Grand Canyon Education's (LOPE) CEO Brian Mueller on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Grand Canyon (LOPE)

Grand Canyon Education (NASDAQ:LOPE)

Q2 2014 Earnings Call

July 31, 2014 4:30 pm ET

Executives

Brian M. Roberts - Senior Vice President, General Counsel and Secretary

Brian E. Mueller - Chief Executive Officer, President, Director and President of Grand Canyon University

Daniel E. Bachus - Chief Financial Officer and Principal Accounting Officer

Analysts

Faton Begolli - BofA Merrill Lynch, Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Adrienne Colby - Deutsche Bank AG, Research Division

Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Timothy Connor - William Blair & Company L.L.C., Research Division

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

John D. Crowther - Piper Jaffray Companies, Research Division

Operator

Good day, ladies and gentlemen, and welcome to Grand Canyon Education Second Quarter Earnings Conference. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Brian Roberts, General Counsel. Sir, you may begin.

Brian M. Roberts

Thank you, operator. Good afternoon, and thank you for joining us today on this conference call to discuss Grand Canyon's 2014 second quarter results. Speaking on today's call is our President and CEO, Brian Mueller; and our CFO, Dan Bachus.

This call is scheduled to last 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 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.

Brian E. Mueller

Thank you. Good afternoon, and thank you for joining Grand Canyon University's Second Quarter Fiscal Year 2014 Conference Call. In the second quarter 2014, enrollments grew by 12.7%, and net revenues grew by 12.1%. New enrollments grew in the high-single digits, and operating margins are at 24.1% for the second quarter 2014.

I want to begin the commenting on the recent Department of Education program review. We asked the review team to change the format slightly, allowing us to demonstrate the $100 million investment we have made in technology the last 4 years. The systems we built have brought automation to the transcript evaluation, admissions, financial aid, scholarship processes, curriculum development, content delivery, faculty training and evaluation and especially assessing student learning outcomes. The program review touches all these areas to some extent.

I am very pleased to announce that the review team and their reports set forth only 3 minor student-specific information gathering and/or reporting errors related to individual students that were all fixed on the same day. The review was completed and closed in 27 days. I want to thank the review team for their professionalism. I also want to thank our entire GCU team, all of whom have worked extremely hard the last 5 years to put us in position to make this happen.

Now that the 2014/'15 academic year is just a little 3 weeks away, I want to give you a few updates on our traditional campus. Our total student body on ground will be just be under 11,000. New students will be about 5,500 with the average incoming GPAs of only admitted students over 3.5. 50% of the students will be studying in the sciences. 6,400 students or over 60% of the total will be living on-campus.

The student demand continues to grow at our Phoenix campus. Applications for the next year are coming in at an accelerated rate. To meet the demand and maximize return on CapEx investment, we are going to accelerate our building on the main campus and delay our East Valley campus until the fall of 2016. We remain committed to the East Valley and still plan to build out a large STEM-oriented campus.

The 2015/'16 academic year on the main campus, we are building 4 new 6-storey dormitories, totaling approximately 3,000 additional beds. The first half of a 160,000-square-foot engineering building, a 50,000-square-foot general-use classroom building and an additional parking garage. The new student goal of 7,500 for next year remains the same. We now plan to put them all on the Phoenix main campus. Total CapEx expense will remain the same, just shifted to a single campus. We will keep you updated on the opening of the East Valley campus in the fall of 2016.

We are starting the computer science and information technology programs this fall, and we'll open up 3 engineering programs in 2015. We are also starting our worship arts program in the fall of 2014 and are building out a music studio to support the efforts of the talents we are attracting to the campus.

The online campus continues to grow slightly above expectations, partly because of the new start growth but mainly because of the continued increase in retention rates. Our sequential quarter retention rates reached an all-time high of 94% in the first quarter and is 90% in the second quarter. Our traditional ground students, doctoral students, master's degree students and RN to BSN students were 56.4% of our student body in the second quarter of 2013. They are now 60.7% of our students. Retention highs are the result of the increased quality of our student body and commitment to full-time online faculty, small class sizes and the continued commitment to both academic and operational services. We are on track to open 20 new graduate programs for our online students this year.

The visibility and brand of the institution will continue to grow this year because of student participation in the performance areas. Our debate teams have an expanded schedule. Our theater and music groups will be performing on-campus and throughout the southwest. And our 22 athletic teams have really strong Division 1 schedules highlighted by the men's basketball team playing on the road versus Kentucky and Indiana and at home against Harvard and New Mexico in our newly renovated 7,000-seat arena.

Now turning to the results of operations. Net revenues were $158.6 million in the second quarter of 2014, an increase of $17.1 million or 12.1% from the $141.5 million in the prior year period. Operating margin for quarter 2 2014 was 24.1% compared to 22.3% for the same period in 2013. It is important to note that tuition, room and board has been frozen for 5 years on our traditional ground campus, and there was no increase in tuition for the online campus this past year.

Net income was $23.2 million for the second quarter of 2014 compared to $19.1 million in the prior year period. After-tax margin was 14.7% compared to 13.5% for the same period in 2013. Instructional costs and services grew from $61.7 million in the second quarter of 2013 to $67.6 million in the second quarter of 2014, an increase of $5.9 million or 9.4%. 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 increased 1% to 42.6% primarily due to the decrease in our bad debt expense as a percentage of revenue from 3.2% of revenue in the second quarter of 2013 to 2.1% of revenue in the second quarter of 2014.

Employee and faculty compensation and related expenses, including share-based compensation, increased 20 basis points between years due to increased use of full-time faculty and higher employee benefit cost between periods. Instructional supplies, dues, fees and subscriptions increased 30 basis points. Occupancy and depreciation and amortization expense increased 20 basis points.

Admissions advisory and related expenses as a percentage of net revenue stayed flat. Advertising expenses as a percent of net revenue decreased 40 basis points from 10.3% in quarter 2 2013 to 9.9% in quarter 2 of 2014 primarily due to us leveraging our increased brand advertising focused on the Southwestern region of the United States over against higher revenues.

Marketing and promotional expense as a percent of net revenue increased 20 basis points from 1% in quarter 2 2013 to 1.2% in quarter 2 of 2014. General and administrative cost as a percentage of revenue decreased from 6.3% in quarter 2 2013 to 5.7% in quarter 2 2014 primarily due to employee compensation and related expenses, including share-based compensation decreasing 50 basis points between years.

Interest expense decreased as a percentage of revenue by 0.1% to 0.2% for the second quarter of 2014 as a result of the decrease in the average balance of our credit facility between periods due to scheduled monthly principal payments. As a result of the above, net income increased from $19.1 million in the second quarter of 2013 to $23.2 million in the second quarter of 2014.

With that, I'd like to turn it over to Dan Bachus, our CFO, to give a little more color on our second quarter, talk about changes in the income statement, balance sheets and other items.

Daniel E. Bachus

Thanks, Brian. Revenue and income from operations exceeded our expectations primarily due to significantly higher summer school enrollment than anticipated. Revenue per student was down slightly year-over-year as expected due to the differences in the start and end date of our spring semester for our ground traditional campus. We estimate that approximately $2.3 million of additional revenue was earned in the first quarter of 2014, and $2.3 million less of revenue was earned in the second quarter of -- second quarter than would have if the start and end dates of our spring semester were the same as 2013.

Scholarships as a percentage of revenue increased from 13.1% in Q2 2013 to 14% in Q2 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 as a percentage of revenue decreased to 2.1% in Q2 2014 as compared to 3.2% in Q2 2013. This decrease is primarily the result of continued improvements in processes and the quality of our student body.

Our effective tax rate for the second quarter of 2014 was 38.9% as compared to 38.7% in the second quarter of 2013. We repurchased 23,900 shares of our common stock during the second quarter of 2014 at a cost of $1 million and have $25.9 million available under our share repurchase authorization as of June 30, 2014.

Turning to the balance sheet and cash flows. Total cash, unrestricted, restricted and short-term investments at June 30, 2014, was $229.9 million. Accounts receivable net of the allowance for doubtful accounts is $8.5 million at June 30, 2014, which represents 5.7 days sales outstanding compared to $8.6 million or 5.7 days sales outstanding at the end of the second quarter of 2013. CapEx in the second quarter of 2014 was approximately $54.8 million or 34.6% of net revenue.

This quarter, the university had the opportunity to acquire property including 3 multi-family units adjacent to our Phoenix campus to support our growing traditional student enrollment. One of those multi-family units will be used for student housing this fall. One will be used for surface parking, and we are still in the process of determining how the third will be utilized.

We have reaffirmed our previous guidance for the second half of the year with a slight increase in our revenue guidance. We feel very good about current trends in new student enrollment and retention but continue to experience significant year-over-year increases in graduates, which will continue to pressure year-over-year total enrollment growth. Revenue in the third quarter will be helped by summer school enrollment being higher than anticipated, but the higher average incoming GPA of our new students will put pressure on our fall revenue per student.

We also continue to see a slight decrease in our revenue per student for working adults as a result of current trends and the breaks students are taking; the growth in programs such as doctoral, which earns less revenue per day; and a slight increase in online scholarships as a percentage of revenue.

We remain comfortable with our previous estimates of our effective tax rate but have lowered diluted weighted average shares outstanding by quarter slightly based on our recent stock price performance. 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 a 2014 stock grant.

I will now turn the call over to the moderator so that we can answer questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Sara Gubins from Bank of America.

Faton Begolli - BofA Merrill Lynch, Research Division

This is Faton Begolli calling in for Sara Gubins. My first question is can you give us an update on online starts for the quarter. And can you comment on the sustainability of that growth rate?

Brian E. Mueller

The -- yes, the online starts are in the high -- upper-single digits, and they've been there for a while. So as we sit here today, yes, I would tell you that's sustainable. Our long-term goal is 6% to 8%, and so yes, that's sustainable.

Faton Begolli - BofA Merrill Lynch, Research Division

And so my second question is do you think the new relationship between Arizona State University and Starbucks changes the competitive landscape for Grand Canyon.

Brian E. Mueller

No, not at all. The -- number one, delivering education online to working adult students is not an innovative practice that's been going on for about 30 years. Secondly, having relationships with corporations, there's thousands of those out there, including many that we have. The difference in this one is that it's exclusive, and that's really not a standard practice in the industry and one that will probably heavily scrutinized. What you're really asking students to do, for example, let's say, work for Starbucks in Tucson, is to drop their program in -- at the University of Arizona and to have their credits transferred and join Arizona State university online, which asking people to drop their current programs in order to join an online program so that they can get reimbursed, seems to represent a conflict of interest and not something that would be in the best interest of students. So although that got a fair amount of publicity, those people that are a little more experienced in the industry and have been doing this for many, many years knows that it's probably not a good thing for students at all. It really encourages them to discontinue their current educational plans and do something different in order for Starbucks to help them out, which doesn't seem to be in the best interest of students.

Operator

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

Jeffrey M. Silber - BMO Capital Markets U.S.

You guys were pretty fast on some of the details, but I was just wondering if you could just comment by trends, by field of study.

Brian E. Mueller

Field of -- yes. The -- in terms of enrollment trends?

Jeffrey M. Silber - BMO Capital Markets U.S.

Exactly.

Brian E. Mueller

Okay. Obviously, ground is a very strong enrollment trend, that there's going to be hyper growth in that over the next few years. Doctoral students are growing at a rate that's outpacing the rest of most of the programs, which is a good thing for us. Those 2 categories of students are really important in our strategic plan because they represent more than the average annual revenue per student of our other programs and therefore, your revenue streams. So the fact that those 2 programs are outpacing is very good. Education, especially at the master's degree level, remains fairly flat. That's a very competitive area. So remaining flat is not a bad thing for us. The nursing programs are -- continue to outpace other programs, which is a very good thing for us, especially the RN to BSN program and the MN program. And so the only programs that aren't growing at a faster rate are those undergraduate programs that we deliver online in the areas of business and other liberal arts, which that's by plan. I mean, if we wanted more undergrad working adult students in those areas, we could certainly get them, but as I said, those categories that I listed, which are our top categories and the thing that we most focus on because of the high retention rates, those are the ones that are accelerating. So our plan is really going well from that standpoint.

Jeffrey M. Silber - BMO Capital Markets U.S.

Okay. And the shift of the East Valley campus to the fall of 2016, are there any issues going on there that we should be aware of besides just a change in direction from your perspective?

Brian E. Mueller

No, the market remains a strong one, and it is our intent to be there and be a significant player, especially in STEM-related academic programs. But we turned so many students away this year that were academically qualified from around the Southwest that wanted to be here and live on our campus simply because we didn't have enough beds. And so when we look at our CapEx expense and how we could return the greatest value, especially to shareholders, there's no question at investing that money this year on this campus will meet a need, and will return a greater value than to start on the East Valley campus this year. But it is our intent to be there and have a very strong presence starting in 2016.

Operator

Our next question comes from the line of Jeff Volshteyn of JPMorgan.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

So just following up on that, are you able to attract some of the demand from East Valley to your main campus that's expanded now?

Brian E. Mueller

Yes, that's picking up. That's another reason we kind of -- there's more and more students that are in the East Valley. More and more families are recognizing the tremendous value that our tuition levels represent and our degree programs represent. And so they're choosing to come over here and live on-campus. That's one of the reasons we ran out of beds, even though we built 2 additional dorms this year. We -- the influx in California continues to be very strong, but a higher-than-expected percentage of East Valley students are now coming across the valley and living on-campus. Still doesn't change our opinion about the commuter campus in the East Valley, but that definitely has happened.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Are there any updates on your thoughts on further expansion kind of beyond Phoenix?

Brian E. Mueller

Not right now. We still have kind of ongoing talks. The people of Tucson would really like us to come down there and Albuquerque and Las Vegas would as well. But the demand for what we're doing here is just so great that every dollar that we can invest in this campus to take advantage of this demand is the most expeditious thing for us to do right now. So in the next couple of years, you won't see us do that.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

And then the last question, more model related. Does this shift change anything about your admission -- investments in admissions and marketing and branding?

Brian E. Mueller

No, no. The -- you've seen that steadily go down. In fact, we've made advertising gains. We went from 10.3%, I believe, to 9.5% in this quarter versus last -- same quarter last year, which means the brand is growing, and we're becoming -- our dollar invested is getting more efficient.

Operator

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

Adrienne Colby - Deutsche Bank AG, Research Division

Back to the question about dorm capacity, so I think that there were 2 dorms that you were trying to complete for the fall start. Just wondering where you're at on that. And if you could actually quantify how many applicants you -- that will qualify that you did have to turn away for the fall term?

Brian E. Mueller

It was in -- it was a couple of hundred that -- and mainly students that were coming from California that were qualified, but just, we didn't have bed for them. So -- and the first question was about -- oh, the dorms, yes. We had -- we build a new -- a brand-new dorm with 1,000 beds in it that was apartment-style living. We're very excited about. That one is on track. And then we have another dorm of about 600 beds that we started late, but it's also on track and will be completed. We're a little bit under the gun here as we get to the final days, but it's looking good, and we'll be ready.

Daniel E. Bachus

And then, as I mentioned, we also bought a multi-family complex adjacent to campus that we're putting over 2 -- almost 300 students in. So that was a late add to fill the unmet need.

Adrienne Colby - Deutsche Bank AG, Research Division

Great. And then in terms of modeling, the bad debt expense came down again this quarter, and usually, the second and third quarter, I think you tend to see a little bit of an increase there. How sustainable is it around 2% of revenue?

Daniel E. Bachus

I think it's sustainable. I think it'll be up a little bit in the third quarter. We closed out our spring semester for the ground traditional campus at a rate that was lower than what we anticipated it being. The ground campus operations continue to improve. They're doing an outstanding job, and the rate was lower than we expected. So we've got a little bit of a pickup in the second quarter associated with that, that we obviously won't get at the start of the fall semester. And so it should be up a little bit in the third quarter. But we do feel very good that we can keep bad debt under 3% going forward.

Adrienne Colby - Deutsche Bank AG, Research Division

And one last one if I could. How much capacity do you think you have with your current admissions and enrollment staff? Again, that expense line has been really stable, and it seems like with the increased demand that, that's going to have to go up at some point?

Brian E. Mueller

That was one of the real positive things that happened this year. We didn't really go up much in terms of that staff and yet, produced about the number that we wanted to produce even though that we ran out of beds. And that number goes up to 7,500 new students next year, and we're not adding much. So the brand continues to grow, and the average productivity of those people is really going up. I mean, the -- that hyper growth that sometimes people worry about because we'll actually go to over 14,000 students -- about 14,500 students on our campus next year, we feel very good about without adding much either in terms of advertising or additional counselors.

Operator

Our next question comes from the line of Jerry Herman of Stifel.

Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division

Brian, question about margin. And you've now sort of drifted above the target, and the focus on the core campus would suggest that the high return on that investment will drive those margins even higher. Talk about that, if you will, in the context of the optics of growing margins and high margins generally.

Brian E. Mueller

That was something that we talked about a lot a year ago and 2 years ago. And from an optics standpoint, we've been saying to our investors recently we're not worried about that anymore. The university has established a reputation of reinvesting in infrastructure and things that add to the development of the community, as well as add to the value for investors. And so if it goes up 1 point or 2 on an annual basis from an optics standpoint, we're not concerned about that.

Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division

And then the next question is a question about the program review. And I'm wondering if, in those discussions, you had the opportunity or it came up, the notion of margin and rate of growth for you guys and if they had any commentary on that.

Brian E. Mueller

Well, yes, they used the rate of growth, not margin, but they used the rate of growth as reason for their coming back and doing an additional program review. So -- but there was no discussion of that in the meetings. I asked them if they would be willing to change the format of the meeting so that we could get about 25 of people involved with our management team to really walk through for them exactly everything, all the automation that we bought -- brought to everything, especially what we do online. And they agreed to that, and they became very enamored with how we teach online, how we deliver instruction, deliver content, evaluate learning, conduct discussion. They were really overwhelmed with the amount of interaction, collaboration and discussion that was going on in our classrooms, the amount of activity that was going on and how it so resembled a traditional classroom setting with 20 or 22 students in it. And so that was a big part of the discussion. They were really focused on our net price calculator and how transparent that information was. And it was available to every single student that starts our program. That went really well. They were very interested in that. In fact, made the comment that anybody that's involved in higher education should have a system that operates that way because of the amount of transparency it provided. But we also talked about the fact that we were fortunate that we've been doing this for a couple of decades now. The challenge that they're going to have is they're going to have literally hundreds and hundreds of universities they had since the downturn in the economy have jumped into this market without a lot of experience. So how they're going to handle all of that going forward, we'll see. The bottom line in the program review for us is we are really happy that they decided to do it. We are unbelievably happy with how well it went and how fast it was closed. And for us, it puts to bed any discussion of the Harkin report. All of the bad information that was in that report was bad enough. But now that we've been through this and have got through it like we've gone through it, we don't feel the need to respond to anymore Harkin report questions. So from that standpoint, we think it's a great thing.

Daniel E. Bachus

Jerry, one comment back to the margins. As you know, where the majority of the margin expansion has come over the last couple of years is really 2 places: One is bad debt has come down significantly; and the second is leveraging general and administrative costs. We have been spending where appropriate. We've been -- IC&S has been fairly flat if you look at it without bad debt, even up a little bit. We're spending on full-time faculty. We're spending on administrative -- or academic counseling and that sort of thing. And so we'll continue to do that as we go out because those are the right investments to be making for the long term.

Operator

Our next question comes from the line of Jeff Meuler of Baird.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

So with taking the intake for the new students next fall to, I think, 7,500 on the existing campus, what does that imply in terms of where you guys are taking the planned capacity of the Phoenix campus?

Brian E. Mueller

It'll be over 25,000 students. We started with 100 acres. We have about 180 acres now. We're going to expand out in the next 12 months to approximately 240 acres, and that will give us the capacity for greater than 25,000 students on the main campus. And at the current rate of 5,500 news this year, 7,500 news next year with the very high retention rates that we're achieving, we feel confident that we've got both the space, and the demand is there for us to have over 25,000 students on this campus.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Okay. And not too long ago, I think it was 12,000 and 18,000, now 25,000. What are the land constraints kind of around your campus in terms of where it could kind of peak if there's potential upside to that 25,000?

Brian E. Mueller

Well, the -- we are -- we've got -- we've almost doubled. We've gone from 100 to 180, and we will be at 240 in less than 12 months. And that doesn't include a 30-acre piece of land that we have, just what would turn out to be only 2 blocks to the east of our further -- furthest, most east border. And so that really puts us close to 270 acres. And so that 270 acres easily will be able to handle the 25,000 students. Now could we possibly go higher than that? It's possible, but we'll focus the next couple of years on that expansion in getting the 25,000 students, and then we'll see where it goes from there. Now remember, that doesn't include the East Valley. And the East Valley is going to be somewhere between 5,000 and 10,000 students. What we've learned in the last couple of years is that there is really no end to the appetite for a private Christian higher education that's affordable. And so it's -- and our ability to do it profitably and keep the tuition in line is a real strong tailwind for us.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then the 3 buildings that you guys acquired, is that -- how much do they cost? And is that outside the CapEx number?

Daniel E. Bachus

That's included in the CapEx number. I don't want to really get into what those cost. But it is included in the CapEx number, and that's why we -- our spending this quarter was a little higher than what we had forecasted.

Operator

Next question comes from the line of Tim Connor of William Blair.

Timothy Connor - William Blair & Company L.L.C., Research Division

I wanted to revisit what -- Jerry's question on margins. So you're above your sort of long-term target of 25%. It's going to be a bit higher than that this year. So how are you thinking about long-term target margins now?

Brian E. Mueller

Still in that vicinity. We said 24%. If it turns out to be 25%, maybe a little bit higher. Dan indicated that bad debt expense has gone down. The things that could drive it are -- just a little bit higher are the -- as our student body on-campus grows -- what happened was we were planning on 50% of our ground students being on-campus, and a traditional ground student on average pays us between $7,800 and $8,000 for tuition, but when they stay on-campus, it gets to $12,000. And so that's a little bit of a positive thing. And then if we can get any leverage out of our S&P line. But I wouldn't count or build model -- build in your model much over 25%.

Timothy Connor - William Blair & Company L.L.C., Research Division

And given the excess demand, have you considered any price increases or room-and-board increases?

Brian E. Mueller

At this point, no. A little bit from a room-and-board perspective because we're building some higher-end dormitories. And so for example, this latest one that we built, they're a little -- that's a little bit higher. But we're, at this point, not planning on raising tuition.

Timothy Connor - William Blair & Company L.L.C., Research Division

Okay. And then combined -- I just wanted to get my numbers straight. So combined capacity between the current capacity at -- in the Phoenix campus and East Valley is 30,000 to 35,000 ground students?

Brian E. Mueller

Yes.

Operator

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

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

So I want to ask about the undergraduate engineering program on-campus. It sounds like, I think, that you referenced that you're building a new classroom building to support that. And then related to that, it's also -- your emphasis on the STEM features of the new campus, you seem to emphasize that more. And I wondered if you could sort of talk about how you're thinking about STEM at the expansion campus in 2016 versus STEM being offered on the core campus and kind of what led you to that decision to sort of highlight that feature.

Brian E. Mueller

It's a big part of our strategy, a big part of our planning. The state of Arizona is very unlike states around us, where there is significant amount of both state university infrastructure and private university infrastructure, especially as it relates to things like information technology and math and engineering. Arizona is really different in that we don't have a strong private university presence here. So there's huge opportunity. We're not producing probably -- we're probably producing 33% of the engineers and IT professionals that this economy could support. And so there's lots of opportunity. The IT program, the computer science program, we're rolling out this fall, and so our first students will be in that program in this fall. We're building an 80,000-square-foot engineering building that will be ready by August, and then we'll add an 80,000 square feet to that building for the following year. We plan to open with electrical engineering, mechanical engineering and biomedical engineering in the fall of 2015, but we expect to expand even past those programs as we move forward. The East Valley -- so when we get 25,000 to 30,000 students on this campus, our goal, and this is a challenge, this is tough, but our goal is that 70% of the students will be studying in STEM areas. We already have 50% of our current students studying in the sciences, mainly biology majors for all kinds of different reasons: premed, nursing, athletic training, pre-PA, a whole variety of reasons. Our biology programs are very, very strong. So we've got 50% of the current student body. As we grow, we'll grow those science programs, and we'll add the IT, the computer science programs, the engineering programs so that when fully built out, we're 70% on this campus. East Valley, that will -- as we build out those classrooms, that's going to be huge a priority in the East Valley. So it's not easy to do -- it's easy to bring in students in those areas. It's much more difficult to graduate them. One of the things that we're going to do is we're going to be heavily involved in the state of California, identifying really strong high school students who have done really well in calculus because we can bring them in and get their programs accelerated. But yes, you're right in pointing out that it's a major priority of ours and it's a major need in Arizona. And very honestly, there's a lot of organizations in Arizona that are very excited about what we're going to do.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

When the East Valley campus opens, would you anticipate sort of shifting or encouraging students to shift over to it? Or it's just simply going to be incremental?

Brian E. Mueller

Incremental. Yes, well, our belief is that it'll be incremental.

Trace A. Urdan - Wells Fargo Securities, LLC, Research Division

And then last question, Brian, did -- given the heavy emphasis you have on STEM and science and engineering and IT on the ground campus, are there opportunities for you to develop related programs with your online population, I mean, given that I think it seems as though your brand is going to sort of continue to build in that area?

Brian E. Mueller

In IT, in computer science, yes. Engineering not as much from an online standpoint. However, we do believe that there's market out there, and we're exploring it now of 26 and 27 and 28 year olds who want to come back for a second degree, do it full time on a campus and complete it in a couple of years because they all have the general education completed. There's just such a need in those areas, especially in this marketplace that, that's something that we'll explore. We won't explore going online with those programs initially.

Operator

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

John D. Crowther - Piper Jaffray Companies, Research Division

You've got John Crowther on for Peter. Just real quick, you guys were going fast through the review, and just wanted to make sure I understood it. So you're expecting average revenue per students to be a little bit pressured in the upcoming quarter because of the mix. Just wanted to confirm that there. And then just wondering, obviously, at the calendarization impact, the Q1 and Q2 quarters, wondering if that reverses next year and if there's anything we should be thinking about from a calendar perspective for the rest of this year.

Daniel E. Bachus

Answer to your second question is no. So on the calendar issue, it was a timing issue between the first and second quarter of this year that will be the same next year. So it's not something that you have to worry about next year. And it's not an issue in the fourth quarter because the fall semester ends at the end of December. There might be a little bit of additional revenue accelerated into the third quarter versus the fourth, but it's not nearly as significant as what we saw between the first and the second. In terms of your first question -- and I'm trying to think what your first question was. Oh, revenue per student, only versus our original guidance. On the ground traditional campus, we have automatic scholarships based on incoming GPA. And when the average incoming GPA is slightly higher than what we forecasted, then the average revenue per student is slightly lower, and that's what we're -- given the students registered as of today, that's what we are anticipating. Now that's going to be -- the flip of that is going to be that we are going to get more summer school revenue in the third quarter than what we originally forecasted. And that -- those enrollments don't really factor into our end of third quarter enrollment. So I think generally, things will trend about we expected on a revenue-per-student basis for the third quarter, but there are 2 offsetting factors.

Operator

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

Adrienne Colby - Deutsche Bank AG, Research Division

I was just wondering if you're seeing any improvement in conversion rates with the better job market environment we're seeing.

Brian E. Mueller

No, I don't think that is impacting our conversion rates. Our conversion rates are positively impacted, and you can see that our advertising as a percent of revenue was down because of our movement away from Internet-generated leads. Those will account for less than 20% of our starts this year. So I would say that, that is the reason for our increased conversion rate.

Brian M. Roberts

All right, we have reached the end of our second 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.

Operator

This does complete the program, and you may all disconnect. Everyone, have a wonderful

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