Grand Canyon Education, Inc.

Good day and thank you for standing by. Welcome to the Q3 2021 Grand Canyon Education Earnings Conference Call. At this time, all participants are in a listen-only mode. And after the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. And if you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Dan Backus, Chief Financial Officer. Please go ahead.

Joining me on today's call is our Chairman and CEO, Brian Mueller. Please note that many of our comments today will contain forward-looking statements that involve risks and uncertainties. Various factors could cause our actual results to be materially different from any future results expressed or implied by such statements. These factors are discussed in our SEC filings including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. We undertake no obligation to provide updates with regard to the forward-looking statements made during this call, and we recommend that all investors review these reports thoroughly before taking a financial position in GCE. And with that, I'll turn the call over to Brian.

Good afternoon, and thank you for joining Grand Canyon Education's third quarter fiscal year 2021 conference call. I want to begin again by listing the major challenges facing higher education because so much of our strategy is meant to directly address those challenges. I believe those issues continue to be, one, the out-of-control rising costs of university education. From the early 1980s to the late 2010s, the price of college increased eight times, the increase in wages. Number two, the increasing student debt levels that will seriously hinder graduates as they begin their adult lives. Three, as tuition levels go up, diversity on college campuses go down. Four, bachelor's degrees should not take four to six years to complete. Five, programs and delivery models lack the creativity and flexibility necessary to address critical shortages in some very important industries. Six, there are inadequate counseling and support services, especially for first-generation students or those studying at a distance. Seven, three-fifths of college graduates would change majors if they were starting over, 30% for better job opportunities. Prior to the pandemic, 43% of college graduates were underemployed in their first job. Two-thirds remained in jobs that don't require college degrees five years later. In addition to these challenges that have been building up for decades, I want to read from an article that came out on October 26th. Enrollment at U.S. colleges and universities is on track to fall by nearly 500,000 undergraduate students this fall. continuing the historic draft that began with the start of the coronavirus pandemic, according to new data out Tuesday. The decline of 3.2% in undergraduate enrollment this fall follows a similar drop of 3.3% the previous year, the first fall of the pandemic, according to the research from the National Student Clearinghouse Research Center. The numbers are from a preliminary data set representing 8.4 million undergrad and graduate students from about 50% of U.S. colleges. The numbers show that there are now 240,000 fewer undergrads enrolled this fall compared with the same time of last year. And if that rate of the slide holds up for the rest of the colleges, that could translate into almost a half a million fewer undergraduate students. If these preliminary numbers hold up, Shapiro says, the last two years undergrad decline, totaling more than 6%, would be the largest two-year decrease in at least half a century. This fall, the drop in undergraduate enrollment is spread across all sectors, but numbers are worse at community colleges, public four-year colleges, and private for-profits. While schools that are primarily online saw gains last year during the height of the pandemic, Those positives turned to negatives this fall, with enrollment dropping by 5.4% for undergrad programs and 13.6% for graduate programs. In the context of these negative trends, we believe Grand Canyon Education is doing well and is very well positioned going forward. Grand Canyon Education's business is comprised of three pillars. I want to review the performance of each pillar, beginning with the GCU traditional campus. In spite of the significant obstacles presented by the COVID-19 pandemic and the challenges we just reviewed, GCU's traditional campus is having a remarkably successful fall semester. The university's goal this year was 8,800 new students, and they started the fall semester with 8,911, up from 8,402 in the fall of 2020. The average incoming GPA of this year's record-breaking class was 3.6. The prestigious Honors College at GCU has grown to approximately 2,800 students with average incoming GPAs of 4.1. The number of students housed on campus has grown to 15,570, up from 11,441 the prior year. The university built three additional residence halls, thinking it had built one year out in advance. However, all but 100 beds are filled. The total number of grad students on campus is 23,628. GCU's traditional campus tuition has not been raised in 13 years. The average GCU student takes out less debt than the heavily subsidized state university students. Parent loan amounts are 50% of the average parent loan amounts at the three state universities in Arizona. The traditional campus is becoming a national institution. 35.8% of the students are from Arizona, 22.7% from California, and there is significant growth in the northeast, northwest, midwest, and southeastern parts of the country. The diverse seat of the student body is very encouraging. as 28% of our students are Hispanic, 6% African American, and 46% are students of color. To prepare for the students this year, GCU invested almost $140 million to add three new residence halls, a huge parking garage, three new restaurants, and 55,000 square feet of additional classroom and laboratory space. GCU made this investment with its own cash reserves and additionally has accumulated $407.4 million in cash. The university, after the transaction, continues to be in a very strong financial position. Two additional residence halls, additional classroom and laboratory space, two new restaurants are being added for next year as next year's incoming class is expected to exceed 9,600 students. The campus is completely open with no vaccine or mask mandates, and active positive cases on campus are now less than 15 total students. Participation rates at campus activities are at an all-time high. I would also like to note that GCU's fall sports cumulative winning percentage leads the nation, with men's soccer at 85%, women's soccer at 76%, and women's volleyball at 78%. We believe this momentum will take GCU to 40,000 students on the Phoenix campus, but the demand for what is offered is much higher than that. Further building out the current campus to greater than 40,000 students and or adding additional campus location continues to be evaluated. We estimate that the service fees we earn in this pillar will be 25% of GCU's total 2021 revenues, and we estimate that they will grow to just under 30% of total revenues in the next four years. Our strategic advantages in this segment of the market are very significant. The second GCE platform I want to discuss is Orbitz. Dealing with the COVID-19 pandemic across many academic institutions, geographies, and hospital settings has not been easy. We have had to be extremely creative and flexible to keep this moving. We have developed technology solutions with our university partners, including virtual simulations and virtual reality projects that have replicated and replaced some of the clinical experiences. Enrollments have grown to 5,652 across all existing sites, which is a 12.1% increase. Nursing enrollments have actually grown 17%, but we have had a reduction in occupational therapy enrollments due to a backlog in clinical placements directly related to the pandemic. Year-to-date revenue from Orvis partners has grown over 17%. That is not the 20% that we initially projected, but given the significant COVID challenges, we are extremely happy with the performance. The fall semester, Newman-Folden-Romans exceeded our expectations. We have also exceeded our expectations in terms of the number of partners and the number of locations. There are still regulatory bottlenecks in certain markets. We still plan to have approximately 40 locations open by the end of 2022 and will eventually grow to 80 locations. We estimate that service fee revenues earned from Orbitz Partners will continue to grow in the mid to high teens year over year in 2022. We estimate that these service fees will be 15% of GCE's total revenues and we estimate that they will grow to greater than 20% of total revenues in the next four years. The third pillar, Grand Canyon University Online, is the pillar being hit currently the hardest by the pandemic. The working adult online space is very crowded, and GCU has a very large student body. GCU Online has 89,838 students, as of September 30th, 2021, which is flat year over year. But new enrollments declined in the low teens this past quarter. To combat the very private space with most players using the same advertising enrollment and programmatic strategies, we have created a very successful B2B model. GCU has over 4,000 partners with over 17,000 locations in the healthcare, education, counseling, business, and technology industries, and greater than 30% of the new starts were coming from those partnerships. When the pandemic hit, which shut down our access to those partners, the new numbers eventually took a hit. The opening up of the country, including schools, businesses, hospitals, counseling centers, et cetera, has been an uneven process, and our new start numbers have reflected that on a year-over-year basis. New enrollments improved in August and September as schools reopened. However, cops are very difficult in October, November, and December, and we anticipate new starts to continue to be down some year over year. However, meetings with many of the over 4,000 partners are now being scheduled at historic pre-COVID rates. In addition to the B2B strategy, GCU Online is also well-positioned because it has done the difficult work of being able to provide academic programs that lead to professional licensure in a total online environment. While working adults, online enrollments are declining in generic programs whose value is currently being questioned. The licensure programs that GCU offers in education, healthcare, counseling, social work, et cetera, continue to be in high demand. To work in these professional areas, academic degrees will always be required. Currently, 36,167 GCU online students are in licensure programs, and that number continues to grow as a percent of the total. We expect momentum to return next year and eventually return to mid-single-digit new and total enrollment growth at GCU online. GCE is in a very strong position. Long term, we are set up to be a mid to high single digit revenue growth company with margin expansion on a yearly basis. The ground campus has considerable strategic advantages in the marketplace and will grow revenues in the high single digits and will become larger as a percent of total revenues. GCE Orbis is in a very high demand space. the country will need an additional 1.3 million nurses in the next five years alone. The path is clear to 80 locations, and additional programs will be rolled out over time. This pillar will produce mid- to high-teens revenue growth and will also become larger as percent of total revenues. GCU Online continues to add a minimum of 20 new academic programs on an annual basis. As the country continues to open up and our outside activity resumes to normal levels, we believe revenue will again grow in the mid-single digits. Having three differentiated platforms to grow with high-quality students is important because we want to continue to produce quality outcomes. Even in this pandemic-induced transitional period, we continue to produce good graduation rates. a very low 5% cohort default rate, a 69% 90-10 calculation, low student debt amounts, and very low parent loan amounts. We are doing this while at the same time GCE continues to invest in Orvis infrastructure, new online learning and technical administrative infrastructure, and GCU continues to invest in building out the traditional campus all of which will create growth opportunities for students. With that, I would like to turn it over to Dan Backus, our CFO, to give a little more color on our 2021 third quarter, talk about changes in the income statement, balance sheet, and other items, as well as to provide 2021 guidance.