Q2 2021 Grand Canyon Education Inc Earnings Call

August 5, 2021

[music].

Ladies and gentlemen, and thank you operator and Steve.

Grand Canyon Education second quarter 2021 earnings conference call will begin on entirely again, please standby.

Sure.

[music].

Good afternoon, ladies and gentlemen, and welcome to debt Grand Canyon Education second quarter 2021earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, it and once you get quite assistance during the conference. Please press Star then zero.

On your Touchtone telephone. Thank you I would now like to turn the conference and have a great deal of hosted each Mr Gone backwards, Chief Financial Officer and change the floor is yours.

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 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.

And 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 and GC and with that I'll turn the call over to Brian.

Good afternoon, and welcome to Grand Canyon Education second quarter fiscal year 2021 conference call GCE had another successful quarter and long term and the future is very bright and we continue to experience. Some short term issues due to the pandemic, which I detailed on our first quarter call and I will provide an update and a minute however long term.

We are building 3 unique and differentiated platforms and that will provide significant and impactful growth depend.

And the pandemic has been a serious challenge for universities and many are experiencing significant enrollment and financial issues and it continues to be gce's goal.

To create educational models that address the real issues within higher education I believe those issues continue to be 1 the out of control rising cost of a university education from the early 1980 used to the late 2000 tens and the price of college increased 8 times the increase in wages.

Number 2 the week, the increasing debt levels that will seriously hinder graduates as they begin their adult lives 3 as tuition level goes up diversity on college campuses goes down 4.

And for Bachelors degree should not take 46 years to complete.

5 programs and delivery models like the creativity and flexibility necessary to address critical shortages in some very important industries.

There are inadequate counseling and support services, especially for first generation students or those studying at a distance.

7.3 fifths of college graduates would change majors, if they were starting over 30.

And 30% for better job opportunities.

Prior to the pandemic, 43% of college graduates, who are underemployed and their first job 2 thirds remain in jobs that don't require a college degrees 5 years later.

Grand Canyon Education is a large organization is and a very strong financial position and can invest and educational infrastructure to help institutions grow their student enrollments. For example, GCE just completed the development of a new and extremely robust online learning system and has implemented it currently across GCE used more than 110.

<unk> thousand and students.

1 of our partner institution now derived 14% of their total revenues from GCE Orbis health care programs and they want to do more.

Combination of institutions looking for additional revenue streams, and our ability to help them launch programs locally debt prepare students for in demand occupations is creating rapid partnership growth. Let me explain how GCE is in a great position to support the 3 main pillars of our platforms of our business.

First pillar Grand Canyon University online is 91572 students that as of June 32021, and in the quarter. Just completed total students grew 4.1% year over year.

<unk> has historically put a priority on new program development and to help students gain employment and build careers and the modern economy and ease.

Also focused on programs, leading to professional licensure with most of those being at the graduate level.

As we previously as we've previously discussed when the pandemic hit last March we saw a huge surge and new enrollments in the months of April May and June.

New enrollments continue to grow above our stated ex.

Objectives. The next 12 months and total enrollment grew above expectations because of very high retention and reentry rates.

We knew the last 3 quarters of this year would be challenging because of the very high comps, but we're also running into 3 additional challenges.

New starts did not meet our original expectations in April and May because may schools hospitals counseling and centers and businesses have not opened up the way, we expected them to and our access to their employees had not returned to normal.

Improvements in June as things started to open up which resulted in significant year over year growth and new enrollments and June.

Even with the strong June and new enrollment GCU online new enrollment declined and the high single digits year over year in the second quarter.

Additionally, because of the high retention rates during 2020, the number of graduates are exceeding our expectations and our reentry pooled write up which was pressuring the year over year total enrollment growth rate.

It's extremely important to note the miss in enrollment has been mostly at the graduate level.

We haven't pivoted to recruiting more adult undergraduate students and the short term because gcu's high quality student body produces very good metrics, including high graduation rates low cohort default rates less than 6% a.

A 69, 7% 90, 10 percentage low student debt amounts as compared to state and private universities and very low parent plus amounts as compared to state universities.

And with the spread of the Delta variant, we encountered some of the same issues that we incurred.

In April May and July.

We still consider this enrollment challenge to be short term.

Although we don't know exactly how long that will be until our direct work with companies hospitals school districts and counseling centers returned to historical levels.

As a result, we don't want to change a very successful 13 year strategy.

Given this uncertainty we have given a range of outcomes for the second half of the year with the high end of the range being if things return to normal and the next few weeks and the low end of the range assumes that our work remains at the April May July levels through the rest of 2021.

Regardless, we are confident and our ability to grow GCU online's enrollments at our long term stated objectives once things return to normal.

The second pillar of our platform to our business is the GCU traditional campus as many of you know GCU began to fall 2020 semester with 22000 and 363 ground campus students of whom approximately 5000 and stayed home and took their classes online.

And the spring 2021 semester GCU started with 19000 and 721 ground campus students on whom approximately 3500 stayed home and took their classes online.

This resulted in approximately 3000 fewer students paying room board and other fees related to being and on campus students.

However, this was partially offset because GCU actually had an increase of 11, 5% and ground traditional students excluding professional studies were.

We are extremely excited with the current trends related to the GCU campus enrollment based on the number of students currently registered we should meet or exceed both the university's new enrollment goal and total enrollment goal.

The University is also currently at near capacity for residential enrollment.

GCU actually built 3 new residence halls, this year, believing that they wouldn't need to build any new residence halls. The following year.

Not only will the residence halls be at capacity. This year GCE will have to build at least 2 new residence halls to meet the demand for the following year.

In addition, the approximately 9000 new students attending campus. This fall we will have on average incoming GPA of 3.6 <unk>.

<unk> honors college will grow to a greater than 2800 students with average incoming gpas exceeding 4.0.

The traditional ground.

Campus continues to be highly diverse with approximately 28% Hispanic 6% African American and over 40% students of color.

This is a remarkable achievement given the challenges of the last year and the enrollment declining at many universities.

The fall semester begins the day after labor day, and currently plans are to be fully up and running and the traditional manner.

Gcu's traditional campus is and a very strong position is becoming a bigger part of the strategy.

Gcu's goal is now to have 40000 students on this traditional traditional campus in Phoenix.

The pandemic has made it abundantly clear that 18 year old students desire to have a campus experience as much now as they ever have but it has to be affordable comb.

A combination of GCU and GCE and building out degradation on campus has many strategic advantages.

1 Phoenix as a destination city and Arizona, Arizona is a destination states to GCU has invested $1.5 billion and educational infrastructure and the campus is currently ranked 19th and the country over 75% of the traditional campus students are studying and fix.

And in Science Technology Engineering, math and business areas and the students are extremely impressed with the new and modern classrooms and laboratories that exists across the campus.

GCU Hasnt raised tuition and 13 years and their students take out less debt and the average state University students. In addition to Wall Street Journal recently released average plus loan debt amounts DCU parents take out approximately 50% of the debt amount taken out by the 3 heavily subsidized state universities in Arizona.

GCU now has 9 colleges that have over 209 academic programs emphasis and certificates.

5 GCU is adding more than 20, new programs per year targeted at growing occupational areas.

<unk> University will invest $500 million additional dollars and the next 4 years with the plan to grow at its campus to accommodate and 40000 students universities and a strong financial position and.

And the aftermath of a split from GCE to becoming nonprofit institution.

<unk> $307 million and cash as of June 32021, and as financing all of its capex growth.

Those that predicted the transaction the transaction would produce financial rule and to the University, we're very wrong.

7 GCE has invested heavily and building out virtual tours of campus on live lab classroom demos to expose current high school students to GCU during the pandemic when travel is limited.

8 gcu's Christian and free market positioning and makes it attractive to a large national audience with very few affordable and scalable options.

Included in the GCU ground enrollment numbers professional study students working adult study on the ground traditional campus at night due to COVID-19, we have started bringing adult students.

We have just started bringing adult students to campus in the evening. After almost 18 months as a result and professional studies number included in the ground enrollment number has declined significantly year over year due to graduations. However, our information meetings are filling up and we expect our professional studies and enrollment to begin growing again.

The third pillar our platform of the business as Grand Canyon Education, and slashed Orbis.

Our goal is to continue the rapid expansion of partners some of which want to provide both healthcare and non health care programs.

<unk> bought Orbis 29 months ago.

Since that time, we have expanded to 27 partners.

University partner enrollments at our off campus classroom and laboratory sites were 4210 and increase of 14, 2% over enrollments at June 32020, which includes 176 GCU students at June 32021.

And we're seeing enrollment is up 19% during that same period offset by a decline and occupational therapy students due primarily to COVID-19 restrictions.

We opened 10, new office off campus classroom and laboratory sites.

Since June 32010, resulting in an increase of those sites to 31.

We have signed contracts with new partners in the southern California market and in New York City market.

We will open up medical lab science programs with 2 new partners.

We are working very hard at a number of locations in the west to implement Gcu's nursing and other health care programs.

The goal is to have over 40 locations by the end of 2022.

<unk> 50 locations by the end of 2023, and eventually grow to 80 locations.

This is a huge national platform in which to enroll students and produce graduate and this.

And this is very important since the country is experiencing huge deficits and many healthcare professions.

GCE now has not only the largest partner and the OPM space GCU is also rapidly adding partners.

This is happening because first many quality universities are experiencing financial stress and looking for options to increase their revenues second they are important and health care and other technology careers that are experiencing serious shortages.

Third universities don't have the resources to scale many of those programs for GCE has the capital and and know how to scale those programs and create opportunities for thousands of underemployed young adults, while helping universities create important additional revenue streams.

Most locations start with the ABS and program, but most have the ability and desire to add additional programs.

<unk> will eventually accommodate between 250.

And 1000 students in multiple programs programs will take between 12, and 24 months and lead to jobs paying between 50 and $100000.

And many of the students and those programs will have already completed a bachelor's degree but consider themselves underemployed.

<unk> will fill many of the sites in the west and we'll continue to expand into additional healthcare and non healthcare academic areas.

We continue to work with Hardie and University on the rollout of multiple orbis sites as well as a fully developed model for some of their masters degree programs.

This is the first more comprehensive contract and may be replicated once it become successful.

Grand Canyon Education has 3 large well financed highly professional platforms to grow with and the next 5 years. Each platform is addressing real needs and the market and is producing high quality outcomes for our partners and the economy I have never been more excited about the future of GCE.

And a previous conference call I outlined the GCE and GCU 5 point plan designed to transform and inner city neighborhood.

The plan involves bringing jobs, creating safety restoring homes and investing and K 12 support leading to a huge scholarship program for inner city students to qualify.

We are very proud of the ongoing quality efforts that are producing real results.

In addition, GCU GCE ran a vaccination center on campus to serve our neighborhood that center provided a total of 116000 vaccinations and a 10 week timeframe at very important work was provided by 3900 volunteers, who were 31463 volunteer hours, resulting in no cost to the.

Sure.

The project was assisted by partnerships with <unk> and our local Mexican embassy and provided a much needed service to a very vulnerable population.

With that I would like to turn it over to Dan <unk>, our CFO to give a little more color on our 2021 second quarter talk about changes and the income statement balance sheet and other items as well as to provide 2000 and 'twenty 1 guidance. Thanks.

Thanks, Brian and 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 June 32021, and 2020 and.

Non-GAAP amounts exclude the tax affected amount on the amortization of intangible assets.

On the MRI sizable intangible assets acquired and the Orbis acquisition totaled $210.3 million and amortization expense and both the second quarters of 2021, and 2020 was $2.1 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 3 months ended June 32021, and 2020 is $1.12 and $1.3 respectively.

Service revenue was in line with our expectations and the second quarter of 2021 as expected the GCU online enrollment growth rate slowed in the quarter due to the items, Brian mentioned earlier Grand ground Summer school enrollment and Orbis enrollments approximated our expectations revenue per student continues to grow on a year over year basis, primarily.

Due to increased room and board fee and other ancillary revenues at GCU as compared to the prior year period, and the growth and the enrollment for students at off campus classroom and laboratory sites.

These increases were partially offset by a 1 day shift and timing for the spring campus semester, resulting in 1 day moving into the first quarter of 2021 from the second quarter of 2020.

Service revenue per student for off campus classroom and laboratory sites generates a significantly higher revenue per student and we earned under our agreement with GCU as these agreements generally provide us with a higher revenue share percentage the partners have higher tuition rates and GCU and the majority of their students take more credits on average per semester as they are and accelerated programs.

Included in both our 8-K and the 10-Q filed today is a detailed explanation of the actual impacts of COVID-19 on <unk>.

And our University partners.

Our effective tax rate for the second quarter of 2021 was 23, 3% compared to 24, 6% and the second quarter of 2020, and our guidance of 23, 7%.

The lower than expected effective tax rate was primarily due to favorable adjustments as a result of the completion of several state audits.

We repurchased 981431 shares of our common stock and the second quarter of 2021 at a cost of approximately $95.3 million and another 218777 shares at a cost of 20 million and subsequent to June 32021.

And May 2021, we entered into an accelerated repurchase plan with Morgan Stanley, resulting in a net payment for $50 million with.

Initial common shares delivered a 418279 approximately 80% of the shares based on the fair market value of these shares and $40 million on the payment are included in our second quarter share totals and available authorization and balance the remaining $10 million prepaid will be included and the treasury shares repurchase once we have final settle.

And then for shares repurchase under the ASR agreement, which will be no later than September 19, 2021.

And July 2021, and the board of directors increased the authorization under our existing share repurchase program by $970 million, which I will talk about more and in a moment as of today and including the increase authorization, we have $1.050 billion.

Available under our share repurchase authorization.

Turning to the balance sheet and and cash flows total unrestricted cash and short term investments at June 32021 were $113.9 million.

<unk> Capex and the second quarter of 2021, including Capex for new off campus classroom and laboratory sites was approximately $6.8 million or 3.4% of net revenue.

We continue to and we continue to anticipate Capex for 2021 will be between 30% and $35 million.

<unk> has been funding its capital expenditures using its own funds, except that in both June 2021, and 2020 GC requested additional loan amounts that approximated its previous capital expenditures during those fiscal years and both instances GCU repaid the amounts borrowed and the following month, we borrowed $35 million on our credit facility.

At the end of June to facilitate <unk> request and the borrowing was repaid in July once GCU repaid us.

Thus our credit facility had and available line of credit of $115 million at June 32021, but has and availability of $150 million as of today.

A number of months ago, GCU engaged a firm to assist them and refinancing the secured debt.

And we've been informed by GCU debt. Although there is significant work that still must be done. They are optimistic that the secured note will be repaid in part or in full by the end of the year Inc.

If <unk> is successful and refinancing all of our part of the secured note it would eliminate or reduce the interest income earned by us and anticipation of a possible repayment. The board of directors increased the authorization under the stock repurchase program by $970 million and approved a plan to repurchase stock and the second half of 2021.

Under the board's directions, we will repurchase an amount equal to $500 million, if the amount refinanced is less than or equal to $500 million or the amount that is refinance if that amount is greater.

Last I would like to provide color on the guidance, we have provided for the rest of 2021.

The guidance that we have provided continues to be non-GAAP as adjusted net income and as adjusted diluted diluted income per share as we exclude amortization of acquired intangible assets.

As Brian discussed earlier due to the uncertainties related GCU online enrollment being caused by COVID-19, we have provided ranges for revenue operating margin and earnings per share for the last 2 quarters of 2021 with the high end of the range being if our counselors that work directly with school districts hospitals.

<unk> and counseling centers can return to pre COVID-19 levels over the next few weeks and the low end of the range assumes that Theyre work remains at the April May July levels through the rest of 2021, we have also slightly reduced revenue per student and the second half of 2021 as students days and class behavior returns to pre COVID-19 levels and due to a slight mix shift.

We have raised our enrollment and revenue expectations related to the GCU ground traditional campus as we currently anticipate residential enrollment will exceed our initial projections. The ground enrollment growth rate continues to be pressured by a significant decline year over year and professional study students working adults and take courses on ground, primarily gcu's traditional campus.

As we have just started enrolling for these programs after a pause of almost 18 months due to Covid and most of these students have now graduated out of their programs.

As it relates to GC slash Orbis, and 1 new off campus classroom and laboratory site opened and the spring 2 additional sites opened and the summer of 2021 as expected and we are hopeful.

And to open 1 additional new site and the fall the 2 new MLS programs will now opened and 2022. We are currently anticipating that 2022, we'll have between 8 and 11 openings, depending on the timing of regulatory approvals.

On the expense side, we have not changed our expectations for the last 6 months of 2021, thus the operating income ranges correspond directly to the revenue rates.

We did make $5 million of contributions in lieu of state income taxes and July 2021, which resulted in an increase which will result, and an increase in general and administrative expenses and the third quarter of 2021. These.

And these contributions are dollar for dollar reduction and our state income taxes, 3 quarters of which is recorded as a reduction and our effective tax rate and the third quarter. When the payment is made and a quarter and the fourth quarter.

Thus, we have adjusted our expected effective tax rate to 27% and Q3 and 22, 8% and Q4.

All remaining stock options were exercised during the first quarter of 2021, and the majority of the outstanding restricted stock vest and the first quarter of each year and therefore, there will not be any excess tax benefits the rest of the year.

We have adjusted the weighted average shares outstanding amount and the interest and income amount for the second half of 2021, using the assumption that we will repurchase $500 million of additional stock through October 15th and that $500 million on the secured note will be repaid on October 15th.

At the University does not refinanced and note by this date interest income will be higher than what is and current guidance, but it's likely that interest expense will be higher as well as it is our intention to use our ability to borrow against the secured note to repurchase stock.

If the University is able to repay and amount greater than $500 million. This will result in less interest income and less weighted average shares outstanding debt what is and the guidance we have provided.

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

Thank you ladies and gentlemen, if you have a question at this time. Please press the star and the number 1 key on your Touchtone telephone and once again you May question I wanted to ask a question. Thank you.

A question and ask me and Gary are you wish to remove yourself from the queue. Please press the balance.

Keith and I welcome Boz, Danny last day.

Your first question is from the line of Jeff Silber from BMO capital markets. Your line is open.

Thank you so much I wanted to focus first on the new enrollment trend.

And.

Grand Canyon University online.

And we're very thorough and identifying the areas that you think caused that.

If we step back do you think there may be more of a secular issue in terms of specifically new competition theres tons of schools that are out there really expanding and graduate programs online I'm wondering if you're seeing any impact of that.

If you look at the.

Data with regards to searches.

And other marketing data.

We're seeing a lot of institutions decline and the return that theyre getting.

We are not seeing that.

But we've moved away.

A lot more than other people.

From that and.

And so.

Greater than a third now of the new students to start at the University are starting as a result of that direct work, we're doing inside of school districts hospitals, and those kind of places and so.

And I agree that there is more competition and I agree that there is more competition for the best students, which are graduate students.

But we get a big percentage of our graduate students from net work that we do directly inside hospitals school districts company's counseling and centers and so.

We always talk about.

And the 50% of our students being grad students and we slipped 2 percentage points during this pandemic.

Off the high number.

But we still believe and we're seeing evidence of it.

Because the.

And as schools are opening up hospitals are opening up.

We are.

Re engaging and we see information meetings filling up and.

And there's going to be potentially some either even pent up demand there.

So I understand that that would be a trend you would see if youre just looking at this thing with the results you can get from.

Certain places, but we still believe that we because of our strategy.

We will be back to normal.

Fairly soon and won't be impacted the way others are.

Okay. That's.

And that's very helpful.

Obviously.

The lead story and the news on 1 of the lead story is the ramping up of the Delta variant.

We're not taking it lightly.

But on the other hand.

Well I think we're in this in a boat of we've got to learn to live with this and we've got and open schools up and we've got to open businesses up and we got to keep the economy open and the vast vast majority of the students that are coming here and the fall are in that category of thinking and so.

We're excited about it we're not we're not taking it lightly.

I and obviously nervous about it will be watching it every single day, but I I really like our chances to have a very successful semester and part of that is based upon how we finished the spring semester. We finished with very very few active positive on our campus.

And so we're.

We're optimistic about what's going to happen and and the vast vast majority of our students and families are extremely optimistic.

Alright, great I appreciate you, calling on my age and I'll I'll jump back and the Kid [laughter] sorry [laughter].

Yeah and next mentioned is from the lineup check me out and I have some bearable and nineties open.

Yeah. Thanks, So Brian and I think he just said that I just Wanna.

Clarify so it's about 2 thirds of new enrollments that typically come.

From the other marketing channels, besides the direct counselors that partner.

Is that 2 thirds and they've been hitting the targets.

Right and that's continuing recently is that correct.

Yes, yes.

And as the GCE board to approve this share repurchase plan for the second half of the year They think.

A couple of things 1 that the stock's undervalued currently.

Number 2 that they're confident that the university will get some type of refinance done.

And thus as investors have asked.

Our plan is to refinance and.

To take the proceeds from the refinance and use it to buy back stock and then the.

Meantime, if that gets delayed a little bit longer.

And then we hope we will use our own.

Cash reserves and our own financing opportunities to.

And to buy back stock that then we'll then get paid off as soon as the refinance.

Proceeds are received.

And I can reinforce that Jeff.

We're at the point and now we're evaluating between options.

So there are a number of options and that's.

There is an evaluation process taking place my understanding is is the enthusiasm.

For this refinance among various debt holder the potential debt holders is very very strong.

And it should be because the university has.

And the incredible asset here with.

Their ground campus that was recently valued at over $2 billion and so.

It's a fairly low debt.

To.

Asset ratio and.

So I think theres a lot of enthusiasm for that.

Got it and then.

And just finally on Orbitz.

13% growth.

Considering that and include the GCU students.

It seems kind of low to me or below what I guess.

Aspired orbis to grow out at the time of acquisition.

And I know we spend on the pandemic there was above any kind of general commentary on Orbitz is growth and.

And you gave us nursing and then there was something about occupational therapy that I didn't totally understand.

There was an issue with 1 partner that was.

It was and Ot partner, but I don't know if it was broader than that 1 partner. Thanks.

Yes currently Orbis has won occupational therapy partner.

And on.

And that enrollment for that occupational therapy program is actually down year over year.

On the partner requested that they stop enrolling new students.

To allow the existing students to get through.

There.

Clinical type rotations.

And given the Covid.

That we've just that we've recently opened which just started and markets large enough to do that.

Got it thank you.

We've reached the end of our second quarter Conference call. We appreciate your time and interest and Grand Canyon Education. If you still have questions. Please contact myself and back is thank you for your time.

And just became ladies and gentlemen, and this concludes the conference call. Thank you all for joining kinnie now disconnect.

[music].

Good afternoon, ladies and gentlemen, and welcome to the Grand Canyon and Education second quite a 2021 and names conference calls at this time. All participants are you know these and only mode Neater and we will conduct a question and answer session and instructions will follow at that time and you want you to quiet assistance during the conference. Please.

Press Farthingale on your Touchtone telephone. Thank you I would now like to turn the conference over to your host the day, Mr Gone backwards to financial officer strength of lorries yours.

Joining me on today's call as our chairman and CEO, Brian Mueller. Please note and many of our comments day will contain and forward looking statements and 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 or discuss it on our SEC filings, including our annual report.

Good afternoon, and welcome to Grand Canyon Education second quarter of fiscal year 2021 conference call GCE had another successful quarter and long term. The future is very bright we continue to experience. Some short term issues due to the pandemic, which I detailed on the first quarter called and I will provide and update and a minute. However long term.

We are building 3 unique and differentiated platforms and it will provide significant and impactful growth depends.

The pandemic has been a serious challenge for universities and many are experiencing significant enrollment and financial issues. It continues to be G E gold.

To create educational models that address the real issues with and higher education I believe those issues continue to be 1 the out of control rising costs of the University education from the early 1980 S to the late 2000 and tens the price of college increased 8 times the increase in wages.

Number 2 the we the increasing debt levels that will seriously hinder graduates as they begin their adult lives.

3 as tuition level goes up diversity on college campuses goes down for.

4 bachelors degrees should not take 46 years to complete.

5 programs and delivery models, lack the creativity and flexibility and necessary to address critical shortages and some very important industries..6 there are inadequate counseling and support services, especially for a first generation students are those studying at a distance.

7.3 fifths of college graduates would change majors, if they were starting over 30% for better job opportunities 8.

And high comps, but we're also running into 3 additional challenges.

New starts did not meet our original expectations and April and May because may schools hospitals counseling and centers and businesses had not opened up the way, we expected them to and our access to their employees had not returned to normal.

We saw improvements in June as things started to open up which resulted in significant year over year growth and new enrollments in June.

Even with the strong June and new enrollment GCU online new enrollment declined and the high single digits year over year in the second quarter.

Additionally, because of the high retention rates during 2020 and number of graduates are exceeding our expectations and our reentry pool dried up which is pressuring the year over year total enrollment growth rate.

It's extremely important to note the miss in enrolment has been mostly at the graduate level.

A 69, 7% 90, 10 percentage low student debt amounts as compared to state and private universities and very low parent plus amounts as compared to state universities.

With the spread of the Delta variant, we encountered some of the same issues that we incurred.

In April May and July.

We still consider this enrollment challenge to be short term.

Although we don't know exactly how long it will be until our direct work with companies hospitals school districts and counseling centers returned to historical levels.

As a result, we don't want to change a very successful 13 year strategy.

Given this uncertainty we have given a range of outcomes for the second half of the year with a high end of the range being if things return to normal and in next few weeks and the low end of the range assumes that our work remains at the April May July levels through the rest of 2021.

Regardless, we are confident and our ability to grow GCU online's enrollments at our long term stated objectives once things return to normal.

The second pillar of our platform to our business as the GCU traditional campus as many of you know GCU began the fall 2020 semester with 22000 and 363 ground campus students of whom approximately 5000 and stayed home and took their classes online.

And the spring 2021 semester GCU started with 19721 ground campus students on whom approximately 3500 stayed home and took their classes online. This.

This resulted in approximately 3000 and fewer students paying room board and other fees related to being on campus students How's.

However, this was partially offset because GCU actually had an increase of 11, 5% and ground traditional students excluding professional studies.

We're extremely excited with the current trends related to the GCU campus enrollment based on a number of students currently registered we should meet or exceed both the university's new enrollment goal and total enrollment goal.

University is also currently at near capacity for residential enrollment.

GCU actually built 3 new residence halls, this year, believing that they wouldn't need to build any new residence halls. The following year not.

Not only will the residence halls be at capacity. This year GCE will have to build at least 2 new residence halls to meet the demand for the following year.

In addition, the approximately 9000 new students attending campus. This fall we will have on average incoming GPA of 3.6.

<unk> honors college will grow to a greater than 2800 students with average incoming gpas exceeding 4.0.

Through traditional ground.

Campus continues to be highly diverse with approximately 28% Hispanic 6% African American and over 40% students of color.

And this is a remarkable achievement given the challenges of the last year and the enrollment declining at many universities.

The fall semester begins the day after labor day, and currently plans are to be fully up and running and the traditional manner.

Gcu's traditional campus is and a very strong position is becoming a bigger part of the strategy.

Gcu's goal is now to have 40000 students on this traditional traditional campus in Phoenix.

The pandemic has made it abundantly clear that 18 year old students desire to have a campus experience as much now as they ever have but it has to be affordable the.

And the combination of GCU and GCE and building our traditional campus has many strategic advantages.

And 1 Phoenix as a destination city, and Arizona, Arizona as a destination states.

GCU has invested $1.5 billion and educational infrastructure and the campus is currently ranked 19th and the countries.

Over 75% of the traditional campus students are studying and fix and science technology engineering math and business areas and the students are extremely impressed with the new and modern classroom and laboratory that exists across the campus.

GCU Hasnt raised tuition and 13 years and their students take out less debt and the average state University students and addition to Wall Street Journal recently released average plus loan debt amounts DCU parents take out approximately 50% of the debt amount taken out by the 3 heavily subsidized state universities in Arizona.

GCU now has 9 colleges that have over 209 academic programs emphasis and certificates.

5 <unk>, adding more than 20, new programs per year targeted at growing occupational areas 6 University will invest $500 million additional dollars and the next 4 years with the plan to grow audits campus to accommodate 40000 students.

Overseas and a strong financial position.

And the aftermath of a split from GCE to becoming nonprofit institutions.

<unk> $307 million and cash as of June 32021, and as financing all of its capex growth.

And those that predicted the transition the transaction would produce financial rule and to the University, we're very wrong.

GCE has invested heavily and building out virtual tours of campus on live lab classroom demos to expose current high school students to GCU during the pandemic when travel is limited.

8 gcu's Christian and free market positioning and makes it attractive to a large national audience with very few affordable and scalable options.

Included in the GCU ground enrollment numbers professional study students working adult study on the ground traditional campus at night due to COVID-19, we have started bringing adult students.

The third pillar of our platform of the business as Grand Canyon Education, and slash Orbis or.

Our goal is to continue the rapid expansion of partners some of which want to provide both healthcare and non health care programs.

<unk> bought Orbis 29 months ago.

Since that time, we have expanded to 27 partners.

University partner enrollments at our off campus classroom and laboratory sites were 4210 and increase of 14, 2% over enrollments June 32020, which includes 176 GCU students at June 32021.

And Theyre seeing enrollment is up 19% during that same period offset by a decline in occupational therapy students due primarily to COVID-19 restrictions.

We opened 10, new office off campus classroom and laboratory sites.

Since June 32010, resulting in an increase of those sites to 31.

We have signed contracts with new partners in the southern California market and in New York City market.

We will open up medical lab science programs with 2 new partners.

We are working very hard at a number of locations in the west to implement Gcu's nursing and other health care programs.

The goal is to have over 40 locations by the end of 2022.

<unk> 50 locations by the end of 2023, and eventually grow to 80 locations.

This is a huge national platform in which to enroll students and produce graduates. This.

This is very important since the country is experiencing huge deficits and many healthcare professions.

GCE now has not only the largest partner and the OPM space GCU is also rapidly adding partners.

This is happening because first many quality universities are experiencing financial stress and looking for options to increase their revenues second day are important health care and other technology careers that are experiencing serious shortages.

And third universities don't have the resources to scale many of those programs for GCE has the capital and and know how to scale those programs and create opportunities for thousands of underemployed young adults, while helping universities create important additional revenue streams.

Most locations start with the ABS and program, but most have the ability to and desire to add additional programs.

Sites will eventually accommodate between 250.

And 1000 students in multiple programs programs will take between 12, and 24 months and lead to jobs paying between $500000.

Many of the students and those programs will have already completed a bachelor's degree but consider themselves underemployed.

<unk> will fill many of the sites in the west and we will continue to expand into additional healthcare and non healthcare academic areas.

We continue to work with Hardie and University on the rollout of multiple orbis sites as well as a fully developed model for some of their masters degree programs.

This is the first more comprehensive contract and may be replicated once it become successful.

And a previous conference call I outlined the GCE and GCU 5 point plan designed to transform and inner city neighborhood.

The plan involves bringing jobs, creating safety restoring homes and investing and K 12 support leading to a huge scholarship program for inner city students are qualified and.

We are very proud of the ongoing quality efforts that are producing real results.

Sure.

The project was assisted by partnerships with <unk> and our local Mexican embassy and provided a much needed service. So a very vulnerable population.

Thanks, Brian and 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 June 32021, and 2020 and.

Non-GAAP amounts exclude the tax affected amount on the amortization of intangible assets.

On the MRI sizable intangible assets acquired and the Orbis acquisition totaled $210.3 million and amortization expense and both the second quarters of 2021, and 2020 was $2.1 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 3 months ended June 32021, and 2020 and $1.12 and $1.3 respectively.

Service revenue was in line with our expectations and the second quarter of 2021 as expected the GCU online enrollment growth rate slowed in the quarter due to the items, Brian mentioned earlier.

Ground Summer school enrollment and Orbis enrollments approximated our expectations revenue per student continues to grow on a year over year basis, primarily due to increased room board and other ancillary revenues at GCU as compared to the prior year period, and the growth and the enrollment for students at off campus classroom and laboratory sites.

These increases were partially offset by a 1 day shift and timing for the spring campus semester, resulting in 1 day moving into the first quarter of 2021 from the second quarter of 2020.

Included in both our 8-K and the 10-Q filed today is a detailed explanation of the actual impacts of COVID-19 on our University partners.

Our effective tax rate for the second quarter of 2021 was 23, 3% compared to 24, 6% and the second quarter of 2020, and our guidance of 23, 7%.

The lower than expected effective tax rate was primarily due to favorable adjustments as a result of the completion of several state audits.

We repurchased 981431 shares of our common stock and the second quarter of 2021 at a cost of approximately $95.3 million and another 218777 shares at a cost of $20 million subsequent to June 32021.

And May 2021, we entered into an accelerated repurchase plan with Morgan Stanley, resulting in a net payment for $50 million with and.

Initial common shares delivered a 418279 approximately 80% of the shares based on the fair market value.

Ishares and $40 million of the payment are included in our second quarter share totals and available authorization and balance the remaining $10 million prepaid will be included and the treasury shares repurchase once we have final settlement for shares repurchase under the ASR agreement, which will be no later than September 19.2021.

Available under our share repurchase authorization.

Turning to the balance sheet and and cash flows total unrestricted cash and short term investments at June 32021 were $113.9 million.

GCE capex in the second quarter of 2021, including Capex for new off campus classroom and laboratory sites was approximately $6.8 million or 3.4% of net revenue. We continue to and we continue to anticipate capex for 2021 will be between 30% and $35 million.

<unk> has been funding its capital expenditures using its own funds, except that in both June 2021, and 2020 <unk> requested additional loan amounts that approximated its previous capital expenditures during those fiscal years and both instances GCU repaid the amounts borrowed and the following months, we borrowed $35 million on our credit facility.

The end of June to facilitate Gcu's request and the borrowing was repaid in July once GCU repaid us.

Thus our credit facility had and available line of credit of $115 million at June 32021, but has and availability of $150 million as of today.

A number of months ago, GCU engaged a firm to assist them and refinancing the secured debt.

We have been informed by GCU debt. Although there is significant work that still must be done. They are optimistic that the secured note will be repaid in part or in full by the end of the year.

If <unk> is successful and refinancing all of our part of the secured note it would eliminate or reduce the interest income earned by us and anticipation of a possible repayment and the board of directors increased the authorization under the stock repurchase program by $970 million and approved a plan to repurchase stock and the second half of 2021.

Lastly, I would like to provide color on the guidance, we have provided for the rest of 2021.

The guidance that we have provided continues to be non-GAAP as adjusted net income and as adjusted diluted diluted income per share as we exclude amortization of acquired intangible assets.

<unk> and counseling centers can return to pre COVID-19 levels over the next few weeks and the low end of the range assumes that their work remains at the April May July levels through the rest of 2021. We are also slightly reduced revenue per student and the second half of 2021 as students days and class behavior returns to pre COVID-19 levels and due to a slight mix shift.

And.

We have raised our enrollment and revenue expectations related to the GCU ground traditional campus as we currently anticipate residential enrollment will exceed our initial projections the.

And the ground enrollment growth rate continues to be pressured by a significant decline year over year and professional study students working adults and take courses on ground, primarily gcu's traditional campus as we have just started enrolling for these programs. After a pause of almost 18 months due to Covid and most of these students are now graduated out of their programs.

As it relates to GC slash Orbis, 1 new off campus classroom and laboratory site opened and the spring 2 additional sites opened and the summer of 2021 as expected and we are hopeful to open 1 additional new site and the fall.

2 new MLS programs will now opened and 2022. We are currently anticipating that 2022, we'll have between 8 and 11 openings, depending on the timing of regulatory approvals.

On the expense side, we have not changed our expectations for the last 6 months of 2021.

Thus the operating income ranges correspond directly to the revenue rates.

These contributions are dollar for dollar reduction and our state income taxes, 3 quarters of which is recorded as a reduction and our effective tax rate and the third quarter. When the payment is made and a quarter and the fourth quarter.

And thus we have adjusted our expected effective tax rate to 27% and Q3 and 22, 8% and Q4.

All remaining stock options were exercised during the first quarter of 2021, and the majority of the outstanding restricted stock vests, and the first quarter of each year. Therefore, there will not be any excess tax benefits the rest of the year.

We have adjusted the weighted average shares outstanding amount and the interest and income amount for the second half of 2021, using the assumption that we will repurchase $500 million of additional stock through October 15th and at $500 million on the secured note will be repaid on October 15th.

At the University does not refinance and note by this date interest income will be higher than what is and current guidance, but it is likely that interest expense will be higher as well as it is our intention to use our ability to borrow against the secured note to repurchase stock.

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

Thank you, ladies and gentlemen, we have a question and at this time, Inc.

Thus far and the number 1 key on your Touchtone telephone and once again you May question I wanted to ask a question is your question asking and Gary are you wish to remove yourself from the queue. Please check your balance sheet.

And Brian will be compiled gaming last day.

First question is from the line of Jeff Silber from BMO capital markets. Your line is open.

Thank you so much I wanted to focus first on the new enrollment trend.

At Grand Canyon.

And University online.

Very thorough and identifying the areas that you think caused it.

And we step back do you think there may be more of a secular issue in terms of specifically new competition and there's tons of schools that are out there really expanding and graduate programs online and I'm wondering if you're seeing any impact of that.

If you look at the.

Data with regards to searches.

And other marketing data.

<unk> seen a lot of institutions decline and the return that theyre getting.

We are not seeing that.

But we've moved away.

A lot more than other people from that.

And so.

Greater than a third now of the new students could start at the University are starting as a result of that direct work, we're doing inside of school districts.

Rates hospitals, and those kind of places and so.

And I agree that there is more competition I agree that there is more competition for the best students, which are graduate students.

But we get a big percentage of our graduate students from net work that we do directly inside hospitals school districts company's counseling and centers and so.

We always talk about.

And the 50% of our students being grad students and we slipped 2 percentage points during this pandemic.

<unk>.

Off the high number.

But we still believe and we're seeing evidence of it.

Schools are opening up hospitals are opening up.

We are.

Re engaging.

And we see information meetings filling up and theres going to be potentially some EBITDA, even pent up demand there.

So I understand that that would be a trend you would see if youre just looking at this thing with the results you can get from.

Certain places, but we still believe debt.

Because of our strategy.

We will be back to normal.

Fairly soon and won't be impacted the way others are.

<unk>.

Okay.

That's very helpful.

Obviously.

The lead story and the news on 1 of the lead story.

The ramping up and the Delta variant.

Are you seeing any impact of that maybe in terms of students on the ground reluctant to come back to school because of this.

No it's the opposite.

There is.

I'm, a long way away from those days.

Maybe even as far as you are but.

Yes.

Theres, a fearless and us.

It's a little bit the opposite from our ground campus perspective.

I get emails daily from parents, who are saying, please don't give and so the hysteria are our sons and daughters are expecting a fully open campus and they expect to be back and have all of the experiences that GCU is known for and split and so please hold the line and make sure that happens and.

And so if anything we have seen and.

The increase and back.

Now.

We are not.

Demanding that they have vaccine that debt.

Students be vaccinated, we're working really hard with our faculty with our security with our cooks with our.

<unk>.

Landscaping personnel, where there is older people to get as close to a 100% and vaccination as possible and then we have vaccinations available and <unk>.

Very convenient and we will encourage students to use them. We also have.

Testing procedures and we have.

<unk>.

Strategies and so we're not taking it lightly.

But on the other hand.

Well I think we're in a in a boat of we've got to learn to live on this and we've got to open schools up and we've got to open business was up and we got to keep the economy open.

And the vast vast majority of the students that are coming here in the fall or in that category of thinking and so.

We're excited about it we're not taking it lightly.

And obviously nervous about it we will be watching it every single day, but.

And really like our chances to have a very successful semester and part of that is based upon how we finished.

The spring semester, we finished with very very few active positives on our campus.

And so.

Sure.

We're optimistic about what's going to happen and the vast vast majority of our students and families are extremely optimistic.

Alright, great I appreciate you, calling on my age and I'll jump back and the Q as well.

Sorry.

Okay.

Your next question is from the line of Jack Meehan from.

And Baird. Your line is open.

Yes, thanks, So Brian and I think you just said this but just 1 on.

And clarified.

2 thirds of new enrollments that typically come.

From the other marketing channels, besides the direct counselors that partner.

Is that 2 thirds, they've been hitting both targets year to date and Thats continuing recently is that correct yes.

Yes, yes.

Yes.

Of our.

Saying has not is not falling off.

Part of the reason it hasnt fallen off is that we don't feel a need to spend more money and.

Get decreasing.

Results as a result of that.

And you're watching obviously, we can watch it but you watch the spending patterns of some of our competition.

And they keep spending more.

And getting.

Decrease results as.

As a result of that and we haven't had to do that.

And I think that's reason that debt that part of it hasn't diminished.

Got it and.

And then.

So I just.

So the plan and if youre going to buyback.

$501 million.

Stock.

And that's regardless if there is.

Any refi.

The debt and then depending upon the amount on the refi the debt you might buy more of a net is that correct.

That's correct.

And can you give us an update on like.

Okay.

Sounds like it's still potentially several months out until this would close so.

Where is the university with meeting with debt investors or just what's the calendar for that process.

My understanding is the University continues down that process they have.

We received some proposals.

<unk> proposals from a different different parties on ways to refinance the entire amount that's owed to us.

And they are working through those proposals.

With the various parties and ultimately we'll move forward with 1 of those.

And they are optimistic not only that they will get it done but that there'll be able to refinance.

By that October 15th date, now could it get pushed a little bit.

And.

And that's obviously possibility, but I think they are very optimistic.

And thus that gave the confidence to the GCE board to approve this share repurchase plan for the second half of the year they think that.

A couple of things 1 that the stock's undervalued currently.

Number 2 that they're confident that the university will get some type of refinance done.

And thus as investors have asked.

Our plan is to refinance and.

And to take the proceeds from the refinance and use it to buy back stock and in the meantime, if that gets delayed a little bit longer.

And then we hope we will use our own.

Cash reserves and our own financing opportunities.

To buy back stock that then we'll then get paid off as soon as the refinance.

Proceeds are received.

And I can reinforce that Jeff.

And we're at the point now where it's evaluating between options.

And so there are a number of options and that.

And there is an evaluation process taking place my understanding is is the enthusiasm.

For this refinance among various debt holder and the potential debt holders is very very strong.

And it should be because the university has.

And incredible asset here with their ground campus that was recently valued at over $2 billion and so.

It's a fairly low debt.

To.

Asset ratio and.

So I think theres a lot of enthusiasm for that.

Got it and then.

And just finally on Orbitz.

13% growth.

Considering that and include GCU.

<unk> students.

And it seems kind of low to me are below what I guess.

Fired orbis to grow up at the time of acquisition and.

And now we've signed on a pad.

So above any kind of general commentary on Orbis is growth and.

Dave US nursing and then there was something about occupational therapy that I didn't totally understand I think there was an issue with 1 partner that.

Was and Ot partner, but I don't know if it was broader than that 1 partner.

Thanks.

Currently Orbis has won occupational therapy partner.

And.

And that enrollment for that occupational therapy program is actually down year over year.

The partner requested that they stop enrolling new students.

And to allow the existing students to get through.

And there.

Clinical type rotations.

And given that the.

Covid situation and so they are back I think as of September there'll be enrolling new students again, and occupational therapy and in the meantime, you've seen a decline year over year. So if you exclude that occupational therapy program.

Orbis as nursing programs, which is the primary component is up 19%.

Percent year over year, which.

Is a little bit lower than our long term objectives and it has completely everything to do with just the timing of site openings.

We're very excited and Brian touched on this about the site openings and 2022.

And the hope is that that will accelerate.

Their enrollment growth and anything Brian to add logistics, yes.

Some of the driver of the success has been and the larger markets.

And so Chicago was a big driver.

Some of the markets that were opened and recently have been and smaller markets, but theres from very big markets coming.

Houston.

Southern California, New York.

Which really bodes well for the next 234 years.

But those markets I, just mentioned, they're going to be capable of multiple site openings.

And as opposed to some of them that we've that we've recently opened which just started market is large enough to do that.

Got it thank you.

We have reached the end of our second quarter Conference call. We appreciate your time and interest and Grand Canyon Education. If you still have questions. Please contact myself Dan Bachus. Thank you for your time.

Okay. Thank you and ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.

Q2 2021 Grand Canyon Education Inc Earnings Call

Request a DemoDemo

LOPE

Grand Canyon Education

Earnings