Wall Street Transcript Interview with Grand Canyon Education Inc. (LOPE) CEO Brian Mueller

Wall Street Transcript

67 WALL STREET, New York - August 29, 2012 - The Wall Street Transcript has just published its Education Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Enrollment and Retention Trends - Regulatory Risks - Chinese Education Growth Catalysts - For-Profit Institutions - Online Content Distribution

Companies include: Grand Canyon Education, Inc. (LOPE) and many others.

In the following excerpt from the Education Report, the CEO of Grand Canyon Education discusses the outlook for his company for investors.

TWST: If you would, please start by introducing our readers to Grand Canyon with a brief history and an overview of the company today.

Mr. Mueller: Grand Canyon University started in Prescott, Ariz., in 1949, stayed there for two years before moving to Phoenix in 1951. We're still on the property that was purchased in 1951 to build the university. It was started by a group of Southern Baptists who wanted to create a private, Christian, nondenominational university in Phoenix. There was a close connection with the Baptist Church for many years, although there were Christians of all denominations that attended Grand Canyon through the years, and it was known as a very strong, private, traditional, Christian liberal arts university. About 1,500 students were on campus typically.

They had really strong programs in teacher education and health care, particularly in nursing. The university eventually developed a business program, a full array of liberal arts programs, majors in sociology and psychology and history, and a fine arts department with a focus on theater and musical performance. GCU also had a pretty strong athletic program that competed at the NAIA level. About 10 years ago, Grand Canyon fell into very serious financial difficulties. In fact, we were $20 million in the red at the end of 2003 and were ready to close the university. Brothers Brent and Chris Richardson stepped in and were willing to take control of the university and also assume that $20 million in debt.

That transaction took place, and they assumed control of the university, but didn't have the total $20 million. Their first choice was to stay as a not-for-profit university and go out and raise the money in terms of donations. But unfortunately Grand Canyon's graduates were teachers and nurses, and - God bless them, they provide great service to society, but - there weren't millions of dollars to get the university out of its financial trouble. So they decided to change the university's status to a for-profit status and to build a business plan that invites investment. The business plan was to mimic the University of Phoenix's online program. They hoped it would extend GCU's mission by offering programs delivered online to working adult students and perhaps make the university profitable. The Richardson brothers developed that online program from 2004 to 2008. They had about 15,000 online students. Most of those students were 32 to 34 years old. That did help the university become profitable and got rid of the debt.

At that point, the decision was made to get another infusion of funds by going public. I was at University of Phoenix at that point as President of Apollo Group, and they asked if I was interested in coming over to GCU. When I looked at this opportunity, I was very interested because there's really no other private, traditional, Christian university in Arizona, which is very unusual. There are 70 such universities in California, and other states like Michigan and Indiana and Ohio have 20 or more. Arizona was really an anomaly in that sense, and I saw a chance to create something very unique here.

So I came over in 2008, and we took the company public in November 2008. We received an infusion of $250 million of funds and started to build out the university.

Today we're a hybrid university that is experiencing some phenomenal success in a number of ways. We'll start the fall semester here with 6,500 traditional students on our ground campus. They're 18- to 22-year-old students; 70% are from Arizona, and that's up from 1,000 traditional ground students years ago. We intend to build this ground traditional campus out to 15,000 students, with 12,000 of them undergrad and 3,000 graduate students.

There are some very significant points to be made about this traditional ground student body. First, the average student is paying $7,800 a year for tuition. Our published tuition rate is $16,500, but the average student spends $7,800 after scholarships for tuition. That's unbelievably low for a private university. In fact, that's probably two-thirds less than most private traditional universities. We don't receive any state tax subsidies for our students. In the state university system in Arizona, the undergraduate tuition is $11,000 and students can earn scholarships to reduce that. But we are now competitive with state universities from a tuition perspective, without any tax subsidies from the state. The reason that's so important for us is we're making private university education affordable for all classes of Americans, not just the upper-middle and upper classes of Americans.

The average GPA of our incoming students will be about 3.4, and that is rising. We're very proud of that. We are very diverse from a student body population perspective. We are well represented in terms of Latino and African-American students. That diversity is one of GCU's most unique features. Nearly 42% of our traditional ground students are studying in the sciences, so they are premed majors, prephysician assistant majors, nursing majors, biology majors. A significant amount of our student population is preparing for careers in health sciences. Our teacher education program is strong and growing rapidly. Our business program is strong and growing rapidly. And we still have the full array of liberal arts programs, with sociology and psychology and world history majors.

The fine arts are just exploding on our campus. We have a fast-growing theater program that will put on five major productions this year on campus, beginning in two weeks. With the first production, "Much Ado About Nothing," we're adding tremendously to the talent that exists in that area. Our music programs include majors in piano and voice. GCU has begun instrumental programs this year, and we have numerous student musicians performing at very high levels throughout the state and country. We also have dance majors in a number of productions on campus.

Our athletics program last year finished in first place in the Learfield Sports Directors' Cup. That measures your performance against all other universities across all programs that are at the NCAA Division II level. We are very proud of that accomplishment. We have 21 NCAA Division II sports, more than any university in Arizona, and we're looking forward to winning the Directors' Cup title again this year. We're also working very hard to eventually compete at the Division I level. Currently, we're looking for a conference to invite us in.

A lot of this has been fueled by the fact that we now have 40,000 working adult students attending online, and we're growing that about 8% annually. Nearly 45% of those 40,000 working adult students are earning degrees at the graduate level, which is a strong academic fact for Grand Canyon, so they're earning either master's degrees or doctoral degrees. We've just been approved to offer our first Ph.D. program in psychology, which we're very excited about.

So what you have here is kind of a hybrid institution in that we have a very strong traditional campus - it sits on about 115 acres, is at 6,500 students currently and growing to 15,000 students in the next three years, with students getting very, very low tuition rates at no expense to the taxpayer - and then on the other side, we have the 40,000 online students, 45% of whom are studying at the graduate level, mostly in the health sciences and education as well as business, and that's growing at about 8% annually. Those two student body populations share a common infrastructure, and so they share a common President and Deans, Provost, financial aid department, accounting department, technology, all of those departments and infrastructure necessary to operate a university. The expense is shared across both student bodies.

The economies of that are much greater than we anticipated, which is why we're able to offer our students increasingly low tuition rates. In fact, not only are we not raising tuition in most programs, in many programs we're lowering tuition. It is our goal and objective to offer private, Christian higher education at very little expense to the taxpayer, and make it absolutely as affordable as we possibly can, so that all classes of Americans have access.

TWST: You mentioned the low tuition costs. Two analysts we've interviewed so far for this report cited Grand Canyon as a top stock pick, in part because the low tuition prices make your company more competitive. Would you talk a little bit more about how you have been able to keep the tuition costs down, and do you anticipate being able to continue to do that and have that as a competitive advantage?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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