Grand Canyon Education, Inc. (LOPE) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Grand Canyon Education's Fourth Quarter 2014 Earnings Call. [Operator Instructions]. As a reminder this conference call will be recorded. I would now like to turn the conference to our host, Mr. Brian Roberts, General Counsel. Sir, you may begin.

Thank you, operator. Good afternoon, and thank you for joining us to discuss today on this conference call to discuss Grand Canyon's 2014 Fourth Quarter Results. Speaking on today's call is our President and CEO, Brian Mueller; and our CFO, Dan Bachus. This call is scheduled to last 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. We'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, 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 Brian.

Good afternoon and thank you for joining Grand Canyon University’s fourth quarter fiscal year 2014 conference call. I want to begin by reviewing the results of operations for the quarter. In the fourth quarter of 2014, enrollments grew by 13.7% and net revenues grew by 16.9%. New enrollments grew in the mid-single digits and operating margins are at 28.2% for the fourth quarter of 2014. Enrollment on our traditional ground campus grew by 30.7% to just under 11,000 students. New students grew to approximately 5,500. The average incoming GPA of new students was approximately 3.5 and 50% of students are studying in natural sciences. We successfully opened up computer science and information technology degrees this fall, bringing our total program count to over 160 graduate and under graduate degree programs right across eight colleges. By the end of the calendar year 2015, our program count will be approximately 200, including mechanical, electrical, and biomedical engineering degrees. Approximately 60% of our traditional students live on campus in very new and modern residence halls. Campus life has become incredibly vibrant and has become a hallmark for the GCU brand. We have had four major theater productions, many sold out concerts, numerous smaller concerts put on by our students through our growing music programs. Our debate teams are competing on a national basis and our chapel services average over 5,000 students. After a difficult pre-season schedule, our basketball team is entering the final two weeks of our conference season in second place with the chance to win the conference championship. Both our baseball and softball programs are off to a strong start and both have a good chance to finish first in the conference. Last night, our baseball team beat University of Nevada Las Vegas, seven to nothing on our home field in front of the capacity crowd and are now ranked 45th in the country. Next year’s ground enrollment is expected to be 14,500 including 7,500 new students, with approximately 70% living on campus. The 70% number is interesting because at most universities if the enrollment number goes up, the percentage living on campus goes down. This is an important trend because it brings up the average revenue per student and residence halls are very profitable. This will be our largest building year with four new six storey resident halls, the first 80,000 square feet of a 160,000 square feet engineering building, a 50,000 square feet general use classroom building, and a parking garage, and a new 6,000 seat stadium for soccer, lacrosse, and rugby. The online campus has grown 11.1% to 55,060 students. The student mix continues to move in a strong direction. Our strongest students by virtue of high graduation rates, low acquisition costs, low bad debt expense, and low student loan default rates are on our doctoral students, or master students, and RN to BSN students. If you add our traditional ground students to those categories, they comprise 63% of the total student body in fourth quarter of 2013 and are now 66% of our total student body. The strength of the student body increased academic effectiveness across many objective measures, increased continued commitment to student academic support services, and continued operational excellence has caused the revenue and expense areas to improve as well. Academic effectiveness at GCU is measured party by outputs like the following; over 75% of our pre-med students receive admission to medical school while the national average is 42%. The first time pass rate of nursing students on the in-FLEX examination over the last few years has been between 90% and 97% while the national average is 82%. We have a 100% certification in American nurses credentialing center and 87% certification on the American Academy of Nurse Practitioners. We have 100% placement rate with our traditional nursing graduates, a 100% placement rate with our traditional teaching graduates, and a 90% placement rate with our traditional business graduates within six months of graduation. We expect to produce similar results in our New College of Science, Technology, and Engineering. As you can see, we are attacking academic excellence from an output perspective, but also from an input perspective as we raised our admissions requirement to 3.0 and our average incoming GPA is now over 3.5. Net revenues were $190 million in the fourth quarter of 2014, an increase of $27.6 million or 16.9% from a $162.4 million in the prior year period. Operating margin for quarter four 2014 was 28.2% compared to 25.2% for the same period in 2013. It is important to note that tuition and housing has been frozen for six years on our ground traditional campus, and there was no increase in tuition for the online campus in the past two years. Net income was $33.1 million for the fourth quarter of 2014 compared to $26.2 million in the prior year period. After-tax margin was 17.4% compared to 16.1% for the same period in 2013. Instructional cost and services grew from $68 million in the fourth quarter of 2013 to $78.6 million in the fourth quarter of 2014, an increase of 10.6 million or 15.6%. This increase is primarily due to the increase in a number of faculty and staff to support the increasing number of students attending university as well as increase in occupancy expenses and depreciation expense due to the additional ground campus buildings open in the fall and higher instructional supplies and related expenses. As a percent of revenue, IC&S decreased 25% to 41.3%, primarily due to the decrease in our bad debt expense as a percent of revenue from 3.1% of revenue in the fourth quarter of 2013 to 2.2% of revenue in the fourth quarter of 2014. Admissions advisory and related expenses decreased 1% to 15.1%, primarily due to our ability to leverage our admissions advisory personnel across an increasing revenue base. Advertising expense as a percent of net revenue decreased 40 basis points from 9.3% in the fourth quarter of 2013 to 8.9% in fourth quarter of 2014. We spent less on advertising for ground traditional students and for online students, and our ground traditional campus is growing faster than our online student enrollment. Marketing and promotional expenses as a percent of net revenue increased 10 basis points from 0.9% in the quarter four of 2013 to 1% in quarter four of 2014. General and administrative cost as a percentage of revenue decreased from 6.7% in quarter four of 2013 to 5.5% in quarter four of 2014, primarily due to our decision to make contributions to school, sponsoring organizations in lieu of state income taxes of $2.8 million in the third quarter of '14, while in 2013 we made a contribution of $2.5 million in the fourth quarter. GCU has become a huge partner to both private charter and some public schools through this tax credit program. We have also launched the largest corporate habitat for humanity project in the country through this program and plan to update and improve 700 homes in our neighborhood in the next four years. The first 20 homes have been completed involving over 300 students, faculty, and administrative volunteers. I'm also very pleased to report that our three year cohort default rate for the 2012 cohort has dropped to 11%. Our two year default rate for the 2013 cohort, which is no longer officially reported, but we can calculate it based on information we receive from our lenders is now 6.5%. This reflects the quality of our student body and the rise in graduation rates across all sectors of our student body. As a result of the above, net income increased from $26.2 million in the fourth quarter of 2013 to $33.1 million in the fourth quarter of 2014. I'd like to give you an update on what has happened since the last call regarding going back to a not for profit status. We have had continued conversations with the Department of Education, the Higher Learning Commission and the IRS about potential structures and with our bankers and the rating agencies about financing the translation. We have also had conversations with individuals about charitable giving to help finance the transaction. Although we might receive some donations we do not anticipate the amount received will be significant. The majority of the financing will come from debt. We continue to work with our bankers and the rating agencies to determine the maximum amount of debt that University can support as well as the significant terms such as interest rate, payment requirements et cetera. We are still hopeful that we will be able to provide an buyout option to our shareholders that is to their satisfaction. Whether or not this process is successful and there is still some work to be done we believe the growth in upward trajectory of the University will continue. If the plan is successful it will allow us to avoid paying nearly $100 million in taxes on annual basis in the next few years. This would put the University in an even stronger financial position going forward and allow us to continue to compete successfully against not-for-profit state and private universities who don't pay taxes. With that I would like to turn it over to Dan Bachus, CFO to give a little more color on our 2014 fourth quarter, talk about changes in the income statement, balance sheet and other items.

Thanks Brian, revenue and income from operations exceeded our expectations in the fourth quarter, primarily due to higher enrollments and higher revenue per student than expected. Revenue per student was up year-over-year due to our residential traditional campus enrollment growing at a rate higher than our working adult enrollment. When factoring in room boarding fees, the revenue per student is higher for these students than for our working adult students. Scholarships as a percentage of revenue increased from 18.2% in Q4 2013 to 18.7% in Q4 2014 due primarily to the growth in our ground traditional student enrollment between years. Online scholarships as a percentage of related revenue continues to be up slightly year-over-year due to an increase in students from organizational partners. Bad debt expense as a percentage of revenue decreased to 2.2% in Q4 2014 as compared to 3.1% in Q4 2013. This decrease is primarily the result of continued improvements and processes and the quality of our student body. In addition as a reminder during the third quarter of 2014 we changed the way we recognize the revenue for students that were dropped from the university, such that revenue is recognized when payment is received. Given the low withdrawal rate of our students and our historical reserve methodology this change has an immaterial net impact on our financial statement but slightly reduces revenue and bad debt expense. Our effective tax rate for the fourth quarter 2014 was 38.1% as compared to 35.2% in the fourth quarter of 2013. The increase in effective tax rate between years is due to us making contributions in state income taxes to school tuition organizations during the fourth quarter 2013 as compared to the contribution being made in the third quarter of 2014. We did not repurchase any shares of our common stock during the fourth quarter of 2014. We have $25.9 million available under our share repurchase authorization as of December 31, 2014. Turning to the balance sheet and cash flows, total cash unrestricted, restricted and short term investments as of December 31, 2014 was $233.9 million. Accounts receivable, net of the allowance for doubtful accounts is $7.6 million at December 31, 2014 which represents four days sales outstanding compared to $7.2 million or 4.4 days sales outstanding at the end of the fourth quarter of 2013. CapEx in the fourth quarter of 2014 was approximately $27.4 million or 14.4% of net revenue. This was slightly lower than we expected as although this quarter the university commenced construction on additional classroom building for oncology science technology and engineering, started four additional dormitories that will house 3,200 students beginning in the fall of 2015 and a new parking garage to increase our capacity on the Phoenix, Arizona campus, not as much as this construction was paid for in 2014 as we had forecasted. Thus our total CapEx spend in 2014 of $168.6 million was less than our projection of $175 million. Therefore we are slightly increasing our estimated spend in 2015 from a $185 million to $192 million. Our cash base is 90.10 [ph] for 2014 was 76.5%, down from 78.5% in 2013. We believe that this decrease is primarily due to the continued growth in our ground traditional student body which has a much lower 90:10 ratio than does our working adult students. Last I would like to provide some color on guidance we have provided for 2015. As you probably noticed we have again provided estimates for each quarter of 2015. We do this because our financial results continue to become more seasonal due to the significant growth of our ground traditional campus. A large percentage of these students only attend class between the end of August and the end of April. However a large percentage of the ground traditional campus costs are fixed and these cost continue to grow due to our anticipated growth. We must hire additional support staff to service the increasing student body in the spring or summer of each year so that they are trained and can start working with the students to be students when these students are ready to be registered for the fall semester. Our enrollment guidance assumes mid to high-single digit online new start growth depending on quarter. It also assumes a slight increase in retention and an increase in graduates between years of approximately 20%. The significant gains we have seen in recent years and the continued shift to a higher percentage of graduate students will result in increased graduates in 2015. In January 2015 alone we graduated approximately 2,500 students up from almost 1,800 in January 2014. This resulted in online year-over-year growth rates have slowed from 11% at the beginning of the year to 7% by year’s end. We estimate that our total ground enrollment which includes ground traditional and professional study students to be 12,100 in the spring, 4,750 in the summer, 16,500 in the fall and 16,300 in the winter. Our revenue guidance assumes no tuition increase for our ground campus or our online campus. We anticipate the revenue per student will continue to grow year-over-year as a result of the growth of our ground traditional student body as a percentage of our total student body. In addition our revenue per student will be slightly impacted by one additional day of revenue in the first and third quarter and one less day of revenue in the second and fourth quarters than in 2014. On the expense side, we have forecasted instructional cost and services as a percentage of revenue to be up year-over-year. We anticipate employee competition and related expenses to be up as a percentage of revenue in the first three quarters due to the headcount increases in support of fall enrollment and due to higher benefit cost. We also are forecasting instructional supplies and depreciation and other occupancies cost to be up 50 basis points and 40 basis points year-over-year respectively. Instructional supplies will be up as a percentage of revenue primarily due to the small profit margin we derive on food sales while depreciation and occupancy cost will be up due to the additional buildings that have been or will be placed into service in late 2014 and 2015. We plan to continue to invest in new program development and various community projects. Bad debt is projected to be down slightly as a percentage of revenue in the first half of the year due to change in revenue recognition I discussed earlier and flat the second half of the year. We anticipate that advertising will be up 50 basis points year-over-year. We estimate that we will get leverage in admission advisory and related expenses in general administrative expenses between years. Interest expenses net of interest and other income will be approximately $1.5 million. Our guidance this year assumes an effective tax rate excluding the contributions made in real estate income taxes of 38.9%. We have also provided our estimates of diluted weighted average share outstanding by quarter although we might repurchase shares during 2014 these estimates do no assume repurchases. They do assume increased dilution from stock options and restricted stock granted in previous years and from a potential 2015 stock grant. I will now turn the call over to moderator so that we can answer questions.

[Operator Instructions]. And our first quarter comes from Philip Stiller from Citi. Please go ahead.

Hi, guys, thanks for taking my question. I guess I just wanted to start on the potential conversion, obviously you have had a lot discussions over the last several months, just wondering which discussions you feel have made this more or less likely over the last several months, and I guess which issues have kind of off to the top of the list in terms of potential hurdles going forward?

You know, I think generally we are in the same position when we were probably a quarter ago from this perspective. We started talking to people about contributions. I don’t think that’s a huge surprise, but that’s not going to be a significant part of the funding of this, that was an update.

I think that’s the only thing that’s changed. We did make some calls from a contribution perspective, and there’s just not a lot like this model out there for people to get comfortable with, that it’s not been out there that long, and so raising significant amounts of money from a contribution perspective is just not going to happen. So it is going to have to be debt, that’s really the only change that’s taken place I think.

Is there any more color you can provide in terms of your discussions with financing partners, in terms of how much leverage might be possible? And then also maybe you can give us an update in terms of timing in terms of when you might get clarity on that decision?

We don’t know in terms of the leverage yet. It really -- a lot depends on ratings and how comfortable ultimately everybody gets with our cash flow projections in the future. So we just don’t know that we are going through the process. What we have heard, I think is positive so far, but it’s just too early in that process to get much more color than that.

We met with Moody’s last week and so I think probably the best summary is that we are in the ball park. It is certainly not out of question I think it is possible from both a rating standpoint and from a debt standpoint that they could work.

Okay, great. And then one last question, I will turn it over. The margin guidance I guess, excluding the state tax contribution kind of implies it is flat. I mean you walked through a number of the headwinds year-over-year. Just wondering how do you think about margins longer-term, should we view the ‘15 margins being flatish as more of an investment year and then you get leverage on top of that or is this kind of a new normal given the mix effects that you’ve going on between ground and online, thanks?

I think it’s the new normal given that as recently as 12 months ago we were probably saying more like 24% to 25%, so to say 28% at this point we are pretty much exceeding what we have been saying for a couple of years. And so for us to keep it at 28%, maybe nudge it up just a little, we have been saying that 50 basis points in S&P is kind of where we are going to get it because bad debt expense now is down to 2.2%. It just can’t get much better than that, but S&P income down to 4% which exceeded our goal of 0.5, and so if we get another 50 basis points out of S&P in the next year, that would be good.

Okay, great thanks.

Our next question comes from Peter Appert from Piper Jaffray. Please go ahead.

So Brian or Dan can you give us any further color in terms of the time frame we should think about in terms of the further developments on the go-private transaction and sort of the process that you need to go through from here?

I think we said last time that we would be able to give people a lot more definitive information in the first quarter conference call which would be in April. So, I think that’s still a date that we are pointing towards in terms of having a lot more concrete information to share with you.

Got it, and anything specific in terms of the discussions with IRS, do you feel comfortable in terms of how that’s progressing?

Yeah, I think the conversation so far although preliminary have been progressing fine.

Okay, and then Brian anything new or interesting you can talk about in terms of what you are seeing in the online market in terms of competitive dynamic, you guys continue to outperform the industry pretty substantially?

I think that continues to go as we predicted three or four years ago. The traditional universities that are kind of mid-tier in their rankings are increasingly trying to get into it. Most of them are using service companies to do it, which means they have the split revenues and their tuitions are higher. There hasn’t been another real major player emerge yet, Liberty’s a major player, Southern New Hampshire is a major player, and then there is just a myriad of minor players, but for the most part, the growth is coming at the expense of the other private for profit education companies. That trend really hasn’t slowed down. We are very, I guess I have to say we are still excited about what we are doing because the percentage of students that are in those higher ranking categories that graduated high rates and have always positive characteristics, we have made another 3.5 percentage points improvement in terms of the total student body in those categories, and so our growth rate is accomplished with an increase in the quality which is very encouraging for us.

Much discussion about increased competition in the nursing field especially are you seeing any evidence of that?

Yes, we haven’t slowed down but yes, just and it’s anecdotal evidence just watching people want to get involved in that area, or focus more in that area, more advertising is out there in that area. There is just a lot of work in the hospitals around trying to increase the education levels of nurses that are already nurses, which is I think going to continue. We are doing well I believe because people recognize our contribution on the [indiscernible] nurses. They are really really expensive to educate and provide but it’s the most important thing to the hospitals. And you look at most universities they either don’t provide that program or they provide on a very limited basis because it’s just very difficult to do and be profitable. So we’ve been able to build relationships with hospitals and even though that program is difficult to deliver and its expensive to deliver the hospitals have been very pleased with our graduates and pleased that we are willing to do this and that’s really helped us in terms of the [indiscernible] in the Doctoral program.

Great thanks Brian.

Our next question comes from Sarah Gubbins from Merrill Lynch. Please go ahead.

Hey this is David Chu for Sarah Gubbins. So in terms of your conversations with Moody's what was that profile that they assessed?

David we're not going to talk about that.

Okay, and just I guess maybe I can ask it a different way, like we haven't been able to find like the non-profit school operating with let's say like $2 billion in debt. I mean are there schools out there with this type of structure?

I would quit looking because I don't think you're going to find it. So there is no question that this is very different and that was the problem with the fundraising, with the charitable contributions. We've really been active for -- between five and six years now. So relatively short period of time. You really can't find anybody else whose financial models look similar to this. So it takes a bank a long time to get -- to recognize the full value that's inherent in this model. And so no, there isn't anybody else that has gone about this, the way we're going about it. There is probably maybe Liberty but there is not a lot of other models that look similar to this. So that's on the downside but on the upside is the model is very good. And so people are having to balance, why we haven't seen a lot of this with wham, but it looks very good and maybe on a track record of say peers. And so we still think there is a good chance that we can do it.

Okay great. Just a couple of quick follow-ups. Scholarship expectations for 2015?

Yeah, they'll be up year-over-year. As a percentage of revenue probably for the full year about 100 basis points.

Okay and last one. So I think the mid-single-digit growth you quoted, that was for online correct.

Correct yes.

Was that a slight slowdown versus the past couple of quarters?

No, no, in fact. It's up a little bit sequentially but still mid-single digits but up sequentially a little bit.

Okay, got it. Thank you.

Our next question comes from Jason Anderson from Stifel. Please go ahead.

Good evening guys. Just wondering, I think it was asked. I'm not sure if you exactly touched on it. But is there any other color maybe you found out or that you could highlight on maybe with HLC or the states in your discussions or…

No the talks with HLC and the Department of Education continue to be good. We're providing the HLC specifically with additional information that they're requesting and that continues to be positive. We had a one meeting with Ted Mitchell which went very, very well and then a follow-up telephone conversation with Arne Duncan that also went well. They're both supportive. Various talks with the Governor, the Mayor and others in Arizona. And so people are interested in getting to the bottom of why this is working so well and what it means if we go not-for-profit from a state perspective and we are open with them and having discussions with them. And so it's pretty much as it's been, all of the states getting more interested because it was be a loss of revenues for them if it is successful.

Okay and then I guess, maybe we asked about timeline and thanks for your help on that. But maybe if we can gauge your efforts and the diligence effort here, do you feel like a lot of heavy lift has been done or do you feel that there is a long way to go. And I guess I'm just thinking on maybe you again your efforts and diligence and how far along you are in that regard.

I think the heavy lifting primarily has been done. I think at this point we're letting the professionals do their work and ultimately our expectation is that they'll come back with specifics in terms of what -- how much debt we can take on, what the interest rate would be et cetera. That will allow us to figure out what our tax liability would be on the transaction and thus you put it all together what we can afford in terms of from an investor perspective. And I think at that point we will take to our Board who might or might not choose to take that to the investors. So I think that’s how the process will shake out. But we have done I think the majority of the work that we needed to do and now it is just time to get some answers back.

Great, thanks. And then one more -- thanks for touching on RPS. I understand the drivers there in to ’15. But as far as maybe the way we can look it and calculate it looks like it accelerated from last quarter. Should we think of 4Q kind of RPS increases being a decent run rate into the rest of ’15 -- and through ’15?

Yeah, but so I have given you both enrollment, our guidance gives by quarter both enrollment and revenue. So you will be able to calculate what our estimated RPS is by quarter. So you will see for the most part you will see some pretty nice year-over-year gains on a quarterly basis. Obviously second and third quarter, especially third quarter will be a less of gain with the third quarter being because we had a really, really large new traditional campus start group and only one month of revenue in the third quarter. And so revenue per student is actually I think down a little bit third quarter ’15 over third quarter ’14 because of that but you will be able see our expectations on a RPS basis by quarter.

Great, thanks for that.

Our next question comes from Adrienne Colby from Deutsche Bank. Please go ahead.

I was wondering if you could update us on fall 2015 registrations, how they are trending versus a year ago and how you view them versus the targeted 7,500 fall class?

We feel good about it. You know the registrations are going about to the pace necessary given what we did last year, which was 5500 students were pacing at about a 7500 rate. I think for us the exciting thing is the contribution of the three engineering programs and the growth of the computer science and information technology program but we are on pace.

Great. And I was wondering if you could go back to the comment you made about depreciation expenses. There have been a lot of new building that have gone up and I thought Dan said that depreciation will be up 50 basis points next year. Just wanted to make sure I heard that correctly?

You did, that is correct.

Okay.

And remember this is our biggest building year, ever on a year-over-year and that’s really what’s driving that.

Got it. And then I guess last thing for me it sounded like Grand Canyon is planning an online student night on campus, that it’s coming up and I am just wondering if you could talk about kind of the tenants you are expecting and if you had similar events like this before to connect online students with the ground campus.

Yeah, it’s interesting that you asked that because we just got an update on that about 30 minutes before this started. Yeah we are tracking towards a 1000 or so people that are going to attend the event, and we got a couple of days left here. It’s the first time we have done it and we have actually selected three online students who have outstanding stories and so we are going to highlight them. We are going to do some scholarship awarding to children but it is going to a chance -- we invite them to campus every chance that we can get, we want to involve them in everything that goes in and so time them as close as we can to what goes on in this campus is really important part of our strategy. So this is the first time that we have done at a basketball game but this is the beginning of something that will grow much larger as we go forward.

Thank you.

Our next question comes from Jeff Silver from BMO Capital Markets. Please go ahead.

Hi, good afternoon guys. This is Henry Chen calling in for Jeff. Just wanted to follow-up on your comments around some of the charitable donation, could you just elaborate a little bit on maybe some of the reasons of why some of the people who would give would be I guess gave a little bit than you expected. Thanks.

So, I see. Yeah the donations as far the go-private thing. We called on three people who are very well -- who've done very well, who have been known to especially contribute to things that have a Christian world view perspective, because that's where we were kind of going to go. People in that world are excited about what's going on here. It's just the people are used to contribute or donating to a University that they have some connectivity to, that they graduated from, one of their children graduated from at or that university has a huge need for some reason, the Hobby Lobby, Green Family gave $70 million recently to Old Roberts just to save the University. To get them to think about -- to go back not-for-profit buy out investors concept with regard to supporting something, it's just too new. It hasn't been around long enough, there is too much uncertainty around that to get people to make major contributions of say $50 million or more. And we recognized that early on in the process and it just doesn't make sense to spend a lot of time to doing that. So that's why we've discontinued it.

Okay, got it. So you're not looking to, I guess focused more and more on the educating and trying to open that channel or is that sort of…?

Well if we're successful at going back with the not-for-profit status and we will get very involved in the world of grant riding and research, very involved in the world of getting especially Christian just to line up behind this, because they're looking for something that is scalable and really can be transformational, and unlike what’s going on at most Christian universities this is. And so what we're doing in terms of size and scale combined with what we're doing in the stem [ph] areas is exciting to a lot of people in that world. So I think once we can be a tax deductible donation in the traditional sense, I think that will be a world that's opened up to us that really is not available right now.

Got it and that makes sense. And just a last one from me, on the online side we see a lot of schools moving their programs online and you mentioned that there is some competitive or just increased competition in the nursing space. I mean as you look maybe long-term or on this current year, where do you see Grant Canyon's specialty or sort of differentiated product in terms of online, I guess by the Greenfield or however you look at it? Thanks.

Yeah, that's good question and it’s a very good question because that's the thing that will most dictate the long-term success of this is the ability to keep growing at that conservative rate in the online world. Very much focused on Masters Degrees and Doctoral degrees. We're trying to add 20 masters degrees on an annual basis and right now those masters’ degrees are really across our eight colleges. Still more in education and to some extent nursing but we're really getting into two areas that we haven't been very prominent in, one of them is misology [ph] and Christian studies which has a huge market for that. And the other area is in psychology counseling and health field and there is a huge area going in that especially at the Master’s degree level. We're also going to explore what we can do from a computer science and information technology perspective online. We won't do anything from an engineering perspective but computer science and information technology also is an opportunity for us. So what you'll see as we go forward is that we will spread our online offerings more evenly across all eight colleges. I mean that will a real focus at the graduate level.

Got it, okay, thanks so much.

Our next question comes from Jeff Mueller from Baird. Please go ahead.

Yeah, thanks and congrats on another terrific year. I guess just first I have heard you guys talk a lot about, over the years about what your plans are for tuition pricing. What are your plans for scholarships, it sounds like you're seeing really strong demand from high caliber students for on ground. So what are your plans for scholarships and what your plans for room and board. I don’t mean so much in 2015, I mean how do you think about those as potential price levers over the next few years?

That’s -- it’s really a good question and there are four areas that we can tweak, if we need to tweak them. One of them obviously is tuition. If we want to raise tuition 2% or 3% for couple of years consecutively that would be easy for us to do and still be very competitive at the online space and still be ridiculously low from the ground space. And so that’s a lever and we could pull going forward. A second lever is ground scholarships. We can keep our tuition at 16.5, [ph] the average student is paying after scholarship 7,800. We can tweak that and have the average student pay 8,100, 8,200 and 8,300 and so that would be easy for us to do. The third area is room. There is a lot of -- we are just so far under room and board, full room and board on our campus is about $6,500. At most state universities and other private it’s between $10,000 and $12,000. So tweaking that number up a little bit would still keep it way under and when we get to 25,000 students we expect 70% to be living on campus and so that’s a tweak that we can make that would be substantial. And then the other area that’s possible is we call Canyon Connect because we are delivering our materials electronically versus students paying $200 to $300 for books in the class, are also paying far less than that. And so tweaking that 3% to 4% or 5% make a considerable difference and so we don’t need really make any changes into those three to four areas right now. But as we go forward those are four areas that we have available to us to tweak and still be in a very positive position.

Okay and then as you have the conversations with key potential financing sources or rating agencies, how do the plans and timeline for the second campus filter into that, does the second campus potentially get the delayed to throw off more free cash flow earlier on, maybe paid down some of the higher tranches of debt and then open that at later date or how does that factor into this conversation?

Absolutely. We want to do something eventually in the East Valley and we keep getting calls from Tucson and from Albuquerque and from Las Vegas and so those are always potentials down the road but there is no -- we are not going to do anything in the next two to three years. We really have figured out that we can’t -- it’s hard for us to stop the demand on this campus and every dollar that we invest on this campus right now returns far more than we could by starting new in a different location. And the interesting thing is if you just take the east valley in Tucson, our room and board is so low that students are finding that they were planning to be commuter students, but our room and board is so low that they are saying you are not going to have a campus but I will just go and live on your current campus and that’s why the percentage of all students living our campus just continues to go up and so don’t expect us to make any major capital commitments to a new location in the next two to three years.

All right thank you.

Our next question comes from Trace Urdan from Wells Fargo Securities. Please go ahead.

Thank you. So I want to beat this horse to death but just to put some finite numbers on it you Brian were quoted by the Arizona Republic in late January saying you guys were looking for $500 million in charitable contribution. Is that number not accurate or no longer accurate given the comments you made today?

Yeah, that’s not accurate. The money is going to have to come from debt.

Okay, all right. And then have you decided or do you know, I mean given that there is that this is not a transaction that you are presumably engineering or helping to engineer what method are you going to or you are planning to use to determine the valuation for the transaction?

Well I think you have two separate groups looking at this. So the board of directors will have their own valuation firm do a fairness opinion to make sure whatever is being proposed is a fair offer. On the other side of it it’s just simply how much debt and other sources of financing can we put together to make an offer. So I think there will be a fairness opinion done. If we can put together our financing team and to that stage as Brian said earlier we feel still that we can get to a point where we can put a fair offer together.

When you go and meet with the lenders, there is no prospectus. I mean you don’t -- there is range that you are proposing to them and when you talk to Department of Education this has not come up as a topic about that how much leverage you are looking on lay on the university and I presume you guys must have an opinion at this point?

Do we have an opinion on the amount of debt we think we can take on?

The opinion on the evaluation of the company that you are looking to target and how much debt you know…?

Well, it think the current trading price of the stock is the value of the company as it sits today. The question is what type of premiums to whatever the trading price is at the time of the transaction can we put together.

And we think that the eventual price that investors would think would be fair has a lot more to do with the rest of the industry maybe than it does for us. Obviously if this was eight years ago it would be a completely different story. But I think as we said from the beginning the industry has changed so drastically in the last four years that it places some would say an unofficial ceiling and what you can accomplish as compared to years ago.

You describe that the Department is supportive of the transaction but it seems strange to me that would be the case given that what presumably you will end up with regardless of the exact price is going to be a very heavily levered university, which by standard metrics and certainly by the lens of looking at actors in the space puts the students at an increased level of jeopardy and risk then if you are not carrying that debt. So how those two things reconcile, like why this is a positive from their perspective?

Well I mean that is very, very good question. Ted Mitchell in particular spent a huge amount of time, we ascertained from a research perspective and he knew this operation in a lot of detail, including the contribution that we are making towards the economic revival of the west side of Phoenix. And so that played a lot into his thinking. Obviously there is the side of our government that doesn’t like for profit educations companies and is pleased that to some extent they think they have got it moving in the direct -- we are one that’s standing out as kind of in their way from that perspective but wasn’t the whole story. He said right away when we went in there, we know you guys aren’t here because of any ability to try to get out of regulation, because you are not in any difficult position from that standpoint. So we know that your motives are honorable but I think and I don’t not know many people he talk to from Arizona but we are becoming a real, real conversation point everywhere within the State of Arizona because we have got three State Universities that require almost a $ 1 billion of financing on an annual basis and the state doesn’t have it. We are also very under funded from a K-12 perspective. And any move in the direction of us being able to make a contribution especially to graduating, stem graduates in very high numbers on an annual basis is something that’s important to Arizona. And so I think it is a combination of things that they have determined there is obvious risk in $2 billion plus of debt but on the other side there is some huge upside potential if we can continue doing what we are doing and then not have to pay $100 million in tax on annual basis how much more could we do. I think they are weighing those things.

Okay, thank for the answer, Brian.

Yeah, thank you. With that we have reached the end of our fourth 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.