Grand Canyon Education, Inc. (LOPE) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings conference call for Grand Canyon Education. [Operator Instructions] I would now like to turn the conference over to Brian Roberts, General Counsel. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining us today on this conference call to discuss Grand Canyon's 2013 second 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 addressed in GCU's SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31, 2012, our quarterly reports on Form 10-Q and our current report on Form 8-K. We recommend that all investors thoroughly review these reports before taking a financial position in GCU, and we do not undertake any obligation to update anyone with regard to forward-looking statements made during this conference call. And with that, I'll turn the call over to Brian.

Good afternoon. Thank you for joining Grand Canyon University's Second Quarter Fiscal Year 2013 Conference Call. In the second quarter of 2013, enrollments grew by 15.2% and revenues by 18.6%. Pre-tax margins are at 22%, and new enrollments were up in the high-single digits year-over-year. We had another very successful quarter, and I want to thank our faculty and staff for their continued high level of commitment to our students. Those students and families continue to choose GCU because of the strong, caring community; the faculty's commitment to excellent teaching; the small, intimate classroom setting; the tremendous service levels of our various counseling teams; the very low tuition rates; and a dry campus with extremely good crime statistics. I want to give you a few updates on our traditional campus. In the fall of 2012, we had approximately 6,500 students, and we'll begin the fall 2013 semester with approximately 8,500 students. The average incoming GPAs of our roughly 4,000 new students will be around 3.5. 50% of the students will be studying in the Sciences. We estimate our retention rate from the spring to fall semester will be 87%. The graduation rate of traditional students, because of the very strong retention rates of the classes of 2010, '11 and '12, is going to be very strong. More than 70% of our traditional students are from Arizona. The word is spreading about the strong, caring culture; the attention to individual needs of students; and the small class sizes. We are planning for over 5,000 new traditional students for the fall of 2014, which will bring total enrollment to approximately 10,500. New land is being acquired, and in 2013 we are adding 2 residence halls; a general-use classroom building; a major, new turf practice field for our soccer, lacrosse and intramural programs; a greatly expanded dining facility; and a brand-new, 3-story, state-of-the-art library. For 2014, we will be adding a new apartment-style residence hall to house 1,000 students and will begin construction on a new engineering and technology building. Our campus will be alive and vibrant in just a few weeks. In addition to classes beginning, there will be chapel services with 3,000 students attending, 5 major theater productions, sold-out concerts and frequent guest speakers. And of course, Division I athletics. As most of you know, we met all NCAA Division I requirements. We're invited to join the Western Athletic Conference and accepted and became official on July 1. Our schedules for our 22 athletic programs are fully built out, and our students, student athletes and alumni are very excited. I want to thank our athletic administration, coaches and student athletes for all the work they've put in to make this happen. I also want to thank the Western Athletic Conference for their support. At a time when many universities are experiencing serious NCAA rule violations, I am proud to say GCU has been a member of the NCAA Division II since 1991 without a single major violation. From a new academic program perspective, we were just approved by HLC to offer a new nurse practitioner doctoral degree. This further solidifies the reputation of our very prestigious nursing program, a program which has the highest NCLEX pass rates in the state. We are planning to offer new technology programs in 2014 and new engineering programs in 2015. These programs will be offered mainly on our traditional campuses. This has already been an exciting day. We had a press conference this morning attended by over 400 people, with media and many different leadership groups attending, including mayors and leaders from the East Valley businesses, health care corporations, churches and schools to announce the location of a new East Valley campus, which will officially open in the fall of 2015. This campus will serve as the anchor tenant of a beautiful, new, master-planned community called Eastmark, which is being designed by DMB, one of the most prolific builders of master-planned communities in the Southwest. There are approximately 1.2 million East Valley residents that live within a 20-minute drive of the campus. It will also serve students from around the state of Arizona and the greater Southwest. The community will have 2 high-end charter schools in addition to GCU, making it a unique community centered on innovation and education. We expect to teach eventually up to 10,000 students in this community. Turning to our online campus. We finished the quarter with just under 47,800 students. Approximately 43% of our working adult students are studying at the graduate level. We plan to grow this campus 6% to 8% per year and continue to focus on high-quality students. We are currently developing 20 new master's degree programs which will increase our graduate students as a percent of our overall student body. Working adults continue to choose GCU because of the strong and caring community. We are aggressively adding full-time faculty to teach these students and are building a strong academic culture as a result. The students are really attracted to the full-time faculty, small class size, the interactive and collaborative intellectual environment and the highly service-oriented counseling teams. By college, our College of Nursing and Health Sciences students produced the highest retention rates, and they went from 27.1% of our student body last year to 29.7% this year. This year, our College of Education students, who also produced high retention rates, dropped from 43.2% to 41% of the total students, but the raw number of those students went up again. College of Liberal Arts students decreased slightly to 15.4% of our working adult student body from 15.5%. College of Business students decreased from 14.2% to 14% of the total. We finished rolling out our own LoudCloud learning system, which provides ease-of-use and functionality that exceeds, we believe, any system in the market. Like most of our traditional students who visit campus before actually starting, many working adult students are now visiting campus to get better acquainted with the University and make a decision to start their program. On these visits, they are able to meet with deans and faculty in the college they will join. These highly personal and student-centered initiatives resonate well with working adult students. We are also excited about our partnership that will begin in September with the Alhambra High School, a public school directly across the street from us on Camelback. We are opening a learning lounge on our campus that will be available to Alhambra students from 3:00 to 8:00 each evening. We are training some of our brightest students to offer one-on-one tutorial help to Alhambra students in critical high school classes. We are paying our students to provide this service, but it is free to Alhambra students and their families. This is one of a number of initiatives designed to lift the academic performance of Alhambra High School students and improve the rating of the high school. Our students are very excited about this project and the many projects that our students, faculty and staff are involved in to support the local community. Now turning to the results of operations. As with any business, we stay focused on the customer, or in our case, the student. The results usually take care of themselves. Net revenues were $141.5 million in the second quarter of 2013, an increase of $22.2 million or 18.6% from the $119.3 million in the prior year period. Operating margins for second quarter of 2013 was 22.3% compared to 21.3% for the same period in 2012. Net income was $19.1 million for the second quarter of 2013 compared to $15.6 million in the prior year period. After-tax margin was 13.5% compared to 13.1% for the same period in 2012. It should be noted that the difference between the 22.3% operating margin before income tax is in the after-tax margin of 13.5%. This is primarily 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 significant net plus to the taxpayer. Instructional costs and services grew from $53.4 million in the second quarter of 2012 to $61.7 million in the second quarter of 2013, an increase of $8.3 million, or 15.6%. This increase is primarily due to the increase in staff and other services to support our students. As a percent of revenue, IC&S decreased 1.2% to 43.6% from 44.8%. We are extremely pleased that bad debt expense as a percent of revenue remained fairly consistent, increasing slightly to 3.2% from 3.1% in the prior year quarter, given the very difficult prior year comp. Employee and faculty compensation-related expenses, including share-based compensation, decreased 50 basis points between years due to our ability to leverage our administrative personnel across an increasing revenue base, partially offset by increased use of full-time faculty and higher employee benefit cost between periods. Instructional supplies and other miscellaneous costs decreased 100 basis points. Depreciation and amortization expense increased 20 basis points as last fall, we placed into service 2 additional residence halls, an Arts and Science classroom building and a parking garage which were needed due to our traditional ground student growth. Admission advisory and related expenses as a percent of net revenue decreased 60 basis points from 17.1% in quarter 2 of 2012 to 16.5% in quarter 2 of 2013. This decrease was primarily due to our ability to leverage our admissions advisory personnel across an increasing revenue base, which was partially offset by increased benefit cost between periods. Advertising as a percent of net revenue increased 70 basis points from 9.6% in Quarter 2 to 10.3% in Quarter 2 2013, primarily due to increased brand advertising. Marketing and promotional expense as a percent of net revenue increased 20 basis points from 0.8% in Quarter 2 of 2012 to 1% in Quarter 2 of 2013. General and administrative cost as a percentage of revenue decreased from 6.5% in Quarter 2 2012 to 6.3% in Quarter 2 2013, primarily due to employee compensation and related expenses, including share-based compensation decreasing 10 basis points from the prior year. Interest expense increased $0.4 million over Quarter 2 of 2012 as a result of the expansion of our credit facility in December of 2012. As a result of the above, net income increased from $15.6 million in the second quarter of 2012 to $19.1 million in the second quarter of 2013. With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2013 second quarter, talk about changes in the income statement, balance sheet and other items.

Thanks, Brian. Scholarships as a percentage of revenue decreased from 14.5% in Q2 2012 to 13.1% in Q2 2013, due primarily to a decrease in scholarships for online students between years. As Brian mentioned earlier, although bad debt expense as a percentage of revenue increased slightly to 3.2% in Q2 2013 as compared to 3.1% in Q2 2012, this result was significantly better than we anticipated as in Q2 2012, we collected a higher-than-normal amount of previously written-off receivables. Our effective tax rate for the second quarter of 2013 was 38.7% as compared to 38.5% in the second quarter of 2012. Our effective tax rates in both periods were lower than expected due to certain non-recurring tax items. We still anticipate our effective tax rate for the second half of 2013 will be 40.5%. We repurchased 102,500 shares of our common stock during the second quarter of 2013 at a cost of $2.4 million and have $28.3 million available under our share repurchase authorization as of June 30, 2013. Turning to the balance sheet and cash flows, total cash unrestricted and restricted and short-term investments at June 30, 2013 was $190.8 million. Accounts receivable, net of the allowance for doubtful accounts, is $8.6 million at June 30, 2013, which represents 5.7 day sales outstanding compared to $8.4 million, or 6.7 day sales outstanding, at the end of the second quarter of 2012. CapEx in the second quarter of 2013, excluding the development of the off-site administrative office, was approximately $23.3 million, or 16.5% of net revenue. CapEx is somewhat seasonal as much of our construction needed to be completed before our fall starts for our ground students is done during the spring and summer months. Thus, CapEx as a percentage of revenue is generally higher in the second and third quarters and lower in the first and fourth quarters. We anticipate that 2013 CapEx will be down slightly to approximately $80 million, excluding the development costs associated with the off-site administrative office. As it relates to the off-site administrative office, during the first quarter of 2013, we entered into an agreement to sell this property to third parties, subject to that party securing outside financing. The buyer was able to secure this financing but at a cost that was higher than anticipated and requested us to absorb most of this additional cost. As a result, the 2 parties agreed to terminate the agreement during the second quarter of 2013. Our reclassification from NCAA Division II to NCAA Division I required us to pay approximately $1.5 million to the NCAA. This payment was made in June 2013. This payment is being amortized over the 4-year reclassification period. I'd like to touch on one regulatory item. During the second quarter of 2013, the university recorded an increase in its estimated litigation and regulatory reserves of $2.5 million. This increase is related to the open U.S. Department of Education program review. As you will recall, in 2010, the Department of Education initiated a program review of the university, covering the 2008-2009 and 2009-2010 award years. The preliminary program review report identified 5 findings, 2 of which were individual student-specific items, while the other 3 findings related incentive comp, the question of whether one of the university's programs was a Title IV-eligible program and whether the university had adequate procedures related to students who unofficially withdrew from the university. As it relates to the incentive compensation issue, the university still believes that the Department has not set forth any definitive finding and that the compensation plan that ensued, both as designed and as applied, did not violate applicable law. As it relates to the eligible program issue, the university still believes that the program cited by the Department was an eligible program under the applicable law and regulations. As it relates to the unofficial withdrawal issue, this finding relates completely to a period before the university converted from a term-based financial aid system to a non-term, borrower-based financial aid system. During the second quarter of 2013, the university completed the extensive file review requested by the Department. The increase in the reserve primarily relates to the fact that we were not able to demonstrate, in all cases, that our faculty followed our established grading policy as it relates to students that stopped attending prior to the end of the semester but not -- did not formally withdraw. In an effort to resolve this issue and conclude the program review, which is now entering its fourth year, and even though the Department of Ed has not issued its final determination on the program review, the university has made an offer to the Department of Education, pursuant to which it would assume that each of the students in question should have been unofficially withdrawn even though an unofficial withdrawal may not have been warranted in each individual case and to return the funds required by the Title IV regulations with respect to those students based on that assumption. Although the university makes a return of Title IV funds, the applicable student is obligated to repay the university for the amounts returned. If the above offer is accepted, the university will not seek reimbursement from these students once the returns are made. At this point, the Department of Ed has not yet responded to the university's offer. Excluding this increased reserve and the $3 million in estimated litigation and regulatory reserves recorded in the second quarter of 2012, operating margin and net income would have been 24.1% and $20.6 million in the second quarter of 2013 and 23.8% and $17.4 million in the second quarter of 2012. Last, I would like to discuss our second half 2013 guidance. Our revenue guidance continues to assume no net tuition increase for our ground campus or our online campus. We saw revenue per student growth in the first and second quarters of 2013, primarily due to retention gains we have experienced over the past couple of quarters, last year's working adult tuition price increase and the increase in ground traditional students as a percentage of the total. The continuing retention gains has allowed us to increase our revenue guidance for the third quarter of 2013. As a reminder, though, we do not anticipate revenue per student will -- we do 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, and the fact that we are anticipating that the year-over-year retention gains we have seen over the past 18 months will start to level off in the second half of 2013. Q4, we should see a small gain in revenue per student. We have raised our margin guidance for the third quarter of 2013 as we anticipate bad debt expense and certain other costs will be slightly lower than previously expected. However, we will be investing more than previously budgeted on new program development and full-time faculty. We have also provided updated estimates of diluted weighted average shares outstanding by quarter. Although we might repurchase shares during 2013, these estimates do not assume significant repurchases. They do assume increased dilution from stock options and restricted stock awards granted. The slight increase in our estimated shares outstanding is due to the effects of the treasury stock method caused by an increase in our stock price. I will now turn the call over to the moderator so that we can answer questions.

[Operator Instructions] Your first question comes from the line of Bob Craig with Stifel. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: I was wondering if you could run down what the cost associated with that is going to be, and the timing of those expenses?

We will begin building out there in 2014, probably in the spring of 2014. And we'll probably complete the first phase of the campus in around July -- June or July of 2015, and we'll be prepared at that point for opening the ground campus in September. The guess -- the estimate at this point is probably about $15 million of CapEx expense, which would be the initial classroom buildings, laboratories, student union, library, some athletic fields. And then it'll go from there. 2016, '17, '18, we'll probably spend in the vicinity of another $40 million or so per year. The total investment will be about $150 million to get the 100-acre campus up to speed, where it can house 7,000 to 8,000 students. And then we have an option to purchase an additional 60 acres to build it out from there. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So this is a grassroots facility that you're building from the ground up then, I take?

Yes, it is. It's going to look very, very similar to the facility that we have here in West Phoenix. The look and feel of the architecture, the look and feel of the campus will be very similar. Everything is going to be brand new. We are going to move our administrative center, which currently houses about 1,000 employees in Tempe. We're going to move that out there and it will be on that campus as well. So it's going to be a very, very interesting, new and very unique community. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: And, Brian, are you still looking for another location? You mentioned Tucson before. Or is this one going to keep you busy for a while?

Tucson is very, very interested, as is Albuquerque and Las Vegas. And so once we get this kind of off and running, then we will reengage with discussions with those 3 places. I don't really know at this point where that's going to go, but they have very strong interest. They stay in contact with us and announce new properties that they've uncovered. And so we'll begin discussions with them again once we get this underway. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And last one from me and I'll turn it over. How do you expect total enrollment growth to slow down as much as you're estimating going from 15% to 11% in the third quarter despite the ground campus being a greater contributor to the total, and that's growing faster? Maybe you can reconcile that for us?

I mean, we're being somewhat conservative there, but we keep pushing the online campus to a 6% or 7% enrollment growth rate. We're exceeding that currently. But even as we exceed that, we keep pushing more and more students into graduate school. And so we have been exceeding what we've been saying. We might exceed just a little bit, but it really -- the reason we're doing this is that long term, our online campus is going to be primarily a graduate school, and our traditional ground campus will be primarily an undergraduate school. That is the ultimate goal, and that's why we're kind of purposely moving it down to -- and again, the question is could we grow faster than that right now? We absolutely could grow faster than that right now but we're -- long term, we've got a pretty definitive picture in our minds of what we want this to look like.

The other thing I would just add is that our retention gains, as I mentioned in my prepared remarks, have been really significant year-over-year gains for about the last 18 months. And at some point, we believe that though -- you'll still probably see some retention gains, but you won't see the year-over-year retention gains. And so, again, when you're talking about year-over-year growth rates, we've really gotten a lot of tailwind from those retention gains that we think will start to level off now that we're in kind of the 90% level on a -- from a sequential quarter basis from a retention standpoint.

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

It's just a follow-up on that. Could you talk about what you saw in terms of new student start trends in online in the second quarter?

They were high-single digits, and so a little bit above what we were predicting, but the ratios of the students that are coming in are the correct ratios, so we are okay with it.

And then on marketing, could you talk about how student acquisition costs have been trending?

Well, they're going down because the advertising expense is fairly steady and consistent, and enrollment counts or costs have gone down some. So we -- that's a positive trend, from our perspective.

Great. And then just last question about Division I status. I know there's been a good amount of press around it recently. Could you -- is there anything that's worse reporting or any delays that you think you might face, given some of the opposition?

No, not at all. We're invited by the Western Athletic Conference. In fact, we just went through an orientation period today. We were invited. We accepted. It became official on July 1, and so now we've begin the process. Our schedules are all fully built out and we start in a couple of weeks here. So there was a little bit -- there has been some discussion about this, driven mainly by Arizona State University and we think in response to the competitive environment that exists now for students in this marketplace. But that discussion aside, no, we are firmly in a good position, and we start in a couple of weeks.

Your next question comes from the line of Jeff Volshteyn with JPMorgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Brian or Dan, are there any notable changes in the mix of lead sources, changes in conversion rates perhaps by geography or by type of students?

Not as opposed to what we've been reporting. The big growth for the university right now is in Arizona, with both traditional and non-traditional students. It is in California, New Mexico, Nevada and starting to grow more rapidly in Colorado. So it's very much a regional approach and more and more of both our ground and -- our ground traditional and online students are from that area. That's where we're seeing the biggest or best return for every dime and dollar spent. We're not seeing any serious decline in outlying areas, but we are seeing the improvement in the Southwest, especially Arizona. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Okay. And then on CapEx for 2014, outside of the new campus, what should we think about when we think about CapEx?

A number probably that's a little lower than what we spent this year, but not significantly lower. We're going to build -- we're going to start actually in 2013, and it'll be built -- most of it in 2014, 1,000-student residential apartment-type building. We are going to be building an additional classroom, building at some point probably in '14, probably the later part of '14 for this campus to get us to build out. And then we'll obviously be spending, like we have been, a significant amount of money in IT-related costs. So I think it'll be something similar to what we're going to spend in '13, but probably slightly lower, excluding the new campus.

Your next question comes from Peter Appert with Piper Jaffray.

So, Brian, the profitability improvement has been pretty impressive, particularly pre some of these non-recurring items you've mentioned. Have you rethought at all your margin targets for the next couple of years?

No. We're still -- we value our tuition. And the higher quality our student body gets, the higher the retention and graduation gets, and our classes of '10, '11 and '12 are tracking really well. The more we can leverage the new campus and additional students across a similar infrastructure, we were really happy to be able to freeze tuition for our online students this year. We froze tuition again for our ground students. We increased scholarships. And so I think 24% is a good number, and I think we can -- if it sneaks a little bit above that, it might, but we are really focused on keeping -- holding tuition steady or lowering it.

Okay, fair enough. And then, Brian, how do we think about the operating costs associated with opening the new campus? I'm assuming you get to capitalize the costs starting out till it opens. Correct? So there'd be no impact from a P&L standpoint for a couple of years? Is that right?

No. We would have to expense general costs such as salaries, et cetera. But I don't think you'll see anything significant until the summer, maybe the spring of 2015. As Brian talked about, we might open it for -- with some level of students in 2014, but I don't think that will be a material cost. You'll see some costs sneak into the spring and summer of '15 before the campus opens, but we don't believe that, in 2015, we will run that campus a loss. So we think we'll be breakeven to profitable from the beginning.

No impact then on margin in '14 likely from this?

Yes. None in '14 and maybe a little bit in '15.

Your next question comes from Adrienne Colby with Deutsche Bank.

I was wondering if you could talk a little bit more about the new East Valley location, if there are community colleges that are nearby and what your current enrollment is like from those schools?

Well -- no. It's very exciting. it's very exciting because when you look at what we're doing here on the left side from a traditional student perspective, where -- the demography is not nearly as advantageous as it is on the east side, the socioeconomic status of the typical residence of the east side is higher. The average amount of education they've achieved is higher. And so our success here is -- I think predicts an even greater amount of success there, and there's just an absence of institutions out there to service them. Somebody asked me today, "Well, you're moving into Arizona State's territory out there." Well, It's just uncommon to have an environment like this where there's so little. I mean, UCLA sits right across the way from UFC and Pepperdine and USC, and they all coexist. And so this is going to be the same thing. We lose hundreds and hundreds of students every single year in Arizona that leave the state to go to private Christian schools. And what we're going to do now is keep those students in the state, keep them closer to home, allow them to save money, take out less debt, stay involved in their local communities, that kind of thing. And so that part of it is very exciting for us. The Science programs are going to have a huge appeal because there's lot of health care facilities out there, so they have need of what we offer on that -- from that standpoint. The community colleges are strong. Mesa Community College, Chandler-Gilbert Community College, those are strong community colleges. They'll be good feeders. And we are establishing really good relationships with the high schools, both the public schools and the Christian schools. And so we're excited about the possibility -- about the possibilities, and we've raised admission standards. You've got to have a 3.0 GPA to get into the Grand Canyon now, and our average incoming GPA is growing higher. So it all points in a positive direction, from an East Valley standpoint.

Great. And I was wondering if you could talk a little bit about your current marketing plans. Are you still advertising in Southern California? We have been hearing that schools like Azusa Pacific and Northern Arizona University have been revamping their online programs and also their recruiting efforts. University of California just talked recently about moving ahead with more online programs. Just wondering what trends or changes you're seeing from a competitive standpoint from that California and the Southwest market.

I mean, I think everybody understands that the California system is under a lot of stress and that there are literally thousands and thousands of students that are good students that are looking for a place to go to school and they can't find one. We are not seeing any negative impact in terms of a response to our advertising campaigns because there's just so much need. When students and families find out what our tuition rates are, they are literally -- they are flabbergasted. And so we grew a lot this year from a traditional student perspective. But next year, I think it's going to grow a lot -- it's going to get much bigger. And so, no, we're not backing off from that effort at all because the need exists.

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

I may have missed this in your prepared remarks, but the enrollment numbers were a bit higher than guidance. Are there any specific programs or areas that drove that outperformance?

No, nothing specific. I'm glad you actually asked that, Jeff, because I did want to mention. We did probably -- we had a little bit of a timing difference on graduates than what we expected. We expected those graduates to occur a little earlier than when they did, and so they ended up counting in our enrollment count number when we hadn't expected that they would. And so I think that was the only thing that was a little surprising, I think. As Brian talked, the new start growth and the retention rates were slightly higher than what we had anticipated, so that helped as well. But that graduation point was one that I meant to make, so I'm glad you asked.

No, I appreciate that. In order of magnitude of that graduation impact, roughly how many students?

About 1,000.

1,000? Okay. That's pretty sizable. All right. Thank you for pointing that out. Just a follow-up from a previous question about the move to Division I. Are you going to see -- or have you seen an increase in scholarships, specifically because of that, to attract some better athletes?

No, that's -- we were fully scholarship at a Division II level, and we haven't the increased the number of sports. We're still going to participate in 22 sports. And so that part of -- there's not a significant increase from a scholarship standpoint. There really isn't a significant increase from a facility perspective. We've invested in most of the facilities, and there's not really a significant increase from a travel perspective. There'll be some increase from a travel perspective, but we had 22 -- we prepared this time. We had -- tell them about the travel.

Yes. Travel costs should be about the same, too. Because if you recall, our PacWest conference, 1/2 of the teams were in Hawaii. And so it'll probably be similar. And I think most investors know this, but just full disclosure because there's been some confusion out there, but we do anticipate losing money in athletics. We don't anticipate making any money. We don't have the same TV contract rights that conferences like the Pac-12 do. So that is -- obviously, factored into our guidance is the loss from an athletic perspective.

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

The increases in persistence, are we looking at the tail from the move to borrower-based lending? Is that what's going on there? Or what do you attribute that strength to and the subsequent short of ebbing of that strength?

It's student body mix. It's the student body mix. As the ground students become -- as a percent of our overall students, a greater number, and as the graduate students as a percent of all students become a greater number, and as the RN to BSN students as a percent of all students becomes a greater number, the retention levels go up across the entire student body. And so that's what's caused it in the last 2 years. And so is it -- it's at a tail, I would say. It's nearing an end from an online standpoint, but we'll keep getting better just because our ground students, as a percent of the total, keep getting bigger.

It's ending from an online standpoint because the mix in the RN to BSN is starting to slow down?

A little bit.

The percentage of the total?

A little bit. Yes, although there is still room there. But yes, I would say a little bit because of that.

I think my biggest concern is, when you look at the sequential quarter retention rate, we're now approaching 90%. The question -- and where -- when we started, we were in the low-80s. Four years ago, we were in the low-80s. Now we're approaching 90%. You just wonder where that can go. I mean, these are working adult students that things cough up in their lives, and so could we get into the 91%, 92% potentially? But you won't see the 200, 300 basis point year-over-year growth that you've seen over the last couple of years.

Got it. Okay. And then I wanted to ask about marketing because it looked as though the typical seasonal decline that we see this quarter didn't happen in quite the same way. And I know you're not responsible for our models, but I wondered if there was anything that went into marketing expense -- or advertising expense, I should say, in the quarter that was more than what you had anticipated?

Yes. It's the branded television advertising. And you know how important it is that we change people's view of who we are as compared to the other for-profit institutions. We've just got to get the message out there about this growing traditional campus and its impact on the brand of the institution. And other than the funding model, which is not a tax model or not a donation model, other than that, this is a fully built-out Liberal Arts institution in the truest sense of the word. And so we didn't back off of that branded advertising because that's really starting to pay dividends for us.

Okay, fair enough. And then last question. I just wondered, it looks as though the operating cash flow trend is not as robust as the net income trend. It looks like maybe for the first 6 months we saw sort of a step-up in accounts receivable. I wondered if there's anything going on there that's worth mentioning.

No. Actually, our DSO has been going down. The biggest thing, though, that you'll notice -- if you pull it apart in pieces, is there was a really significant year-over-year change in income taxes between the payable and the receivable. Just timing, payments and estimates -- estimated payments that we make. I think there was something, I can't recall exactly, that happened in the first 6 months of last year that flipped it into a pretty large payable versus a receivable. So that, and then you've got just timing of accrued expenses, et cetera. And so it's really just working capital changes. It's nothing else than that.

Your next question comes from Tim Connor with William Blair.

I think you had a number of potential spots for the East Valley campus. It sounds like you've got a pretty unique setup with the one you picked. But what kinds of tax and infrastructure benefits are you going to receive on that? And then does that potentially move the needle on either CapEx or the tax line?

I wish I could tell you they were huge incentives, but there weren't any incentives other than we got a good deal on land because we had come to a meeting in the minds in terms of us being an anchor tenant and how mutually beneficial this could be for both us and our new partners, DMB, and then the building out of that community. This is really, really exciting for us for so many reasons. We're going to build our -- move our 100,000 square-foot administrative center out there and move 1,000 employees out there. And a lot of those are going to want to take advantage of the family and friends' benefit of buying a new house and become a part of that community. We're going to use this to attract really good faculty and staff. People will be able to buy a home and be within walking distance of their work, within walking distance of high-end charter schools and have a chance to join a community that could make life very, very convenient. So it's always a little bit of a risk because it's a master-planned community and the housing has just begun. But these guys have such a strong track record of making these things work. And I think with us as an anchored tenant, it's going to be a very, very attractive and unique place. And so worth a little bit of the risk.

Other thing I would mention is Arizona has moved very aggressively over the last few years, where their incentives are really tied to job growth. And so we will be getting those incentives that are available to all companies here in Arizona that grow from a job perspective. And so -- and we've been eligible for those incentives here in the West Valley as we've grown. So there are incentives, but they're tied to job growth, and there are incentives that we've already been eligible for here on this campus.

Okay. And just a couple of more follow-ups. How big is the community going to be when it's fully ramped up? And then what is your relationship with the charter schools that you mentioned were going to be part of this development as well?

12,000 homes, 70,000 people in the community. It's roughly 5 square miles. And then the relationship -- there is no relationship at this point with the charter schools, but I think there will be a relationship. The most important thing, though, it provides high-end educational opportunities for the children of our faculty and staff.

Your next question comes from the line of Nick Nikitas with Baird. Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division: Just looking at the decision to enroll 5,000 new students in the fall of 2014. Is the plan then to enroll 5,000 new each year? And then with that -- and also acquiring some new land, are you guys potentially changing the long-term targets for the main campus from that 12,000 undergrad and 3,000 grad student mark?

Yes. We've definitely changed the targets at the West Valley campus. We're now thinking between 15,000 and 20,000 students on this campus and we're acquiring the land to do that. There's just a huge demand for private Christian education at very low cost. So, yes, the 5,000 news is based on next year, and then it would be a minimum of that for the next couple of years. I don't know for sure whether we'll go up from there, but we won't go down from there. Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then you mentioned the change in marketing strategy near term, going to TV a little bit more. At what point do you expect to maybe get some leverage on the advertising expense? We kind of think you get halo effects from the ground campus, creating a nice kind of branding effect. And are you not required as much direct advertising expense? I guess that could be more of a long term and near term. And do you expect to keep that in an elevated level?

That's very -- it's a great question. It's a million-dollar question. It's very difficult because really, nobody's done this. And so I agree with you 100%. We expect to see leverage over time. But at this point, we're not building into the budget. We're keeping it at a consistent spend level. But if, over time, we're able to accomplish our goals with less spend, obviously, we'll do it. And then we'll lower tuition.

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

Thank you. This concludes today's conference. You may now disconnect.