're putting behind those lower-end programs, we're really restricting that as well. And so again, if we wanted to grow new enrollments by 10% instead of 5%, we could absolutely do that. What we're trying to do is get to a total enrollment number with only a 5% increase in new enrollments. It's that total number that we're focused on, and we think that we can get that because if you take a look at ground students, doctoral students, master students and RN to BSN students, which are the highest-quality students, and it's not close, any increase in those in new starts gets an incremental increase in total starts. And that's what we're trying to do.

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

I wanted to shift the focus back to the ground campus. When you have a potential student that decides not to enroll, I'm just curious, where do they go? Is it another institution? Or do they decide not to enroll in school at all? And had that changed in recent quarters?

It used to be that what we would lose them to, in Arizona, would be a community college. We lose less now to a community college than we -- if we lose them now, we typically lose them to Arizona State. And the reason for that is that we really kind of eliminated half the Valley because there's really -- you can't -- if you think about our ground students, 45% live on campus, 55% are commuting. If you look at the East Valley, Arizona State's got 70,000 students, of whom less than 10% live on their campus, which means the rest of them, largely from Arizona, are commuting. And so it's really the -- we lose East Valley students to Arizona State because they can commute to Arizona State, which is in the East Valley, they can't commute to Grand Canyon. We're losing many -- we're losing far less students who are looking for a private Christian university that would, in the past, have gone to Southern California. They would have gone to Azusa Pacific, California Baptist, University of San Diego, Pepperdine, we're losing very few that will leave the state to go there. In fact, that trend is reversing. Now people are leaving California that would have gone there that are coming here. Does that help?

Yes, it does. I appreciate that. And you gave some specific guidance on CapEx and other issues related to that. I'm just wondering if you can kind of remind us what your focus is or priorities for future cash flow?

Number one is CapEx. We believe the best investment that we can make right now is in the ground campus here and potentially additional ground campuses. And then secondarily would be buyback of stock, although we have never aggressively bought back stock and don't plan to. And maybe down the road, we'll look at dividend. But at this point, the #1 priority is investments that would generate us revenue and income for the future.

Your next question comes from the line of Jerry Herman, Stifel. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: A question about the online start numbers, and in particular, Brian, your comment about self-induced limit on that. Are you doing something from a selectivity point of view in online or -- I know earlier you referenced just your focus on particular types of students, masters, doctorals and so on. Is there some selectivity migrating its way into online as well?

Really, the selectivity mainly is caused by when you think about the marketing spend, you know where you get students. We know where we get our ground students. We know where we get our doctoral students, our master students and RN to BSN students. We also know the avenues that we spend to get the undergraduate students in the business in the large areas. They're not all the same places. And so we just take money out of those other areas. We reduced -- out of those low-end areas, we reduced the number of counselors significantly in those areas. We moved the counselors to the upper end. We moved the marketing spend to the upper end. And then really, the only game is, how big are those markets? And so we're looking at ways to expand those upper end markets. And for the ground, that is more locations, Tucson, East Valley, maybe Albuquerque, maybe Las Vegas. And then for the doctoral students, which is where we have a lot of room, we're looking at where we can spend more to get them. So it's really a matter of understanding where we get inquiries that lead to students and moving money towards those upper ends. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Great. And with regard to the new campus or campuses and particularly you said you thought that 4,000 to 7,000 students would cost you about $50 million to $60 million in CapEx. That seems proportionately lower than what you're spending now. I'm wondering if the cities that are gathering proposals to you are enticing you in any way that will lower your CapEx requirement to move into those areas?

Maybe a little bit. But here's the exciting thing. I'm from Wisconsin, and if you look at the Wisconsin State University System, you'll see, I don't know, 8 or 9 colleges -- universities, La Crosse, Stevens Point, Oshkosh, et cetera. And what they do with those places is they replicate every single service. And so you've got admissions at every single -- you've got financial aid, you've got technical support, you've got accounting, you've got athletics. Well, if we go to a multicampus thing, we won't replicate all those services. All the back-end services would just be done here. And so you need less CapEx, you need less office space and those kind of things, but you have a lot less personnel costs. And so really the exciting thing for us is to see if we make the East Valley campus go and if we make the Tucson campus go, could we make a couple others go, because you would be in a situation where versus $7,800, you might make the 23% or 24% margin at less tuition than that. And so the game comes in seeing yourself as a system and not replicating every single one of those back-end services or even athletics at every one of the places. That's where the cost saving comes.

And on the CapEx side, at this point, the thought is that this would not be residential campuses, which is a lot of where our CapEx has been on this ground campuses, is building dorms. That -- the numbers that Brian talked about would be primarily classrooms and support service-type location for the students. And ultimately, if we decide to build dorms, that would take that $50 million to $60 million number up, but as we've talked about in the past, dorms are extremely profitable. And so that will be a good thing if we decide that there is a need for residential students.

In saying that, though, another exciting thing is that these would be campuses other than residential that would look like our campus here and would include a very high-end chemistry, biology labs, DNA, forensic science. And then we're looking very aggressively at moving into the other STEM areas, especially math, engineering and technology. And so the amount of back end -- back office spend that we can eliminate, the amount of CapEx in terms of dormitories that we can eliminate, allows us to spend in very high-tech classroom amenities that we think are going to attract a lot of very good students.

Your next question comes from the line of Alex Paris, Barrington Research.

This in Joe Janssen filling in for Alex Paris. Given we're late in the call, I'll keep this short. But Brian, maybe just regarding WAC, can you refresh my memory? I heard in your comments it can start fall of 2013 because you're participating in DI [Division I]. What about NCAA tournaments? And secondly, are there any marketing restrictions associated with this? Or are you able to advertise to potential students right now?

Yes. There's no marketing restrictions. And in fact, we're building these high-profile schedules. We can for next year. I talked about the Stanford game with our soccer team. I think University of Hawaii will be our first home basketball game, Division I. So we start all 22 sports at the Division I level in the fall. There's no restrictions on marketing, and so we'll build the best schedules that we can get. We cannot participate in NCAA championships for 4 years or until the fifth year. But we can participate -- compete for Western Athletic Conference championships. We can compete BNE, NIT in basketball. And so there is a tremendous amount to compete for and a tremendous amount to leverage. It's just the more you think about athletics and universities from a business standpoint, you either want to beat Division I and get all the press and coverage and PR that results from that or you want to be Division III and that gives scholarships. It doesn't make much sense to spend a lot of money on scholarships to be at the Division II and NEI level because other than us, unfortunately, nobody cares.

I'm just curious why not being able to participate in NCAA Championships for -- late in the period. What's the thought process behind that?

They want you to pay your dues, and they want to make sure you're capable. And so they make you pay your dues literally, and figuratively, they make you pay your dues and then they make you prove that you're capable of executing. And very honestly, it's just a way for those conferences to get dues and not have to worry about one of those things that we don't think necessarily makes sense. But those are the rules, and so it applies to everybody, not just us. It applies to everybody that becomes Division I.

Okay, that helps. And then I heard your comments, Dan, on stock based comp. Did you mention anything about G&A for 2013?

I did, that it would be up, let me make sure I get the right number for you, 20 basis points year-over-year.

Your next question comes from the line of Trace Urdan, Wells Fargo.

Two things. So in December, there was a write-up in the Arizona Republic on your exploration of additional campuses, and in that piece, they made mention that you're actually contemplating perhaps going outside of the state. I think they mentioned maybe Nevada and New Mexico. So I wondered if you can comment on that. And then the second question I have was RN to BSN has been such an important driver for you guys, but it strikes me that at some point, we might start to deplete the number of RNs out there that can participate in that program online and I wonder if you could comment on sort of what sort of a tail you feel like that market has for you.

That's a significant tail that we don't see any insight there in the short term. More and more states are passing rules around the number of BSN nurses that have to be at a hospital. And there's huge encouragement there. And in fact, we just signed an agreement, beating out Arizona State and Chamberlain for a new pre-licensure program in the West Valley, which will give us even more exposure in the banner healthcare to get more RN to BSN students. So we feel good about that. Albuquerque and Las Vegas, they're both very interested. In fact, large contingents from both of those places came out and visited. And they're going to go back and they're going to make a number of proposals to us because they really want a private Christian university in both of those places. It's remarkable how similar those 2 places are to Arizona, to the Valley. In Las Vegas, there's one major player. It's UNLV and there's not much else in terms of traditional university offerings, and the same thing is true for Albuquerque. It's UNM. So I don't now that we're going to move on those in the short run, but there's a possibility that we will be moving on those in the long run.

Operator, we'll take one more call because we're past time. So we'll take one more.

Your final question comes from the line of Brandon Dobell, William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Sneaking one last one in here. Guys, any comments or color around what you have planned hiring-wise for enrollment counselors and faculty in the next 12 or 18 months, I guess? And then kind of a follow-up would be any efforts around growing the certificate or kind of continuing ed level program, especially kind of between bachelors and masters in the education or the health care space?

Enrollment counselors are going to be very flat in the first half of the year. We might uptick just a little bit at the end of the year. And so that's for enrollment counselors online. On ground, we're about where we need to be for the entire year. We won't uptick much there at all. And then the other question was on the faculty, full-time faculty. Yes, we're going to go from 50% to 70% in the next 2 years on ground. Online, we have a plan to keep growing that out. And we're doing it methodically. We're doing it in classes where we believe we can get the most gain. Where it will end, I'm not sure. Do I think it's going to be over 50%, yes I do. In classes like graduate-level statistics, and we're teaching more graduate students all the time, those are classes where you're going to get a big uptick in retention. As you know, our whole thing around full-time faculty online is increasing the quality of instruction students get, making it more consistent but also building a faculty culture. It's counterintuitive, but our full-time online faculty all work on our campus and they all work in the same area. And so we're really getting real-time improvements from a curriculum and instruction standpoint on the fly. We're building a faculty culture that you could never get with people dispersed all over the country in their homes. And so we're really getting 2 things that we think in the long run will build the academic brand of the institution and build graduation rates. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: And then to follow-up around kind of the certificate or continuing ed programs in education or health care, kind of between the bachelors and masters level degree area, any kind of bigger picture opportunity there? Or is it just going to take in students as they come?

We're doing some things in education. We're doing continuing ed things in education where we see certificate programs where there are things that are of immediate need, the school districts have. We're doing some things in nursing. But we don't have that as a major part of our growth strategy at all. We're trying to meet needs, especially in education and health care where hospitals and school districts have them. But it's not becoming a major part of our growth plan. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Okay, I appreciate it.

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

This concludes today's conference call. You may now disconnect.