Q2 2019 Earnings Call
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At this time I'd like to turn the call over to your host Dan Backus CFO . Please go ahead.
Thank you joining me on today's call is our chairman and CEO , Brian Mueller. Please note that many of our comments today will contain forward looking statements that involve risks and uncertainties.
Various factors could cause our actual results to be materially different from any future results expressed or implied by such statements.
These factors are discussed in our LTAC filings, including our annual report on Form 10-K quarterly reports on Form 10-Q , and current reports on form eight k.. We undertake no obligation to provide updates with regard to the board and looking statements made during this call and we recommend that all investors review. These reports thoroughly before taking a position and GC and with that I will turn the call over to Brian .
Good afternoon, and welcome to the Grand Canyon Educations second quarter fiscal year 2019 conference call.
During the second quarter of 2019 enrollment in the programs at our partner universities for which we provide services increased 11.4% to 90906.
This increase includes 3316 enrollments in programs that service by Orbis education as of June Thirtyth 2019.
New working adult students attending our partner institutions grew in the low teens year over year.
On a comparable basis total enrollment grew eight total enrollment grew 8.1% and new enrollments grew in the high single digits.
I want to begin by addressing the issues regarding to you.
They have been leaders in the opium space and we wish him nothing but the best going forward.
However, I want to be clear about how the T. strategy is different and why we believe we will be successful.
Number one the Grand Canyon University online strategy, it's a strategy being replicated throughout the country, namely picking academic programs that have been designed to teach traditional students in a face to face environment on a campus in redesigning them to be delivered online to working adult students.
This is the quickest and least expensive way to begin operating in this space.
Although this space is very competitive Grand Canyon education has some significant advantages.
Number one it has the world's largest and most comprehensive platform to deliver both academic and operational services to GCU and other partners going forward.
For the same or very similar revenue arrangements GC. He will offer over twice as many services, including operational services that most co PM don't offer.
So allow programs to be offered at scale.
He's aren't fully automated services that include the following program and curriculum design learning management system faculty services, including recruitment training and assessment admissions intake, including transcript evaluation comprehensive financial aid services automated class scheduling fully develop academic in counseling services, including course reminder, calls practitioner or licensure follow ups scheduled Billboard changed and technical support.
These services will be offered in addition to the advertising in enrollment services, which are common in the space.
Number two GC. He is already the biggest player in this space with 2600 very experienced staff members serving over 80000 students on a $200 million platform producing very favorable outcomes.
These outcomes those outcomes include high graduation rates low average debt at much lower cohort default rates are good and still improving 90 10 rate as well as PC use programs meeting the foremost gainful employment guidelines.
Adding additional partners into this already large proven money, we'll put a minimum of initial strain on the GC operations and its financial.
The next point is very important.
He is not looking for many new partners with a lot of very small programs. We are looking for three or four partners that want to scale to approximately 5000 students over a five to seven year period.
We want to make sure that our partners are differentiated based on either brand geography or program mix.
We also want to avoid partners and programs with extremely high price points, resulting in an $80000 plus master's degrees.
These factors will produce good results per student GCB, the partner institutions and our investors.
Number two Grand Canyon Education is providing services to Grand Canyon University is traditional ground campus, which has become a very unique asset.
The D. GCU traditional campus is going to grow to over 30000 students in the next five years.
This growth is happening at very low tuition rates has become profitable and GC you will continue to reinvest its profits to build out its campus.
The competitive advantage PCU ground enjoys is unique and transformative in higher education.
$1.5 billion has been invested into the campus in the last eight years and it has been ranked the 16th best campus in the country.
GCU is built out nine colleges with over 230 academic programs and continues to grow with very high quality students.
Number three the Orbitz acquisition is a second very unique asset.
While the rest of the country is rushing into the GCU online very crowded space Orbis kiss uniquely differentiated.
It involves ground classroom and laboratory infrastructure located in strategic markets combined with online delivery.
There's a huge need for the health care professionals. It produces and there is a significant positive value proposition for its graduates.
These locations programs in students don't cannibalize any other GC GC University partner students.
PC. He is in a strong position to support the rapid expansion of Orbis Orbitz had 19 partner schools under contract at the close of quarter, two and expect to sign either two or three new partners by the end of 2019.
This will bring the total number of Orbitz partner schools, either 21 or 222 by year end.
Well the board. This is 19 partners are currently enrolling students across 19 sites with four new sites set to open by year end.
In 2020, we plan to open between six and nine new site, which is higher than the 48, new sites that we originally projected.
Six of the possible nine new sites will represent partners, who are opening their first sites with the remaining three or with partners, who have a site already open, but who are adding additional sites.
This represents more than the necessary amount of activity to achieve a greater than 35% enrollment growth rate in program service by Orbis education in 2020.
In summary, the opium space is still a relatively new and evolving space and GC. He has a unique and differentiated strategy. It is lumpy. Unlike any it currently exists.
Now turning to the results of operations.
As a reminder, beginning July Onest 2018, the results of our operations do not include the University operations at GCU, but rather reflect the operations at GE as a service technology provider.
Therefore for comparability purposes, we will discuss amounts on that and then as adjusted basis as was discussed as discussed in a minute.
Additionally on January 22nd 2019, GC completed the acquisition of borders therefore, the results for the second quarter of 2019 include or business financial results for the entire quarter.
Service revenues were 174.8 million in the second quarter 2019, compared to 236.8 million of University related revenue in the prior year.
Has the GC GCU transaction occurred on January 1st 2018 comparable service fee revenue would have been 142.1 million in the second quarter of 2018.
This represents an increase of 23% between second quarter of 2018 in second quarter of 2019 on a comparable basis.
The increase year over year and comparable EPS adjusted revenue was primarily due to our orbits acquisition on January 22nd 2019, and the increase in GCU enrollments between years.
The partnership agreements that were acquired as part of the Orbitz acquisition generally generate a higher revenue per student than our partnership with GCU has these agreements generally have higher revenue. The orbitz partners have higher tuition rates the GCU and the majority of the of these students are studying in the accelerated Bachelor of science in Nursing program. So these students take these students take on average more credits per semester.
End of the period enrollment increased 11.4% quarter over quarter to 90906 from 81620.
As adjusted operating income as adjusted operating margin for the three months ended June Thirtyth, 2019 were 53.1 million and 30.3% respectively.
As adjusted operating income as adjusted operating margin for the three months ended June 32018 were 44.7 million and 31.5% respectively.
GC he will continue to invest profits to create additional educational infrastructure for our partner institutions that will create more opportunities for students and families.
Technology in academic services grew from $10.7 million in the second quarter of 2018 to 22.5 million in second quarter of 2019, an increase of 11.8 million or 111%.
This increase was primarily attributable to the partner agreements acquired in the Orbitz acquisition, which requires certain technology and academic services, including headcount classroom facilities and equipment to be provided to each university partner.
These costs along with the increased cost to service our existing client GCU increased enrollment resulted in the increase.
As a percent of comparable revenue these costs increased 540 basis points to 12.9% from 7.5% primarily due to the partner agreements acquired requiring a higher level of technology in academic services in our partner agreement, which you see you.
Counseling services and support expenses grew from $50.8 million in the second quarter of 2000 $18 million to $54.3 million in second quarter, 2019, an increase of $3.5 million or 6.8%.
This increase was primarily attributable to the partner agreements in acquired in the acquisition, which requires certain counseling services and support.
Principally head count could be provided to each university partner.
These costs along with the increased cost to service our primary University partner GCU increased enrollment resulted in the increase.
As a percentage of comparable revenue these costs decreased 470 basis points to 31.1% from 35.8% primarily due to the accounting services and support costs to service the acquired partner agreements being less as a percentage of revenues and the cost to service PCU.
And due to our ability to leverage our counseling services and support expenses across an increasing revenue base.
Marketing and communication expenses as a percent of comparable revenue increased 20 basis points from quarter. Two 2018 to quarter. Two 2019. This increase is primarily due to the advertising costs associated with marketing, our new University partners programs.
General and administrative expenses increased 3.4 million between years and as a percentage of comparable revenue increased 120 basis points to 5.3% in quarter two 2019.
4.1% in quarter two 2018.
This increase was primarily due to increases in employee compensation and benefit cost between years and other administrative expenses in occupancy and depreciation and in professional fees, including audit and legal expenses.
Our increases in employee compensation occupancy and depreciation and other general and administrative costs are primarily related to the acquisition, including additional headcount office space in Indiana.
With that I would like to turn it over the impacts our CFO to give a little more color on our 2019 second 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 SEC. We haven't included non-GAAP net income and non-GAAP diluted income per share for the three months ended June Thirtyth 2019, the 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 statement.
The Amortizable intangible assets acquired in the Orbitz acquisition totaled $210.3 million in amortization expense in the second quarter of 2019 was 2.2 million.
We believe the non-GAAP financial information allows investors to develop a more meaningful understanding of the company's performance overtime.
As adjusted non-GAAP diluted income per share for the three months ended June Thirtyth 2019 is a dollar nine.
Service revenue exceeded our expectations in the second quarter of 2019 due to slightly higher revenue per student.
GCU and Orbitz enrollments were generally in line with our expectations.
Included in investment interest and other as a onetime gain of $2.1 million. This resulted in three cents of the earnings beat.
Our effective tax rate for the second quarter of 2019 was 21.7% compared to 23.3% in the second quarter of 2018, and our guidance of 24.5% the lower than expected effective tax rate is due to a recent law change with respect to Arizona state taxes, and higher than expected excess tax benefits to $2.2 million in quarter, two 2019 from $1.2 million in quarter two 2018.
The lower than expected tax rate resulted in four cents of the earnings beat.
We repurchased 3000 shares of our common stock in the second quarter 2019, the cost of 0.3 million and another 10000 shares at a cost of $1.2 million in July .
We had 77.8 million available under our share repurchase authorization as of June Thirtyth 2019.
Turning to the balance sheet and cash flows total unrestricted cash and short term investments at June Thirtyth 2018, we're 80 million restricted cash and cash equivalents were 300000 as of June Thirtyth 2019, and represents pledged collateral for newly acquired lease site.
GC capex in the second quarter of 2019, including Capex for New Orbitz partner sites was approximately 5.1 million or 2.9% of net revenue.
We continue to believe that GE is 2019, Capex should range between 20, and 25 million consisting primarily of software development and the Buildout of Orbitz partner locations.
We funded Capex on behalf of GCU three is the secured note of approximately $139.9 million in the second quarter of 2019, which includes an advance of $99 million for estimated capital expenditures through the end of 2019.
Some amounts may be repaid during the six months remaining in the year ended December 31 2019.
This funding is to finish the 2018 19 school year project and for the initial cost to build three additional apartment style residence halls, a classroom building and a parking garage for the 2019 20 school year.
Based on recent conversations with you it continues to be likely that the University will not request us to continue to fund its capex. After this year as a university anticipates that will be able to fund its own capex moving forward.
Lastly, I would like to provide color on the guidance, we have provided for the rest of 2019.
The guidance that we've 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 and the loss on transaction.
We have increased revenue guidance for the full year due to the second quarter beat we've not adjusted revenue for the second half of 2019, but have increased revenue guidance for the third quarter and lowered it by the same amount in the fourth quarter as Orbis revenue, we slightly higher than initially predicted in the third quarter, but less than the fourth quarter due primarily to timing differences in the cohorts start dates.
Excluding the effect of the conservation contribution made in lieu of state income taxes that will discuss in a second we have raised operating margin for the third quarter from 31.1% to 31.8% and lowered in the fourth quarter due to the Orbitz revenue shift and due to slightly higher projected orbis spend in the fourth quarter on new site openings.
All other expense assumptions remain the same for the second half of the year.
In July we made $4 million of contributions made in lieu of state income taxes, which has the effect of increasing general and administrative expenses and decreasing income tax expense.
The entire $4 million of expense that was recorded in DNA expense in the third quarter, while three quarters or $3 million of this amount is recorded as lower state income tax in the third quarter and a quarter or $1 million is included as lower state income tax in the fourth quarter.
This along with us revising our excess tax benefit estimates result in our revised effective tax rate of 21.0.
Percent in Q3 and 22.6% in Q4, we have also revised our net interest income projections for the second half the year based on the borrowings that took place in June and our assumptions that no additional borrowings will take place the rest of 2019, but there's some repayments might be may we project net interest income in the third and fourth quarters of 2019 will be $13.0 million and $12.5 million respectively.
Although we might repurchase additional shares during 2019. These estimates do not assume repurchases other than those made today.
I will now turn the call over to the moderator. So we can answer questions.
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I show our first question comes from Jeff Silber from BMO capital markets. Please go ahead.
Thank you so much I wanted to start with Orbitz.
You've been putting up some really good numbers in those programs. Since you purchased the company I'm just curious what has gone better than your expectations why does it seem to be growing faster than you might have thought.
I would say that.
This excess levels of the.
Initial partners.
Have given a lot of confidence too.
The whole organization.
We have been making the rounds and meeting with some of the universities and.
Every single institution, not only wants to build their current location to larger amounts, but they want additional locations and so it's the the success we happened to buy it at a time when they were really starting to turn the corner.
The end Clecs results our consistently high.
And.
The.
They are consistently hitting their enrollment numbers and so the confidence levels of the model.
Our our growing and people are very excited about expansion.
Okay, that's great to hear.
I appreciate the color you gave on the overall RPM or managed services market. Im just curious is there any update in terms of potential timing on any announcements of any new partnerships from your perspective.
Yes, we are we are working hard.
We have been on the road for two months now and were going back on the road next week for additional meetings with.
Three potential partners, which will be.
We're down the road with with all three.
Some of the meetings will include.
As many as 100 people.
From those partner institutions and so.
I think it's a it's a long time to process the way it's been traditionally done in this whole pm industry.
But this is a little bit longer because we're we're not looking to pick off a program improve we can do it well.
You know with 100 students or 200 students are 300 students. We really are looking for an institution three or four institutions like I said who's President is behind this in his whole heartedly behind it.
And who has very tire academic infrastructure behind it and excited about it.
So that when we hit the ground running.
That we can produce.
Not.
You know results that are nice, but but not really don't really change anything.
Grand Canyon University in Grand Canyon Education has has fundamentally altered the economics rupture of higher education.
Our students now on our traditional campus here are on average going for less room Board.
Tuition room and board fees than our average state University student in this country, probably two thirds under the private universities.
Average student and so if we can find the right.
And it's probably going to be private University partners in the Midwest and northeast that want to scale to 5000.
Between five and 7000 students over five to seven year time period. It won't have a dramatic effect on their institution as its had on ours that but it will have a significant effect.
And it will be transformative in a sense and so.
Making sure that we've got an entire institution versus just a couple of small programs.
Is why it's taking a little longer but but.
We think that in the next.
For certain before the end of year, we will have partners in place and start working towards starting students in the fall.
Okay.
I appreciate the color if I could just sneak one more in over the past few weeks, there's been some noise in the market about.
Changes to state authorization rules in California, and potentially limiting their residents from getting title for financial aid to go to an online nonprofit institution out of their state.
Hopefully this has been resolved, but do you think there was any impact on your upcoming enrollments for the next few quarters or so because of this issue.
No.
No.
We will be fine.
All right.
That's good to hear all right I'll get back into queue. Thanks, so much.
Thank you.
Our next question comes from Jeff Mueller from Baird. Please go ahead.
Yes, Dan Thanks for the detailed guidance I just want to make sure that I have it right. Because there is a lot of timing factors on moving around in terms of geography on the piano with.
The contribution Lou for for the income taxes. So just in terms of underlying if I just heard the timing and that movement.
Are the only two real underlying changes here flowing the the upside from Q2, and and then a little bit of incremental expense for Orbis Q4 like for like given that you're opening.
A greater number of locations than previously contemplated are those the only underlying changes other than the timing NPL movement.
Yes, you hit it on the head we are we'll have a little bit additional expense in the fourth quarter.
Related to order business.
And we're making up for that with slightly higher interest income and slightly lower effective tax rate on a combined basis everything else is basically nets out the revenue shift nets out and the.
Other expenses other than the slightly higher orbis expenses in the fourth quarter all net out so.
You know what you said is exactly correct.
Okay, and then Brian is there interest on your part that you would potentially do sorry.
So Pam partnerships signed them all at once and is there any framework for what like 2020 margin implications could look like.
Just thinking if you would potentially do three lpms plus you're stepping up the pace of Orbis.
Launches is there any sort of like intermediate term margin framework you could provide.
I don't think that we would sign three at the same time I think it is likely that we'll probably signed two within a reasonable amount of time.
And.
The but if we do that in the next 60 to 90 days.
We wouldn't actually be starting students until the fall.
And so there would be some expense that would be incurred.
But it would not be.
It would not be an extreme amount of success that would have hugely material impact on the financials.
And the only thing I would add as I think theres still a lot of things that have to be resolved as we've mentioned before how material. The upfront expenses are has significantly the biggest factor in that is how fast the partner wants to scale and so.
Coming to.
Agreement on that or them, telling GCB, how fast they want to scale is a is a critical component. So as soon as we have a partner in place and we have those plans.
Finalized we will be able to give you a lot more detail on the impact it will have both on the expense side, but then on the revenue side.
And are you seeing fall 29, keeping you current students starting at these terminals or you're seeing fall 20.
Fall Plenti all plenty that's why.
We're not going to we're not we might sign an agreement in the next 60 to 90 days, but we wouldnt write art student or nine months after.
Yes.
It's not like we are going to be throwing a bunch of expense in the first 30 days Thats no.
Thanks, good okay, and it could be those programs don't rollout even until January of 2021, So fall 20 or or spring of 2021, I think is as early as well.
All placed one Paul 20 is the earlier Tim Yes.
Got it and then just as a follow up to the other jeffs question the around kind of the California and state.
Reciprocity or re also the.
So I guess you are saying you'd be in good shape. It sounds like that is going to accommodate the California proposal, but maybe it didn't take off all of the boxes just.
If there continues to be future noise about this so I'm thinking like if there were.
If the judge in the original court ruling would chime in or something.
Even if there would be a period, where California students were not.
Eligible for title for did the University or do you have some sort of.
Stop gap financing planned or did you not even go that far down the path given that it was so short lived.
You know what GC. He was told by GCU is to continue to.
Do the right thing for the students in terms of enrolling new students and retain the students that it had.
And.
It took the risk on its own balance sheet that the department of Ed and the state of California would come to.
A reasonable conclusion on this and that financial aid would be disbursed and so.
That's why there's really no impact on GE, CE and frankly other than a short term cash impact on GCU. There was no impact on GCU and if something happens in the future I would assume that the same would would occur.
Helpful. Thank you.
We have reached the end of our second quarter Conference call. We appreciate your time and interest in Grand Canyon Education. If you still have questions. Please contact myself to Ambac is thank you very much.
Thank you ladies and gentlemen for attending today's conference. This concludes the program you may all disconnect good day.