Grand Canyon Education, Inc. (LOPE) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Grand Canyon Education Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to hand the conference over to Mr. Brian Roberts, General Counsel. Sir, 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 third quarter results. Speaking on today's call is the 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; quarterly reports on Form 10-Q; and our current reports on Form 8-K. We recommend that all investors thoroughly review these reports before taking a financial position in GCU, and we do not undertake any obligation to update anyone with regard to forward-looking statements made during this conference call. And with that, I'll turn the call over to Brian.

Thank you. Good afternoon, and thank you for joining Grand Canyon University's Third Quarter Fiscal Year 2013 Conference Call. In the third quarter of 2013, enrollments grew by 14.7% and revenues by 14.1%. New enrollments grew in the low double digits, and pretax margins are at 24.5%. We had another successful quarter, and I want to thank our faculty and staff for their commitment to building a premier private Christian university in the Southwest. Before I give you updates on the traditional campus, I want to talk about how we are going to classify students going forward. We will discuss 2 types of students. We're going to define traditional campus students as those who are traditional aged and attending the campus. That includes all students attending our campus in Phoenix, and then nursing students who are attending off-site campuses. The student count for that group is approximately 8,200 this year. We also have approximately 2,000 working adult students that generally attend classes on the ground in the evening, including over 1,000 that attend all of their ground campus -- ground courses at our Phoenix campus. These working adult students are classified as professional studies students. However, their characteristics are identical to working adult students who attend online. I want to give you a few updates on our traditional campus. We started the fall with approximately 8,200 students. Approximately 4,000 are new students to the university. The average incoming GPAs of the fully admitted new students is approximately 3.4. Just over 50% of the new students are studying in the very strong science programs at the University. In order to serve this growing student body, we have added 2 new residence halls, 3 new restaurants, a greatly expanded central dining facility, an expanded student union, a new intramural field and a new library. The school year is off to a very strong start. Participation levels on campus are in an all-time high. Classrooms and residence halls are at capacity. Chapel services have 3,500 students in attendance. Soccer and volleyball matches are attracting over 1,000 fans. Almost all of this year's theater performances have been sold out. Our first Division I basketball game is this Friday, and we are expecting to sell out. We had some very high-profile speakers at the Arena in the first half of the semester, and there are some exacting concerts and special speakers scheduled for the second half of the semester. For the 2014-'15 school year, we are targeting over 5,000 new students, which would bring the total student body to somewhere between 10,000 and 10,500. To accommodate this growth, we are adding a new 4-story classroom building, a 1,000-bed apartment-style residence hall, 3 new restaurants, and we are expanding the Arena to 7,200 seats. We are in the planning stages for the East Valley campus. We are on schedule open up in the fall of 2015 with approximately 2,500 students. And we'll eventually grow the campus to 10,000. When we open up the campus, there will be 2 80,000 square-feet classrooms and laboratory buildings, a large student union with multiple dining facilities and a new library. It will have a 65,000 square-foot recreation center that will accommodate the general student body, intramural sports, numerous club sports, as well as seat 4,500 students for chapel services and other events. The campus will also include additional outdoor athletic fields. In addition, there will be a 1,000-bed apartment-style residence hall. We anticipate that this buildout will support 5,000 students. We are adding 2 technology programs in the fall of 2014 and 2 engineering programs in the fall of 2015. These 4 new programs will be taught at both locations. Turning to our online campus. As most of you know, our plan is to grow this campus at 6% to 8% per year. Over time, our online campus will be primarily a graduate campus, with our traditional ground campus primarily an undergraduate campus. Currently, 43% of our working adult students are studying at the graduate level. These students are attracted to the full-time faculty, small class size, the interactive and collaborative intellectual environment and the highly service-oriented counseling teams. The highest quality students at the University are our doctoral students, all students studying in master's degree programs, our RN to BSN students and our traditional campus students. These students have high graduation rates, low bad debt expense and low default rate on student loans. These currently -- these students are 62% of our total student body and 68% of our new students in the third quarter. These represent increases of 400 basis points and 570 basis points, respectively. The growing number of high-quality students has had a tremendous impact on key metrics, including a reduction in our overall 2-year cohort default rate. Although the 2-year default rate for the period that ended September 30, 2013 is no longer going to be released by the Department of Education, based on information that we received from the lenders our 2-year default rate for this period is approximately 7%, which is down significantly from 12% in the prior year. One of the trends in higher education is that traditional students want to stay closer to their homes. This is true for working adult students as well. Our brand has grown in strength in Southwest, which is where the majority of our growth is. In the past 12 months, we have grown 27.8% in Arizona; 51.5% in California; 34.1% in Colorado; 41.3% in Nevada; and 45.8% in New Mexico. Now turning to the results of operations. Net revenues were $152.4 million in the third quarter of 2013, an increase of $18.8 million or 14.1% from the $133.6 million in the prior year period. Operating margin for the third quarter 2013 was 24.5% compared to 23.4% for the same period in 2012. Net income was $22.5 million for the third quarter of 2013 compared to $18.5 million in the prior year period. After-tax margin was 14.8% compared to 13.8% for the same period in 2012. It should be noted that the difference between the 24.5% operating margin before income taxes and the after-tax margin of 14.8% is primarily money that we pay in taxes that goes back to the taxpayers. Given our relatively low default rate and our relatively low Pell usage and the high tax amounts we pay, we're a significant net plus to the taxpayer on an annual basis. Instructional costs and services grew from $57.4 million in the third quarter of 2012 to $64.7 million in the third quarter of 2013, an increase of $7.3 million or 12.8%. 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 0.4% to 42.5% from 42.9%. We are extremely pleased that bad debt expense as a percent of revenue decreased to 3.5% from 4.2% in the prior year. Employee and faculty compensation and 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 increased 40 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. And in the fall of 2013, we added 2 additional dormitories and a new administrative building, which were needed due to our traditional ground student growth. Admissions and advisory and related expenses as a percentage of net revenue decreased 60 basis points from 16.7% in Q3 2012 to 16.1% in Q3 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 expenses as a percent of net revenue increased 50 basis points from 9.7% in Q3 of 2012 to 10.2% in Q3 of 2013, primarily due to increased brand advertising. Marketing and promotional expenses as a percent of net revenues stayed relatively flat over the period at 0.9% in both Q3 of 2012 and 2013. General and administrative costs as a percentage of revenue decreased from 6.4% in Q3 of 2012 to 5.9% in Q3 of 2013, primarily due to employee compensation-related expenses, including share-based compensation decreasing between years. Interest expense increased $0.4 million over Q3 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 $18.5 million in the third quarter of 2012 to $22.5 million in the third 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 third quarter, talk about changes in the income statement, balance sheet and other items.

Thanks, Brian. Scholarships as a percentage of revenue increased from 13.8% in Q3 2012 to 14.6% in Q3 2013, due to the growth in our ground traditional student enrollment between years. Online scholarships as a percentage of related revenue is down slightly year-over-year. Bad debt expense as a percentage of revenue decreased to 3.5% in Q3 2013 as compared to 4.2% in Q3 2012. This result was significantly better than we anticipated. Our effective tax rate for the third quarter of 2013 was 41.1% as compared to 40.5% in the third quarter of 2012. Our effective tax rate in the third quarter of 2013 was higher than anticipated, due primarily to nonrecurring tax items. We repurchased 15,400 shares of our common stock during the third quarter of 2013 at a cost of $0.5 million and have $27.8 million available under our share repurchase authorization as of September 30, 2013. Turning to the balance sheet and cash flows. Total cash, unrestricted and restricted, and short-term investments as of September 30, 2013, was $170.3 million. Accounts receivable, net of the allowance for doubtful accounts, is $8 million at September 30, 2013, which represents 5 day sales outstanding, compared to $8.9 million or 6.7 day sales outstanding at the end of the third quarter of 2012. CapEx in the third quarter 2013, excluding the development of the off-site administrative office, was approximately $21.2 million or 13.9% of net revenue. We still anticipate that 2013 CapEx will be approximately $80 million, excluding the development costs associated with the off-site administrative office. Earlier, Brian discussed our development plans at both the Phoenix campus and the future Mesa campus. Our current expectation is that CapEx will be approximately $125 million in 2014 and $150 million in 2015. These amounts are higher than what was previously planned, as we have decided to accelerate some of the construction and now plan to build residential housing on our Mesa campus. We believe our cash flows from operations will be sufficient to fund our CapEx needs during this period. We will continue to look at options to offset balance sheet -- to up [ph] balance sheet fixed assets, but historically, we have deemed the cost to do this is too high. One other quick comment on our CapEx spend. I often get questions from investors regarding our return on invested capital related to the campus buildout. We believe the ROIC on these projects is in the low- to mid-teens. I would like to touch on 2 regulatory items. As disclosed in our third quarter 10-Q that was filed today, on September 27, 2013, the University and the Department of Ed entered into an agreement that fully resolves the findings in the preliminary program review report, which closes the program review. Since April 2011, we have been certified to participate in the Title IV programs under a provisional program participation agreement. In accordance with the terms of the provisional certification, we were allowed to apply for recertification on a full basis by submitting a complete application by no later than September 30, 2013. In July 2013, we submitted our complete application for full certification. In October 28, 2013, the University received a new program participation agreement with full certification from the Department of Ed, which gives the University the ability to participate in the Title IV program through September 30, 2017. Last, I would like to discuss our fourth quarter guidance. We have raised our enrollment and revenue guidance as a result of our higher-than-anticipated enrollment. A large piece of the increase in the enrollment guidance is the result of nonresidential ground students exceeding our expectations. These students have lower revenues per student than both our online students and our residential students. This, and the fact that we have 1 less day of revenue in the fourth quarter of 2013, compared to the fourth quarter of 2012 for both our online and our ground traditional students, which equates to approximately $2 million, is why we are anticipating revenue per student to be down slightly year-over-year in the fourth quarter. We have raised our margin guidance as we anticipate bad debt expense and certain other costs will be slightly lower than previously expected. However, as we mentioned last quarter, we will be investing more than previously budgeted on new program development and full-time faculty. Our guidance assumes an effective tax rate of 40.5% for the fourth quarter, although it is likely that we will give a large contribution in lieu of state income taxes like we have done in the past. This will allow the effect of increasing G&A operating expenses and reducing income tax expense in the fourth quarter, although none of this is contemplated in our guidance. 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. I will now turn the call over to the moderator so that we can answer questions.

[Operator Instructions] Our first question comes from the line of Peter Appert from Piper Jaffray.

So Brian, you guys have achieved impressive margin leverage in the context of the enrollment growth you've been generating. You've cautioned us in the past that you want to sustain margins at current levels, yet you continue to exceed those. So what's your thinking about the appropriate level of margin on a go-forward basis at this point?

Yes. What we talked about is that if the margin goes up significantly, that we wanted to hold out the possibility that we would be able to lower tuition in key programs. We just haven't found the need to do that at this point. We've frozen room and board, tuition and fees on our ground campus for 4 years running now, and we're going to continue to hold the line on all of those levels. And then this year, we also hold -- held the line on online tuition. And so if the margin goes up 1% or 2% without us having to raise tuition and not feeling the need to lower tuition, then we'll let it go up 1 point or 2.

Right. And beyond Mesa and the east Phoenix campus, anything to report in terms further developments on physical expansion?

It continues to be a topic of discussion in the Tucson papers, and Las Vegas and Albuquerque would both like us to come. And -- but we told them we want to get the East Valley campus up and running and continue to talk to them. And maybe at some point 2 years from now, we would decide to move in that direction. But right now, we're just going to focus on building this campus out to 15,000, and build an East Valley campus, get that thing up and going, and then we'll look at those other cities at some point.

Got it. And then last thing, the -- in terms of the -- much discussion in the marketplace about the competitive dynamics in the online education market being more intense. What are you seeing in the marketplace?

Oh, I think that's definitely true, and we believe that to be true for 3 years now or maybe 4. And so we expect that to continue. We also expect to continue that people are going to go to school online, and they're going to do it at a school that's in their geography. That will increasingly be a trend. It's going to be more and more difficult to operate on a national basis, which is why we're happy with where our relatively low number is from an online student perspective. Growing 6% to 8% on that number is not too difficult for us to do. And it also can be accomplished between Texas and California in -- 40 million people in California and then with Texas being as large a state as that is, we think we have plenty of a population base to get our growth in that area and keep those students connected to our campus the best that we can.

And our next question comes from the line of Sara Gubins from Bank of America Merrill Lynch.

Could you give us some more detail on online starts in the quarter? I think you mentioned double digits overall?

Yes. It's above 10.

For online. So did it accelerate versus last quarter?

Yes.

Yes. And so yes, the answer to that is yes. We -- and it's in the right categories, too. And so it's good. It's -- I guess, yes, it is accelerated over the previous quarter, but the students are coming in the right categories, and so that's -- we're okay with that.

Actually, I want to -- hold on. Let me -- Sara, if you have another question, let me look for some other stuff, but go ahead.

Sure, okay. So the growth in the states that you mentioned is really very impressive. Could you maybe talk about what you're seeing in the rest of the country? Are there regions that are declining? I know that's not much of an area of focus, but I'm wondering how that's trending.

Well, I couldn't tell you overall for the rest of the country. What we do is we look for pockets where there's not much competition, where we have programs that are in demand, and then we focus on those areas. And so there are 3 or 4 states in the eastern part of the country that we do well in, and we're continuing to do well in. And we're deemphasizing those states where we don't have a competitive advantage where our programs are not in great demand. And so we're trying to be pretty strategic about how we spend our advertising dollars in every area of the country other than the Southwest. And we -- and in those states that we do target, we're doing fine.

Great. And then just last question from me aside from the starts was, is your bad debt improved nicely? Do you have a targeted level for that? Do you think we could stay at these levels or get even lower?

I think we're at where we need to be. The -- we don't -- if we can keep it right where it is, I think that's -- we're in a very strong position.

And our next question comes from the line of Jerry Herman from Stifel. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: I just wanted to follow up with regards to sort of long-term growth. In the past, you talked about 8% to 10% enrollment growth and maybe 10% to 12% revenue growth. In light of the possible capacity expansion, have you revisited those in any way? Should they be increased?

The capacity expansions for the ground students? Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Correct, correct.

No, I would keep them -- our long-term target is still 8% to 10%. If we exceed that a little bit in the short run, we're okay with that. But I would still say, long-term, 8% to 10% is what we're trying to get. And that includes the growth of both ground campuses. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: And just a follow up. With regard to differentiation, help us, if you can, with some color on the impact of Division I, both from a P&L perspective and maybe from an inquiry or interest level perspective. And then also, separately, have you guys updated the survey you did a couple of years ago with regard to why students attended and -- with some of -- the 2 of the key metrics being the Christian orientation and having an on-ground facility?

The -- we haven't updated the survey, but we've got what we call a Canyon Christian Consortium of Schools that now is over 200. Our first target was 100. Now we have over 200 high schools that are in that consortium, and a large percentage of our traditional ground new students are coming from that consortium. So that is -- so the Christian status of the institution is really being helped on the ground campus. We have not updated a survey for our online students, but I would tell you, anecdotally, I believe, it's at least is where it was and probably even better than that at this point. That's becoming a very sticky thing for us. And then in terms of Division I, that's tough for us to evaluate at this point. We're getting a lot of press in local newspapers. We are going to be playing in key cities in the Southwest this year and we have a great schedule for next year. So I think we're getting a little bump for that, but I wouldn't say we would tell you that it's really significant at this point. I think 3 or 4 years from now, it could definitely be significant. But I don't think it's hugely significant at this point. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: What about the expenses of that at this point?

It's not much. The -- we already had an extensive budget at the Division II level because we were playing in a conference that had 4 schools in Hawaii and that was kind of a killer for us expense-wise. So it's up some, but it's not material, and we don't expect it to be going forward.

And our next question comes from the line of Adrienne Colby from Deutsche Bank.

Can you tell us what percent of your online students are now from Arizona?

We just had that.

We're going to get it for you. Do you have a second question while he's getting that?

Yes, I do. Can you update us on the number of enrollment counselors you have currently and how we should think about that trending over the next year or so as your brand grows?

We don't give that number out, but I can tell you that it's relatively stable, and we want to keep it relatively stable as we go forward. It will not go up more than 2% to 4% as our enrollments go up 10%. That's the plan, and that's been working in the last 12 months. The Arizona students online are...

Online is just under 20% of our total online students are from Arizona. And then what we've talked about in the past is our total Arizona students are roughly 28%. 28% of our total students are from Arizona.

And our next question comes from the line of Jeff Meuler from Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Brian, you mentioned that you pretty much have enough runway just, if you look at the size of Texas and California, to grow at your targeted growth rates for a long time. If you guys look today at the new enrollment growth, roughly what percentage is coming from those 5 states that you listed: Arizona, California, et cetera?

It would be Arizona, Colorado, New Mexico, Nevada, California and Texas and put Utah in there. So that is what do we define as the Southwest and that number is, what?

Just under 60%.

Just under 60% of the students. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Of new enrollment growth? Or of the total online enrollment growth?

Well, this is -- that's total new enrollment growth. Total, so that includes both ground and online. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Got it. And then on the 5,000 planned new ground students for next fall, what's the contribution to that in terms of grad students? And Brian, are you implicitly changing your longer-term targets in terms of how many students you're planning on having in the Phoenix campus if you're planning on enrolling 5,000 new in the fall?

No. We're still going to -- we still plan to build this campus out to about 15,000. There was a higher percentage in our initial plan of those 15,000 being grad students. We're backing that off a little bit. Most of the graduate students in the programs where we have graduate students prefer to go online or in evening cohorts, versus being a student who's going to be on our campus as traditional grad student. And so that's why we backed off of that initial number. But the total number still is 15,000 at the traditional campus and then 10,000 at the traditional campus in the East Valley. They just won't -- there won't be as many graduate students as we -- on those campuses as we initially talked about.

And our next question comes from the line of Jeff Volshteyn from JPMorgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: What level of new enrollment growth online is implied in your fourth quarter guidance? And then, perhaps, you could give us maybe an early look into 2014 across different line items.

Did you ask what percentage of new start growth is in there? Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Is in the fourth quarter guidance.

It's similar to what we've been talking about, mid- to high-single digits is implied in there. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Okay. And then for 2014, maybe you can give us a little color on your performance or your outlook.

We have not spent any time or any significant time yet putting together our budgets for next year, but I think that when we do, they will be numbers that are very similar to what Brian has talked about for our long-term objectives. He would like to get our online growth to that 6% to 8% level. And so our expectation is that from an enrollment counselor perspective and everything else, that will be driven based on that goal. Could we outperform that a little bit, especially in the early part of the year? That's definitely possible, but that really is our goal, is to drive total enrollment growth online down to that 6% to 8% level. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: It's helpful. If I could ask another one. When we look at your graduating cohorts, how should we think about the number of graduates, perhaps, as a percentage of total enrollment, online and on-ground, in 2013 and then going forward into 2014?

We typically have not given that number out. Jeff, I just don't -- I don't think we want to comment on that. I mean, Brian obviously has thoughts that we discuss amongst the management team on how we want to plan that out now and to the future. But I do think that's something we really want to discuss publicly at this time.

I'll give you one 40,000-foot view of that. There's 2 offsetting things: the -- our graduation percentage is going up because of the increased amount of graduate students that we have, and so it's going up. But it's being offset by the fact that we have more students now that in 4-year revenue stream programs. As ground students as a percent of the overall student body gets bigger and as doctoral students as the overall student -- percent of the overall student body gets bigger, those 4-year revenue stream students will kind of offset the increased master's students that graduate at a faster rate. And so those 2 things are kind of offsetting each other, so whatever you've got in your model at this point is probably pretty good.

And our next question comes from the line of Jeff Silber from BMO Capital Markets.

You mentioned in your comments the decision to accelerate the construction at the East Valley campus. Can you just give us a little bit more color what went behind that reasoning? What's changed over the past couple of months?

The demand that we believe we're going to get out there. At first, we were going to design the campus for initially maybe 1,500 to 2,000 students and kind of build it as we go. But we think overinvesting in the first year, so that we build it to accommodate 5,000 students, is going to give us the kind of presence that we want on that campus that should long-term accelerate us getting to the 10,000 students. We've got the cash available to do that. Our margin expansion is good, and so we think, right now, making that investment is one of the best uses of capital that we could possibly put to use. Dormitories are very, very profitable, and our traditional ground students are achieving the level of profitability of our online students. And so it made sense to fast forward that and have that campus appear as if it's near capacity. Just the psychology of that, as people visit the campus, I think, is in our favor.

Was there any initial market research that you did to solidify that decision?

Yes. The research is the base -- is the incoming leads from the East Valley campus that we have had over the last 2 years, and then our discussions with those leads and those families. The socioeconomic and demographic characteristics of the East Valley from a college-going perspective are much better than the West Valley. And we've done very well in the West Valley, and so there isn't any reason for us to believe the East Valley won't go equally that well and possibly better because of the college-going characteristics of that area -- of that part of the population.

Okay. And I know you're not talking about 2014 yet, but can you give us any color -- are there any seasonal issues that we need to be aware of for the year?

Well, let me go back to the other question first, and then I'll answer that one. The other major change is that when we had come out with our original expectations on CapEx on the East Valley, as you might recall, we had said that we weren't planning on building any residential dorms there. That has changed. We are planning on building 1,000 beds for that very first year. And again, as Brian said, we've made that change: number one, because we believe the demand is clearly there for those beds; and number two, it's extremely profitable. And so we're doing that. So that is one of the more significant changes on the CapEx standpoint. If you'll recall, to build 1,000 beds is somewhere in the $35-ish million range. On the question about seasonality. The seasonality that we've seen over the last couple of years will continue. We will become more and more seasonal as ground traditional students as a percentage of our student body continues to grow. It is currently our intention to give guidance at the end of next quarter for 2014. And as we did this year, our plan is to give quarterly guidance by quarter for each of the 4 quarters of 2014 at that time, primarily because of the seasonality effects and how we see that seasonality playing out. I also would say that from an online perspective, and this is nothing different, but versus others, our online students are more seasonal as well. Given the high percentage of teachers and nurses in our programs, those students tend to take a little more time off in the summer than students studying in other programs. And so even online, historically, has been very seasonal here.

And our next question comes from the line of Trace Urdan from Wells Fargo Securities.

I wanted to kind of go a little deeper, maybe, in the East Valley question. Have you started talking to your market about that campus' imminent arrival? And maybe how are you thinking you're going to handle recruiting for the 2 campuses? Are they going to be sort of marketed separately? Or are you going to try to direct students to the campus that's close to them? How's that going to work?

Good question. We have an enrollment counselor base that isn't going to go up as a result of us adding the East Valley campus. And so we are going to give the students absolutely an option, and it depends upon what -- how they want to do college. Some will absolutely want to come to this campus and live on campus in the residence halls and participate in everything that we have on this campus. They'll be attracted to, I think, the 15,000 students and the intercollegiate athletics and all of that. There'll be some East Valley students who, we believe, will want to live on the campus in the East Valley, even though they're from the East Valley because it's a little bit more suburban, it's a little bit smaller and they'll get to take a leadership position in the student body earlier. So -- but we also think there's going to be a large demand, a very large demand for commuter students, those students who want to stay at home, move into an apartment with friends and attend campus in the East Valley as a commuter student. That was the original purpose of the campus. It's just that the demand to live on campus was growing. Our -- in terms of the network that we have, we've got substantial enrollment counselor base in those East Valley high schools. And our brand in those East Valley high schools is really growing. The service level that we provide to those high schools, the transparency that we provide in terms of the financial aid deal, is really becoming a competitive edge for us. Parents love the fact that we can give them a very transparent amount of money that it's going to cost. We can give it to them in advance, and they love the fact that their son or daughter can stay closer to home. So we're confident about the growth of that campus.

Okay, fair enough. And then, I know, Brian, you mentioned that the growth in online was in all the right places. Are there any trends by program offering that are worth mentioning, anything speeding up, slowing down relative to the different types of programs you're offering online?

I think one is that we have a very aggressive growth plan for our doctoral programs, and the -- we're not exceeding that tremendously, but we're hitting that, which is a very, very good trend. The percent of all students that are doctoral students is going up according to our plan, which high graduation rates and 4-year revenue streams is so -- it not only helps the academic credibility of the institution, but it really helps from a financial standpoint. That would be the one area I would say we're not exceeding our plan, but our plan was aggressive and we're hitting it, which is good.

And can you just remind us, quickly, the disciplines in which you are offering doctorates right now?

Education. We have a doctoral program, Education in leadership. We have a PhD program in Psychology. We have a doctoral program in business, a DBA, and we've just been approved and are very excited about the doctoral program and nurse practitioner, which we're going to start in a couple of months in January.

And our next question comes from the line of Phil Stiller from Citi.

I just wanted to ask about the full-time faculty trend. It seems like you guys are investing more there. Can you provide an update where you are, both from an online and ground perspective in terms of percentage of full-time faculty, what the goals are and what that means for expense leverage as that percentage goes up over time?

Yes. We're about 55% on ground now, courses taught by full-time faculty, and our goal is for that to be over 70%. And we will get that -- we will get there pretty quickly. In terms of online classes taught by full-time faculty, we're about 30%, and our goal is to grow that towards 70%. It'll take us a little bit longer, but our goal is to grow that towards 70%. If you include both now, we're -- both online and on-ground, we have about 300 full-time faculty.

I think you asked about the cost differential. I think the cost differential is roughly 20% or so, higher for full-time faculty, primarily driven by benefits. And we obviously had that factored into our models in terms of instructional costs as a percentage of revenue, et cetera, but it's...

But I'm glad you asked that question because the 2 things that are really aiding us on -- from a growth standpoint is: number one, our average class size on our ground campus is 25. And that's in very stark contrast to the state university system, and that is a strong and attractive feature of what we have to offer incoming college freshmen. And then on the other side of it, the fact that all -- for the most part, the first 3 courses of every program are taught by full-time faculty. That also is a growing and attractive feature of what we have to offer because as you're getting started as an online student, that steady presence 8 hours a day and very quick response times, and in many times, immediate response times to questions and that kind of thing, the word spreads about that. And so that's become attractive feature and one of the reasons it's growing.

So to clarify, would you actually view this as margin dilutive so it's just it's kind of viewed as an investment that you're making to improve the quality of the education and brand?

No. To this point, it's been neutral because we're getting increased retention rates. And so as we go forward, on ground, we don't expect it to be material as we go to more full-time faculty. Online, as we go from 30% to 70%, we need to go in the classes that have the difficult classes, the ones that have the higher dropout rate. Graduate-level statistics and those kind of courses is where we're moving first, expecting to get the retention gains that offset the differential.

Okay. That makes sense. And then, last question on marketing budget. You guys have done a bit more brand advertising recently. Can you talk about the returns that you're seeing from that and what that implies for the marketing budget as we move forward?

Well, for the short-term, I think you can expect it to stay between 10% and 11%. Obviously, the reason that we're doing it is that, long-term, we want it to come down. And so the stronger that the brand becomes, the less Internet-generated leads we have to buy, and the objective is to get out of that business completely. That's a long-term goal. So I would tell you the next couple of years, I wouldn't expect there to be any movement. I think it'll be between 10% and 11%. But hopefully as the brand grows in the Southwest over time, that is an area where we can reduce the cost, and therefore reduce tuition.

And our next question comes from the line of Tim Connor from William Blair. Timothy Connor - William Blair & Company L.L.C., Research Division: With the retention gains you're seeing and then the mix shift toward doctoral and ground students, I guess, can you help quantify how much longer the average student is staying now or you expect to stay versus a couple of years ago?

We don't have the ability to quantify that for you right now, although it's a good question, and it's something that we'll work on and try to provide to investors going forward. Timothy Connor - William Blair & Company L.L.C., Research Division: Okay. And then is it safe to assume that the incremental margin, once you've acquired a student, are significantly higher than the overall mix? And then maybe you could help us out with that as well.

Yes, they are. And that's -- so you start with the ground students. Number one, it's less dollars to acquire them when we first get them. And then they typically take 30 college credits in their first year. The exciting thing, and the reason that our models got readjusted and we got very aggressive about the whole ground student phenomenon, was that they come back at a pretty high percentage, and they come back for no acquisition cost and take another 30 credits, and then the same thing as juniors and seniors. And so as you go from 8,200 ground students to 25,000, that should have a positive impact on acquisition costs going forward and the profitability level of those students. Doctoral students also have a pretty high graduation rate. They also have -- even though our doctoral tuition is much less than others, it's still a higher tuition level than our other tuition rates. And so over time, as they become a higher percentage of our overall student body, it will have a positive impact. We don't have the ability to quantify that for you right here, but we will. Timothy Connor - William Blair & Company L.L.C., Research Division: Got it. Okay. And then a final one for me. You've talked about the brand spreading to sort some of the bordering states with Arizona. Are there any new geographies where you're seeing the brand spread a bit or you're concentrating advertising dollars versus what you were seeing a couple of quarters ago?

Yes. On the ground, Washington and Oregon are areas that are increasing in on the ground. Online, there's a couple of states that we're doing well in, just because of the unique characteristics of the competitive environment. New Jersey is an example of where we have a very good ground sales force and we're doing significant television and even outdoor advertising because our programs are resonating well there and there's not a lot of competition for those students. So that would be one example. And there are other examples in the east, where we kind of focus efforts because we're more competitive than that. We just don't like to give all that out to the general public.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.