Q3 2019 Earnings Call
Thank you for standing by hand walk into the Q3 2019 Grand Canyon Education earnings Conference call.
Hi, My participant lines are not listen only mode.
After the speakers presentation, there will be a question answer session.
Ask a question during the session you want me to press Star one on your telephone. Please be advised the today's conference is being recorded if you acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Dan Baucus CFO . Thank you. Please go ahead Sir.
Thank you joining me on today's call is our chairman and CEO , Brian Mueller.
No. The many of our comments today will contain forward looking statements involve risks and uncertainties various factors could cause our actual results to be materially different from de future results expressed or implied by such thing.
These factors are discussed in our LTC filings, including our annual report on Form 10-K quarterly reports on Form 10-Q 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 all investors review. These reports thoroughly before taking up by Mitchell position and you see.
And with that I'll turn the call over to Brian .
Thank you in todays conference call I want to spend some time discussing the future of higher education, and how do you see is positioned to be a significant long term contributor.
What is being written about higher education, but our opinion not enough.
Isn't that context of the challenges.
Students families communities and the economy. The challenges have been building for decades since 1990, the cost of living has gone up in this country 95 sample of the past pirate education has gone up 393%.
This has happened in the midst of a rapidly changing economy, requiring knowledge and skills sets that are significantly different than those required enforcement post World War two America.
Except for cost many things have not changed inside the academy.
Challenges are not car to identify one college cost way too much what if students cover the cost directly to private universities or public some of the cost to community colleges are state universities and tax payers are paying the difference.
Two students are taking a wait too much debt.
Three as twitching goes up typically the diversity of student bodies go down.
For bachelor's programs take what a six year in too many instances, adding to the total cost. We believe many program should be completed in three years.
Five many times programs are not tie directly in up to where the jobs are.
And so there are not enough counseling and support services back my technology and artificial intelligence intelligence to assist especially first generation College students.
In the past and still to this day U.S. News and we'll report rankings measured and things like number of applications rejected subject appear evaluations in dollars raised two development officers brands were built partially on rankings derived from those criteria, none of which relates directly to the relevance of programs for many of the curriculum and disruption and yet.
To support services offer.
We believe the future will be more about the value and a return on investment that students families communities and the economy experiences.
<unk> education has four pillars that is supporting and each one addressing the challenges that have been identified.
First Grand Canyon University online.
Just partner institution heavy 4081 online students as of September Thirtyth 2019, and in the quarter just completed new students grew in the mid single digits in total students grew 7% year over year.
Yeah, I read the tuition per student for GCU students is 90, $9100, which is way below that that is paid typically a private universities and it will blend in many cases to what discharge it heavily pack subsidized state universities.
Shortly GCU on line has been profitable currently both GCU online and CE CE are profitable. This has allowed us to invest $200 million, an academic and operational infrastructure to serve students had an extremely robust online platform.
Back it's easy continues to be profitable allows it to continue to invest for example, GCU just released 40, new <unk> 41, new academic programs that you see he will help implement for students in the next six months.
She sees building on the state of the arc learning management system that GCU built in 2011 by building a new even more robust system that will be released in approximately 10 months.
GC East profitability and continued investment has been accomplished with modest less than 1% tuition increases by GCU online.
In addition, GC he continues to invest in operational components of it best in class administrative system that affords students unprecedented levels of transparency.
Every student starts program knows the full cost of the entire program before they begin.
Universities will give them at most of the cost of the first year.
Not only will get will you give cost for the entire program will also breakdown loan packages and repayment amounts based on the amount of student chooses to borrow.
The level of transparency around credits transfer courses that need to be taken tuition level in all other cost us not exist at most university.
He continues to invest in constant services and support technology. So students remain completely up to speed on their progress.
These investments have produced high quality metrics Sgc you.
Good graduation, right led to over 25000 graduates last year most in high demand areas.
GCU has slightly over 5% cohort default rates when the national average is greater than 10%.
Gpus 90, 10 calculation a that is 70 is 73% and continues to drop.
None of these views on line program to be able to gainful employment calculations.
Many private state universities, especially if you include tax subsidies that go to state institutions would not pass.
GCU students take out less debt than the average private and state University students. According to the Institute for College access and success.
The second pillar is the GCU traditional campus.
Well, most traditional university campuses show declining enrollment trends VC use traditional campus enrollments habits floating.
From 900 students 10 years ago GCU started this semester with nearly 21000 students.
Gpus traditional campus is profitable and is invested over $1.5 billion, an academic and other campus infrastructure.
GCU, we'll invest more than 500 million additional dollars in the next five years to continue the growth.
Without inefficient operational model this would not be possible.
GCU as published this without raising tuition and its traditional campus in 11 years.
Campus has been rank as high seven in the country by niche Dot com.
The quality of the student body continues to grow with this year's class, having incoming GPH exceeding 3.5, what the dynamic honors college growing to 2300 students with average incoming GPH exceeding 4.1.
Over 50% of students are study in a rigorous stem areas in over 40% of graduates are completing in three years.
And do the fact that the average residential student pays $8100 per tuition and $8200 in room and board on annual basis. The percentage of students living on Gcs campus continues to grow residential students grew 9.3% year over year.
He will continue to support just use traditional campus operationally as it grows to over 30000 students.
The third pillar of the GP strategies for bus.
Orbitz fits in the strategic plan because originated as the result of a huge marketplace need and is using a very innovative delivery model.
Orbit like GCU online and GCU Brown will be profitable.
The profits will be reinvested into orbit to create more opportunities both in terms of locations and adding programs to current locations.
Self sustaining economic models that don't rely on tax payer subsidies or philanthropic donations aren't huge benefit to the economy and the state budgets.
Since we bought corbis for partners have been added and as of this fall we are up to 23 locations.
The goal is at least 30 locations by the end of 2020.
The creative delivery model, which combines on ground laboratory work with online delivery of course content is producing tremendous outcomes for students to healthcare community and University partners.
He will continue to support Orbitz, the capital marketing and operations support including advanced technologies.
In terms of metrics graduation rates are approximately 90% and first time pass rates any intellect exam or consistently over 90%.
GC used nursing program the last two quarters produced over 98% first time pass rates.
Orbis revenues have grown 50.7% on a year over year basis in the three months ended September Thirtyth 2019, while enrollments on a comparable basis have grown 28.1% year over year.
TC East fourth pillar is a set of three or four partners with a more comprehensive arrangement.
We're working hard at this pillar, but we'll continue to be selective.
Model of many partners many low enrolled programs at very high price points, if not interesting to us.
We believe we can add tremendous value to University partners in the Midwest and northeast and are in dialogue with the number of them.
Most of them have had partners in the past and they have not been successful skip scaling those programs.
Our strategy a front end services combined with robust back in services is a clearly differentiated approach.
The model, we are suggesting is proven and a very large scale.
Few hybrid campus, having large student bodies in both markets has been successful at an unprecedented ways.
Hi, 40 students producing great outcomes at great value.
Combined with making huge investments to constantly upgrade infrastructure as a matter of fact not opinion.
Everybody that visits the GCU campus goes away very impressed.
Sadly from other institutions, who haven't visited and seen firsthand. What this model has been able to produce our challenge for us.
Future miles of higher education should be based on the results they produce and not what do they fit into pre existing structures.
Our other three core pillars are performing well have great potential and as a result, we have the ability to be selective.
We will find the right comprehensive partners, who are interested in pursuing in model, which produces better value for students.
We have turned away potential partners in the last six months and May have to walk away from more we're not going to make deal with the administration, if properly or not fully on board.
The other half if we find the right partners. This model has produced transformative results that are a factual and not a penny or wishful thinking.
Grand Canyon Education is also looking for partners that pay more than superficial lip service about making real transformative contributions to the communities. The are part of.
Do you see NGC you continue to work together to make a real and positive impact on the inner city community in which we reside to apply point plan is producing real results.
One of the plan is to grow both GCU NGC in this neighborhood together, we have created 11000 jobs 5000 full time 3000 part time at 3000 student workers when you add construction and other related jobs. A conservative estimate is that we are worth $1.1 billion to the irrs on economy on a yearly basis.
Part two is putting off 12, new businesses that employ over 400 people in just the last three years.
In addition, we have 22 new businesses incubating currently in an innovation center.
In part Threep is $1.6 million neighborhood safety initiative that has property and violent crime down over 11% in the recent year, while it's up in almost every other Zip code.
The fourth part is one of the largest habitat for humanity programs in the world together every of restored over 250 homes to date with the goal being 800.
Since we started the program housing values are up 302%.
At this part is support local K 12 schools GCU has 400 students providing to dream for over 100 schools West Phoenix between three o'clock eight o'clock Monday through Friday at 10 o'clock to six o'clock on Saturday.
We have raised money support 250 students through both with scholarship that come out of the program with the goal of building that number just to 800.
I am extremely excited about which students faculty and staff of GC GCU Orbis have been able to accomplish through these initiatives are.
Our progress is producing real actual results to improve People's lives and is unprecedented in higher Ed World.
Now turning to the results of operations, we have provided supplemental non-GAAP financial information excludes amortization of intangible assets loss on transaction expenses and contributions made in lieu of speed income taxes to schools sponsoring organizations to allow investors to develop more meaningful understanding of the company's performance over.
Time units educational services business.
Service revenues were 193.3 million in the third quarter 2019, compared 155.5 million in the prior year. This represents increase of 24.3%.
Increase year over year was primarily due to our Orbitz acquisition on January 22nd 2019, and an increase in GCU enrollments between years.
The Orbitz education University partnership agreements generally generate a higher revenue per student in our partnership with GCU as these agreements generally have a higher percentage of service revenue.
The Orbitz partners have higher tuition rates than GCU and the majority of these students are studying the accelerated Bachelor of science in nursing program. So these students take on average more credits first semester.
We're also seeing an increase in revenue per student from our GCU partnership, resulting from the increase in residential students.
In the period enrollment increased 10.2% quarter over quarter 208821 from 98750.
As adjusted operating income and as adjusted operating margin for three months ended September 32019 was 65.9 million in 34.1% respectively.
Adjusted operating income as adjusted operating margin for the three months ended September Thirtyth 2018.
Were 53 5.3 million and 35.6% respectively.
GE will continue to invest profits to it to create additional education infrastructure for our partner institutions that will create more opportunity for students and families.
Technology in academic services group from 11.1 million in the third quarter of 2018 to 24.2 million in third quarter 2019, an increase of 13.1 billion or 118.3%.
This increase was primarily attributable to this Orbis education University partnership agreements, which requires certain technology and academic services, including headcount assessment facilities and equipment to be invited to each University Park.
These costs along with increased cost to service our existing client gcs increased enrollment resulted in increase.
As a percent of comparable revenue these costs increased 540 basis points to 12.5% from 7.1% primarily due to the orbits education University partnership agreements, requiring a higher level of technology and academic service and our partnership agreement with GCU.
Gaussian services and support expenses grew from 51.1 million in the third quarter of 2018 to 56.3 million third quarter, 2019 increase of 5.2 million or 10%.
This increase was primarily attributed to the Orbis Education University partnership agreements, which requires certain counseling services support principally head count to be provided each to each university partner. These costs along with increased costs service, our primary University partners skews, increasing enrollment resulted in increase.
As percentage of comparable revenue these costs decreased 280 basis points to 29.1% from 32.9% primarily due to its accounts in service support cost to serve the Orbitz education University purchase agreement being left as a percentage of revenue in the cross assert that the cost of service GCU.
And due to our ability to leverage our accounts in services and support expenses across an increasing revenue.
Marketing communication expense as a percent comparable revenue decreased 100 basis points from Q3 2018 to Q3 2019. This decrease is primarily due to our ability to leverage our marketing communication Cross the trust increasing revenue base.
General and administrative expenses increased 3.5 million between years as a percentage of comparable revenue increased 50 basis points to 7% in Q3 2019.
From 6.5% in Q3 2018. This increase was primarily due to increases in the employee compensation costs between years.
In other general and administrative costs, including professional fees and occupancy and depreciation.
Our increases in employee compensation occupancy depreciation and other general and administrative costs are primarily related to the acquisition, including additional headcount in office space in Indiana without it would like to turn it over to Dan back as our CFO to give a little more color at our 2019 third quarter talk about changes in the income statement balance sheet and other.
Items as well as to provide 2019 guidance.
Thanks, Brian .
Included in our form 8-K filed with the FCC. We have included non-GAAP net income non-GAAP diluted income per share for the three months ended September 32019.
non-GAAP amounts exclude the tax affected amount of the amortization of intangible assets and the loss on transaction amounts included in our consolidated income.
The amortized Amortizable intangible assets acquired Orbitz acquisition totaled $210.3 million and amortization expense in the third quarter of 2019 was 2.2 million.
We believe that non-GAAP financial information allows investors to development more meaningful understand the company's performance over time.
As adjusted non-GAAP diluted income per share for the three month ended September 32019 is $1.24.
Service revenue exceeded our expectation in the third quarter 2019, due to slightly higher revenue per student from GCU, partially offset by slightly lower revenue per student than expected from Orbis partners GCU online do you see ground residential and orbis enrollments met or exceeded our expectations.
Our effective tax rate for the third quarter of 2019 was 20.7% compared to 20.5% in the third quarter 2018, and our guidance of 21.0% slightly lower is slightly lower rates due to lower excess tax benefit of 0.4 million in Q3 2009.
Team from $1.4 billion in Q3 2008.
We repurchased we repurchased 64330 buy shares of our common stock in the third quarter 2019 at a cost of approximately 7 million and another 77622 shares at a cost to 7.7 million in October we had $70.8 million available under our share repurchase authorization as of September 30.
2019.
We extended our expiration date on our share repurchase authorization to September 31 2012.
Turning to the balance sheet and cash flows total unrestricted cash and short term investments at September 32019 were 133.9 million restricted cash cash equivalents were 300000 as of September 32019, and represents pledged collateral for links site.
He capex in the third quarter 2019, including Capex for New Orbitz partner sites was approximately 5.5 million or 2.8% net revenue.
We continue to believe that GE CES 2019, Capex should range between 20, and 25 million consisting primarily of software development and the build out of Orbitz partnerships locations.
No additional funding was provided GCU for capital expenditures in the third quarter 2019.
GCU repaid 60 billion on the outstanding loan during the third quarter of 2019, and another 40 million in October .
We entered into a second amendment for the credit facility on October 31, 2019. This amendment increased the revolving commitment by 68.8 million to 150 million.
Term loan was reduced by the same 68.8 million to 150.6 million.
We elected to repay the 68.8 million revolver balance on November one 2019.
Last I'd like to provide color on the guidance, we have provided for the fourth quarter 2019.
Guidance that we have provided continues to be non-GAAP .
As adjusted net income and as adjusted diluted income per share as we exclude amortization of acquired intangible assets in the loss and transaction.
We have increased revenue and operating income guidance for the full year do third quarter being and have reaffirmed fourth quarter revenue and operating income guidance.
We continue to believe that net interest income in the fourth quarter will be 12.5 million, although the repayments from GC will decrease interest income on the secured note, but that will be offset by reduced interest expense due to our pay down of the note payable.
Our effective tax rate for the fourth quarter remains at 22.6% and we have lowered our weighted average shares outstanding due to the stock buyback discussed earlier.
I'll now turn the call over to the moderator. So we can answer questions.
As a reminder to ask a question you wanting to press Star one now your telephone to withdraw your question press the pound cake. Please standby will we compile the Q and a roster.
Our first question is from Jeff Miller from Baird. Your line is now fan.
Yes. Thanks, So first just want to ask about the online enrollment growth or new enrollment growth that.
Do you.
I know that you set across the institutions that enrollment met or exceeded your expectations, but.
Mid single digit slower than it's been the last few quarters. So I don't know if this is rounding error, but just if you can talk about I guess is the constraints enrollment advisor headcount and I think this is a seasonally busier time of year, but just any comments on the GCU online new enrollment growth.
No. It's just third quarter is a it's a big quarter.
The comps are are those are the toughest comp third quarter times or the other are the toughest comps and so.
We expected that it would be a little bit lower than in the other quarters and so it came out about as we expected.
Okay, and then just as we start to see the repayment.
Of the counterparty Capex by GC, you just maybe.
As the president of GCU can you just comment on the financial health of the University and is the expectation that you're GC is done providing counterparty financing and we should continue to see some level of repayment.
Yes.
We're now a year into this transaction and both GCU NGC from a band financial perspective are doing very well, it's coming out about as we expected which is very very good news.
The fact that we've already repaid $100 million on that note is a very very positive sign and we will continue fccs breast I'm speaking now we will continue to to pay that down.
So the the worry about the health the financial health of drinking University is not even close to be reality in Grand Cayman University is doing well in fact.
Until we paid that $100 million down we had gone we had $350 million in cash already.
So things are going well.
Okay, and then just last from me on the other opium the fourth pillar.
I get that you want to be disciplined and signed the right partnership but there was something in your language about some of these partners have existing programs. So just I don't know is that a meaningful barrier or what were you getting out there.
No. The melt illustrates this has been very interesting to us that many of the people that were speaking to have had a partner in the past and.
In many cases it has not lived up to their expectations things up not worked out as they had hoped.
That provides a little bit of an obstacle to us a challenge to us because with possibly another is one I know is what's going to be different this time.
So they are getting our two issues to be worked out there one is what's going to be different this time.
So you have to explain that and the other is there's a little bit of hesitancy in terms of some of those back and things like financially.
And so it takes us a while to walk through.
How automated weve built the systems that we built how automated they are and how.
Tremendous the tremendous results that they're providing.
We just finished and honored at.
From a financial aid perspective, and that was it was an amazing we just finished not it from a from a BA perspective, and there wasn't a single finding in a V.A. said they've never ever seen there.
But it's because we've eliminate a lot of potential in those things for human error.
We think that a lot of the reason that these institutions have not been successful with other partners is that scales difficult. When you can't do the back end functions.
And what we're trying to convince them others, we're not we're not talking about something that hasn't been brewing.
He has a partner with 100000 students.
And so it's been proven and so we will continue to work at that and we will find the right partner, but I think the most important thing as we already have 21 additional partner.
Through orbit and those are in very non competitive areas and we will continue to work AD and invest.
In that part because it's meeting a huge need.
It's doing it in a very high quality way with very high quality metrics.
It's completely mountain competitive with Gpus offerings.
And so it's.
That's another thing, it's going better than we even anticipated originally for the most part.
Got it thank you.
Thank you. Our next question is from Jeff Silver from be Ammo capital markets. Your line is now open.
Thanks, So much just a quick follow up on that last question from Jeff.
Also in your prepared remarks, I think you specifically stressed that with the partners that you may have turned away some because you need faculty.
By in has that been an issue. This is something that I don't remember you bring up that much in the past beforehand.
All in a couple of cases definitely.
Separately the.
The.
Faculty have been.
Resistant.
And we understand.
Yes, that's it's.
You have.
It's really it really is the beginning of a new era for an institution. When you think about scaling it it's not if youre going to add 100 students in a particular program.
But if you're student body today has let's just I'm just throwing out numbers has 5000 students and the goal is to add 5000 students.
That makes people nervous now.
The impact of that.
When you leverage common infrastructure like it's happened at GCU is you it can be really impactful.
But it but you have to we've got to finding institution it really wants to do that.
And.
We will eventually but we don't want to sign a deal with an administration that realizes how impactful this could be but the fact, we are not going to be on board. That's that that was my only comment.
So if it takes longer than than it will.
All right that makes sense I appreciate the color let me go back to the other three pillars.
You got a pretty sizeable upside surprise in the quarter can you kind of rank what drove that.
From an earnings perspective.
Yes, I'm sorry.
It's it's the continuation of what we've seen this entire year, where we've been able to hit our new and total enrollment goals without significantly increasing staff.
And so that obviously very very exciting to us and frankly, something thats probably.
Different than what most universities are seeing so.
If you look at head count per student.
Across GE.
It's down and so Thats continued that's been the trends continue over the course of this year.
As we look into next year I'm not sure we'll be able to continue to drive that I know that upside will probably have to start increasing staffing.
And so I think.
30 basis points or whatnot increased margins next year is probably a lot more reasonable to think about than what you've seen this year.
But thats whats driven anything Brian to add to that.
Okay, I guess, not Dan I'm, sorry, yes.
So you got a perfect segue into my next question anything up and you're not going to get 2020 guidance till next quarter, but anything else, we should be aware about that might be different in 2020 than what we've seen in 29 came.
No I mean, I think Brian the stated goals very clearly that on the pillars.
We want to grow GCU online, 6% to 7%.
Do you view.
Well, if they want to grow roughly 1500 net students most of them. It's on all will be residential.
And then Orbis, we want to be at 30 plus percent revenue growth.
Next year and feel good about our ability to do that given.
The.
Partnerships that they've signed this year in locations that we'll be opening although I will say most if not all of those new locations will be open.
In the in the fall of next year, we don't believe any of that will be open for the fall.
So that that's something to be factored into the guidance for next year.
Okay. Appreciate the color. Thanks, so much.
I'll now turn the call back over to Brian for one final statement.
As we've discussed previously on January 18th 2018 in connection with our proposed sale of Grand Canyon University to an independent fiber one C nonprofit entity Grand Canyon University voluntarily filed a request for pre acquisition review of the transaction with US Department of education seeking to departments review.
Of the proposed transaction in input as to any regulatory limitations such as the letter of credit for growth restrictions that department might choose to impose on Grand Canyon University. Following the closing of the transaction.
While GCU had ongoing engagement with the department about the transactions throughout ensuing months the department failed to respond to the request.
However, based on this engagement and a number of other factors, including the historical financial strength and performance of GCU the importance to GCU, completing the transaction and reverting to a historical nonprofit status and advice from the respective council to the company NGC you about the risk involved in closing the transaction prior to that.
CVN departments feedback the board of directors of the company and the board of Trustees, you concluded that the benefits of consummating the transaction at that time, where numerous and any regulatory limitations imposed by department could be managed particularly since piece use regional predator and state regulator and already approved the transaction.
Yes.
The transaction closed on July 1st 2018, Gcs operated a sense operated as a service provider to GCU.
Following its acquisition of Orbitz education in January 2019 to 20 other University partners.
While GCU has since operated as an independent private university. According accorded nonprofit fiber one C status by the IRS and and treated as a nonprofit entity by the state of Arizona among others.
We're pleased to report that approximately one hour ago and more than 16 months. After the transaction closed GCU in informed us that it had to receive correspondence from the department confirming that the department has approved the transaction and granted to Grand Canyon University, a provisional program participation agreement for bidding grant.
Canyon University to participate in title for HCV programs for the period through June Thirtyth 2022.
SPP a is automatically granted on a provisional basis due to the fact that the transaction constituted a change of control of University.
We understand that the provisional PPA has been granted without any requirement to post a letter of credit or any growth restriction.
We and our client have waited a very long time to reached this point and we are pleased that department is finally acted after these many months.
As noted above the IRS branded the University status of a Bible once C tax exempt organization and other governmental entities, including the state of Arizona also treated as a nonprofit entity.
In addition to receiving the provisional PA. However, we understand at Grand Canyon University was also informed by the Department of University does not satisfied the departments definition of a nonprofit entity and as a result will continue to be treated as a for profit entity for purposes of its participation in title for each year.
Programs.
While we have not yet kind of full opportunity to review. This letter ended departments reasoning, we do believe that Grand Canyon University meets all the requirements to be treated as a nonprofit into deeper title for each year program purposes, and we would expect at University will initiate appropriate measures to challenge this decision.
In the meantime, we would like to strongly emphasize file.
As discussed many times over the past several years, we did not undergo the transaction for the purpose of avoiding the various regulations such as the 90 10 rule or gainful employment rules that apply solely to for private entities.
Given the health of its finances in operations those or profit only regulations have limited to no impact at all on the university's operations, we do not expect the departments decision if it withstands challenge to have any material impact on the universe.
We would simply repeat again that federal government in the form of the IRS independent determine that Grand Canyon University is a fiber when C tax exempt organization. Likewise University is treated as a nonprofit entity by the state of Arizona.
At this time, we remain unclear as to the basis upon which the department is purporting to act to reach this conclusion.
Since we just received this information within the last hour you can appreciate simply need further time to digested tend to discuss it with our client we expect to make a further statement once we have a chance to do so.
We have reached the end of our third quarter Conference call. We appreciate your time, it's interesting Grand Canyon Education, if you still up questions. Please contact myself the in back thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.