Grand Canyon Education, Inc. (LOPE) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Grand Canyon Education First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, 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 2014 first quarter results. Speaking on today's call is our President and CEO, Brian Mueller; and our CFO, Dan Bachus. This call is scheduled to last one hour. During the Q&A period, we will try to answer all of your questions, and we apologize in advance if there are questions that we are unable to address due to time constraints. I'd 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, 2013, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We recommend that all investors thoroughly review these reports before taking a financial position in GCU, and we do not undertake any obligation to update anyone with regard to the forward-looking statements made during this conference call. And with that, I will turn the call over to Brian.

Good afternoon. Thank you for joining Grand Canyon University's First Quarter Fiscal Year 2014 Conference Call. In the first quarter of 2014, enrollments grew by 15% and net revenues grew by 17.9%. New enrollments grew in the low-double digits, and operating margins are at 25.9% for quarter 1 2014. We had another successful quarter, and I want to thank our faculty and staff for their hard work, continued commitment to innovation and for driving high levels of student achievement. Now that the 2013-'14 school year is nearly complete, I want to give you some important updates regarding our traditional campus. Retention levels reached a new high, with 90% of students who didn't graduate transitioning from the fall to the spring semester. This was impressive because nearly 50% of our students are studying in very challenging science programs. We are still waiting for final grades from the spring semester. But given that very high demand for student housing, we expect the percentage of students transitioning from spring to fall to be very high as well. Most recent graduating class of [indiscernible] exam at a rate of 94.2%. In 2013, 75% of our premed students were accepted into graduate school with the national average being only 42%. This includes prestigious universities such as Harvard, University of Michigan and University of Washington. We expect similar results this year. For the most recent reporting year, pass rates for our College of Education students on their professional knowledge exam was: elementary education students passed at 92% rate; secondary education students, 97% rate; and special education students, 93%. Based on the current trend, 90% of our business graduates will have secured jobs within 6 months of graduation. We have all the approvals necessary to begin teaching in information technology and computer information systems for the fall of 2014, and we are in the process of seeking approval for engineering programs beginning the fall of 2015. Our students' level of achievement in the performance areas exceeded expectations. Our theater and music department put on 5 major productions and over 200 total performances in front of over 125,000 patrons. They won many local awards and appeared on local news shows numerous times. Our student debate team competed in venues across the country and experienced significant success in their first year of competition. Our athletic teams performed exceptionally well in the first year at the Division I level. Most of our teams were predicted to finish at the bottom of the Western Athletic Conference but did considerably better than expected. Our women won the WAC indoor track championship and our men finished second. Women's tennis finished with a 13 and 6 record and the men were 11 and 8. Women's golf finished third in the conference tournament, and the men competing this weekend are expected to do well. Women's softball won the WAC regular season championship, and the men's baseball team is currently in second place. Men's and women's basketball both finished third in the conference. Our students, faculty, staff and alumni and growing fan base are obviously looking forward to our second year of competition. Next year, we are expecting over 5,500 new students, which would bring the total to over 11,000. The average incoming GPAs of new students for next year is currently above 3.5. With the completion of 2 new dormitories, 6,000 students will be living on campus. We will break ground on the East Valley campus in July of this year and it will open in the fall of 2015. Our plan is to grow our online campus at 6% to 8% per year, but we continue to exceed that in the short run. Over time, our online campus will be primarily a graduate campus. The students continue to be attracted to the full-time faculty, small class size, interactive and collaborative academic environment and the highly service-oriented counseling teams. Doctoral students, masters students, RN to BSN students and our traditional campus students now make up 63% of our total student body. The quality of the student body continues to grow and has resulted in projected 3-year financial aid default rates to be 12%, unofficial 2-year default rates to 7% and actual bad debt expense of under 3%. As many of you know, we will go into a Department of Education program review beginning May 5. We are looking forward to the experience. It will be an opportunity to showcase a very experienced leadership team and to demonstrate very advanced academic and operational workflows, which are supported by high levels of technology in automation. Our ability to monitor the progress of each student on an every day basis as they move through the program has become a hallmark of the institution. We have spent over $100 million in technology in the last 4 years, much of it to support the systems that we will show. These include our online learning system, 24-hour transcript evaluation, a net price calculator that provides student a quick and totally transparent financial plan, automated attendance taking and an early alert system for students who may need additional academic help. This review and eventual report will provide third-party validation for very strong academic and operational processes to support our students. Now turning to the results of our operations. Net revenues were $167.4 million in the first quarter of 2014, an increase of $25.4 million or 17.9% from $142 million in the prior year period. Operating margin for quarter 1 2014 was 25.9% compared to 23.7% for the same period in 2013. It's important to note that tuition room and board has been frozen for 5 years in our ground traditional campus and there was no increase in tuition for the online campus this past year. Net income was $26.3 million for the first quarter of 2014 compared to $20.9 million in the prior year period. After-tax margin was 15.7% compared to 14.7% for the same period in 2013. It should be noted that a difference between the operating margin before income taxes and the after-tax margin of 15.7% 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 significant net plus to the taxpayer on an annual basis. Instructional cost and services grew from $60 million in the first quarter of 2013 to $70.7 million in the first quarter of 2014, an increase of $10.7 million or 17.8%. This increase is primarily due to the increase in the number of faculty and staff to support the increasing number of students attending the university. As a percent of revenue, IC&S stayed flat at 42.2%. We are extremely pleased that bad debt expense, as a percent of revenue, decreased to 2.3% from 3.5% in the prior year quarter. Employee and faculty compensation and related expenses, including share-based compensation, decreased 80 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, dues, fees and subscriptions increased 20 basis points. Occupancy and depreciation and amortization expense increased 20 basis points. Admissions and advisory and related expenses as a percent of net revenue decreased 50 basis points from 16.2 in quarter 1 of 2013 to 15.7 in quarter 1 of 2014. 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 decreased 120 basis points from 11.2% in quarter 1 of 2013 to 10% in quarter 1 of 2014, primarily due to us leveraging our increased brand advertising focused on the Southwestern United States region over higher revenues. Marketing and promotional expense as a percent of net revenue increased 10 basis points from 1% in quarter 1 of 2013 to 1.1% in quarter 1 of 2014. General and administrative cost as a percentage of revenue decreased from 5.7% in quarter 1 2013 to 5.1% in quarter 1 of 2014, primarily due to employee compensation and related expenses, including share-based compensation decreasing between years. Interest expense decreased $0.2 million over quarter 1 of 2013 as a result of the decrease in the average balance of our credit facility between periods due to scheduled monthly principal payments. As the result of the above, net income increased from $20.9 million in the first quarter of 2013 to $26.3 million in the first quarter of 2014. With that, I'd like to turn it over to Dan Bachus, our CFO, to give a little more color on 2014 first quarter, talk about changes in the income statement, balance sheet and other items.

Thanks, Brian. Scholarships as a percentage of revenue increased from 16.6% in Q1 2013 to 18.4% in Q1 2014, due primarily to the growth in our ground conditional student enrollment between years. Online scholarships as a percentage of related revenue is up slightly year-over-year due to an increase in students from organizational partners. Bad debt expense as a percentage of revenue decreased to 2.3% in Q1 2014 as compared to 3.5% in Q1 2013. This decrease is primarily due to a significant amount of collections of previously fully reserved receivables and improved retention for our online students. Excluding the increased receivable recoveries, our bad debt expense would have been 2.9%. Our effective tax rate for the first quarter 2014 was 38.9% as compared to 40.4% in the first quarter of 2013. The low effective tax rate in the first quarter 2014 was primarily due to state tax rate changes that are gradually being phased in beginning in the first quarter of 2014. We repurchased 14,000 shares of our common stock during the first quarter of 2014 at a cost of $0.6 million and have $26.9 million available under our share repurchase authorization as of March 31, 2014. An additional approximately 24,000 shares at a cost of $1 million have been repurchased subsequent to quarter end. Turning to the balance sheet and cash flows. Total cash, unrestricted and restricted, and short-term investments at March 31, 2014, was $247.4 million. Accounts receivable net of the allowance for doubtful accounts is $7.4 million at March 31, 2014, which represents 5.2 days sales outstanding compared to $7.7 million with 5.2 days sales outstanding at the end of the first quarter of 2013. CapEx in the first quarter 2014 was approximately $27.2 million or 16.3% of net revenue. I'd like to touch on one regulatory item. As was announced a few weeks ago, and as Brian just mentioned, the Department of Education will be conducting a program review of Grand Canyon University covering the period July 1, 2012 to June 30, 2014. We have been informed that the primary reason for the review is the university's growth since the last program review, which was for the period July 1, 2008 to June 30, 2010. The program review team will be on site in early May. Last, I'd like to provide some color on the updated guidance for 2014. As a reminder, the growth in our ground traditional student body as a percentage of our total student body continues to make year-over-year comparisons more challenging as these students are much more seasonal than our working adult students, and there can be differences between years and the start and end date of our semesters. For example, due to the differences in the start and end date of our spring semester, approximately $2.3 million of additional revenue was earned in the first quarter of 2014 and $2.3 million less revenue will be earned in the second quarter than it would have if the start and end date of our spring semester were the same as 2013. Our initial enrollment guidance assumed mid-single-digit online new start growth, a slight increase in retention and an increase in graduates between years in excess of 30%. We exceeded both our new start and retention rate improvement assumptions in the first quarter 2014 while graduates were in line with our initial assumptions. We did have one extra start date in March, which had a positive impact on our year-over-year comparison. We have made tweaks to our assumptions for the remainder of the year, which has resulted in increased enrollment, revenue and net income guidance. We have brought down our revenue per student slightly to reflect current trends and the breaks students are taking, the growth in programs such as doctoral, which earned less revenue per day, and the slight increase in online scholarships as a percentage of revenue. On the expense side, we have brought down our estimated bad debt expense for the rest of 2014 to reflect the lower bad debt trends. We anticipate that advertising expense as a percentage of revenue will be higher -- as a percentage of revenue will be higher in the second and third quarters of 2014 than in the first quarter of 2014 as our expense should be similar, but revenue will be lower. We have also adjusted down our effective tax rate for the remainder of the year to 39.5% based on the reduced state tax rate. We remain comfortable with our previous estimates of diluted weighted average shares outstanding by quarter. Although we might repurchase shares during 2014, these estimates do not assume repurchases. They do assume increased dilution from stock options and restricted stock granted in previous years and from the 2014 stock grant. Our previous estimated CapEx for 2014 and 2015 was $145 million and $155 million, respectively. We are now estimating those amounts to be $175 million and $185 million, respectively, with the increase primarily due to additional resident halls needed to meet the student demand. Historically, approximately 50% of our students lived on campus in our residence halls, but given the increased demand from our continuing students, we now estimate that this will increase to between 55% and 60% of our students living on campus to meet our previously provided total enrollment goal. Given the strong return on invested capital for resident halls, we believe this is a good investment for the university. I will now return the call over to the moderator so that we can answer questions.

[Operator Instructions] Our first question comes from the line of Jeff Meuler from Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Are you assuming for fall to -- or I'm sorry, from spring to fall retention for the on-ground students to get to the ground guidance that you're giving for Q3?

Is that a question? I'm sorry, I missed it. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: What are you assuming for spring to fall retention for the on-ground students that do not graduate?

If we are assuming, it will be at its historical rate, which is a little bit less than 90%, and so we haven't baked in any increase which there could be. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Okay. And do you have a sense for how it varies by students that live on campus and the commuters, versus the commuters, I guess?

It is slightly higher for students that live on campus, although the place where there is meaningful indicators is the difficulty of the program. So one of the things that we like to talk about is about 50% of our students on our ground campus are currently studying in science areas, especially biology, and preparing for medical careers. Those are difficult programs and not all of the kids can make it through those programs. When we have fully built out our campus and we have 18,000 students and another 10,000 on our East Valley campus, our goal is that 70% of them will be studying in the science areas and then including engineering and information technology and computer information systems. Those are tough challenges, those are tough goals, but the rates we've been able to achieve in biology and science, we think we can achieve those also in engineering and technology, which would speak well in terms of employability because that's what we're most after, which is getting kids involved in programs that will lead to jobs and good paying jobs. And if we can graduate them at the current rates, will make a significant contribution to Arizona. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then during the first year or 2 that it's open, what is the program offering in terms of the degree levels and the majors going to look like at Eastmark versus what it's at on the traditional campus today?

Most of the programs that we're going to be offering at our traditional campus will be offered at the East Valley campus, but we will start with -- 90% will be freshmen. There'll be a few sophomores that we'll let in, but 90% of the students as we start in the fall of 2015 with about 2,500 students will be freshmen, and they will be studying in pretty much the same areas that people are studying in -- on this campus with the exception of we plan to open that campus with engineering.

Our next question comes from the line of Jeff Silber from BMO Capital Market.

I think you gave a start date. I was just wondering if you can give that for just the online programs.

That is -- the numbers Brian gave were just for the online program. The...

Because the ground campus enrollments for spring are very small.

Small, okay, great. And the 5,500 new students that you're anticipating for the fall, I'm just wondering, has that been finalized? Are you still taking applications, or is that class pretty much set?

It's a lot more set than it has been in the past, that's for sure. The -- we are still taking applications and there are students who will still be admitted. Our problem is going to be space. We are building the 2 new dorms and every bed is accounted for, and we're just not going to have enough beds. And so this will really be the first year that we're going to have to turn away highly, highly qualified students that are from out-of-state and need to live on campus in order to be admitted here.

Okay, all right, that's good to hear. Not for them, but that's good for you, it's good. And then finally, you mentioned the program review, the fact that the Department of Education, I guess, was looking at you because of the growth since they last came on. Did they point to anything specific that precipitated this review?

No, not really. I think the -- indirectly, there still is a lack of understanding around the difference between being in a borrower-based environment and being in a term environment, and we're really looking forward to the review because it's going to give us a chance to demonstrate some really advanced technology that we've applied to students who are working full time and going to class online, taking one class at a time and how really the best way to provide financial aid to those students is not in a term environment, it's in a borrower-based environment. And the ability to work with working adult students who come in out of programs, because of life's challenges, it is so much better if you can do it in a borrower-based environment that we're kind of anxious for the review. Because really, we think it should be a model for -- there are so many universities now that want to get into the business of teaching working adult students and they want to deliver online. And the academic part of that is one part of it, but the operational part of it and the financial aid part of it is a whole another game. And when you try to manage a large student body of those students in a term-based environment, you're going to run into significant difficulties. So we think we can turn this into a very positive thing where we think the Department of Ed can walk away with an understanding of how universities should be doing this going forward, if they're really going to teach working adult students and deliver it online.

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

There's been some news in the press at school that some schools are beginning to make a push to expand in Arizona. Is that something that you've been seeing or you would expect to see?

Well, no, not really. There was -- the Mayor of Mesa brought in 4 or 5 private, small private colleges a couple of years ago and put them in a kind of a storefront situation in downtown Mesa. Those enrollments are not doing well. One of them has already closed down. So we know of those 4 that still remain -- I don't think any of them at this point yet has 200 students in them. And then there is a university that has a technical program that's coming in, in the northwest part of town. I don't think they're here yet. But other than that, we don't know of anything.

Okay. There's also been some news about the President focusing on teacher education and teacher training. Are you expecting any of that to impact your activities?

No. In fact, if anything, I think that will reinforce our activities. Whether it's teacher education or whether it's just delivering education online in different programs, people are getting into it and not really applying the resources to what they need to in order to do a good job. An example of that is, many universities who are doing this are offering programs to students in states where they haven't received authorization to do that. We have placed -- we have put millions of dollars in place to make sure that we are authorized in every state, where we are teaching students online. We are also -- put millions of dollars into making sure that every place we do teacher education, we have put every student teaching, every internship, every observation that's required and necessary to prepare teachers in those states. All of that is in place. And so if there's any further regulation around those kinds of issues, actually that would be a very competitive advantage to us because the people that are trying to get into it now have really gotten into it without investing in all those areas.

Our next question comes from the line of Jerry Herman from Stifel. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Brian, I'm wondering if you can give us a feel for what the ramp will -- the ramp rate would look like in the technology and engineering programs, sort of the first-class side and then what it will take to get to your goal there and what those goals might be.

The information system -- information technology and computer information systems will not be large because we don't have a lot of big ramp-up time for fall of 2014. So we're anticipating maybe 100 students in each of those programs. We'll have a much bigger ramp-up time for engineering for fall of 2015. And so those classes will be significantly higher than that. We are building out major laboratories and classroom facilities in advance, in anticipation that those programs, once we get our feet on the ground, will grow significantly. So I can't -- we're not prepared to give you specific numbers at this point, but it is not our objective. It is our objective to do those 2 areas just like we've done biology, nursing, premed and those areas, which is not to limit enrollments based upon lack of funding to put in place laboratories and those kind of things. So we are going to build out well in advance. And the exciting thing for those areas right now is there's been a shutdown of some aerospace industries and companies -- companies and industries in Arizona, which is not a good thing, but the positive result of that is there's a lot of very smart Ph.D.-prepared people around looking for faculty positions. And so we won't be limited in terms of our growth in those areas by faculty. Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division: Great. And then just a question about Mesa. You guys have obviously displayed good ability to build facility, but as we understand it, that campus will be in sort of a larger planned community, if you will. Is the rest of that project, to your knowledge, on track?

Yes. To our knowledge, it's on track. You know, this is a very, very experienced group. DMB is a company. They've built major master-planned communities throughout the Southwest. They're very well funded, they're very experienced, and we have confidence that they will deliver. If it wouldn't go as well as planned, which we don't anticipate that to be true, but if it wouldn't, that's not a concern for us. Where this place is located is very convenient, from an intersection of freeway locations perspective. It's going to be very easy for commuter students that come to campus during the day to access it, and we also are excited about the potential of it for evening classes for working adult students. And so even if it doesn't go as fast as they're anticipating, that should not be a negative drag on what we do at all.

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

So Brian, can you give us any additional color on the breakdown of the current online enrollments by program area? I'm specifically interested on what's driving these really robust numbers you're seeing.

Yes, the healthcare and nursing had another significant gain. And so there is tremendous potentials in both the RN to BSN program, the MN program and now our Doctor of Nursing program. And so those gains were significant year-over-year. The College of Education is flat to a little bit down, and as you know, that's our larger -- our largest area as a percentage. The raw number is up, but as a percentage, that's a little bit down. The business school is up in terms of raw number, but as a percentage, it's a little bit down because most of those students are undergrad online students and we're purposely deemphasizing those. And so the doctoral programs, it is -- are way up and the health -- nursing and healthcare programs are way up, and those things are driving the majority of the growth at the online level.

A rough breakdown of the percentage between the various 4 programs you broke out?

In terms of total students College of Liberal Arts and Sciences is at almost 17% of the total; College of Education is 37.5%; Health Science -- Nursing and Health Sciences is 32%; and the College of Business students is at 13.8%.

Brian, you've been talking forever about the 6% to 8% online growth rate. Obviously, you're doing substantially better than that. The growth actually accelerated here in the most recent quarter. I've been -- are you just being excessively cautious? Or do you want to dial back the growth rates? And when do you think that 6% or 8% becomes relevant?

We're engineering it so that the percentage of students that come into the program are in those upper categories that have high graduation rates, high retention rates, low default rates and those kind of things. And so the first part of that story is if we wanted to grow faster in the short term, we couldn't go faster. But we're pulling back in areas where we know the students aren't graduating at as a higher percentage. The -- can I give you a specific quarter after which we're going to get down to 6% or 8%? I can't. I think you can expect it'll happen over the next 4 quarters, over the next year so. It'll start getting down to 7% or 8%.

I do think you'll see it decelerate on a sequential basis this next quarter, so everyone should expect that. We have a lot of graduates coming up in the next few months, and we don't -- our start periods in the second quarter are not as high as they obviously are in the first. And so on a sequential quarter basis, it should decelerate in the second quarter from the first.

It sounds like you basically are choosing to grow -- potentially choosing to grow at a slower rate rather than being demand constrained.

Well, definitely. I mean, if you look at our S&P as a percentage of revenue, we gained almost 2 percentage points. I mean, it went down almost 2 percentage points. So we're obviously not spending on either advertising or enrollment counselor salaries to get additional growth. In fact, we're dialing that back and we're still getting the growth, which we've been saying all along. This is going to be more about brand in the future than it is going to be about counselors and advertising dollars and those kind of things. And so that absolutely is happening in the short run.

Peter, one other thing, when you asked about growth by programs that we've seen is -- as I'm sure you've seen is the acceleration of the master's as well. So we're -- and this is a big focus of ours. So we have seen some pretty good year-over-year growth rates in some of the master's programs that we've rolled out over the last couple of years.

Our next question comes from the line of Phil Stiller from Citi.

I wanted to ask about the margins. They're obviously very strong in the first quarter, up over 200 basis points year-over-year. The guidance implies pretty significant slowdown year-over-year improvement. I'm just wondering where the increased expense investments should fall. What line items are you guys investing in later in the year?

It's mainly a matter of revenues being down in the second and third quarter because of the absence of the traditional ground students, which are becoming our bigger percentage of the overall total. That's really the main reason. And the other reason would be that we were at 2.3% in bad debt expense, which was really 2.9%. And so that's really going to be closer to 3% in that category. So that's 50 basis points there as well. So really, it's those 2 things.

Okay, that's helpful. And then Brian, I think you mentioned in the response on one of the questions, 18,000 students at Phoenix, which I think is higher than what you've talked about in the past. Is that part of the new -- or the increased CapEx budget that you talked about earlier?

Yes. Definitely, it is. The last 12 months has demonstrated to us that there really is not a limit to families in this country that are looking for high-quality, private, Christian higher education that's affordable. I mean, there is a huge demand for families that are looking for a high-quality, private education that has a focus on spiritual development, on character formation, that provides a very, very safe campus, that provides a very strong sense of community, where there are very low class sizes and where there's a focus on the vibrancy of the campus and getting students involved, and our student clubs are growing exponentially. The attendance at major events on campus are growing. And so there just really is not a limit to parents that are looking for that for their kids. And so, honestly, if we would've built another thousand-person dorm for this year, we may have filled it in addition to the 2 dorms that we already filled. And so yes, we -- our plan is to build this campus out now to 18,000 students and the CapEx plan is put in place to do that. Most of those are investments. We've done the heavy lifting now in terms of infrastructure, the student union, the rec center, the arena. And so now we're adding things that just not only allow us to take more tuition dollars, but we make money on dorms even though our rates are very low. So as we continue to build these dorms out, those things are going to produce revenues and profits for us for the next 20 years.

And if you think about the, I guess, now $360 million of spend over this year and next year, where would that take your total ground capacity to, like 2016?

By 2016, it will probably be somewhere around 17,000, 18,000 between this campus and the East Valley campus. And then we hope to peak out between the 2 campuses, about 28,000. So I would say 17,000 or 18,000. And in the next number of years, it will grow to 28,000, which would really put us in a category of a mid-sized state university from a numbers standpoint.

And then what is the assumption in terms of on-campus living versus off campus for both of the campuses on a steady-state basis?

Yes, it's really going up. It was about 50%, and what it's going to be next year is somewhere between 55% and 60%. We're doing very, very well in California. This is going to become a major economic driver for the state of Arizona. Arizona used to lose thousands of kids on an annual basis that would leave the state, take their brain power and their tuition dollars to, especially Southern California, to access private Christian higher education. What's happening now is that those kids are staying home and they're coming here, but California kids are leaving California and coming here in droves. Of our 5,500 new students next year, 1,700 or 1,800 are going to be from California, which will bring our total from California to close to 2,800, which represents nearly $50 million in revenues, in addition to the brainpower. But that doesn't account for the amount of gas they buy, groceries they buy and those kind of things. And so we end up at 28,000 ground students and we end up with 7,000 or 8,000 from California. That's going to be a major economic driver for the state of Arizona, which the state is excited about.

Real quick, on the East Valley campus, I think that's still yet to be determined. We're building 1,000 beds for the very first year and then I think that's something we'll evaluate on an annual basis from that perspective.

So are there only 1,000 beds contemplated in the current CapEx budget for this year and next year?

For the East Valley campus, that's correct. But not for obviously the West Valley, we've got a lot more than that planned.

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

Could you update us on what your assumptions are for summer school enrollment on your ground campus?

Approximately 2,000 students.

Great. And this quarter, how many of your new students or what percentage would you say were sourced from third-party leads? I know last quarter you talked about taking that down to about 25%.

Ground students or online students or both?

Just for the online, the new online students.

Yes, it's less than 25%. But, in fact, it's quite a bit less than 25% year-to-date.

Great. And then lastly, I was wondering what guided the decision not to participate in the U.S. News and World Report's online bachelor's program rankings this year. Just wondering if you're anticipating some competitive pressure from ASU's program being ranked ninth. I think it was something like 40th last year, if that changes your decisions going forward about participating in the survey.

No. The U.S. News and World Report, number one, it's -- there's a lot historical to it, we've -- we've been at this thing for 5 years. Really, kind of a miracle is where we are in terms of what we're doing academically in a 5-year time period. What we care about and where we are placing our emphasis on is what the hospitals say about our nurses and they want them and replacing them at the rate of 100%. What the school districts say about our teachers and they're in huge demand and they're wanted and we'll place them at almost 100% rate. What the professional business community is saying about our business graduates and we'll -- we will -- they will be getting jobs at a rate greater than 90%. We want to accomplish those same things in terms of engineering and information technology. And so most -- much of what goes into the U.S. News and World Report is based upon inputs, and we're not focused on inputs nearly as much as we are focused on outputs and producing people that are going to get jobs and they're going to get high-paying jobs and they're going to do well in the business community. That's what's important to us.

Our next question comes from the line of Tim Connor from William Blair. Timothy Connor - William Blair & Company L.L.C., Research Division: It sounds like you're seeing some strength in the corporate business. How meaningful is corporate for the online segment? And where do you see this going? And what's driving the growth there?

It's very, very important from a healthcare standpoint. Our relationships with hospitals continue to grow, and it's because hospitals are desperately in need of highly qualified nurses, pre-licensure nurses. It's growing in terms of our premed students and then getting into prestigious medical schools and coming out as doctors and returning to the state. It's really growing in terms of school districts, schools and school districts. We're signing partnerships, a couple literally, every day with schools and with school districts because they want our student teachers, they want our teachers and they want our faculty who are participating in service training for -- in many, many schools and school districts. We just had an advisory committee of 18 prominent business professionals on our campus today who are providing tremendous feedback for us as we continue to develop our business program. These are very high-profile business professionals. They are running companies in the Valley because they're anxious to get a hold of our business graduates because of the focus that we have on integrity, character formation and all those things, in addition to them being involved in our business program academically. We have an advisory committee that has significant people on it that we are -- that are helping us build our engineering programs. And then we continue to get traction with the military. Because they love the transparency with -- with which we do with financial aid and program scheduling and those kind of things. And so really, it's those partnerships that continue to grow mainly in the southwest that are sending us students, sending students our way, versus us having to use lead-generating activities to guide business. Timothy Connor - William Blair & Company L.L.C., Research Division: Okay. And how are you thinking about prices over the next couple of years, both ground and in online, given that you do seem to have excess demand? Is it simply continuing to raise admission standards? Or is there a point at which you might consider passing through some form of a price increase, either room and board or tuition?

We're going out to meet with some people in Washington in the first part -- or the last part of June, and we're taking seriously the agenda that President Obama has put out with regards to the goals for higher education. And we are doing everything that we can to hold the line on tuition, both on the ground and online, and we are going to try very hard to do that. We are continuing to make gains in 2 ways: the quality of our student body keeps going up. Retention levels keep going up, and so the ability -- the need to get new students at a certain level of get the total growth, that's working in our favor and you can see we gained 2 additional percentage points in terms of S&P spending this quarter. So the strength of our student body is going up, which means there are higher graduation rates, higher retention rates, less need for new students to get to growth. We're also getting an increased percentage of students, our doctoral students and ground students, which is really important and really impact us positively because both those groups have 4-year revenue streams. And so you pay less to a player, those students, especially the ground students. But when they have 4-year revenue streams versus an 18-month graduate master's degree student, those things all play in your favor in terms of pushing up the margins a bit so that investors get a good return, but not having to do it at the expense of students, meaning higher tuition. And so I'm not telling you that we're not going to raise tuition, but we're trying very hard not to do it. We're trying to get the returns to investors based upon our increased efficiencies, not based on increasing tuition for students. Timothy Connor - William Blair & Company L.L.C., Research Division: Okay. And then final question for me. Given the out-of-state interest in attending the on-ground campuses, does that sort of lessen your interest in building a school or campus outside of Arizona? And would you potentially think about just basing the operations exclusively in Arizona, whether it's expanding the current campuses or even adding another one in Arizona?

Yes. The answer is yes. We're not really focused at this point at all in terms of a new campus other than East Valley campus. We have 5, 6 years running here to get to the 28,000 student goal. We're very excited about the average incoming GPAs, the average -- the increased admissions requirements, the adding of the STEM programs. And so at this point, there is no plan to build a campus outside of the state of Arizona.

Our next question comes from the line of Jeff Volshteyn from JPMorgan. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: I apologize, I joined the call late. Can you address the -- can you talk about your aspirations, or kind of longer-term margin, the balance of tuition and profitability?

We were talking about 24% margins and they become 26% margins. They've become 26% margins without raising tuition. They become 26% margins mainly as a result of us becoming more efficient. We've taken about as much efficiency as we're going to be able get out of bad debt expense. Getting it under 3% is tremendous and it's a tremendous -- is a credit to our staff, just a huge credit to our staff, both for bringing good students and also for all the procedures that are in place to make that happen. Where it can still come, 50 basis points or so a year maybe, is in the S&P area. The stronger our brand gets, the easier it is to get students without having to spend the same amount of money in admissions advisor salaries mainly. So being at 25% or 26% is where -- is above where we initially intended. Another 50 basis points or so a year in those other areas is probably where it would come from. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Great. And would you be able to quantify a percentage of S&P spending that goes towards branding as opposed to direct advertising?

It's way up in terms of branding. If you notice, our increased amount of our spending is the branded television advertising that we do, which is not direct response. And so the goal is to have less inquiries and more students, not more inquiries and less student, and we are on a good track to do that. And it just demonstrates that as the brand grows, all of those search areas and all of those -- all those areas grow, which puts less demand or need to do anything with the lead-generating companies. And we're moving in a strong direction from that point -- standpoint and it's not only do you get better students, but you build a brand with the institution. And it's interesting that people talk about, well, 10% of revenue spent on advertising. The point is that we have a model, a financial model, that allows us to grow at a certain rate that produces an endgame, which is very low tuition at no expense to a taxpayer. And that's really the only thing that should matter as people evaluate this model. The financial model is very effective because it spreads the administrative structure across 2 student bodies, 2 growing student bodies in a way that produces efficiencies, and the advertising spend allows us to get that growth rate we need, which allows us to keep tuition low, which is the thing that's -- ultimately, that should be the thing that's most important to people. Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division: Great. One last question for me. What percentage of your students are military students? And going forward, is military or potentially veteran students, are they a large focus for your marketing efforts?

They're not a large focus. I would tell you that about 5% of our students now are active duty military students. It is growing strong, but it's not something we're placing a huge focus on. We've got a really strong student body in terms of those military students. Their graduation rates are good. And our brand is growing in the military, but it's not something that we're putting a lot of resources towards making it happen.

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

Brian, I wonder if you could talk about -- you guys have been putting up some pretty strong numbers with doctoral degrees and they're starting to rise to be a kind of a material piece of the enrollment. Can you just speak for a moment about what's driving that in your view and whether you're putting special attention on trying to boost that population?

Two things. The traditional ground campus and the credibility of the traditional ground campus and our faculty, that's a big driver. Doctoral students, a lot of them come out of traditional academic environment. If they can be affiliated or associated with the traditional campus as they're doing their doctoral program and as they come to do their residencies. That's a major and important feature to doctoral students. A second thing that's driving it is low tuition. I mean, our tuition rates for doctoral students are a huge percentage points below most of our competition and so when you take into account low tuition and the fact that we have a traditional ground campus whose credibility is really growing and then you add that to the fact that we just have some very strong academic programs. The work that we're putting into those programs is really good work, and they're growing in their academic reputation. And when you accompany that with the fact that we have low tuition and then students love to come on this campus, and so when they do their residency, if they come on our campus and they spend a week here and that association and knowing that this is going to be here 50 years from now and that they're joining a university and earning their doctorate or earning their Ph.D. and that they will become part of that university, which they know is going to be here 50 years from now, is a big part of the advantage that we have.

Okay, that makes a lot of sense. And then the second question I had was just at the risk of being a little bit esoteric here. I wonder if you could comment on the fact -- I mean, you guys and American Public, I believe, are the only 2 among the publicly traded university companies that has -- their CEO is also the President of the university and you both have, I think, very strong regulatory profiles. And I'm just wondering if you could comment on that briefly. What advantages do you think it brings, the fact that you're both the University President and the CEO of the company?

I think that does -- I think it's very helpful. If you look around at where we're spending our money and we're making significant investments, you can come on our campus and you're not going to see a major administrative building. Almost 100% of monies that we're investing are to improve what goes on academically at the institution for students. And so you're going to see brand-new classrooms and state-of-the-art laboratories and you're going to see low class sizes and you're going to see an increasingly qualified faculty and you're going to see lots of student support systems in place to ensure that students have all the academic assistance they need to be very successful in a classroom, given that they're studying in difficult programmatic areas. And so I think having no division between the President and CEO, so there is no question about what is most important and that is the academic experience that our students have. I think that's important. But I will tell you there's something that's more important than that, and that is that if you look around at the top 25 people in the university, probably 90% of us have been working together for 20 years or more. And so from the academic perspective, from the operational perspective, from a financial perspective, we have a very experienced team and we have a very integrated and tight team, and I think that has more to do with our current level of success even than the fact that I have both titles. I think what a lot of people are finding out is that this is not a very easy thing to do. With the downturn in the economy, a lot of people jump into wanting to have a hybrid campus. And so we had a traditional campus and now they want to have an online campus because they like the potential of the profits that they can get from that. But the investments are significant. We've put $100 million in the technology in just the last 4 years. The services you have to provide students are greater than what you provide for them on campus. You can't get away with shorting students in terms of electronic library and advanced curriculum and delivery and a lot of strength operationally in terms of how you do financial aid and how you do student scheduling and all those things. We have a very big fortune of having 22 years of experience at that, at the Apollo Group before we came here. And so I would tell you I think that's the most important thing, is the experience level of the team that's is doing it.

Our next question is a follow-up from the line of Jeff Meuler from Baird. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Do you have a sense for how long you expect the program review to take?

Well, they'll be on-site for probably just about a week. But then after that, you just don't know. They might ask for follow-up information after. It might take weeks, if not months, to get a preliminary report. A lot of it just happens to do with how busy they are, with what's on their plate. They might go immediately from Grand Canyon to a different school and so we just don't know. But our hope -- we're hopeful that it goes smooth and we're able to get a preliminary report quickly. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: I think it's under one OPEID. Presumably, they're also reviewing the ground campus operations?

It's all the university. We don't really have an online and ground operations per se. I mean, it's one university so they'll be looking at all things university. Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then when you're talking now about 18,000 ground student at the original ground campus, how are you guys doing with land constraints? And the land, the residential building, your old residential building just north of your athletic fields, who owns those? And is there optionality on that land?

Yes. The 19 acres, almost 20 acres, that's north of those athletic facilities, was a condominium complex that we now own and those buildings are coming down in about 30 days. So that gives us an additional 20 acres. We also are working on -- well, the way it's going currently within 3 years or so, we'll probably have close to 200 acres and we started out at about 100, 110 acres. We'll be close to 200 acres in 3 to 4 years.

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

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.