Good day, and thank you for standing by. Welcome to the Q2 2024 Grand Canyon Education Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Dan Bachus, Chief Financial Officer. Please go ahead..

Hello. 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..

in that time, GCE has helped Grand Canyon University graduate 169,521 students. 46,251 in education, including 22,465 first-time teachers at a time when teacher shortages have created a national crisis. 46,209 in nursing and health care professions including 2,443 pre-licensure nurses at a time when there is a huge shortage of nurses.

33,689 in the college of humanities and social sciences, including thousands in counseling and social work, where there are also huge shortages. The College of Business has become one of the largest business schools in America, and has produced 29,493 graduates.

The College of Science, Engineering and Technology has grown by 225% and provided 6,880 graduates. The Doctoral College, Honors College and College of Theology also continued to grow. In addition, GCE has helped its other partners graduate 17,443 pre-licensure nurses and occupational therapists assistance.

The numbers that I have cited all have happened in the past six years since the GCU, GCE transaction and since GCE has become an education services provider. Service revenue was $227.5 million for the second quarter of 2024, an increase of $16.9 million or 8% as compared to the $210.6 million for the second quarter of 2023.

The increase year-over-year in service revenue was primarily due to an increase in GCU enrollments of 7%, an increase in university partner enrollments at our off-campus classroom and laboratory sites of 12.1% and an increase in revenue per student year-over-year.

Operating income for the three months ended June 30, 2024, was $42.7 million, an increase of $7.3 million as compared to $35.4 million for the same period in 2023. The operating margin for the three months ended June 30, 2024 was 18.8% compared to 16.8% for the three months ended June 30, 2023.

Net income increased 20.4% to $34.9 million for the second quarter of 2024 compared to $29 million for the same period in 2023. GAAP diluted income per share for the three months ended June 30, 2024, is $1.19. As adjusted, non-GAAP diluted income per share for the three months ended June 30th is $1.27.

With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on our 2024 second quarter, talk about changes in the income statements, balance sheet, and other items as well as to discuss the updated 2024 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, 2024, and 2023. The non-GAAP amounts exclude the tax-affected amount of the amortization of intangible assets of $2.1 million in the second quarters of both 2024 and 2023.

The tax-affected amount of the losses on fixed asset disposals of $0.1 million for the six months ended June 30, 2023, and the tax-affected amount of $1.1 million in severance costs recorded in the quarter related to Dan Briggs' departure.

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, 2024, and 2023 is $1.27 and $1.01, respectively.

Service revenue was higher than our expectations in the second quarter of 2024, primarily due to higher-than-expected revenue per student.

Revenue per student continues to grow on a year-over-year basis, primarily due to the service revenue impact of the increased room board and other ancillary revenues at the GCU traditional campus enrollments between years.

Service revenue per student is also positively impacted by the growth in hybrid ABSN students as these students generate a significantly higher revenue per student than we earn on the other students as these agreements generally provide us with a higher revenue share percentage, the partners have higher tuition rates and the majority of their students take more credits on average per semester as they are in accelerated programs.

The increase in revenue per student was less and somewhat by the timing of the spring semester for the ground traditional campus. The spring semester started one day earlier in 2024 than in 2023, which had the effect of shifting $2.1 million in service revenue from the second quarter of 2024 to the first quarter of 2024 as compared to the prior year.

In addition, contract modifications for some of our university partners in which the revenue share percentage was reduced in exchange for us no longer reimbursing the partner for certain faculty costs and the termination of one university partner contract at the end of the Spring 2024 semester had the effect of reducing revenue per student.

Our operating margin in the second quarter of 2024 was higher than our expectations primarily due to the higher revenue per student and lower-than-expected headcount. We continue to invest heavily to meet our clients' growth goals.

These investments have included headcount increases, travel primarily related to discover, increased clinical costs at off-campus classroom and laboratory sites due to the nursing shortage, technology services, both in headcount and license fees as a result of new technology requests by our partners and costs related to the new hybrid locations as we opened five sites in the year ended December 31, 2023.

Four sites in the six months ended June 30, 2024, and more will open later in 2024.

The second quarter operating margin was positively impacted on a year-over-year basis due to the contract modifications and negatively impacted on a year-over-year basis by the timing difference between years and the start of the spring semester for GCU's ground traditional campus.

And the $1.1 million in severance costs recorded in the quarter related to Dan Briggs' resignation effective June 30, 2024. Our effective tax rate for the second quarter of 2024 was 25.5% and compared to 23.8% in the second quarter of 2023 and our guidance of 24.9%. The effective tax rate increased year-over-year due to higher state income taxes.

We repurchased 281,014 shares of our common stock in the second quarter of 2024 at a cost of approximately $38.7 million, and another 94,520 shares we repurchased since June 30, 2024. We have $189.8 million remaining available as of today under our share repurchase authorization.

The Board and the company intend to continue using a significant portion of its cash flows from operations to repurchase shares. Turning to the balance sheet and cash flows. Total unrestricted cash and short-term investments as of June 30, 2024, were $341.8 million.

GCE CapEx in the second quarter of 2024, including CapEx for new off-campus classroom and laboratory sites was approximately $9 million or 3.9% of service revenue. We still anticipate CapEx for 2024 to be between $30 million and $40 million. Last, I would like to provide color on the guidance we have provided in our 8-K filed today.

As a reminder, the guidance we have provided in the outlook section of our 8-K filed today is GAAP net income and diluted income per share with the components to adjust the GAAP amounts to non-GAAP as adjusted net income and non-GAAP as adjusted diluted income per share.

I want to just mention very quickly before I go through the rest of the guidance in a press release that went out earlier today, announcing our results, full year guidance for the non-GAAP and as adjusted diluted income per share did not include the tax affected severance costs recorded in the second quarter.

The 8-K was correct and the press release has been amended. We have made a few changes to our second half 2024 guidance due to current trends or items that recently occurred, so I'll start with a high-level perspective and then drill into the detail. We have updated full year 2024 guidance to include the second quarter revenue and earnings beats.

We have narrowed the revenue ranges for the third and fourth quarters and lowered total revenue at midpoint by $8 million. $1million in the third quarter and $7 million in the fourth.

As you recall, the large spread between our initial high and low estimates in the second half was primarily due to our uncertainty around GCU's ground traditional fall semester enrollments due to the items Brian mentioned earlier. As Brian discussed, it is likely that we will be near the bottom of that initial range.

And thus, we have narrowed the range considerably and lowered our expectations at midpoint for this pillar by $8.5 million in the second half, $2.5 million in the third quarter and $6 million in the fourth quarter.

We have also lowered revenue at midpoint by $4 million in the second half, $1.5 million in the third quarter and $2.5 million in the fourth due to the contractual changes recently agreed to with three more university partners in which we will no longer reimburse those partners for their faculty pay in exchange for a lower revenue share percentage.

These modifications have no material impact to the income we generate on the contract, but reduces revenue and technology and academic services expenses. We have raised our assumptions for online and hybrid revenues due to the positive current trends by $4.5 million, $3 million in the third quarter and $1.5 million in the fourth.

We have increased operating expenses in the third quarter as we made the contributions in lieu of state income taxes to tuition organizations of $4.5 million in July. This is an increase from what has been contributed in prior years due to higher state income tax.

These contributions have the effect of increasing general and administrative expenses in the third quarter by this amount and lowering income tax expense by the same amount roughly, three quarters in the third quarter and one quarter in the fourth quarter.

So neither of these most -- these changes have an impact on net income for the second half, but does decrease income slightly in the third quarter and increases it slightly in the fourth quarter.

We have lowered our operating expense assumptions in both the third quarter and the fourth quarter due to our current staffing levels, but it is important that we get fully staffed in the fourth quarter so that we can meet our university partners 2025 enrollment goals.

On a more detailed level, we continue to anticipate the new online enrollments will be up year-over-year in the mid- to high single digits in each of the final two quarters of 2024 and that total online will continue to grow year-over-year above our long-term objectives. As Brian has discussed, the online enrollment results were outstanding in 2023.

Lead trends remain strong, but as a reminder, not only did -- new enrollment grow at a much higher rate than we expected.

And then in the second half of 2023, these growth rates were coming off very difficult year-over-year comps, but also retention rates significantly improved over the prior year, which has resulted in the decline year-over-year in reentries, students returning to school after break and a significant year-over-year increase in graduates.

These factors will continue to impact the total enrollment growth rate in the second half of 2024.

As has been previously discussed, with the new student growth rate in the hybrid pillar will moderate to high single-digit growth year-over-year in the fall start excluding closed locations, due to much more difficult comps as fall 2023 is when we start to see significant acceleration in new start growth.

And due to some of the GCU locations already being at capacity and thus, no growth year-over-year as possible at those locations, whereas significant growth at those locations occurred in previous quarters.

As I just discussed, the revenue growth rate for the hybrid pillar as a result of the enrollment growth continues to be partially offset by changes made to the contracts for the university partners that are no longer being reimbursed for faculty costs and the site closings discussed in last quarter's call, but these changes have had the effect of increasing margins.

On the expense side, as you will recall, we made significant investments in the past few years, primarily in headcount and travel expenses to meet the growth goals of our partners. Our headcount growth has slowed significantly so far in 2024, which is one of the reasons that margins were so much higher than we expected in the first half of 2024.

But there are still expense categories that we continue to see year-over-year increases greater than revenue growth including those that I discussed earlier and on last quarter's earnings call, and we do plan to reaccelerate headcount growth in the second half of 2024 in anticipation of our clients' growth expectations in 2025.

We anticipate the hybrid pillar will continue to lose money during the remainder of 2024, given that a number of mature sites remain significantly below pre-COVID student count. The newer sites are generally back to historical margin profiles as they are back to growing at rates more similar to what we experienced pre-COVID.

But to get back to profitability, the mature sites need to get back to pre-COVID enrollment levels. Those that are now admitting advanced standing students are generally back to growth. Those that have not generally continue to see enrollment challenges.

In estimating interest income for 2024, we continue to assume similar cash balances to 2023 and a similar interest rate environment until September, but with three interest rate cuts now expected in the second half of 2024 with the first anticipated occurring in September, we are anticipating lower returns on our excess cash and investments in most of the second half of 2024.

We have reduced the effective tax rate for the last two quarters of 2024 to 20.8% and 21.7%, respectively, due to the contributions in lieu of state income taxes mentioned earlier. Excluding the contributions in lieu of state income taxes, the effective tax rates for the third and fourth quarters of 2024 remain consistent with prior guidance.

Our weighted average shares guidance assumes that we purchased most of the remaining amount authorized by our Board over the rest of the year. Although given the rise in the stock price, we anticipate purchasing less stock in 2024 than in 2023.

The Board continues to authorize the repurchase of shares as it believes the stock remains undervalued based on the metrics 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.

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

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Steven Pawlak from Baird. Please go ahead..

I would like to start with the June online new enrollment. You said it was softer there. Just any color around what that was? And then it sounds like things were back on track in July. So just any sort of commentary around the outlook as well? Thanks..

No, not really. We continue to do better than expected with online enrollments. Lead flow is good. The outside activity is just -- continues to go very, very well. It's becoming an increasing bigger percentage of our starts on a monthly basis. And that work is not as totally predictable as the work that gets done inside with people responding to lead.

So no, July is good, and we expect to have two good quarters in the third and fourth quarter..

And then I'm sorry, you said June was softer in the prepared remarks.

Any commentary there?.

June is a little....

June was a little softer. It's -- it was predicted. I mean, we knew that there was 1 less Monday start, which is our undergraduate start, which is growing faster than the graduate start during this quarter as compared to last year.

And so we knew the second quarter -- the other thing is the second quarter is by far our slowest start quarter of the year. And so we're not talking significant enrollment numbers. And that's, as Brian said, we're generally on our target..

Okay. And then on the FAFSA delays, I hear you there as far as the things needed to be sort of resubmitted even after the delays sort of got corrected. But you had talked last quarter about sort of actions you were taking to sort of be more proactive with students that were interested.

So I just how did -- I guess, some of the actions there maybe contribute to FAFSA not being as that is otherwise?.

Well, we had to -- there were a tremendous amount of overtime that needed to be worked. There was a lot of manual work that had to be done that typically didn't have to be done.

And so in addition to the delays that we experienced in the first part of the process, the second part of the process, involve delays as well because the information wasn't accurate and we had to do a lot of manual calculations in order to get the work done. And so that just kept pushing back dates.

And when you are in a low-income family or even a lower middle-income family, the uncertainty of what I was going to get and -- or what I was not going to get created a lot of anxiety and people just decided to stay home, attended junior college and make a new decision in the next year. And so that impacted people all over the country.

For us, to be nearly where we were last year is a huge gain, because if you look at the marketplace at a 40,000 foot view, there are fewer high school graduates, and there are -- there's a smaller percentage of those graduates going to college. And for us to maintain our -- where we -- were this year is a big win.

Now as we look forward to next year, we've already established a goal that's over 15% higher than where we were this year, because we expect the FAFSA site to be fixed. We expect to be -- there's some -- be some moderation of inflation. But you have to -- it's the FAFSA, but it's also inflation.

You have to understand that for middle-class families $1,000 or $2,000 can impact their decision one way or the other. But we think both of those things will be -- the first one will get fixed, the second one will be moderated, and we'll be in a very, very strong position and expect a big year next year..

All right. Thank you..

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..

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