Grand Canyon Education, Inc. (LOPE) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Grand Canyon Education's Fourth Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I will now like to turn the conference over to Brian Roberts, General Counsel. You may begin.

Thank you, operator. Good afternoon and thank you for joining us today on this conference call to discuss Grand Canyon's 2015 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 that 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, 2015, our Quarterly Reports on Form 10-Q and our current reports on Form 8-K. We recommend all investors thoroughly review these reports before taking a financial position in GCU, and we do not undertake any obligation to update anyone with regard to forward-looking statements made during this conference call. And with that, I'll turn the call over Brian.

Good afternoon and thank you for joining Grand Canyon University's fourth quarter fiscal year 2015 conference call. In the fourth quarter of 2015 enrollments grew by 9.9%, and net revenues grew by 13.7%. New online enrollments grew in the mid-single digits, operating margins are at 29.2% for the quarter. This is our 21st consecutive of beating consensus in raising expectations and I want to give an update on the key differentiated strategies that guide our decision making as we move forward. First, is the commitment to building a high quality student body. On our traditional campus our initial requirement is the high school GPA of 3.0 and our academic institutional scholarships begin at that level. Over 90% of our traditional students are on some level of academic scholarship. The scholarship program is weighted towards the highest GPA students and is helping produce an average income in GPA of approximately 3.5, almost 70% of the students are studying in science, technology, engineering, math, or business. We started this fall with approximately 15,500 students attending the Phoenix campus. Our target next fall is 7,200 new traditional students with the average incoming GPAs again being approximately 3.5. That would bring total enrollment on campus to somewhere between 17,500 and 18,000. Our goal in five years is to have over 25,000 students on campus. We have already acquired more land than we need to accommodate that number. Our online student body continues to grow from a quality perspective as well. 47.8% of our working adults are studying at the graduate level which is 180 basis points up from a year ago. 67.7% of our students are studying in areas to produce the highest graduation rates, that is 130 basis point improvement from one year ago. Our fourth quarter online student persistence rate was 90.5% which is consistent with the fourth quarter of prior year. We will continue to grow the online campus between 6% and 8% per year with high quality students. Second, it's important to build a high level of excellence and stability in the personal that work with our students on an everyday basis. Our full-time teaching faculty, both on ground and online have been critical to our success. I'm very pleased to report that we have less than 6% turnover rate on an annual basis with that group. In addition, our student counselling group who plays the vital role in keeping students on-track and progressing towards graduation has less than 8% annual turnover rate. Our graduates through end of program and alumni surveys have rated their overall experience at GCU either a 4 or 5, and are likely to scale at greater than 90% rate. Building experience in teaching and counselling services is an important aspect of our strategy. Third, it is critical to build academic programs that are relevant in today's economy and lead to good paying jobs. In 2015 we rolled our Bachelor of Science programs and computer science, information technology, mechanical engineering, electrical engineering, biomedical engineering, computer programming and business information systems. In 2016 we rolled out programs in biochemistry, molecular biology, environment science, electrical engineering technology, and mechanical engineering technology. This is not a complete list but I want to give you an idea of GCU's commitment to provide a rigorous academic programs in the STEM areas that lead to jobs that are in high demand. The university as a result has taken on a more high profile role in both, the Greater Phoenix Economic Council and the Arizona Commerce Authority. Fourth, we remain committed to the hybrid campus strategy. Our traditional ground campus and our online campus for working adult students are leveraging the same administrative infrastructure that continues to produce leverage in operating margins without raising tuition. There is a financial crisis going on in higher education that makes our pricing an attractive value proposition to students and families. We have frozen tuition on our ground campus for eight years and had only 1% increase online this year but we're still able to expand margins. Not outsourcing key university profitable functions like online learning and student resident falls have played a key role in allowing us to hold the line on tuition. Fifth, the perfomatories of GCU extend our reach into the community and contribute to building the brand of the institution. Our theatre and music programs continue to win awards, both locally and nationally. Our debate team is now ranked 19th in the country. Just this past weekend, our team performed at a tournament on the West Coast. We took second place overall out of 25 schools losing only to last year's National Champion and beat out top programs like UCLA, USC, Notre Dame and Pepper Dime. We set a team record for a three-day tournament by taking home a combined 18 Top 5 finishes. In athletics, our swim team is ranked in the Top 20, our baseball team at a Top 35 recruiting class, our softball team is off to a six in start, our men's volleyball team is nine and three so far this season, and our men's basketball team currently stands at 22 and 4, is ranked 15th in the men's mid major Top 25 polled by collegeinsider.com and received the Top 25 vote in the A-People. We continue to pursue a return to a not-for-profit status for the university. I think it's important to note that when the university was on the verge of bankruptcy, going to a for-profit status in order to get access to capital from the public markets was the best thing for our students, faculty and staff, the community, and has worked out well for our investors. We now have an organization and economic model is sustainable for years into the future. We now believe it is in the best interest of our students, faculty and staff, the community and our investors that we pursue a not-for-profit model. I also think it's important to note that all universities who look like us, having a large and vibrant traditional campus, as well as having online students, having not-for-profit status. It is also true that hundreds of not-for-profit universities are outsourcing services like residence halls, online delivery, food services etcetera to service companies, many of whom are for-profit and publicly traded. We believe we have identified a potential structure that would accomplish this conversion and allow the university to operate in a manner that's consistent with the hundreds of other public and private universities. The university has a strong financial position and a strong record of regulatory compliance. The university has no problem with any of the current or proposed regulations placed on for-profit universities by the Department of Education, that this includes the 90/10 Rule, the gainful employment rule, and cohort default rate limits. With regards to the 90/10 Rule, we are at 74.8% and continue to decline and this is without any state subsidies. With regards to the loan default rates, our three-year rate for the 2013 cohort will be under 10% when the maximum allowable is 40%. Because of our low tuition rate, especially the actual tuition paid by students after scholarships, we do not anticipate any material issues with gainful employment rule. Although this is still a fluid process, what has been proposed is that a 501(c)(3) would acquire certain assets of the university from the Grand Canyon Education Inc. We have provided extensive information to the IRS and HLC about this type of structure and are hopeful that we will receive the necessary approvals. Once the required regulatory approvals are received, the 501(3)(c) would attempt to raise the financing necessary to fund the purchase of the assets, as well as required cash reserves, the positive social completion of the transaction which we are hopeful will occur in the first half of 2016. Grand Canyon University would become not-for-profit University. Governed by an independent board of trustees and GCE would become a service technology company similar to companies like 2U and Pearson Embanet, providing services to Grand Canyon University, including technology, marketing, enrollment and student support services under a long term contract. This would also give GCE the ability to provide these services in the future to other universities. The amount paid to GCE service is provided as part of the master services agreement, will be negotiated between GCE and a non-profit university. GCE and a non-profit university are in the process of conducting due diligence which will influence the negotiated amount because negotiation are ongoing we cannot give any further color on revenue or profitability. Please keep in mind that there is a great deal of work yet to be done, so no definite agreements have been signed and significant regulatory approvals remain to be obtained. Therefore no assurance can be given that the transaction will be completed. We will continue to provide updates if and when material developments occur. Net revenues were $216 million in the fourth quarter of 2015, an increase of $26 million or 13.7% from the $119 million in the prior year period. Operating margin for quarter four 2015 was 29.2%, compared to 28.2% for the same period in 2014. Net income was $38.1 million for the fourth quarter of 2015, compared to $33.1 million in the prior year period. After-tax margin was 17.6% compared to 17.4% for the same period in 2014. Instructional cost and services grew from $78.6 million in the fourth quarter of 2014 to $92.4 million in the fourth quarter of 2015, an increase of $13.8 million or 17.7%. 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 and increased benefit cost between years. In addition, we continue to see an increase in occupancy cost including depreciation and amortization as a result of us placing into service, additional buildings to support the growing number of ground traditional students and an increase in dues, fees and subscriptions and other instructional supplies primarily due to increased licensing fees related to educational resources and increased food cost associated with a higher number of residential students. As a percent of revenue, IC&S increased 1.5% to 42.8% due to the factors described earlier. Admissions advisory and related expenses decreased 1.5% to 13.6%, primarily due to our ability to leverage our admissions advisory personnel across an increasing revenue base. Advertising expenses as a percent of net revenue decreased 40 basis points from 8.9% in Q4 2014 to 8.5% in Q4 of 2015. Marketing and promotional expenses as a percent of net revenue decreased 10 basis points from 1% in Q4 2014 to 0.9% in Q4 2015. With that, I'd like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2015 fourth quarter, talk about changes in the income statement, balance sheet and other items as well to provide detailed information on our 2016 guidance.

Thanks, Brian. Revenue per student was up year-over-year due to the 19.2% student growth in our ground enrollment while online enrollment increased 7.7% over the prior year. When factoring in room boarding fees, the revenue per student is higher for ground students than for our online students. Online revenue per student was down again this quarter due to the continued mix-shift of programs that earn less revenue per student per day, although the decrease was much more moderate than in prior quarters due to the small tuition increase implemented in September. We believe this trend of slightly lower online revenue per student will continue. Scholarships as a percentage of revenue decreased from 18.7% in Q4 2014 to 18.6% in Q4 2015, due primarily to a decrease in the traditional scholarship rate year-over-year as a percentage of total revenue due to an increase in ancillary revenues. Online scholarships as a percentage of related revenue were flat year-over-year. Bad debt expense as a percentage of revenue decreased to 2.4% in Q4 2015, as compared to 2.2% in Q4 2014. Our effective tax rate for the fourth quarter of 2015 was 38.6%, as compared to 38.1% in the fourth quarter of 2014. The fourth quarter of 2015 was slightly higher than prior year due to the timing of non-recurring items. We repurchased 288,000 shares of our common stock and an aggregate cost of $11.3 million during the fourth quarter of 2015, and it purchased another 396,000 shares in 2016 such as that our current share purchase authorization has been exhausted. Turning to the balance sheet and cash flows, total cash unrestricted, restricted and short term investments at December 31, 2015 was $181.8 million. Accounts receivable, net of the allowance for capital accounts is $8.3 million at December 31, 2015, which represents 3.9 day sales outstanding compared to $7.6 million or 4-days sales outstanding at the end of the third quarter 2014. CapEx in the fourth quarter of 2015 was excluding our offsite development of $13.6 million was approximately $35 million or 16.2% of net revenue. This was greater than anticipated as we are able to acquire some large parcels of land east of our cancer. Construction on three more apartment style hall, a 170,000 square foot classroom building for our college of science, engineering and technology, a student service center and a fourth parking structure for the fall 2016-2017 school year continues. We currently estimate that 2016 CapEx will be approximately $180 million excluding the offsite office building parking garage that I will discuss in a second. The increase of $30 million from our previous estimates is primarily due to first quarter 2016 land acquisitions. We have no further material land acquisitions planned, although if opportunities similar to those that occurred in the fourth quarter of 2015 and the first quarter of 2016 occur we will consider them. Included in offsite development in 2015 is approximately $10 million we spend to revitalize what was formerly known as the Maryville Golf Course under an initial 30-year partnership agreement with the City of Phoenix. The gold course is now known as Grand Canyon University Championship Golf Course. Additionally, in late 2015 we commenced construction on an office building and a parking garage that is approximately one mile from our ground traditional campus. Employees that work in leased office buildings in the Phoenix area will be consolidated into this new building when it's completed in late 2016. Although the university is currently funding the construction of the building and parking garage, the university is marking this along with a recently refurbished office building in the same development as part of a sale lease back transaction. We are hopeful that we will be able to sell these properties once construction is completed at an attractive cap rate. Our cash basis 90/10 amount for 2015 was 74.8%, down from 76.5% in 2014. 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 our working adult students. Last, I would like to provide color on guidance we have provided for 2015. As you probably know, we have again provided estimates for each quarter of 2016. 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 cost are fixed and these costs 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 students when these students are ready to be registered for the fall semester. Thus we anticipate our margins will be up year-over-year in the first and fourth quarters, and down in the second and third quarters. Our enrollment guidance assumes mid-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 15%. The significant retention gains we have seen in recent years and the continued shift to a higher percentage of graduate students continues to result in year-over-year increases in graduates, that exceed our total enrollment growth rate. Although this delta should start to stabilize in the second half of 2016. This results in online year-over-year growth rate disclosed slightly from 7.7% at the beginning of the year to 7% at the end of the first quarter of 2016, and remains at 7% for the rest of 2016. We estimate our total ground enrollment which includes both ground traditional and professional study students to be 14,000 in the spring, 5,500 in the summer, 17,500 in the fall, and 17,400 at year end. We're starting to experience larger numbers of graduates that are ground campus and although we anticipate our term-to-term retention rates to be flat to slightly better between years, the larger enrollment cost is bigger fluctuations between fall and spring semesters. Our revenue guidance assumes no tuition increase for our ground campus or our online campus. We anticipate that 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 changes between 2015 and 2016 when the traditional campus semesters begin and when the online breaks occur. We estimate the effects of these changes are $1.9 million of additional revenue in Q1 versus the prior year, $1.3 million less in revenue in Q2 versus the prior year, $5.5 million less revenue in Q3 and $4.5 million additional revenue in Q4. The net change of $400,000 in revenue is that which will be pushed into 2017 and a large movement of revenue between Q3 and Q4 is due to the fall semester beginning five days later in August this year. On the expense side, we have forecasted instructional cost and services as a percentage of revenue to be up again year-over-year. This is being caused by the investments we continue to make, significant increases in depreciation and occupancy expenses, as well as growth in ancillary revenues that have forecasted margins in the mid-single digits. This includes food and merchandize sales, and revenues earned at the new Grand Canyon University Golf Course and Grand Canyon University Hotel. Although the revenues are small, we estimated in total, these revenues will grow at just under 50% this year. As a result, we anticipate IC&S of percentage of revenue to be up 160 basis points year-over-year with the primary drivers being employee compensation-related expenses which we expect will be up as a percentage of revenue 50 basis points, depreciation which we expect to be up 90 basis points and occupancy cost to be up 60 basis points year-over-year. We plan to continue to invest in new program development and various community projects. Bad debt expense is projected to be flat year-over-year. We anticipate that advertising will be up slightly as a percentage of revenue year-over-year. We estimate that we will get leverage in admissions advisory and related expenses and general administrative expenses between years of approximately 80 basis points each. Interest expense, net of interest and other income will be approximately $1 million. Our guidance this year assumes an effective tax rate excluding the contribution made in lieu of state income taxes of 38.2%. We have also provided our estimates of diluted weighted average shares outstanding by quarter. Share repurchases made in the fourth quarter 2015 and the first quarter of 2016 have been factored into these estimates. Although we might repurchase additional shares during 2016, these estimates do not assume repurchases. They do assume increased dilution from stock options, restricted stock granted in previous years and from a potential 2016 stock ramp. Last, it's important to note the guidance provided does not factor in costs associated with not-for-profit transaction. To-date, we have spent an insignificant amount in legal and accounting cost but have incurred, and expected to continue to incur significantly cost in the first two quarters of 2016 as we work through the anticipated final stages of this potential transaction including obtaining valuations and a fairness opinion for the assets that are contemplated to be sold. We plan to report these expenses in 2016 separately from our ongoing operations. I will now turn the call over to the moderators, so we can answer questions.

Thank you. [Operator Instructions] The first question is from Paul Ginocchio of Deutsche Bank. Your line is now open.

Thanks Brian, thanks Dan, great set of results. Not to nick it [ph] but I think your guidance was for a couple of hundred more students at the year-end, 700 versus 74,000 -- 700 versus 74,506. What was the differential, where was that slight difference? Thanks.

Okay. We were little bit under on the ground campus than we initially thought we would be.

Okay, great. And can you just talk about what the -- what assets would stay within them 501(c)(3). You talked about technology, marketing enrollment and services being in GCE but is it the real estate, the academics and the athletics that's sitting them in 501(c)(3)?

Yes, if you could look at the contracts that were with these other companies like 2U, this is not going to be that much different from that -- kind of the things that we mentioned are the things that will be in the service company. And then academic programs in those campus and those things will be in the university. So it hasn't been completely finalized yet so we don't want to say exactly what it is but it will be very typical of how these transactions take place?

Great, if I could just sneak one more in. You've submitted it to -- can you repeat that again, I think it was HLC and the IRS.

The IRS.

Is that -- was that just submitted, is it the response time -- when do you expect to hear something from them, both?

HLC, they do a side business which they did a couple of months ago and then that site visit team puts together a report and a recommendation to the Board of HLC which will be occurring here in the next couple of weeks. When we'll actually find out the response we don't know but that's how that works. The IRS is an ongoing dialogue based on a couple of different things that we are requesting approval from the IRS on.

Like we said in the script, we expect either for this to happen or not happen in the first half of this year. So that gives you a little bit of timeframe.

Great. Thanks Brian, thanks Dan.

Thank you. The next question is from Peter Evert [ph] of Piper Jaffrey. Your line is open.

Thanks. Brian, is it possible to talk a little bit more about -- how the process by which you determine the value of the assets that will be purchased.

Yes, I mean both Boards, the potential 501(c)(3) Board and the -- our GCE Board, both hired, very well respected valuation firms that come in and do that work. And so they are both in the process of doing that work and we're hopeful that there will be some overlap between what each side values those assets at so that they can come to an agreed upon purchase prices.

Okay. So is it -- so should we think about it in terms of just tangible book value of these assets or are they imputing some value relative to the earnings power and cash generative nature of these business assets?

I don't know -- if we want to get into the specifics, I don't think it's fair to them probably to do that. I think they will come up with their valuation and then the 501(c)(3) will have to take what that agreed upon purchase price and allocate it to the assets under purchase accounting rules, once that occurs but how are they actually coming up with their valuations, I don't think we should probably speak to that.

Is it possible to talk about how the 501(c)(3) would then fund the purchase?

Yes, the 501(c)(3) would go out and raise tax exempt bond financing to fund the purchase of those assets.

And is there a leverage ratio that you have a sense is acceptable or doable in this transaction?

Again, I would leave that to the bankers who are responsible for putting that together. So I think they have some ideas of the amount of debt that can be raised which would include both, as I said in my prepared remarks, both the cost to acquire the assets and then some required reserves, cash reserves, so that the 501(c)(3) can start with some assets.

Got it. And you mentioned the IRS and HLC approvals, I assume a DOE approval is required as well. Is that correct?

That is correct. Typically the DOE looks at the transactions post-closing, not prior to closing.

Okay. And then last thing, the -- Brian you said, if it happens or doesn't happen, you'll know in the first half. In terms of it not happening would be I guess for some reason not getting regulatory approval or not being able to come to terms on financing. Are there other specific stumbling blocks we should be thinking about?

No, those are the two. A few of the HLC or IRS would put some robust in place, that would be one thing. And then the second thing would be, if we just can't get the bond sold, and if that's not going to be an easy thing to do but obviously it's much easier than what we were talking about previously which was -- which would have required us to buy everything out and double the rate. So it's certainly more doable than what we're talking about a number of months ago.

Got it, thank you.

Thanks.

Thank you. The next question is from Sarah Gubins of Bank of America Merrill Lynch. Your line is now open.

Hi guys, this is David due for Sarah. So if the conversion takes place, do you know who would run the not-for-profit campus at this point?

Yes, we're not going to release any information about that at this point but -- yes, it's just -- we are in a sensitive time and really can't release that stuff at this point.

Understood. And can you speak to the site visit at all from the HLC, I mean what specifically were they looking into? Have you received the staff report yet?

Yes, we have received the staff report. We're not going to disclose the contents of the staff report but they [ph] did come out and visit, and I think their primary focus is to look at the business plan that the university is putting forth because the worst thing that could happen is the transaction occurs and you -- effects that university to fail and so they want to look at the business plan and ensure that both, university management and university board, as well as their experts are comfortable with the financial viability for the new 501(c)(3). And so that was our primary focus, but they met with a lot of different people at the university from all parts of the university students, faculty, staff, executive management, etcetera to learn about the reasons behind the transaction and what's trying to be accomplished etcetera.

I think the fact that we had five years of pretty strong success and we're able to do what we said we could do made a positive impact. It's not something that we're hoping maybe to do but don't have a proven track record of having to do so. I thought that -- I think that really helped. Also I think that the amount of positive feeling that exist with our faculty and staff about this process and about this move had a significant impact on -- our people are really behind this, they really believe in this, they believe it will be the best thing for the university and for their futures and so we think it went well from those standpoints.

Okay, great. That's very helpful. And just lastly, I mean it sounds like it's been largely business as usual but if you can just comment on what you're seeing in terms of lead flowing conversion rate trends for the online?

It is a very competitive environment. And it's very fragmented as compared to what it used to be. There are obviously new players getting in, there are private and state universities with traditional brands, but that's been all set by a huge decline in the for-profit space and the number of students they are serving. There has been a big pull out in the lead buying space and that has impacted that space significantly, we're in a better position this year than we were last year from the standpoint of actually buying lease although we buy less of them than we used to. We're getting higher quality leads than we used to. So it's pretty much business as usual.

Okay, great. Thank you very much.

Thank you. The next question is from Jeff Mueller of Baird. Your line is now open.

Thanks. I think that's one of the -- what time are the tea times tomorrow at the Investor Day?

You know a lot. I got to tell you, since the force opened, we have been booked from 7 in the morning till 3 o'clock in the afternoon. We did more rounds in the first weekend that we were opened by 100 in any golf course in Arizona but it was really significant. In the site where golfers can go and rate their golf experience, golf.com [ph], in the first week of operation we were ranked from a service perspective as the number one course, not just in the state but number one of course in the country. We were really excited about that. It is already not just producing record numbers, we're doing more than 200 rounds a day. And it's usually profitable and we just got started. So it's -- very excited about it, expecting to win at National Championship in golf in the next couple of years.

Excellent. I understand I wanting to answer David's question broadly but can you just confirm Brian since you are President of both the university currently and the CEO of Grand Canyon, the company. Are you planning on staying with the service provider GCE?

Yes, we can. We're continuing to work through those specifics with our crediting body and the IRS. So there is -- we don't want to give any information that could turn out to be different than what we give. So I think as soon as we complete the process with both the IRS and HLC we'll gladly give that information and we hope that will be relatively shortly.

Okay. In terms of the proceeds that you would receive in the transaction for the assets, the return to shareholders, would that be a return of capital tax efficient? Dividend, would it be a tender for shares, some combination, what's envisioned?

I think the things that you mentioned are all auctions. I think ultimately it will be up to our Board along with the advice that they give from the investment advisors that they've hired to make that decision. But I'm pretty confident that there will be some form of return in one of the manners that you or a combination of the manners that you just mentioned.

Okay. And then it was referenced that you will be able to enter into a long term contract, are you just using long term under I guess the accounting technicality -- that's more than one year or will you be able to strike an initial contract link that is consistent with some of the other industry standards that certain other providers more in the 10-year plus timeframe?

Our hope is the latter. But again that's discussions there are currently having with the IRS and HLC.

Okay, thank you guys.

Thank you. The next question is from Trace Urdan of Credit Suisse. Your line is open.

Thanks guys. I understand this is like a multi-variant equation you're trying to solve for and you're not ready to share all the details. But I do -- I'm pretty certain that the valuation conversation is one that the IRS is interested in and it's probably not one that can take place without some kind of basic understanding of how your anticipating revenue would be shared between the service company and the university? So I wonder if you could speak to that. I know you sort of made an oblique reference to other companies that are out there but it maybe that you're investors aren't as familiar with the terms that those companies are commanding. So I wonder can you talk in terms of range. Are we certainly talking about revenue share here, can you just flush that out a little bit?

Yes. I think just like I answered the last question, I think we're better off holding off until we get final approval from HLC and the IRS on what has been proposed. Because if it's different than what's been proposed, I think that would -- we wouldn't like that. So, I think -- again, I think we're going to hopefully have those specific -- that specific information to share with shareholders within -- we're hopeful within a very short period of time.

Maybe a way to answer that is to say that if this transaction happens we are not going to change our long term goals. And so the university is going to have what it needs to build out between 25,000 and 30,000 students and the service company is going to have what it needs to be successful so that there is a good return to investors and we've got -- I think we've got enough of a track record in the last five years, especially to make sure that we get to the right amount so that both of those things happen.

Okay, fair enough. Let me just ask a question about the operations. It looks like the instructional costs are growing at a rate that's slightly faster than revenue. And I wonder if you could -- I am assuming that has something to do with the investments that you're making but maybe could you just speak more specifically about what's driving instructional costs and where were those dollars are going?

Yes, the instructional costs in the short run are higher on our ground campus. There are personal that are necessary in the initial -- and we're in a faster growth rate on the ground campus than we are online. And so that's really what it is but what's interesting about that is that's been offset by lower S&P cost. The ground students are a lot less expensive to a player, both on the advertising side and on the sale side. And so the instructional costs are going up because of the ground campus but the overall margin is fine because we're acquiring the students for less and they have -- between three and four year revenue stream which is -- our best students on the online side are our graduate students who spend 18 to 24 months with us. Our ground students we acquire for a less amount but then we -- they come, they take 30 credits and they come back the second year and take 30 credits for no acquisition costs and they come the third year for no acquisition costs. So there is just an offset there that's positive.

Sure, okay. Thank you.

Yes.

Thank you. And the next question is from Jeff Silber of BMO. Your line is now open.

Good afternoon, it's Henry Chen [ph] calling for Jeff. I just had a question on the conversion. So I just wanted to clarify, so you will be managing technology, marketing and student services, so the decisions related to campus programs or the campus strategy, so will that be part of a different team or is that right now being discussed with the HLC?

The 501(c)(3) will be responsible for those decisions if that's what you're asking.

Got it, okay. But it's unclear whether the current management team will be part of that?

That is still being worked on.

Okay, great. And a different question related to the golf course and the university building, just wondering what the rational or -- sorry, the new office building, just wondering what the rational was behind those investments?

The office building is a good investment, and that we have now about 1500 or 1600 employees, 700 to 800 in Tempe and 700 to 800 in Peoria. And we have significant lease expenses tied to those employees. We're consolidating them in a new office complex basically on our campus which ties them more tightly to the campus, brings them altogether and we'll just be swapping the expenses. And so that really is a long term good investment for us and not something that is dilutive at all. The golf course, the hotel, the restaurant, we have big aspirations around hotel and restaurant management. That program could be very, very, very big in Arizona. There is a program in Northern Arizona but its fly [ph] which is three hours away. This is a huge hospitality resort convention center place and we as a stake could be producing a lot more of those professionals. And so the hotel was something that was giving us some problem in the neighborhood, help clean the neighborhood out, now we have it to be used, we're adding a restaurant to it. And the golf course, we have a golf management program and our hospitality management program also. So we could get as many as a 1000 students between those two programs that are utilized in those two places which would more than pay for itself, we can do that.

Got it, okay. That makes sense, 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.