Q2 2024 Grand Canyon Education Inc Earnings Call

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Good day and thank you for standing by welcome to the Q2 2024 Grand Canyon Education Earnings Conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.

Speaker Change: Ask a question during this session you will need to press star one one on your telephone you would deem here an automated message advising your hand is raised.

Speaker Change: To withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, Dan Bachus, Chief Financial Officer. Please go ahead.

Brian Mueller: Hello, joining me on today's call is our chairman and CEO, Brian Mueller. Please note that many of our comments today will contain forward looking statements that involve risks and uncertainties.

Brian Mueller: Various factors could cause our actual results to be materially different from any future results expressed or implied by such statements. These factors are discussed in our SEC filings, including our annual report on Form 10-K quarterly reports on Form 10-Q, and current reports on form 8-K, we undertake no obligation to provide updates with regard to the forward looking statements made during.

Brian Mueller: This call and we recommend that all investors review. These reports thoroughly before taking a financial position in D C and with that I will turn the call over to Brian.

Brian Mueller: Good afternoon, and thank you for joining Grand Canyon, Education's second quarter 2024 conference call.

Brian Mueller: <unk> had another strong quarter, producing online enrollment growth of seven 5% and hybrid growth of 12, 1% and also continuing to produce strong retention rates exceeding revenue guidance estimates at midpoint by $4.5 million, producing a 17% and adjusted diluting diluted earnings per.

Brian Mueller: Sure to consensus while continuing to invest heavily in initiatives for our University partners.

Brian Mueller: Grand Canyon education, and its largest partner Grand Canyon University as well as Gce's 21, other partners continue to grow enrollments in the midst of an declining enrollments at many universities across the country.

Speaker Change: Want to start by reviewing the reasons that this is happening.

Speaker Change: There is a vast amount of untapped potential in the American Labor force today.

Speaker Change: Lack of created the delivery models by universities is the reason for the untapped potential the best examples of a huge shortages that exist in nursing teaching technology engineering and cyber security just to name a few.

Speaker Change: Expecting every student who has potential in these areas to attend an on campus setting seriously reduces aside of the size of the potential market.

Speaker Change: Our success is the result of understanding that people across the lifespan have unique living situations and the nature of what it is they need to learn varies by academic area.

Speaker Change: The combination of creative delivery models and relevant programs is driving the interest in what we are doing with.

Speaker Change: We currently deliver 340, plus academic programs emphases in certificates across five creative delivery platforms.

Speaker Change: One gcu's traditional ground campus isn't just is designed around the needs of 18 year old High school graduates, who are able to spend three or four years on a college campus preparing for life and work as adults. They're learning is primarily in physical brick and mortar classrooms in other on campus venues and internships and organizations throughout the greater Phoenix area.

Speaker Change: Second Gcu's online campus is designed for working adult students, who enter academic programs, whose content can be learned totally in an online environment.

Speaker Change: Third the third platform is where students who who also can't spend three or four years on a college campus, but what they are studying can't be learned totally online. The 80 Highbred locations. We are building across the country. Our first students entering programs, where some of the content can be learned online while a significant part must be learned in a brick and mortar lab.

Speaker Change: Batori city.

Speaker Change: Currently it is health care programs, specifically nursing and occupational therapy that are offered in those settings, but eventually we will add additional programs that fit the hybrid technology methodology.

Speaker Change: Our total investment in these settings will exceed $240 million and allow us to teach approximately 50000 students.

Speaker Change: Fourth platforms for students, who want access to the rapidly expanding trade professions. These are shorter programs in a physical brick and mortar setting that combine the real world work experience with classroom learning. These students after gaining employment can finish their bachelors degree online.

Speaker Change: We are developing our fifth platform for students, who are 18 year old High school graduates, who want a three or four year college experience, but want to do it at a distance.

Speaker Change: The reality is higher education needs to move way past the simple dichotomy of either learning on our campus or doing it online.

Speaker Change: Bass shortages in areas like teaching and nursing, because we lack creative models of delivery that take into account the student's life situation and the nature of what it is they need to learn.

Speaker Change: However to teach these programs at scale and in certain cases at a distance take significant investment in facilities technology and personnel investments, we have made and will continue to make.

Speaker Change: With that I'd like to review the results of the four current delivery platforms at Grand Canyon Education.

Speaker Change: First the online campus at Grand Canyon University, New starts were up again in the second quarter of 2024, and total enrolment growth continues to be higher than our long term objectives up seven 5% over the prior year.

Speaker Change: The new start growth rate in the low single digits in the second quarter wasn't expecting the acceleration from previous quarters as the year over year accomplished top in June had one less undergraduate start in the year. Prior although we expect June enrollments to come in slightly higher than they did we expected June enrollments to come in slightly higher July new enrollments were in line.

Speaker Change: With our higher expectations.

Speaker Change: We still anticipate starts for the third and fourth quarters to be up in the mid to high single digits, even with the challenging comps. There are many reasons for this strong performance, but I want to highlight for one we have stayed hyper focused on opportunities that exist in todays labor market and since the beginning of the pandemic GCU has rolled out 148, new pro.

Speaker Change: Grams emphases in certificates across the 10 colleges. These.

Speaker Change: These programs are tied directly to labor market opportunities for students.

Speaker Change: One of the responses of universities to declining enrollments is to reduce the number of programs they offer.

Speaker Change: Two we continue to work with employers directly to address their workforce shortages. This effort is focused on the industries have education health care technology public safety in the military.

Speaker Change: In the second quarter, New starts from this work increased in the low teens year over year.

Speaker Change: Three the retention of students in the second quarter went up 50 basis points, which we believe continues to improve because of the relevancy of the programs to students are entering and they are a direct tie to the students career aspirations.

Speaker Change: For GCU has resisted responding to the slower growth during the pandemic by raising tuition significantly which many institutions have done.

Speaker Change: The online net tuition increases since 2018 have averaged approximately 1% per year.

Speaker Change: Second the GCU ground campus for traditional students. We currently anticipate new and total traditional campus enrollments to be close to flat year over year in line with the low end of our original expectations.

Speaker Change: Although this would be a disappointing result, given the significant increase year over year and discover GCU visits this will be much better than what is occurring nationwide.

Speaker Change: The department of educations fast the issues and was processing problems and glitches caused major delays in universities, receiving the fast with data from eligible students and once they did millions of forms were found who have errors and needed to be reprocessed forced almost all universities to pushback deadlines.

Speaker Change: As a result of these delays the number as fast the completions among high school seniors is down significantly including at GCU.

Unknown Speaker: Many are predicting that this will cause overall new enrollment at universities to be down as much as 10% year over year. We continue to register students for the fall semester, but we anticipate new and total enrollments to be close to flat year over year. College of Science, Engineering, and Technology has grown by 225% and provided 6,880 graduates. Net income increased 20.4% to $34.9 million for the second quarter of 2024, compared to $29 million for the same period in 2023.

Speaker Change: Many are predicting that this will cause overall, new enrollment of universities to be down as much as 10% year over year.

Speaker Change: As of today GCU is up year over year as was expected in applications and registrations with students that did not complete a fast.

Speaker Change: But its down in applications and registrations with students that completed the faster.

Speaker Change: We continue to registered students for the fall semester, but we anticipate new and total enrollments to be close to flat year over year.

Speaker Change: I want to add some additional color to the traditional campus results.

Speaker Change: There is a significant change taking place in the attitude of Americans regarding higher education, especially spending four to six years on a college campus.

Speaker Change: Increasing costs high debt levels outdated degree programs any extreme political unrest on college campuses are all contributing factors.

Speaker Change: We believe Americans value learning and preparing for prosperous careers more than they ever have.

Speaker Change: Enrolment on campus will be close to flat year over year, but total enrollments across all platforms are up.

Speaker Change: We are doing well and we will continue to do well because we are adjusting to the flexibility students will continue to demand from universities.

Speaker Change: The flexibility we provide through our five platforms will cost total enrollment to continue to rise ground.

Speaker Change: Ground campus enrollments have been impacted this year by the fastest site problems affecting lower class students and inflationary pressures faced by middle class students. We anticipated the fastest site issues will be resolved for next year's students and are hopeful that inflation will come down.

Speaker Change: Those two changes combined with the other marketplace advantages, we have such as the very low price point very low average debt levels percent of students completed in less than four years, the relevancy of Gcu's expanding academic programs and the 2 billion dollar investment in creating one of the top campus in the country will reaccelerate our.

Speaker Change: Growth towards 50000 students.

Speaker Change: The new enrollment goal for the ground campus will be up over 15% over new enrollments this year.

Speaker Change: Third Grand Canyon, Education's hybrid campus had an increasing enrollment year over year of 12, 1% in the second quarter.

Speaker Change: New summer enrollments were up approximately 30% year over year.

Speaker Change: The new student growth rate in the fall for the hybrid pillar will be moderate to high single digit excluding closed locations.

Speaker Change: This is due to much more difficult comps as fall 2023 is when we started to see significant acceleration of new start growth and due to some of the GCU locations already been at capacity.

Speaker Change: No growth Europe year over year as possible at those locations where significant growth at these locations occurred in previous quarters.

Speaker Change: There are two main reasons for this strong performance one almost all of our active ABS and partners have responded to the younger students interested in the ABS and programs by admitting advance standing students or are in the process of making that change.

Speaker Change: Students with partially completed degrees haven't accumulated a great deal of debt and are very interested in nursing careers, but didn't have an efficient way to earn the prerequisite science coursework.

Speaker Change: GCU created the science courses and some other gen. Ed courses. So they could be delivered online in eight weeks students can access those courses from anywhere in the world.

Speaker Change: There are start opportunities almost every week.

Speaker Change: These courses have been made very affordable are taught by experienced faculty class sizes are low and there is a tremendous amount of academic support including an artificial intelligence project that went live in October 2023, which provides students 24 seven excess to tutoring.

Speaker Change: Since implementing these courses we have already enrolled approximately 9689 students.

Speaker Change: We have a waterfall report that allows us to know how students are progressing through their prerequisite courses and when will they be and when they will be eligible to start at one of our a b S N sites.

Speaker Change: The success rate of students, who successfully enter the absa programs is above 90% and first time pass rate on the <unk> exam is approximately 90%.

Speaker Change: We now have an extremely efficient way to get students academically eligible and prepared to enter the program.

Speaker Change: The positive results, we saw in the fall spring and summer semesters, we anticipate will continue.

Speaker Change: There has never been greater interest among potential students were entering the health care professions and specifically nursing.

Speaker Change: Because of the low in employment rate. The interest has shifted to these younger students who having accumulated a great deal of debt completing a bachelor's degree in another area and are underemployed nil.

Speaker Change: Nearly all of our partners have responded positively to the changes needed to serve the advanced standing students. Our goal is still to have 80 locations with our partners with built audio locations being GCU locations.

Speaker Change: Fourth the centre for workplace development of Grand Canyon University and at 2022 23 School year. We started 80 students in Gcu's electricians pre apprenticeship program in partnership with companies that are experiencing labor shortages in that area and are excited about hiring GCU graduates.

Speaker Change: The program consists of four four credit courses it runs one semester.

Speaker Change: 74 students successfully complete the program in the first year. This past school year. We started 233 students in the program 123 students completed this program in the fall and <unk> 82 in the spring of 2024.

Speaker Change: <unk> also has plans to begin offering this program at one of our locations outside of Arizona in the fall of 2024.

Speaker Change: This past fall GCU also decided 19 students and manufacturer manufacturing certificate program <unk>.

Speaker Change: <unk> was running a small parts manufacturing business on campus. It is doing work for some of the major companies in Arizona.

Speaker Change: <unk> are attending school for 20 hours a week and then working in the facility as a paid employee for 20 hours at the end of the semester. They received a manufacturing certificate it became eligible for employment, Arizona fast growing manufacturing industry <unk>.

Speaker Change: You see us growing college of Engineering also has students assisting with this project. Once this concept has been successfully proved out we expect to work with <unk> to scale the program and then add others.

Speaker Change: Okay.

Speaker Change: I started out talking about the relevant programs and creative delivery models at GCE has implemented with US 24 partner into 'twenty, one partner institutions and.

Speaker Change: In the six years since GCE has become a service provider. It has helped US partners accomplish the following and that time G. C. S out Grand Canyon University graduate 169521 students 46251 in education and.

Speaker Change: Transact transaction and since GCE has become an education services provider.

Speaker Change: Service revenue was $227 5 million for the second quarter of 2024, an increase of $16 9 million or 8% as compared to the $210 6 million for the second quarter of 2023.

Speaker Change: The increase year over year in service revenue was primarily due to an increase in GCU enrollments, a 7% increase in University partner enrollments at our off campus classroom and laboratory sites of 12, 1% and an increase in revenue per student year over year.

Speaker Change: Operating income for the three months ended June 32024 was $42 7 million, an increase of $7 3 million as compared to $35 4 million for the same period in 2023.

Speaker Change: The operating margin for the three months ended June 32024 was 18, 8% compared to 16, 8% for the three months ended June 32023.

Speaker Change: Net income increased 24% to $34 9 million for the second quarter of 2024 compared to $29 million for the same period in 2023.

Speaker Change: GAAP diluted income per share for the three months ended June 32024 is $1 19.

Speaker Change: As adjusted non-GAAP diluted income per share for the three months ended June 30th.

Speaker Change: 2008.

Speaker Change: At June 30th is $1 21, $1 27.

Unknown Speaker: We believe that non-GAAP financial information allows investors to develop a more meaningful understanding of the company's performance over time. Spring semester started one day earlier in 2024 than in 2023, which had the effect of shifting $2.1 million in service revenue from the second quarter of 2024 to the first quarter of 2024 as compared to the prior year. The second quarter operating margin was positively impacted on a year-over-year basis due to the contract modifications, and negatively impacted on a year-over-year basis by the timing difference between years in the start of the spring semester for GCU's ground traditional campus, and the $1.1 million in severance costs recorded in the quarter related to Dan Briggs' resignation effective June 30, 2011. These modifications have no material impact to the income we generate on the contract, but reduces revenue and technology and academic services.

Speaker Change: Programs.

Speaker Change: The increase in revenue per student was lessened somewhat by the timing of the spring semester for the ground traditional campus.

Speaker Change: The spring semester started one day earlier in 2024, then in 2023, which had the effect of shifting $2 1 million in service revenue from the second quarter of 2024 to the first quarter of 2024 as compared to the prior year and.

Speaker Change: In addition contract modifications for some of our University partners and in which the revenue share percentage was reduced in exchange for us no longer reimbursing the partner for certain factory cost and the termination of one University partner contract at the end of the spring 2024 semester had the effect of reducing revenue per student.

Speaker Change: Our operating margin in the second quarter of 2024 was higher than our expectations, primarily due to the higher revenue per student and lower than expected head count we continue to invest heavily to meet our clients' growth goals. These investments have included head count increases travel primarily related discover increased clinical costs at off campus classroom and laboratory side.

Speaker Change: Due to the nursing shortage technology services, both in head count and license fees as a result of new technology request by our partners and costs related to the new hybrid locations as we opened five sites and the year ended December 31, 2023 four sites in the six months ended June 32024, and more will open later.

Speaker Change: In 2024.

Speaker Change: As GAAP net income and diluted income per share with the components to adjust the GAAP amounts to non-GAAP as adjusted.

Speaker Change: Adjusted net income and non-GAAP as adjusted diluted income per share.

Speaker Change: I wanted to just mentioned very quickly before I go through the rest of the guidance in a press release that went out earlier today.

Speaker Change: Announcing our results full year guidance for the non-GAAP and as adjusted diluted income per share.

Speaker Change: Did not include the tax effected severance costs recorded in the second quarter. The 8-K was correct in the press release has been a minute.

Speaker Change: We have made a few changes to our second half 2020 forward guidance due to current trends or items that recently occurred so I'll start with a high level perspective, and then drill into the detail.

Speaker Change: We have updated full year 2024 guidance to include the second quarter revenue and earnings beats, we have narrowed the revenue ranges for the third and fourth quarters and lowered total revenue at midpoint by $8 million 1 million in the third quarter and $7 million in the fourth.

Speaker Change: As you recall the large spread between our initial high and low estimates in the second half was primarily due to our uncertainty around gcu's ground traditional fall semester enrollments due to the items, Brian mentioned earlier.

Brian Mueller: Which has resulted in the decline year over year and re entries students returning to school after break and a significant year over year increase in graduate. These factors will continue to impact the total enrollment growth rate in the second half of 2024.

Speaker Change: As has been previously discussed with the new student growth rate in the hybrid pillar will moderate to high single digit growth year over year in the false start excluding closed locations due to much more difficult comps as fall 2023 is when we started to see significant acceleration of new store growth and due to some of the GC.

Speaker Change: <unk> already being at capacity and thus no growth year over year as possible at those locations, whereas significant growth at those locations occurred in previous quarters as.

Speaker Change: As I just discussed the revenue growth rate for the hybrid pillar as a result of the Roma growth continues to be partially offset by changes made to the contracts for the University partners that are no longer being being reimbursed for factory cost and the site closings discussed in last quarter's call, but these changes have had.

Speaker Change: The effect of increasing margins.

Speaker Change: We're back on track in July so just.

Speaker Change: Any sort of commentary around the outlook as well thanks.

Speaker Change: No not really.

Speaker Change: We continue to.

Speaker Change: Better than expected with online enrollments lead flow is good.

Speaker Change: Outside activity is just continues to go very very well, it's becoming an increasing bigger percentage of our starts on a monthly basis and that that work is not is totally predictable as the work that gets done inside with people responding to lead. So no July is good and we expect to have two good quarters in the third and fourth quarter.

Speaker Change: And then I'm sorry, you said June was softer in the prepared remarks, so any commentary there.

Speaker Change: June is a little June was a little softer.

Speaker Change: It was predicted I mean, we knew.

Speaker Change: There was one less Monday start which is our undergraduate start which is growing.

Speaker Change: Foster than the graduate start.

Speaker Change: During this quarter as compared to last year and so we knew the second quarter. The other thing is the second quarter is by far our slowest start quarter.

Speaker Change: Of the year and so we're not talking.

Speaker Change: Significant enrollment numbers and Thats as Brian said, we're generally on our target.

Speaker Change: Okay.

Speaker Change: And then on the FAFSA delays.

Speaker Change: Hear you there as far as the things needed to be sort of re <unk>.