Brian Mueller - Chairman, President and Chief Executive Officer
Brian Mueller
Good afternoon. And thank you for joining Grand Canyon University’s first quarter 2018 conference call. In the first quarter of 2018, enrollments grew by 9.6% and revenues grew by 11.1%. New working adult students attending our online campus grew in the mid single digits year-over-year. Operating margins are at 32.7% for the quarter. I want to thank our faculty and staff for another great quarter.
As you know, our long-term goals are to grow enrollments 7% to 8% on an annual basis. 6% to 7% will come from online enrollments and the rest from our ground campus. Revenues will grow 8% to 9% primarily as a result of continued retention increases, traditional campus enrollment becoming a higher percentage of the total and the growth of ancillary revenues through new businesses.
The room and board payments of ground students, even though according to the college board they are 30% less than the average cost of room and public universities and 38% less than the average cost at private universities continue to drive up the annual revenue per student number. We began the 2017-18 academic year with approximately 19,000 students on our campus. Last Thursday and Saturday, we had eight graduation ceremonies and had nearly 60,000 people on campus for the three day period. 9,009 students graduated in the spring semester, and we estimate for 2018 calendar year approximately 21,500 students will graduate.
This group will join our Alumni group, which is now over 141,000. Most of these graduates will contribute at increasing levels to the economy as they forward in their careers. It is also significant to note that we dont receive tax subsidies from the state are on track to pay nearly $100 million in total taxes for the year, and yet according to The Institute for College Access & Success. Our students graduate with less debt than the average public university students on less debt than the average private university student.
The relatively low student debt amounts are due to three core strategies; one, our commitment to dual credit enrollment, which results in students transferring in college credits earned while they are in high school; two, students taking courses online in the summer; three, we haven't raised tuition on a traditional campus in 10 years, including our upcoming academic year. Three strategies have resulted in over 54% of our traditional students who graduate doing so in three years.
In addition, these three factors combined with a growing reputation of our academic programs the new very modern campus, which was ranked 8th best campus in the country by niche.com, and the strong sense of community on campus makes GCU a very attractive proposition value preposition to families. Last year at this time, we had 26,438 applications for the fall semester on our traditional campus. This year we have 29,019, which is up 10%. We expect about 7,250 new students, which would bring the total students on campus to 20,500.
The average incoming GPAs of the newly accepted students is about 3.5, 50% are studying in a natural sciences, engineering and technology. We expect that online campus to grow between 6% and 7% on an annual basis. 14% of our new online students in the past two years are enrolled in new programs rolled out in the last two years. Managing the quality of both student bodies has been a very important part of our strategy. I will talk in a minute about our not-for-profit strategy. Before I do, I want to make clear this strategy has nothing to do with current regulations imposed by the DOE and core profit institutions. Our 90/10 number is now down to 71.5%. None of our programs failed to gain good employment guidelines mainly because of our low tuition rates.
Tuition on our traditional campus hasn't been raised in ten years, including the upcoming academic year. And we have generally not raised tuition for our working adult students. We anticipate the cohort default rate for the most recently completed cohort will be approximately 6.5%. On March 5, 2018, the HLC notified University that it’d approve the change of control application that it is filed in connection with the proposed transaction. The approval is subject to customer conditions, including as there’ll no material changes prior to the closing of the proposed transaction as presented in the application, and at new GCU post an HLC evaluation within six months following the closing.
In addition on April 26, 2018, the Arizona State Board for private co-secondary education also approved the University's supplemental license application for a change of ownership and control effective upon the closing of the proposed transaction. University has also filed a pre-acquisition review application with the United States Department of Education, and is currently awaiting a response.
University continues to review various regulatory issues that could impact the viability of the sale of the University's academic related assets; real estate and related intangibles to a newly formed as not for profit corporation, new GCU; as a means of enabling new GCU to conduct itself as a traditional not profit university; consistent with the University's history in a level playing field with other traditional universities with regards to tax status and among other things; the ability to accept philanthropic contributions, pursue research grant opportunities and participate in MCA governance. That review is not completed at this time.
The University does not intend to execute any definitive agreements until issues have been evaluated and resolved in University's satisfaction. At this time, GCE and new GCU have entered into a non-binding letter of intent. University is continuing to prepare for the possibility of the transaction occurring, including allocating employees to new GCU, financial modeling and planning asset transfer processes.
If the proposed transaction is ultimately consummated in various aspects the University's operations would change in important ways. These changes include, but are not limited to, the following; our academic and related operations in assets, as well as approximately 35% of our full-time employees and substantially all of our part-time employees and student workers, would transfer to new GCU. Following this transfer, it longer own and operate a regulated institution of higher education, but would instead provide a bundle of services in support of new GCUs operations. This is a very common practice in higher education today.
New GCU would be a separate non-profit entity, under the control of an independent Board of Trustees and independent management. Accordingly, our relationship with new GCU, both pursuant to the shared services arrangement and operationally, would no longer be as owner and operator but as third party contract provider. While we believe this relationship would remain strong, new GCU's Board of Trustees and management would have fiduciary and other duties that would require us focus on the best interests of new GCU.
Initially all of our revenue would be derived pursuant to the shared services arrangement with new GCU. Accordingly, new GCU's ability to continue to increase its enrollment and tuition and fee revenue, and our ability to continue to perform the services necessary to enable new GCU to do so, would be critical to the success of our service business.
It’s anticipated that the consideration payable by new GCU for the acquired assets, which will be material, will be in the form of a long-term secured note. Our ability to realize the negotiated value of the acquired assets would be subject to new GCU's performance, and its ability to pay amounts due under the secured note as they come due.
Now, turning to the results of operations. Net revenues were $275.7 million in the first quarter 2018, an increase of $27.5 million or 11.1% from $242 million in the prior year period. Operating margin for quarter one 2018 was 32.7% in the first quarter compared to 30.9% for the same period 2017. Net income was $73.7 million for the first quarter of 2018 compared to $55.9 million in the prior year period. After-tax margin was 26.7% compared to 22.5% for the same period in 2017.
Instructional costs and services grew from $102.6 million in the first quarter of 2017 to $111 million in the first quarter of 2018, an increase of $8.4 million or 8.2%. This increase was primarily due to increases in faculty compensation, employee compensation and related expenses due to the increase in a number of staff and faculty to support the increasing number of students attending University, and increased benefit cost between years.
In addition, we had an increase in dues, fee, subscriptions and other instructional supplies between years, primarily due to increased licensing fees related to educational resources, and the increased food costs associated with the higher number of residential students. And we continue to see an increase in occupancy costs including depreciation and amortization as a result of us placing into service additional buildings, especially laboratory intensive stem buildings, to support the growing number of ground for additional students.
As a percent of revenue IC&S decreased 100 basis points to 40.3%, primarily due to our ability to leverage our instructional costs and services expenses across an increasing revenue base. Bad debt expensed a flat at 180 basis points year-over-year. Admissions advisory and related expenses as a percentage of revenue decreased to 30 basis points to 12.6% from 12.9%, 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 to 60 basis points from 9.9% in quarter one of 2017 to 9.3% quarter one of 2018. General and administrative expenses, as a percent of revenue, increased 10 basis points to 4.1% in quarter one of 2018 from 4% in quarter one 2017. This increase was primarily due to increases at legal and other professional costs incurred, primarily as a result of our consideration of a not-for-profit entity conversion.
With that, I would like to turn over to Dan Bachus, our CFO, to give a little more color on our 2018 first quarter, talk about changes in the income statement, balance sheet and other items, as well as to provide updated guidance for 2018.
Grand Canyon Education's (LOPE) CEO Brian Mueller on Q1 2018 Results - Earnings Call Transcript - lope | Seeking Alpha
