Good day and thank you for standing by. Welcome to the Q1 2023 Earnings Conference Call for Grand Canyon Education Inc. [Operator Instructions] Please be advised that today’s conference is being recorded. I will now like to hand the conference over to your speaker today, Chief Financial Officer, Dan Bachus. Please go ahead..

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..

number one, the country need 1.3 million additional versus the next 5 years alone. Nursing programs are very expensive to operate and given the financial pressures facing many universities, they will be unable to invest the dollars we will take to scale the program.

Number two, GCE has the capital to invest in the continued build-out to eventually 80 locations. Number three, in addition to the runway of 8 locations, up from 36 locations currently our enrollment budget for the coming year is only 50% of the actual spots that exist today.

50% short haul this was largely due to the lack of efficient and highly supportive prerequisite course environment. Regulatory issues, creating slowdowns in opening plant locations and the lack of clinical placements to COVID issues.

Most important, there are now over 1,200 students in GCU’s accelerated online science courses, preparing to earn spot in 1 of our 36 locations. These are 8-week courses taught mainly by full-time fast members and provide tremendous academic support services. There are multiple start opportunities on an every month basis.

We expect a 100 number to continue to grow and be a leading indicator of our ability to reestablish growth on the hybrid campuses. GCE is working hard in investing in new enrollment, simulation, virtual reality and prerequisite strategies to be in future fill all the spots that are available.

This is a transitional year for the health care partnerships. However, there is a 10-year runway that is very promising.

It creates a winning scenario for students that want into a promising career, health care providers desperately needing professional nurses and universities who want a low-risk way to help solve the nursing shortage, while at the same time creating additional revenue streams.

Last, we continue to see good results in our fourth pillar certificate program. We are extremely excited because these programs are desperately need in higher education today. This past September, we launched a certificate program in partnership with GCU’s newly formed Institute for workforce development.

This certificate is referring to students for a professional electricians apprenticeship program. This is a 16 credit hour one semester program heavily focused on the mathematical concepts necessary to prepare for our career and an electrician.

This program has been designed with a major industry partner who is offering apprenticeship to the student successfully completing this program. This part needs 1,000 electricians for their business in Arizona alone.

This partner also indicates that the country is short a minimum 100,000 electricians necessarily complete in building traffic currently underway. Last fall, 300 students apply for this program, we accepted 40 into the program.

39 of 40 students of that program completed their program successfully and the feedback that we have received from our industry partners has been very positive. The additional 200 submitted applications for the spring semester and we accepted another 40 in the spring. 35 of those students completed their program successfully.

Once the concept is proven, there is a potential to scale this program in a significant way. We have had many additional industry partners who have expressed interest in participation. Service revenue was $250.1 million for the first quarter of 2023, an increase of $6 million or 2.5% as compared to $244.1 million for the first quarter of 2022.

The increase year-over-year in service revenue was primarily due to an increase in GCU traditional campus enrollments and an increase in revenue pushed year-over-year, partially offset by a decrease in hybrid enrollments, primarily students, universities, partners, Occupational Therapy as systems program.

Operating income for the 3 months ended March 31, 2023, was $74.5 million, a decrease of $3 million as compared to $77.5 million for the same period of 2022 as we continue to invest to meet our clients’ enrollment goals. The operating margin for the 3 months ended March 31, 2023, was 29.8% and compared to 31.7% for the same period in 2022.

Net income increased 2.6% to $59.6 million for the first quarter of 2023, and compared to $58.1 million for the same period in 2022. GAAP diluted income per share for the 3 months ended March 31, 2023, is $1.94. And adjusted, non-GAAP diluted income per share for the 3 months ended March 31, 2023, is $2.04 over consensus estimates.

With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on 2023, 1st quarter, talk about changes in the income statement, balance sheet and other items as well as to discuss the updated 2023 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 3 months ended March 31, 2023 and 2022.

The non-GAAP amounts exclude the tax-affected amount of the amortization of intangible assets of $2.1 million in the first quarters of both 2023 and 2022 and the tax-affected amount of the losses on fixed asset disposal of $0.1 million and $0.7 million for the 3 months ended March 31, 2023 and ‘22, respectively.

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 3 months ended March 31, 2023 and 2022 is $2 and $1.72, respectively.

Service revenue was higher than our expectations in the first quarter of 2023 due to the higher-than-expected ancillary revenues at GCU and a higher-than-expected number of students in the nursing prerequisite courses. Other online and hybrid revenues were in line with our expectations.

The ground enrollment growth rate continues to be impacted by a decline in professional study.

The hybrid enrollment growth rate is being impacted on a year-over-year basis due to the timing of site openings, a 19.9% year-over-year decline in occupational therapy assistant enrollment and a decline year-over-year in the enrollment at some of the material sites due to challenges previously discussed.

Revenue per student continues to grow on a year-over-year basis, primarily due to the service revenue impact of the growth in the GCU traditional campus enrollment for seniors, which has a higher revenue per student due to room, board and other ancillary revenues and the higher revenue per student at off-campus classroom and laboratory site.

Service revenue pursuant for hybrid ABS students generates significantly higher revenue per student than we earn on the other site as these agreements generally provide us with a higher revenue share percentage, partners have higher tuition rates, and the majority of their students take more credits on average per semester as they are an accelerated program.

But the increase in revenue per student was negatively impacted by year-over-year differences in the timing of the GCU traditional campus in spring semester, such the $4.5 million shifted from the first quarter to the second quarter as compared to last year.

Our operating margin was higher than our expectations, primarily due to the higher-than-expected revenue.

As I discussed on prior quarter earnings calls, we have been aggressively hiring in which headcount had mostly been flat since March 2020 and to meet our partners’ expected future growth, which is driving increased compensation costs and technology and academic services and canceling services and support cost.

We also plan for a significant increase year-over-year in travel and employee benefits as those amounts were significantly lower than pre-COVID levels in the prior year. We also plan for increased clinical costs at off-campus classroom and laboratory sites due to the nursing shortage. This spending has generally remained in line with our expectations.

Our effective tax rate for the first quarter of 2023 was 22.3% compared to 25.2% in the first quarter of 2022 and our guidance of 22.3%. The decrease in the effective tax rate year-over-year is due to excess tax benefit of $0.9 million in the first quarter of 2023 as compared to $0.1 million in the first quarter of 2022.

The 2022 effective tax rate was also unfavorably impacted by higher state income taxes. And in 2023, the effective tax rate was favorably impacted by state tax refunds. We repurchased 309,978 shares of our common stock in the first quarter of 2023 at a cost of approximately $34.9 million and another 96,547 shares since March 31, 2023 of the purchase.

We have $149.7 million remaining available as of today under our share repurchase authorization.

The Board of the company intends to continue using a significant portion of its cash flows from operations to repurchase its shares but share repurchases in future years will be less than in 2021 and 2022 as we have utilized all the proceeds from the repayment of the secured note during the past few years. Turning to the balance sheet and cash flows.

Total unrestricted cash and short-term investments on March 31, 2023, were $194.5 million. GCE CapEx in the first quarter of 2023, including CapEx for new off-campus classroom and laboratory sites is approximately $8.6 million or 3.4% of service rev. We expect CapEx for 2023 to be similar to 2020 at between $30 million and $35 million.

I’d like to provide color on the updated guidance we have provided in our 8-K filed today.

As a reminder, the guidance that we have provided in the outlook section of our 8-K filed today is GAAP net income and diluted income per share was component to adjusted GAAP amounts to non-GAAP as adjusted net income and non-GAAP as adjusted diluted income per share and we will continue to provide both GAAP net income and diluted income per share and the non-GAAP amounts with a reconciliation between the two when we report actual results.

We have updated full year 2023 guidance to include the first quarter revenue and earnings peak and are reaffirming the second, third and fourth quarters previously provided guidance. A couple of reminders.

Timing differences in the start and end of the traditional campus semester pushed $4.5 million for Q1 2023 to Q2 2023 in comparison to 2022 and $1.3 million from Q4 2023 to Q3 2023 in comparison to 2020. We anticipate that new online enrollments will be up year-over-year in the high single digits to low teens in the second quarter.

As a reminder, the comps get much more difficult in the second half that new enrollments were up year-over-year in the mid-teens in the third and fourth quarters of 2022. Thus, our guidance provides a wide range of potential outcomes in the second half of between low and high single-digit growth.

Given that our long-term objectives started to grow new enrollments in the mid-single digits, the midpoint of this range would meet our long-term objectives. Based on this, we anticipate that total online enrollment will end the year with a low to mid-single-digit year-over-year growth.

As Brian discussed earlier, hybrid growth will remain below our long-term objectives during the first half of 2023 and but we’re hopeful that we will start to see some acceleration beginning in the fall semester due to new site openings and the impact of the prerequisite initiative on the number of eligible students that can start in our partners’ programs.

We estimate the effective tax rate in the last three quarters of 2023 will be 24.9%, 24.9% and 24%. The effective tax rate will be higher in 2023 than 2022 because of the impact of state income taxes as revenues continue to grow at the offsite locations outside of Arizona, driving our tax rate increase.

These estimates do not assume a contribution of [indiscernible] but if one is made, that will increase G&A expense in the third quarter and decreased the effective tax rate in the second half of the year. Assuming that a contribution of $5 million is made in July of 2023, as was made in July of 2022.

This would decreased net income by $1.3 million in the third quarter of 2023 and increased net income by $1.3 million in the fourth quarter 2023. But again, no decision has been made yet on this contribution.

Our weighted average share guidance assumes that we purchased most of the remaining amount authorized by our Board evenly over the rest of the year.

The Board continues to authorize the repurchase of shares as it leaves the stock remains undervalued based on the metrics that it uses to evaluate, including the ratio of enterprise value to adjusted EBITDA and the free cash flow yield rather than the multiples of other education companies, as although we can be viewed as being in the same sector, there are a few, if any, appropriate comps.

On an enterprise value to adjusted EBITDA basis, the stock is currently trading at roughly 12.5%, which is less than the recent S&P average of 16.4%. The average free cash flow yield for the S&P 500 of $2.8 million, whereas the company’s free cash flow yield is approximately 5.5%.

The guidance we have provided does not include any reduction in revenue or expense associated with the Dear Colleague letter issued last year that I’ve discussed on previous calls.

However, it is likely that a number of our university partners contracts will be adjusted prior to the fall term such that we will no longer reimburse them for certain costs and thus will be reducing our revenue shift. As a result, we do anticipate the full term revenue and expense will be reduced, but cannot currently quantify these amounts.

It is important to note that these changes made will not have a material impact on revenues and operating profit as the Dear Colleague letter does not impact our relationship with GCU as GCU provides all faculty for their course, pace them and receive little or to no reimbursement from us or any other outside sources for the faculty costs and because the contract modifications are being made to make both parties whole.

Last, as I get this question often, I wanted to highlight that the named executive officers have signed extensions of their employment agreement. Brian’s agreement has been extended through June 2020. I’ll now turn the call over to the moderator so we can answer questions..

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Meuler with Baird. Your line is now open..

Yes. Thank you.

For the hybrid pre-req initiative, I guess, have you had any students graduate from that program at this point? When do they apply for the ABSN experience, just like how much of a lag between completing the pre-reqs and enrolling an ABSN would you expect?.

Well, we when they express interest in our program, and we determine they need re-referenced courses, how many there are that they need to take. We immediately begin a schedule in terms of how they’ll transition to the ABSN program.

So depending upon how many courses they need to take will determine the schedule will determine when they’ll finish their last course and then for most of them, they will begin very soon after that, attending one of the sites that they selected even before they start their pre-reqs.

And so for many of the students, they will be lucky to site very near their home. For some, they’ll actually select a site that they’ll move to but all that work is done upfront. The evaluation of their transcripts is done and then we determine what courses they need. Course schedule is built. We don’t – we have a lot of students completing courses.

They are completing courses at a very, very high rate, the one that we’re very satisfied with. We haven’t had a student complete them all and go into the – maybe a good program yet, but we’re very close to that happen. And so the preliminary results have been very good, and I can’t underestimate how important that is.

When you apply to get into a nursing program and it’s determined you don’t have the prerequisites necessary sorry to say this, but if they refer you to a community college, that could literally be a 2 or 3-year time frame before you’re going to hit the courses you need. And if you don’t select that route, the other routes are extremely expensive.

And so what we realized is that you can’t expect a student to take out a massive loan to get the pre-reqs done, not knowing whether that will be successful and they’ll actually get into an ABSN program.

On the other hand if we get students into an ABSN program, if we get them to the door, there is a universal 90% completion rate and a greater than 90% first time class rate on the entrance exam.

And so we absolutely believe that a centralized process no matter where you are in the country to enter into the correct pre-req courses one at a time, 8 weeks log of lots of faculty in tutorial support will put us in a position to create a pool of those graduates who could step into the ABSN program, and we believe that’s the key to reaccelerate the growth.

And obviously, each quarter, we will be providing updates on that. But what we’re experiencing at this point is that the students are doing well in the course work. They are getting a tremendous amount of support and I think this is by far the most important part of adjusting to this market change.

And when you go back to the change, it’s just the supply and demand on the labor pool. When you’ve got a $60,000 or $70,000 a year job, and you’ve already completed your degree, you’ve already taken out sizable amounts of loans to do that.

It’s very difficult for that person to decide if they are going to quit their job invest $50,000 to $60,000 and recur and they are seen to make $75,000 or $80,000. And so there is no lack of interest in people wanting to be nurses.

It’s just that the market now has shifted to people who haven’t already taken out massive amounts of loans to a complete degree, and then are faced with doing that second course..

Got it. And then for the fall ‘23 ground campus enrollment. I just want to make sure I’m interpreting the comments correctly. You gave us the new starts I feel like there was a little bit of a caveat 2 to 3 months ago about registrations tracking behind. I guess has visibility on that front and trends on that front improved.

And then this quarter, I don’t know if this was a new cabin or not, but I thought there was a reference to like some uncertainty around retention of students from spring to fall and increased competition.

So is there any reason to believe that retention could be lower this year?.

No, retention is very good. We will come in with more than we budgeted for in terms of returning students to the can. So that’s really good news. On the other front, things have changed dramatically in higher education with regards to traditional students. This has been coming, but COVID accelerated it.

The reason we’re saying between 10,000 and 11,000 students, and that’s a wide range for us. Usually, we can target the number and be much closer. Our applications are up significantly. Our campus visitations, our one-on-one appointments with students and parents are up. What’s lagging behind is the student’s commitment to register.

So they are not saying they are not coming, they are not committing to register.

We have had a number of institutions visit us well-branded private university students within the last couple of months and explore potential relationships because they are looking at their fall numbers and their fee I’m not going to say Armageddon, but this – what happened last year is probably going to be worse than this year for many institutions.

Students and families know that they are in a driver seat now. Unlike in the past where you try to apply the schools you are interested in helping to get an acceptance and celebrate that. Right now, what they know is that the thing is flipped and if they hold out, people are making increased offers in order to get them to attend their campus.

We’re not doing that. We don’t think we have to do that. And we’re still positive about how we fit into this whole situation because of our low tuition rate. Parents and families students are actually absolutely questioning the value of higher education if it requires $200,000 worth of debt or even $100,000 if you would attend state university.

We think that as they get letters and deals submitted by other institutions, ours as they have in the past, will look very favorable in addition to the fact that we’ve got over 40% of our students graduated in 3 years because of our dual credit programs and all of that.

So we still think we – even though the trend is fewer high school graduates, fewer [indiscernible], if you’re questioning the value of higher ed, this is a very good investment because number one, you’re going to graduate with very little debt. Number two, you’re going to graduate in less years.

And so it’s a much lower risk proposition if you’re questioning that. So we are hanging in there and expect that we will still do real well in the end as compared to others..

And just to clarify, the caveat, Jeff, you might recall this, we had a similar issue last year, but the university built 1,500 new beds. And if retention rates were flat as a percentage to last year, we could recruit for them 1,500 additional new students or 1,300, I think, roughly, additional new students this year than last year.

Based on current registrations for continuing students, they are taking up the entire 1,500 additional beds. Now with that said, once students go home for the summer, we expect some attrition as we’ve seen in the past.

But right now, sitting here today, based on current or prior trends, we will have a much higher retention rate than we projected or we’ve had in the past and continuing students will take up some of that increased Fed situation at the university build, if that makes sense..

From a total enrollment standpoint, It won’t change the total enrollment. It will just change the pieces between new and continuing..

Yes. Got it. Thank you..

Alright. [Operator instructions] Our next question comes from Jeff Silber of BMO. Your line is now open..

Thanks for sneaking me in. I apologize, I joined late. Brian, and forgive me if you mentioned this, and I’m sure you did. You talked about the hybrid business being in a transitional year this year.

At a high level, can you just review why that’s the case?.

Yes. The market absolutely changed because of the slip in the labor market. They are unemployment is so low that 3 or 4 years ago, most of the students where students have completed a bachelor degree, their careers were not going anywhere, and they want to career into nursing.

And so their transition into the program was pretty simple, much simpler because they already completed a degree. Right now, you’ve got people making $60,000 and $70,000 a year, the first couple of years out of college.

And it doesn’t make sense for any of them to put their $70,000 a year job and spend $60,000 to $80,000 it’s those careering post-tax students have kind of dried up. Now that might change again if the employment situation changes, which would like.

But what’s happened is that there is still a huge interest in people becoming nurses, but it’s students that are at a community college or pretty new out of high school, they earned 30 or 40 credits, maybe 60 credits and they haven’t accumulated much debt.

What we needed to do for them is create a very efficient way for them to get the science pre-req courses done so they can go to do an ABSN program. We needed to make the scheduling of those things very efficient. We need frequent start times. So we’ve built those courses at GCI. And they quickly rose to 1,200 suits in those courses.

They are taking anywhere from two or three to as many as seven or eight science courses, chemistry, biology, anatomy, physiology, those courses, and they are completing at a high rate. We’ve reduced the situation significantly to most who are paying cash.

And they don’t have the difficult decision of accumulated a lot of debt, not knowing if I’m going to get in. The reason we’re very bullish on this thing going forward is how quickly the enrollments grew in those courses and how well the students are doing.

The decision then to spend the $50,000 or $60,000 into a program is a pretty easy one given the number of jobs in nursing what they pay, etcetera. And so the transition is mainly that. Now there was a little bit of some sites opened later because in certain situations, in certain markets, we couldn’t get the right number of clinical placements.

So there was a little bit of that, but it mostly has to do with the uncertainty of how do I get those prerequisite course is done.

And so as that number builds as students identify a site they want to go to as they get into the prerequisites, we know after we did our schedule when the pre-reqs will be completed if everything goes well, and therefore with program looks like they’ll attend when they finish it.

So it’s that transition that’s taking place right now, and we’re extremely bullish on the fact that it doesn’t matter where you are in the country. It doesn’t matter what program you’re interested in of our 26 different partners, you can come to GCU, you can do the programs, you can do the courses online, and you can do it in very efficient way..

Okay. That’s helpful. If I could shift gears to GCU online. Can you just give us an update in terms of acquisition costs I know it’s been a competitive market. You guys are doing a great job. But I’m just curious if acquisition costs have come down or how they are tracking..

When you look at us historically, and I know you know this, if you look at the 5 or 6 years our acquisition costs, that’s where we were getting margin expansion. Now we’ve been in a position where they stayed pretty flat. It’s – we have an experience the difficulties a lot have had.

And mainly because 24%, we were 24% over this first quarter of this year over first quarter of prior year and it starts that we have accumulated through our industry partnerships.

That’s taken the pressure off of our marketing plan and [indiscernible] and so where other people have had to spend more marketing dollars, which as you spend more, you get deteriorating results, we’ve been able to keep our actual advertising expense pretty much the same, slight increases because we’re getting the starts out of the school rates, hospitals, counseling centers, military bases where we are putting custom programs together to help them enroll count from inside.

I’ll tell you, the – we have got so many partnerships now with [indiscernible] where we’re taking care of professionals who are making $25,000 a year, putting them into back loyal programs that lead to licensure that allow them to become full-time teachers at $70,000 a year, in some of the biggest cities in America, New York, Chicago, Philadelphia and Boston.

I mean those are – it’s a great story because it’s really lifting people to a middle-class job at the same time, it’s giving human resource departments within large school districts and HR plan that they can count on and give them some level of predictability and a way for us to offer programs without having to buy lease.

So that’s – so we really haven’t had the issue that you probably heard from a lot of groups..

Okay. Appreciate the color. Thanks so much..

We have reached the end of our first 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..

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect..