Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Grand Canyon Education Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to turn the conference over to your speaker today, Mr. Dan Bachus, CFO. Please go ahead, sir..

Thank you. Joining me on today's call is our Chairman and CEO, Brian Mueller. Please note that many of our comments today will contain forward-looking statements that involve risks and uncertainties. Various factors could cause our actual results to be materially different from any future results expressed or implied by such statements.

These factors are discussed in our SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.

We undertake no obligation to provide updates with regard to the forward-looking statements made during this call, and we recommend that all investors review these reports thoroughly before taking a financial position in GCE. And with that, I will turn the call over to Brian..

one, the huge need the country has for healthcare professionals, especially baccalaureate-prepared nurses; two, the opportunity to grow into 70 potential locations; three, the locations will become profitable in just their second year of operation; four, the relatively small amount of investment needed to get locations up and running.

Fifth, these Orbis programs are tremendously beneficial to the financial wellbeing of the university partners. All of the Orbis partners have moved students through their individual university programs during the summer term.

At this time, we have confirmed that all of our partner programs intend to continue delivering quality healthcare education in the fall and beyond.

The academic delivery in the current environment has been challenging, and Orbis' team has been working with our university partners to find successful operational modifications to continue success for the student population that will become essential professionals within our communities.

The Orbis team has been involved in several developments within various programs including, but not limited to, virtual simulation, lab modifications, logistics and operation support for curriculum timing adjustments within a term and alternative testing.

Some of these developments may become standards within programs as they improve the educational experience and efficiently deliver content to students. Even with all of the successes Orbis and our university partners have recently achieved, there will be some short-term impact on the summer involved terms.

A number of students that plan to start in the summer term that were relocating out of state chose to defer their start until the fall, decreasing the new start amount in the summer by approximately 20%. Overall demand for the programs has increased, there is more potential students see healthcare as a solid option for employment.

In a number of locations, demand is start in the fall is greater than the initial plans fall intake size, but a number of our university or healthcare partners have chosen not to increase the go forward size to make up for the summer start shortfall due to concerns about clinical availability.

Therefore, it appears that Orbis all enrollments will be lower than our original expectations. Although due to higher retention rates, and slightly higher expected new starts, we expect to make up some of the summer new start shortfall.

The interest level from potential university partners has also increased the demand to be a future Orbis partner is strong. GCE's fourth pillar is to find three or four partners interested in a more comprehensive arrangement.

Since the pandemic began, there has been an increase in university inquiries for possible partnerships both with universities asking for assistance with improving the quality of what they are doing online with their traditional students and growing their working adult programs given that many universities are concerned about their financial future.

We continue to work at this pillar, but will continue to be selective. The model have made partners many low enrolled programs at very high price point is not interesting to us because the model doesn't fundamentally address the real challenges identified earlier in higher education.

We believe we can add tremendous value to university partners in the Midwest or northeast our dialogue with a number that. Most of them have had partnerships in the past that have not been successful.

We are willing to help universities improve the front end academic experience for their traditional students, but our strategy of front-end services combined with robust back end services is clearly a differentiated approach that can help universities looking to scale their working adult program.

The model we are suggesting is proven on a very large scale. GCU's hybrid campus having large student bodies in both major markets, leveraging a common infrastructure has been successful in unprecedented ways.

High quality students producing great outcomes and great value combined with making huge investments to constantly upgrade infrastructure is a matter of fact, our opinion. Everybody that visits to GCU campus goes away very impressed.

Our other three core pillars are performing well, have great potential and as a result, we have the ability to be selected. If we find the right comprehensive partner, we will sign an agreement. If you look at the strategy of other OPMs in the space, those contracts would most likely be dilutive rather than accretive to our current plan.

In addition the huge upfront investments of these arrangements would place significant risks into our current business. With that, I would like to turn it over Dan Bachus, our CFO, to give a little more color on our 2020 second quarter, talk about changes in the income statement, balance sheet and other items as well as to provide 2020 guidance..

Thanks, Brian. Included in our Form 8-K filed with the SEC, we have included non-GAAP net income and non-GAAP diluted income per share for the three months ended June 30, 2020 and 2019. The non-GAAP amounts exclude the tax-affected amount of the amortization of intangible assets.

The loss on transaction amount and the impact of a large state tax refund received in the first quarter of 2019 related taxes paid in previous years. The amortizable intangible assets acquired in the Orbis acquisition totaled $210.3 million and amortization expense in the second quarter of 2020 and 2019 was $2.1 million and $2.2 million.

We believe the non-GAAP financial information allows investors to develop a more meaningful understanding of the company's performance over time. As adjusted, non-GAAP diluted income per share for the three months ended June 30, 2020 and 2019 is $1.3 and $1.9 respectively.

Service revenue significantly exceeded our expectations in the second quarter of 2020 primarily due to the acceleration in GCU's online enrollment during the second quarter. In addition to the high-teens new enrollment growth drops were down 6.1% year-over-year, which more than offset the year-over-year increasing graduation.

As was anticipated, we realized a decrease in ancillary revenues between years at our primary university partner GCU. GCU moved all summer semester classes to an online environment in the last week of March, and limited residential students remain on campus during the summer semester.

Most doctor residence fees were canceled through June, and ancillary businesses operated by GCU, such as the hotel and merchandise shops were closed due to the COVID-19 outbreak. We estimate the impact of all of these changes made by GCU as well as the Orbis new start shortfall reduced our revenues by $7.5 million in the second quarter.

Included in both our 8K and the 10-Q file today is a detailed explanation of the actual and projected COVID-19 impacts on the university spring and summer and fall semester -- 2020 semesters. And I will discuss these in more detail in a few minutes. Revenue per student was down year-over-year due to the lower ancillary revenues at GCU.

Excluding the COVID-19 impact on GCUs ancillary revenues, revenue per student grew year-over-year.

As we've discussed previously, overall enrollment growth has been pressured over the last few quarters by an increase in the graduation of online students year-over-year, and the fact that professional study students and ground commuter students are flat to down year-over-year, but revenue per student continues to increase as we continue to see very encouraging growth in the areas of our focus, including online residential and Orbis enrollment, where revenue per student is the highest.

Our effective tax rate for the second quarter of 2020 was 24.6%, compared to 21.7% in the second quarter of 2019, and our guidance of 24.2%.

In the second quarter of 2020, the effective tax rate was impacted by higher state taxes, primarily due to the growth in Orbis and lower excise tax benefits of zero in the second quarter of 2020, as compared to $2.2 million in the same period in 2019, due to a lower stock price and lower stock option exercises in the second quarter of 2020.

We repurchased 111,100 shares of our common stock in the second quarter of 2020 at a cost of approximately $8.3 million, and another 23,800 shares at a cost of $2.1 million subsequent to June 30, 2020. We had $58.3 million available under our share repurchase authorization as of June 30, 2020.

In July 2020, the Board of Directors increased the share repurchase authorization to $300 million. Extended the authorization date is December 31, 2021, which increases our available repurchases to a 106.2 million as of today.

Turning to the balance sheet and cash flows, total unrestricted cash and short-term investments at June 30, 2020 were $187.2 million. GCE CapEx in the second quarter of 2000 including CapEx for new Orbis partner sites was approximately $6.1 million or 3.3% of net revenue.

We continue to anticipate CapEx will be between $30 million and $35 million in 2020, due to the planned opening of seven new locations of fall 2020, and four more in the spring of 2021, as compared to the five locations that were opened in the same period in the prior year.

As a reminder to investors, the note due from GCU is secured by all of its assets. Given, this is very difficult -- given this, it is very difficult for the university to get financing from any other source than GCE. Thus we've committed to allow them to borrow for short-term cash needs and to fund capital expenditures.

GCU has informed us that it's the ability to fund its capital expenditures going forward, but they requested and we provided $75 million of funding for short-term cash flow purposes at the end of the second quarter of 2020.

At the time of the borrowing, GCU paid it's June 2020 estimated service fee and interest due on a secure note receivable of $50 million and $4.8 million respectively, thereby reducing the accounts receivable and interest receivable on our consolidated balance sheet as of June 30, 2020.

The $75 million that was borrowed in June 2020 was repaid in July 2020, and GCU returned to its practice of paying the service fee and interest due on the secured note for the month in arrears. GCU paid the estimated service fee and interest due on the note in June 2019 as well.

So the impact is on cash flows for the change in accounts receivable and interest fee receivable between years is not material. Last, I would like to provide color on the guidance we have provided for 2020.

Company initially provided guidance for fiscal 2020 by quarter in its fourth quarter and full-year 2019 earnings released issued on February 19, 2020.

The company provided revised guidance for the second quarter of 2020 with its first quarter 2020 earnings release, which took into account our best estimate at that time of the impact of the COVID-19 outbreak on our university partner's revenue, and operating income for their spring and summer semesters, but withdrew it's guidance for the second-half of 2020, due to the uncertainties of the impact of COVID-19 on its university partners fall semesters.

Today, we have reinstituted guidance for the third and fourth quarters of 2020, based on what we know as of today, although we caution investors that uncertainties around the fall semesters remain. The guidance that we have provided for the second-half of 2020 continues to be non-GAAP as adjusted net income and as adjusted diluted income per share.

As we exclude amortization of acquired intangible assets, we've adjusted our revenue and earnings guidance for the third and fourth quarters of 2020 to take into account the items Brian mentioned earlier.

The change in the fall semester calendar for GCUs ground traditional students will have the effect of moving tuition revenue for these students and certain ancillary revenue for residential students from the third quarter of 2020 to fourth quarter 2020, and the change in the moving date for GCUs residential students will reduce fall semester, room and board for that for the university by three weeks.

We're also projecting lower service revenues from GCUs businesses such as the hotel, which will be closed through the end of the calendar year, and low shop, which will see decreased operating activity.

The university will also recognize less revenue was most of the doctor residence fee, scheduled fee held on the university campus have been cancelled through the end of July, and this is likely to continue through the end of the year.

Our estimates also include our best guess as of today, of the number of GCUs residential students that will live on campus in the fall, which is less than originally projected as almost 3500 students have informed the university that they plan to take all of their fall semester courses online due to COVID concerns.

Orbis revenues in the second-half of 2020 have also been reduced due to the summer new start shortfall discussed earlier.

We estimate that the shift in revenue from the third to fourth, as a result of the shift in the start date of the GCU fall semester is $9.9 million lower revenue in the third quarter and $9.9 million higher revenue in the fourth quarter.

We estimate the impact of the last summer and fall semester ancillary revenues, as well as the Orbis summer new start shortfall totals $20 million in the second-half of the year, $13.1 million in the third quarter and $6.9 million in the fourth.

Although, we anticipate that the higher than expected online and ground traditional enrollment at GCU will make up for most, if not all of this lost revenue.

Even if face-to-face instruction begins in the fall as currently planned for partners, there could be an additional decreasing revenue on the GCU MSA, that is not included in the estimates provided of a higher percentage of students that estimated, decided not to live on campus, but rather take all of their classes in the fall semester online, or take the semester off, or if a significant number of Orbis education partner students decided to lay their start on the fall to the spring semester.

On the expense side, we have not changed our expense projections materially with the exception of the $5 million of contributions made in lieu of state income taxes that were made in July 2020, which I will discuss in more detail in a minute.

We do anticipate lower travel and other costs during the third and fourth quarters but we plan to utilize the majority of these costs or these dollars in other ways to ensure that we meet our partner's enrollment expectations.

Our net interest expectation in the third and fourth quarters are $14.2 million and $14.4 million respectively, which is consistent with original estimates as although interest expense will be lower than originally projected, so interest income on invested cash both due to lower interest rates.

We've decreased our original effective tax rates for the third and fourth quarters. In July 2020, we made $5 million of contributions made in lieu of state income taxes which has the effect of increasing general and administrative expenses and decreasing income tax expense.

The entire $5 million is recorded in G&A expense in the third quarter, well three quarters or $3.75 million is recorded as lower state income tax in the third quarter and a quarter or $1.25 million is included as lower state income tax in the fourth quarter.

This net of recent trends which includes higher state income taxes, and a lower excess tax benefits result in our revised effective tax rate of 20.7% in Q3 and 22.4% in Q4.

We have decreased our weighted average shares outstanding amount based on stock repurchases, although we might repurchase additional shares during 2020 these estimates do not repurchases other than those already made. I will now turn the call over to the moderator so that we can answer questions..

Thank you. [Operator Instructions] Our first question comes from Jeff Silber with BMO Capital Markets. Your line is open..

Thanks so much for a lot of information there.

Let me start with the growth or the accelerated growth in your working adult students online, very impressive in this environment, can we get a little bit more color on that specifically? I'm just curious, is it more disproportionally graduate versus undergrad, and what is the mix between grad and undergrad? Thanks..

Yes, it is. We watch that very carefully. That's a big part of the GCU online strategy. We really want to keep the graduate to undergraduate mix. Well, if you think of graduate students, it's 50%. Then if you include RN-BSN students, which they behave a lot like graduate students, in terms of the outcome it's a great deal more than 50%.

What happened as we had the high-teens growth rate of new starts in April, May, and June, is that the percentage weight of graduates went up, it's around 2%, but the fact that it went up was very, very significant because when you look at persistence rates between grad students and undergrad students, especially in the online environment, when you can engineer your student body that way, you're going to produce really, really high graduation or metrics, really good metrics.

I didn't include it in our call, but it was interesting that this quarter our growth in graduates exceeded our growth in enrollment, which is a really, really significant number from the standpoint of the quality that we are producing from a student standpoint and from an academic perspective..

That's great. I'm sorry….

The other question was….

More focused -- on the undergraduate side, did you see the starts from undergrad go down, or they just didn't go up as much as the starts from grad?.

No, they didn't go down. They didn't go down. They just didn't go up as much as the graduate student. We are talking, and now we are talking about online students..

Correct, correct..

Right, right..

Okay, good. Thank you for clarifying that. Moving on to how you are setting up the campus for the fall semester, obviously, we've seen your disclosure, a number of schools are doing a number of different things.

From a health and safety perspective, can you give us a little bit more color what plans you have in place, if God forbid, there is an outbreak on the campus?.

Well, so yes, what we thought was going to produce -- our students want to be back here, I was having student meetings, was having parent council meetings, and that was just our students want to be back on this campus, and so, given that huge demand, we thought the best thing to do was, number one, move back to start date.

At the very time we were making this decision, Arizona was going through a --- there was an increase, and we became a hotspot. The governor did some things that we thought would work, and they have been working, they are working. So, the curve is starting to flatten, and things are looking better.

So, we thought by moving this the actual move-in date to the last week of September, we would get two things happen. We would get a flattening of the curve, and second, we would get the majority of the heat behind us, so that we could take advantage of October, November, and December. So, students could be outside for all kinds of activities.

What we're doing in addition to those things is, number one, each class will meet once on ground, and in a second time synchronously online during the course of the week, so that in every classroom, only half the classroom chairs will be filled.

Every single classroom is now been equipped with technology, additional technology, so that if the faculty member doesn't feel well and needs to Zoom in or video in their lecture, they can do that, but if a classroom is equipped for 50 students, there will only be 25 students in that classroom.

There will be social distance, masks will be required, and faculty members will be protected by with additional kinds of equipment. That's really, really important to us.

I'm talking to student leaders, our student council, and I just kept emphasizing that I know that it's not -- they're not as vulnerable, but it takes the entire community to run this campus.

So, we have faculty members, and we have security, we have maintenance, we have cooks, and many of those people are in vulnerable age brackets, and we just need to keep the entire community safe.

We are not changing anything with regards to residence halls, but two-thirds of our students do have their own bedroom, because we are an apartment style living. That will help. We are going to put a limitation on visitors. We do have a closed campus.

Our campus does not intertwine with the community, and so, it gives us a chance to control who is on campus, and so that will help. We are building a lot of outdoor shade areas. We are moving, we've got 32 restaurants, but seating is all going to be outdoors. It's going to be shaded. The intramural activities will be non-contact activities.

The Chapel services, which usually put 7,500 people in our Chapel, will put in four different locations, and so, we'll make use of technology in four different locations to keep social distancing. I think that's most of the things that we're going to be doing.

We do have 1,200 of our student leaders who provide leadership in residence halls, RAs, and life leaders, they'll be showing up three weeks earlier, and they're early, and they'll be working with us in establishing the right kind of culture. We want the kids to have a great academic experience, wanted to all progress towards their degrees.

We don't want any additional costs for them. We don't want them to incur additional costs in order to do that, but we also know that the hallmark of GCU is the community.

If you ask 10 kids why they came here, because they love the closeness of the community, the inclusiveness, and all of that, and so, we're going to try to create circumstances, so that they can enjoy that experience..

I'm sorry. I was going to say, I appreciate the details. I'll get back in the queue. Thanks so much..

Okay, thanks..

Thank you. Our next question comes from Jeff Meuler with Baird. Your line is open..

Yes, thank you. Good afternoon.

So, curious on your comments about the online new enrollment growth potentially going from the really strong upper-teens to, I think you said mid to high single-digit in Q3, I understand the high-teens likely is not sustainable for an extended period of time, but just why would it normalize that quickly, because it seems like the demand environment for the population that you serve and your execution in this environment are good and not clear to me why that would kind of go back to the longer-term trend line as quickly as Q3?.

Well, you have to remember that the pandemic hit at a perfect time for that high-teens to happen, because April, May, and June, are not as high of enrollment months as July, August, and September.

And so, the fact that there was all this demand at a time when most people couldn't answer the phone, and we were answering the phone on the first ring, and this is both ground and online, caused a lot of students come here that maybe they were thinking about going someplace else, and it happened at a time when enrollments aren't typically as high as they are in the next quarter.

And so, the timing of that was just very, very good. If people went back to work, to some extent, then things normalize a little bit, but we're still in a strong position. If we get high teens growth in the third quarter, given that toughness of those tops that would be very good.

And that's going to be, as we said that's going to be also count by the fact that the persistence rates of the students that we are putting into the program are going to be high, and so, high-teens new enrollment growth will produce strong cold enrollment growth and we think put us in a strong position..

Other things I would add, Jeff, is obviously we are very early in the quarter, given that August and September are individually the largest starting month of the year. So, August is the largest, and September happens to be the second largest.

So, we're early on, from a [Ross] [ph], new start perspective, the momentum is not slow, but when you take those huge, huge year-over-year comps, it's just a slight smaller year-over-year increase than a similar number attached to the second quarter number. So, we're not -- I don't want anyone to think that we're seeing a slowing in momentum.

It's just a much, much, much more difficult count given that August is our largest start month of the year and September is our second month..

And we tend to open the years under promise, things like over deliver..

I've noticed.

So, on Orbis, can we just revisit that? So, you know I know that previously you talked about the typical relocation wasn't occurring in the summer and you were thinking there might be an opportunity for your partners to make up some of those enrollments in the fall, and it sounds like you know, maybe some of them are, but there's some number of partners there that just are not increasing their expectations relative to what they were previously expecting to take in, in the fall, so still, so is that right, but so still good growth, but you're just not getting kind of that catch up from the deferred summer enrollment and then are those students at this point likely lost for your university partners?.

The demand is there, the students want in, and university has the capability of bringing them in.

They're concerned about the clinicals, and so, it's the second aspect of their education where they don't know that they can scale, and some are more conservative than others, and so yes, the opportunity for catch up is there, except for the cautiousness of -- but we might not be able to get an additional number of clinicals.

Those things are all scheduled in advance, and a year out, and so, if you want more, those things are usually scheduled right up to them. What hospitals think are the maximum. That was a problem..

And as I said earlier, we expect our fall enrollment, our new start is on in the fall enrollment for Orbis to meet or exceed our original expectations, it just won't exceed enough to make up for the 20% shortfall in the summer start, because the -- Brian just talked about it..

Yes. That's helpful quantification. And then, so lots of moving parts and the guidance. On the option GCU campus affiliated students to go online only for this semester for some period of time, it sounds like 3,500 at this point have indicated that the preference at least for the first semester.

Does the guidance assume 3,500, or does it assume a higher number, because I heard you say you'd expect it to go up over time, but you also kind of call that out as a risk factor on the guidance?.

Yes, so as of today, we're not quite at 3,500, but the guidance assumes 3,500..

Okay, got it. Thank you..

Thank you..

Thank you. Our next question comes from Greg Pendy with Sidoti. Your line is open..

Hi, guys, thanks for taking my question.

Just, I guess, in terms of the mix that you're seeing towards more graduate students, how should we be thinking about the impact, if any, on revenue per student that might have?.

Yes. For us, Greg, revenue per student is on a specific quarter between graduate and undergraduate is pretty much the same, maybe a little bit higher for graduates and undergraduates, because tuition on average is a little bit higher, but undergraduate students historically have taken slightly more credits in a semester time period.

So, they're pretty much the same. The big difference, as Brian alluded to, is just the persistence and graduation rates of graduate students, and degree completer undergraduate students is much higher..

Right, thanks.

And then just one more, I mean, have you ever seen a period in time we're sort of the ground bay students, is there any -- it doesn't seems like you're seeing any today, but is there any sort of sensitivity to the economy you think that can work into a student's decision to maybe go purely online?.

Yes. We think that there will be, there are changes right now to how people think about going to college because of the economy.

Well, I speak at high school graduations, and it's amazing when I listen to the students moving across the stage, how many are going to community college first, and then they've already been accepted in a four-year institution two years down the line, and so, they're trying to save money.

Some students are going online first at a local provider, and then going to a more expensive state university or private university.

We are not seeing it, because the average student had GCU campus pays $8,600 a year for tuition, and we haven't changed our tuition amount level for 12 years, and so, like people say to me you're building out this 300 acre, which will become a 400 acre campus, you're going to put 500 more million dollars in four years into buildings, technology laboratories.

What we've learned is that the appetite for students to go to college and have a residential community experience is greater than it's ever been. It just can't be $60,000 a year.

If you could provide it for $8,600 a year, another $8,000 for room and board, students can graduate in three years, they love going to college, they love having that community experience, they love spending time with their professors and office hours, they love the network of friends that they make, and so, very honestly with all the things we share today the number that is really incredible, it will flatten out to some extent, but right now, for fall of 2021, our applications are 81% of where they were at the same time for 2020 last year, and so the demand, which is why we talk about our four pillars, this second pillar, GCU ground, historically in this country, it's always been assumed that you're going to lose money on a ground campus environment that you charge tuition, whatever you don't get, you got a raise and philanthropic donations, but you're going to lose money, and that's not the case.

Now, it's only not the case if you have a hybrid campus, which means you're leveraging in your infrastructure across 80 some thousand online students, and then 24,000 at some point to become 35,000 ground students, but that this ground thing is hugely working in our favor, and is working in the student's behavior that are favoring a huge way.

So, the demand to combine campus and to have this experience as long as it's affordable, that's not going to lay off, or up its increase..

That's helpful. Thanks a lot..

Yes..

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 myself, Dan Bachus. Thank you very much..

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Everyone have a great day..