Grand Canyon Education, Inc.

Good day and thank you for standing by. Welcome to the Q1 2025 Grand Canyon Education Incorporated Interim Conference Call. At this time, all participants are in a listen-only mode. 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 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1 1 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, Sarah Collins, General Counsel.

Joining me on today's call is our Chairman and CEO, Brian Mueller, and our CFO, Dan Backett. Please note that many of our comments today will contain forward-looking statements that involve risk and uncertainty. 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. With that, I'll turn the call over to Brian.

Good afternoon and thank you for joining Grand Canyon Education's first quarter 2025 conference call. GCE had another strong quarter, producing online enrollment growth of 7.9% and hybrid growth excluding the closed site and those we teach at of 16.5%. We also continue to produce strong retention rates, while at the same time investing heavily in initiatives for our university partners. The investments GCE and its 22 partner institutions Many recent high school graduates did not go to college this year because of exorbitant tuition rates, potentially exorbitant debt levels, and difficulty managing a fast food website. Many working adults who could benefit from higher education are not attending because of the lack of creative delivery models and not taking into account a life situation and the nature of what it is they need to learn. Grand Canyon Education will continue to grow at our stated goals over the long run because we are employees. With that, I would like to review the results of the four delivery platforms at Grand Canyon Education. First, the online campus at Grand Canyon University, who starts work in the low teens in the first quarter of 2025, which exceeded our expectations and total enrollment growth was 7.9%, which slightly exceeds our long-term objectives. There are many reasons for this, but I want to highlight four. Number one, we have stayed focused on opportunities that exist in today's labor market. and continue to roll out at least 20 new programs per year for our university partners. Since January 1st, 2023, GCU has rolled out 48 new programs, emphases, and certificates across the 10 colleges. The regular total is just 353 programs, emphases, and certificates. These programs are tied directly to labor market opportunities for students. One of the responses of the university is to decline in emphases to reduce the number of programs they offer. Two, we continue to work with employers directly to address their workforce shortages. This effort is focused on the industries of education, healthcare, engineering, technology, manufacturing, public safety, and the military. In the first quarter, new starts from this work increased 18.2% year-over-year. Three, retention of students in the first quarter increased, which we believe continues Four, GCU has resisted responding to the slower growth in higher education overall by raising tuition significantly, which many institutions have done. While a few GCU online delivery programs have gone up approximately 1% per year, overall, online net tuition rates at GCU have gone down. GCU continues to build technology and deliver other services to its 22 partner institutions. that exist in higher education today with regards to rising tuition and debt funds. Given the tough times, we are still projecting new start growth will be in the mid to high single digit rates during the rest of 2025. Second, the GCU round campus for additional students. As has been previously discussed, newly totaled additional campus enrollment will down slightly year over year in the fall of 2024 for the reasons discussed on previous calls. Although the spring intake is much less than the fall, we did see an increase in new students starting at GCU in spring 2025 as compared to spring 2024, which helped offset the increasing number of students that graduated at the end of the fall semester. We believe GCU will reaccelerate growth around campus because of the significant advantages, including a very low price point, very low average debt levels, percent of students completing in less than four years, and the relevancy of GCU's academic programs. GCU still plans to grow its traditional campus out to 50,000 students. It is our understanding that the Department of Education continues to work on fixes to the basket issues and that the initial results have been positive. We believe that this, along with a number of strategy changes to address this specific challenge for 2025-26 that we have made, will help us meet the university's new enrollment growth goals. We remained ahead of last year in new student registrations for the fall of 2025. So although it is still early in the recruitment cycle, the current trends are positive. Third, Grand Canyon Education's hybrid campus had an increase in enrollment year-over-year of 12.1% in the first quarter. Excluding the closed sites and those that are on teach-out, enrollment increased 16.5% year-over-year. We expected the enrollment rate to maintain up in the low to mid teens during the spring summer of 2045 and the rest of 2045. There are two main reasons for this continued growth. One, almost all of our active ABSN partners have responded to the younger students interested in ABSN programs by admitting advanced standing students or are in the process of making that 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 prerequisites of science coursework. GCU created the science courses and some other Gen Ed courses so they could be delivered online in eight weeks. Students can access these courses from anywhere in the world. There are start opportunities almost every week. These courses have been made very affordable, are taught by experienced faculty, and class sizes are low, and there's a tremendous amount of academic support including in our visual intelligence project, which provides students 24 access to tutoring. Since implementing these courses, we've already enrolled over 14,000 students. We have a waterfall report, which allows us to know how students are progressing through their prereq courses and when they will be eligible to start in one of our ABSN sites. The success rate of students who successfully enter the ABSN programs is in the high gain percent range, and that first-time pass rate on the Excel exam is approximately 90%. We now have an extremely efficient way to get students academically eligible and prepared to enter the program. These pods are resolvable, and we anticipate will continue. There has never been greater interest among potential students for entering the health care professions and specifically nurses. Because of the low unemployment rate, the interest has shifted to these younger students who have accumulated a great deal of debt, completed a bachelor's degree in another area, and are under-employed. Nearly all our partners have responded positively to the change. needed to serve the advanced standing students. Our goal is to still have 80 locations. Non-GCU partners will have approximately 40 locations, and GCU will have approximately 40 of the locations. In 2025, we will open a total of five Boston area in the fall, another site in New York City, and GCU will open up three new sites in 2025 in Albuquerque, New Mexico, which was opened in the first quarter of 2025, Lake Mary, Florida, near Orlando, and in Englewood, Colorado, south of Denver. In addition, GCU's three new site openings will bring its ABSN total locations to 11. We will also expand our programmatic offerings with our hybrid partners by adding a graduate nursing program with seven specializations with Northeastern University, including master's and doctoral-level degrees, starting this summer at several East Coast locations. A hybrid occupational therapy bridge to master's program to our already successful St. Kate's Occupational Therapy-Assisted Hybrid Program. An online health science degree with University, and GCU will launch a Bachelor of Science in Occupational Therapy Assistance Program and a speech language pathology program in 2025 at our West Valley Phoenix location. Adding additional programs at our Hydra location is an important component of our business plan. Center for Workforce Development at Grand Canyon University. In the 2022-23 school year, we started and runs one semester. 212 students successfully completed the program in 2024-25, including 11 in Austin, Texas. In fall 2023, we started GCU's manufacturing CNC machinist pathway in partnership with companies that are experiencing labor shortages in that area and are excited about hiring GCU grads. The program consists of four for-profit courses and runs one semester. 33 students completed this program in 2024-25 fiscal year. These students attend school for 20 hours a week and then work in a facility as a paid employee for 20 hours. At the end of the semester, they receive a manufacturing certificate became eligible for employment in Arizona's fast-forward manufacturing industry. Students in GCU's growing engineering college are being experienced in this manufacturing facility, which is adding to their engineering education. Recently, the manufacturing company, owned and operated by a recent GCU graduate, bought an additional manufacturing company which has more than doubled its capacity and has the opportunity to significantly grow the number of students involved in this program. I started out talking about the relevant programs and creative delivery models that GCE has implemented with 22 partner institutions. In the six plus years since GCE has become a service provider, it has helped its partners accomplish the following. In that time, GCE has helped Grand Canyon University graduate 189,107 students. 51,381 in education, including 24,247 first-time teachers. And finally, teacher shortages have created a national crisis. 50,615 in nursing and healthcare professions, including 2,836 pre-licensure nurses at a time when there was a huge shortage of nurses. 38,586 in the College of Humanities and Social Sciences, including thousands in counseling and social work, but there are also huge shortages. College of Business could become one of the largest business schools in America and has produced 32,900 graduates. College of Science, Engineering, and Technology has grown by 217% and provided 7,806 graduates. The doctoral college, college and theology also continue to grow. In addition, GZS Health's other departments graduate 18,472 pre-licensure nurses and occupational therapist assistants. The numbers that I just cited have all happened in the past six Service revenue was $289.3 million for the first quarter of 2025, an increase of $14.6 million, or 5.3% as compared to $274.7 million for the first quarter of 2024. The increase year-over-year in service revenue was primarily due to an increase in partner enrollments of 5.8%, including an increase in GCU online enrollments of 7.9%, and university partner enrollments at our off-campus classroom and laboratory sites of 12.1%, partially offset by a decrease in revenue for students year-over-year, primarily due to last year being a league year, and previously discussed contract traffic modifications. Operating income and operating margin for the three months ended March 31st, 2025 was $88 million, and 40.4% has compared to $84.5 million and 30.8% respectively for the same period of 2024. Net income increased 5.3% to $71.6 million for the first quarter of 2025 compared to $68 million for the same quarter of 2024. GAAP-polluted income per share for the three months ended March 31, 2025 is $2.52. As adjusted, non-GAAP-polluted income per share for the three months ended consensus estimates. With that, I would like to turn it over to Dan Backus, our CFO, to give a little more color on 2025 for support, talk about changes in the income statements, balance sheet, and other items, as well as discuss the 2025 guidance. Thanks, Brian. Included in our Form 8K filed with the SEC, we have included non-GAAP net income and non-GAAP diluted income per share for the three months ended March 31st, 25th, and 24th. the non-gap amounts exclude the tax-affected amount of the amortization of intangible assets of 2.1 million in the first quarters of both 2025 and 2024 we believe the non-gap financial information allows investors to develop a more meaningful understanding of the company's performance over time as adjusted non-gap diluted income per share for the three months ended march 31st 2025 and 24 is 2.57 2.35 Service revenue was higher than our expectations in the first quarter of 2025, primarily due to higher than expected enrollment. As we expected, revenue for students decreased slightly between years, primarily due to the additional day for leap year in 2024, which added additional service revenue of $1.5 million as compared to the current year, and contract modifications for some of our university partners in which the revenue share percentage was reduced in exchange for us no longer reimbursing the partner for certain faculty costs, both of which had the effect of reducing revenue per student. This is partially offset by the service revenue per student for ABSN students at off-campus classroom and laboratory sites, generating significantly higher revenue per student than we earn under our agreement with GCU. As these agreements generally provide us with a higher revenue share percentage, the partners have higher tuition rates than GCU, and the majority of our partners students take more credits on average per semester. The first quarter operating margin was negatively impacted on a year-over-year basis as we expected due to the leap year impact, additional spend for 2025 partner initiatives, but also due to significantly higher than expected benefit costs as a result of an increase in the number of high-cost clients. Our effective tax rate for the first quarter of 2025 was 21.6%, compared to 22.9% in the first quarter of 2024, and our guidance of 22.2%. The effective tax rate decreased year-over-year primarily due to an increase in excess tax benefits of $2.7 million, as compared to $1.5 million in the three months ended March 31, 2025, and 2024, respectively, partially offset by higher state income taxes. We anticipate this trend of higher state income taxes will continue. We repurchased 395,426 shares of our common stock in the first quarter of 2025 at a cost of approximately $68.4 million. And another 125,780 shares were purchased since March 31st, 2025. We have $209.4 million remaining available as of today under our share repurchase authorization. The board and the company intend to continue using a significant portion of its cash flows from operations to repurchase its shares, and we anticipate daily purchases will continue during 2025. Turning to the balance sheet and cash flows, total unrestricted cash and cash equivalents in investments as of March 31, 2025, was $304.7 million. GC capex in the first quarter of 2025, including capex for new off-campus classroom and laboratory sites, was approximately $8.9 million, or 3.1% of service revenue. We anticipate capex for 2025 will remain comparable with prior year at between $30 and $40 million. Last, I would like to provide color on the updated guidance we have provided in our 8K file today. As a reminder, the guidance that we have provided in the outlook section of our 8 cloud state is GAAP net income and diluted income per share with the components to adjust the GAAP amounts to non-GAAP as adjusted net income and non-GAAP as adjusted diluted income. We have updated full year 2025 guidance to include the first quarter revenue and earnings have increased the second quarter revenue and earnings projections by increasing both the low end and the high end of our previously provided guidance due to the higher than expected enrollments at March 31st. We continue to anticipate that new enrollments will be up year over year in the mid to high single digits at each quarter during 2025, and that total online enrollments will remain in the mid to high single digits over the prior year throughout 2025. total online enrollments will continue to be pressured by increasing graduations and a continued decline in re-entries students returning to school after a break due to high retention rates there could be some upside to our second half projections given the strong trend but given the tough comps we believe these estimates are appropriate we continue to anticipate new and total student growth rate in the hybrid pillar to be in the mid to high teens With the revenue growth rate for the hybrid pillar as a result of the enrollment growth continue to continue to be partially offset by changes made to the contracts for the university partners that are no longer being reimbursed for faculty. All ground traditional enrollment expectations remain the same as what was provided last quarter. On the expense side, as you'll recall, after a pause on certain investments, primarily in headcount, in the first nine months of 2024, we ramped up hiring other spend in the fourth quarter of 2024 and anticipate this continued investment this continued investment to continue in the second quarter to meet the growth goals of our partners we also continue to absorb significant increases in both benefit costs and technology services with benefit costs significantly exceeding our expectations in the first quarter and during the month of april as it relates to the hybrid pillar we will continue to incur additional costs for the new hybrid locations that have opened in the last six months or will open in 24-25 but we're experiencing increased site level profitability due to the increasing enrollments. Last, we continue to anticipate an increase in legal fees again in 2025 over 2024 as we have a couple of lawsuits filed in prior years that are expected to go into the discovery phase and or into trial during 2025. So to summarize, we continue to believe we will see a slight decline in margins in the second quarter as we did in the first due to the investments and other items noted, but are optimistic that margins will expand in the second half as long as we see year-over-year growth in the traditional campus enrollments. We are estimating that interest income will continue to be down year-over-year due to the declining cash balances due to more aggressive stock buybacks. and a declining interest rate environment. We have lowered interest income slightly for the rest of the calendar year due to the greater than expected stock buybacks during the first quarter, while decreasing the number of weighted average shares outstanding. We still believe the effective tax rate for the last three quarters of 2025 will be 24.9%, 24.9%, and 24.1%, with a full year tax rate now of 23.7%. The effective tax rate continues to rise due to higher state taxes as we continue to add new sites in states outside of Arizona, which have higher state tax rates and other factors. These estimates do not assume a contribution in lieu of state income taxes, but if one is made, that will increase G&A expense in the third quarter and decrease the effective tax rates in the second half of the year. As mentioned earlier, our weighted average year's guidance has decreased slightly for each of the three remaining quarters due to the greater than expected purchases in the first quarter. The board continues to authorize the repurchase of shares as it believes the stock remains undervalued based on the metrics it uses to evaluate, including the ratio of enterprise value to adjusted EBITDA and the free cash flow yield, rather than multiples of other education companies, as although we can be viewed as being in the same sector, there are few, if any, appropriate outcomes. I will now turn the call over to the moderator so that we can answer questions.

Thank you. At this time, we will conduct the question and answer session. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jess Silber from BMO Capital Markets. Your line is now open.

Thank you so much. In your prepared remarks, you mentioned a few times about the better than expected enrollment in the first quarter. I was wondering if we can get a little bit of color where that came from. Is there any specific programs, et cetera? Anything would be great.

Yeah, it's two things. One, lead flow and the interest in what we're doing here continues to grow. I think a lot of that lead flow increases because of – And students increasingly, when they're going out and looking for academic programs as working adults, are not trying to just complete a degree. They're looking for a specific area. And so that's one of the reasons. The second reason is we continue to sign contracts school districts, hospitals, military bases, just signed with three large school districts in Florida, including Miami Dade, just signed a contract with a major military base in Missouri. So the work that we're doing directly with corporations, school districts, hospitals, military bases, engineering firms, others, are creating a lot of opportunities that increased the online enrollment. And those things we believe will continue to experience those things.

All right, that's very helpful. My follow-up question, you know, I know there's been a lot of noise in the media about, you know, fears of potential funding cuts coming out of Washington. From a student perspective, I'm just curious, are you seeing students or parents Worried about that, and I'm specifically interested in your fall enrollment at the ground campus, if you might think that might have an impact.

You know, I have been a part of some of those discussions in Washington. I won't get real specific about that, but most of the talk is around dollars that would go directly to state. that there is going to be less funding for higher education. I think the funding will remain the same, might even increase. Some of it might be returned to the states. Some of the things that people are seeing now in the news have to do with research grants. More so with research grants than they have to do with either co-grant levels or loan levels, those kind of things. There are some universities that are very concerned about that. We are not in that we're not, we don't play in that area a lot. We do significant levels of research, especially at the graduate level, but most of it's in direct relationship with companies that we're working with. And we're not relying on a lot of grant funding for the federal government. So I think some universities have reason to to be nervous about some of that, the grant money, the research grant money, but I'm not hearing anything in terms of Title IV programs. In fact, what I'm hearing is that the Title IV program, even though the Department of Ed has been cut back significantly, will probably stay with the people operating at the Department of Ed. So I don't think any of that's going to impact us at all.

All right. That's great to hear. Thanks so much.

Thank you. Our next question comes from the line of Alex Pear from Barrington Research. Your line is now open.

Thank you, and congrats on the strong start to the new year. I have a couple of follow-up questions, primarily on all the enrollment, which was sort of above target, and representing acceleration from the fourth quarter. You, in your prepared comments, you talk about, you know, above the long-term target and stuff. I thought maybe now would be a good time to get an update on long-term targets by line item, you know, maybe total partner enrollment, GCU Online, GCU Ground, Orbis. I'm looking for kind of longer-term targets for each of those pillars.

Well, we don't break that out. And so we're slightly above that at 7.9%. That's a combination of online enrollments, ground enrollments, and hybrid enrollments, and then we're starting to factor in our workforce development area. I can tell you that we're running ahead in terms of new enrollments on the online side. We are running ahead in terms of hybrid enrollments. Both are very strong, and we're running ahead registrations unwrapped. Now the majority of that obviously doesn't start until September, late August, early September. So we won't know ultimately whether we're ahead or behind until we get to August or September. But our low guidance there and our high guidance, there's a pretty big gap there. And right now, online is doing so well that if we do well from a browser standpoint, things are going to be very good. uh if we don't do quite as well uh they're still gonna be good uh because the two the other two areas are very strong and the ground enrollment uh we have a lot of confidence in um there's been uh as you know uh high school graduates number of high school graduates on the annual basis is going down the percent of them that are going to college is going down so you're absolutely seeing a midship in terms of selections people are making But the areas that are growing are mid-tier public universities. More students are staying closer to home and going to mid-tier institutions that have lower tuition. And so those institutions are gaining, and then an institution like ours. We still have students from all 50 states, and students that want to travel will come to a destination city and state like Phoenix, Arizona, when you have the 21st ranked campus in the country and we haven't raised tuition in 16 years and our average students, they've got less debt than the average state university students. And so people are making different choices in terms of 18 year olds and how they can best prepare for life and work. But we are in the sweet spot of that. We're definitely in the sweet spot of that. And so we believe that this little bit of two-year pullback that even we experienced a little bit is going to be reversed this year because of the value proposition that we represent. Does that help with that, Tom?

Absolutely. Thank you. I appreciate the additional color. And then sort of the same question, looking for an update on expectations for this year from an enrollment perspective. I had kind of a bad connection, uh, uh, for the prepared comments. So if you talked about this, I apologize, but, but, you know, you, you had said with regard to GCU online starts in the mid to high single digits every quarter of 2024, you know, Orbis, uh, uploaded mid teens, rest of 2025. Do those still stand?

Yes. Yes. Yeah.

Great. And then, uh, Last question, a question I haven't asked in a while, maybe because it's not particularly relevant, but I'll ask anyway. Thoughts on M&A. Grand Canyon Education has made acquisitions in the past, obviously the hybrid line. Wondering what your thoughts are with regard to M&A. Do you look at them? Is there anything that you'd like to acquire, particularly with a new administration and different rules being proposed in Washington, D.C.? ?

You know, it's a good question, but we continue to prefer building. You know, we did make an acquisition with Orbis and we liked very much the market that they were addressing. They had a little bit of a head start. They missed on some things and we've corrected those things But for the most part, we're addressing what we see as the real potential in higher ed by building things. And that, you know, there's very little chance at this point that we'll be purchasing anything, but we will be continuing to spend that capex to build it. What we're doing in workforce development is a very good example of that. I do believe that manufacturing is coming back to this country. I don't believe they'll come back the same way they came back after World War II, because I think AI and robotics is going to have a big impact. But the reason we're working with this manufacturing facility is that we're trying to find the right intersection between engineering, technology, and manufacturing. Arizona's blowing up with these major Taiwanese chip manufacturing companies that are coming here. And their need for skilled labor, anywhere from electrical engineering students down to entry-level technicians and everything in between, including manufacturing specialists, is huge. And we're going to be a big part of that. We don't see anything out there that can accelerate that for us. We think we can move faster by working directly with companies and building things. And we'll continue to spend most of our time building things for supply.

Fair enough. I appreciate the color. I'll get back to Nick here. Thank you.

Thank you. Our next question comes from the line of Stephen Pollack of Baird. Your line is now open.

Yeah, thank you. Just wanted to ask on the process for converting the students that are in the prerequisite program into the hybrid ABSN programs. And like I said, the question is that it's like there's 14,000 students that you've enrolled in the prerequisite program, but the ABSN enrollment's sort of in that mid-teens or mid-single-digit thousands. So just kind of what's the process for converting 14,000 to the 5,000?

Most students that are interested in a nursing career are people that have 30 or so college credits. They're 19, 20, 21 years old. They've gone to a community college. They are attempting to try and get into a nursing program, but they can see that it's a really, really long route. Biology is all Most of them are working part-time. They haven't accumulated a lot of debt. And so even though our courses are accelerated, they're with us anywhere between six months and up to between 12 and 18 months before they finish that coursework and are eligible to get into an ABSN program. And so with 24,000, when we get to 80, one way to think about it is this, I think. When we get to 80 locations, We want approximately 300 ADSA students per location. So that's 24,000 slots. Eventually we're gonna have to have more than 24,000 students taking prerequisites in order to get those 24,000 slots filled. Or we could have more than 24,000 students taking prerequisites in order to get those 24,000 slots filled. We think this is gonna be the absolute predominant way to get prepared to get into one of those programs. Many of our partners do have a pre-req program on their campuses, but they're semester-long courses and they're $800 a credit hour. And to expect people to borrow that money and to borrow the money to be in it, it's unrealistic. And so gradually, even our non-GCU partners are sending their students into these pre-req courses in order to get qualified to be in. We have a waterfall and we can see which students are progressing and which ones are likely to be eligible because it's not 100%. The courses are difficult, but we need to build that number even above 14,000 to eventually build 24,000 slots. Does that make sense?

No, it makes perfect sense. And then on the non-ABSN hybrid program that you referenced, how quickly can you scale those to the point where they're contributing to the financial performance?

It's going to go a little quicker than maybe we even thought six months ago because what's going on at places like Northeastern and what's going on at places like the GCU location is having an impact on the thinking of our more conservative partners. Those that are a little slower to respond, I believe, are going to respond more quickly in the future because the financial pressures they're under with their normal business is not getting better. And these programs can be so profitable for them and have such an impact on their bottom line that especially those smaller schools, are going to be a lot more open to take a little risk and start these other programs before I think in the past they would want to. So we've got a lot of movement just in the last couple of months. And so I think things will accelerate over the next couple of years. The thing I would like to add to that, and I know Brian talked about this in his prepared remarks, but we're unbelievably excited about the startup of some of these additional programs with some of our other non-GCU partners. This is something we've been talking about for a few years, and it's coming to fruition this year. And so I think right to Brian's point, I think these partners are seeing the success that we're having with GCU and some of our other partners and are asking for additional programs. And some of those programs are actually starting up in 2025, which is really exciting.

Thank you very much.

We've reached the end of our first quarter conference call. We appreciate your time and interest in Grand Canyon education. If you still have questions, please contact myself, Dan Backus. Thank you very much for your time.