Grand Canyon Education Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 4 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Grand Canyon Education Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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 Backus.

Operator

Dan, please go ahead.

Speaker 1

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 SEC filings, including our annual report on Form 10 ks, quarterly reports on Form 10 Q and current reports on Form 8 ks.

Speaker 1

We undertake no obligation to provide updates With regard to the forward looking statements made during this call, we recommend that all investors review these reports thoroughly before taking a financial position in GC. And with that, I'll turn the call over to Brian.

Speaker 2

Good afternoon. Thank you for joining Grand Canyon Education's Q3 fiscal year 2023 conference call. GCE had a remarkable quarter, exceeding enrollment expectations by producing online new starts that were approximately 20% over prior year in our largest start period of the year and also producing greater than expected retention numbers, exceeding revenue guidance estimates at midpoint by $2,400,000 and producing an $0.18 beat in adjusted diluted earnings per share to consensus. Judging by these results and the lead flow for the months of September, October November, there has never been greater interest in what is happening at Grand Canyon Education and its partner Grand Canyon University as well as the other 24 partners. An article that recently appeared in Fortune Magazine titled, The Labor Shortage Pushing American Colleges into crisis with a plunge in enrollment, the worst ever recorded.

Speaker 2

Author Colin Bentley says the following. Nationwide undergraduate and college enrollments dropped 8% from 2019 to 2022 but declines even after returning to in person classes according to data from the National Student Clearing House. The slide in the college growing rate since 2018 is could worsen labor shortages in fields from healthcare to information technology. The trend has continued into 2023, According to the Chronicle of Higher Education with freshman enrollment dropping 6.9% at public 4 year institutions and 4.7% at private non profit institutions. Grand Canyon Education and its 25 university partners are experiencing significant growth in spite of declines in the overall market.

Speaker 2

And I believe that growth will continue for the reasons I will explain as I review the 4 platforms we use to deliver higher education. First, the online campus at Grand Canyon University. New starts were up approximately 20% over the Q3 of the prior year and Total enrollment growth significantly exceeded our expectations and it is now up 8.3% over the prior year. There are many reasons for this, but I want to highlight 4. 1, we have stayed hyper focused on opportunities that exist in today's labor market And since the beginning of the pandemic have rolled out 116 new programs, emphasis and certificates across the 10 colleges at GCU.

Speaker 2

These programs are tied directly to labor market opportunities for students and accounted for 8.1% of the new students that started in the 3rd quarter. One of the responses of universities to the declining enrollments during the pandemic was to reduce the number of programs they offered. Number 2, we continue to work with employers directly to address their workforce shortages. This effort is focused on the industries of education, healthcare, In the Q3, new starts from this work increased 33%. 3, the retention of students in the Q3 went up 40 basis points, which we believe continues to improve because of the relevancy of the programs the students are entering.

Speaker 2

Number 4, GCU has resisted responding to the slower growth during the pandemic by raising tuition, which many institutions have done. Online net tuition increases since 2018 have averaged approximately 1% per year. October online new enrollments remain strong Thus, we are now expecting new enrollments in the 4th quarter to be up in the low to mid teens year over year. 2nd, GCU ground campus for traditional students. Enrollment was in line with what we expected when we gave guidance last quarter.

Speaker 2

And at the same time, the number of traditional age students Starting GCU programs GCU's programs online between April September was higher than we expected as well. As I discussed last quarter, there is Clear trend here that we are uniquely positioned to respond to. Working adult students post pandemic are more inclined to work from home to do higher education from home. This may become a trend for traditional aged students as well. 5,631 traditional aged students started GCU Programs online between April September, which is up 21.5% over the same time last year.

Speaker 2

These students may come to campus eventually or may do the entire program from home. These students are traditional age students, but we are currently counting them in our online campus Early indications for the fall of 2024 indicate GCU's traditional on campus enrollment, We believe will return to its normal growth trajectory based on Discover GCU visits being up year to date over 30%. Because of our significant advantages, including the very low price point, very low average debt levels, Percentage of students completing in less than 4 years and the relevancy of GCU academic programs, we anticipate that GCU will benefit from both trends. We will continue to focus on the growth of traditional students attending our campus with the goal still being 50,000 and also focus on traditional age students across the country who want to do their academic work from home. We anticipate revenue generated from the ground traditional students will be up in the mid single digits in the fall semester of 2023 as compared to the fall semester of 2022.

Speaker 2

3rd, Grand Canyon Education's hybrid New fall enrollments were up in the high single digits year over year and we expect the new enrollment growth rate in spring of 2024 to be even higher. There are two main reasons for this. 1, all but one of our active ABSN partners have responded to the younger Students interested in ABSN programs by admitted advanced standing students this fall 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 prerequisite GCU created the science courses and some other gen ed courses so they could be delivered online in 8 weeks. Students can access these courses from anywhere in the world.

Speaker 2

There are start opportunities almost every week. These courses have been made very affordable, are taught by experienced faculty, class sizes are low and there's a tremendous amount of academic support including an artificial intelligence project that went live in October, which provides students 20 fourseven access to tutoring. Since we implemented these courses, we have enrolled approximately 5,500 students. We have a waterfall report that allows us to know how students are progressing through their prerequisite courses and when they will be eligible to start at one of our ABSN sites. The success rate of students who successfully enter our ABSN programs is 90% And the first time pass rate on the NCLEX exams remains approximately 90%.

Speaker 2

We now have an extremely efficient way to get students academically eligible and We saw positive results in the fall semester and we believe it will get even better from there. 4th, the Center For Workforce Development at Grand Canyon University. In the 2022, 'twenty three school year, we started 80 students in electricians pre program in partnership with companies that are experiencing labor shortages in that area and are excited about hiring our graduates. The program consists of 4, 4 credit courses and runs 1 semester. 74 students successfully completed the program.

Speaker 2

This upcoming school year, we will start 220 students in the program and expect the same results. 119 students started in this program in the fall and we expect Similar number in the spring of 2024. We also have plans to begin offering this program at one of our locations outside of Arizona in 2024. This fall, we also started 19 students in a manufacturing certificate program. GCU is running a small parts manufacturing business on campus that is doing work for some of the major companies in Arizona.

Speaker 2

These students are going to be are going to school for 20 hours a week and then work in the facility as a paid employee for 20 hours. At the end of the semester, they will receive a manufacturing certificate and be eligible for employment in Arizona's fast growing manufacturing industry. GCU's growing engineering college also has students assisting with this project. Once this concept has been successfully proved out, we expect to work with In the 5 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 146,015 students, 39,776 in education, including 19,062 first time teachers at a time when teacher shortages created a national crisis.

Speaker 2

41,220 in nursing and healthcare professions, including 20 80 pre licensure nurses at a time when there is a huge shortage of nurses. 28,308 in the College of Humanities and One of the largest business schools in America and has produced 25,286 graduates. The College of Science, Engineering and Technology has grown by 246% and provided 5,528 graduates. The Doctoral College, Honors College and College of Theology also continue to grow. The numbers that I have just cited have all happened in the 5 plus years since GCU has become a non profit institution and GCE has become an education services provider.

Speaker 2

Service revenue was $221,900,000 for the Q3 of 2023, an increase of 13,200,000 or 6.3% as compared to $208,700,000 for the Q3 of 2022. The increase year over year in service revenue was primarily due to an increase in GCU enrollments of 6.6% and an increase in revenue per student year over year. Operating income for the 3 months ended September 30, 2023 was $41,500,000 an increase of $6,000,000 as compared to $35,500,000 for the same period in 2022. The operating margin for the 3 months ended September 30, 2023 was 18.7 $35,700,000 for the Q3 of 2023 compared to $30,000,000 for the same period in 2022. GAAP diluted income per share for the 3 months ended September 30, 2023 is 1.19 As adjusted non GAAP diluted income per share for the 3 months ended September 30, 2023 is 1 point 26 With that, I would like to turn it over to Dan Backus, our CFO, to give a little more color on our 2023 quarter, talk about changes in the income statements, Balance sheet and other items as well as to discuss the updated 2023 guidance.

Speaker 1

Thanks, Brian. Included in our Form 8 ks filed with the SEC, we have included Non GAAP net income and non GAAP diluted income per share for the 3 months ended September 30, 20232022. The non GAAP amounts exclude the tax affected amount of the amortization of intangible assets of $2,100,000 for the 3rd quarters of both 2023 20 And the tax affected amount of the losses on fixed asset disposals of $400,000 $500,000 for the 3 months ended on September 30, 2023, 2022, respectively. We believe that non GAAP financial information allows investors to develop a more meaningful understanding of the company's performance over time. As adjusted non GAAP diluted income per share for the 3 months ended September 30, 2023 2022 is $1.26 and $1.02 respectively.

Speaker 1

Service revenue was higher than our expectations in the Q3 of 2023 due to Higher than expected enrollments at GCU and some of our other university partners. Revenue per student continues to grow on a year over year basis, primarily due to the service Revenue impact of the growth in the GCU traditional campus enrollments between years, which has a higher revenue per student due to room, board and other ancillary revenues and the higher revenue per student at off campus classroom and laboratory sites. Service revenue per share for hybrid ABSN students generates a significantly higher revenue per student than we earn on the other students as these agreements generally provide us with a higher revenue share percentage, The partners have higher tuition rates and the majority of their students take more credits on average per semester as they are in accelerated programs. The increase in revenue per student was also positively impacted in the Q3 of 2023 by year over year differences in the timing of the GCU traditional campuses fall semester, such that $1,200,000 shifted from the Q4 to the Q3 as compared to last year. Our operating margin was higher than our expectations primarily due to higher than As I discussed on prior quarter's earnings calls, we have been aggressively hiring in which headcount had been mostly flat since March 2020 to meet our partners' expected future growth, which is driving increased compensation costs primarily in counseling services and support costs.

Speaker 1

We also plan for significant increase year over year in travel and employee benefits as these amounts were significantly lower than pre COVID levels in the prior year. We also plan for increased clinical costs at off campus classroom and laboratory sites due to the nursing shortage. This spending has generally remained in line with our expectations. Our effective tax rate in the Q3 of 2023 was 19.3% compared to 17.2% in the Q3 of 2022 and our guidance of 18.6 percent. The Q3 2023 effective tax rate was favorably impacted by the contributions in lieu of state income taxes of $3,900,000 $5,000,000 in July 2023 2022 respectively.

Speaker 1

The slightly higher than expected tax rate in the Q3 of 20 3 was due to the contribution in lieu of state income taxes having a less than expected impact on the effective tax rate due to the higher than expected income before taxes. As a reminder, the contribution in lieu of state income taxes has the effect of increasing general and administrative expenses in the Q3 this year by $3,500,000 and lowering income tax expense by the same amount, but only 75 percent of the $3,500,000 in the 3rd quarter and the remaining 25% in the 4th quarter. We repurchased 306,239 shares of our common stock in the Q3 of 2023 at a cost of approximately $33,700,000 and another 81,943 shares were repurchased since September 30, 2023. We announced today that on October 25, 2023, the company's Board of Directors increased the authorization under its existing stock repurchase plan by $200,000,000 and extended the current expiration date to March 1, 2025. We have $272,400,000 remaining available as of today, which includes the increase in October 2023 under our share repurchase authorization.

Speaker 1

The Board and the company intends to continue using a than in 2021 2022 as we utilize all the proceeds from the repayment of the secured note during those years. Turning to the balance sheet and cash flows, total unrestricted cash and short term investments at September 30, 2023 were 154,400,000 GC CapEx in the Q3 of 2023, including CapEx for new off campus classroom and laboratory sites, was approximately 16.6 We expect CapEx for 2023 to be approximately 40,000,000 which is more than our original projection of between $30,000,000 $35,000,000 The slightly higher CapEx is partly due to higher spend on internal IT projects and due to a couple of the new off-site locations incurring slightly higher than expected tenant improvement costs. I would now like to provide color on the updated guidance we have provided in our 8 As a reminder, the guidance that we have provided in the outlook section of our 8 ks filed today 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 per share. In addition, as requested by a number of our investors, We have included in the guidance section of our 8 ks filed today the non GAAP as adjusted diluted income per share estimates.

Speaker 1

We have updated full year 2023 guidance to include the 3rd quarter revenue and earnings beats. As I will discuss in more detail in a minute, we have also raised and narrowed The revenue and operating margin ranges for the 4th quarter based on current enrollment and spending trends. We have also updated our expected 4th quarter effective tax rate. These changes have resulted in a $0.11 increase in EPS estimates for the Q4 of 2023 at midpoint and a 0 point 5 seven order than our previous estimates, which should result in higher than expected tuition revenue in the Q4. As a reminder, the second half revenue is being Negatively impacted by contract changes going to effect for a couple of our other university partners that I discussed on prior calls, in which we will no longer reimburse those partners for certain costs and as a result have agreed to reduce the contractual revenue share percentage.

Speaker 1

These changes impact both the 3rd and 4th quarters, but have a much bigger impact on the Q4 than the Q3 as it went into effect with the start of the fall term. There have been no material changes in our expense Expectations for the Q4 of 2023. We have slightly lowered our effective tax rate for the Q4 of 2023 to 20.3 percent from 21.3 percent. Our weighted average shares guidance assumes that we purchase additional shares similar to what was used to purchase shares in the Q3 evenly over the rest of the year. The Board continues to authorize the repurchase of shares as it believes the stock remains undervalued based The metrics that it uses to evaluate, including the ratio of enterprise value to adjusted EBITDA and the free cash flow yield rather than the multiples of other education companies As although we can be viewed as being in the same sector, there are few, if any, appropriate comps.

Speaker 1

On an enterprise value to adjusted EBITDA basis, the stock is currently trading at 12.1%, which is less than the recent S and P average of 16.4%. The average free cash flow yield for the S and P 500 is 2.8%, whereas the company's free cash flow yield is approximately 5.8%. I will now turn the call over to the moderator so that we can answer questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Jeff Silber with BMO Capital Markets. Jeff, go ahead with your question.

Speaker 3

Thanks so much. I wanted to focus first on GCU online enrollment, really impressive numbers in terms of the accelerated growth there. Can you just give us a little bit more color what drove that and how sustainable that is going forward?

Speaker 2

Yes, a couple of things drove it. 1, the work that we're doing with school districts, Hospitals, counseling centers, military bases, people are really, really focused on giving opportunities to There are employees that are operating at lower levels in the organization. And so That was up 33% this quarter over the same quarter of the prior year. That work Is having a major impact for organizations and the word is spreading that we have the capability to do that. And so that is a major driver.

Speaker 2

As you know, that work was all shut down for the time during COVID, but We didn't lay those people off. And when the country opened back up, we were poised to really play a significant role for a lot of School districts, hospitals, etcetera. So that's part of it. Secondly, in the months of September October especially, Well, even prior to that, we saw the efficiency of our marketing spend go up. A lot of people that universities as we were entering the summer Started to predict that their enrollment number was not going to hit and that their revenues were going to be down significantly.

Speaker 2

And people stopped spending in terms of advertising. If you're not making Any money are not successful in the few programs that you're delivering online. We just saw withdrawal. People started to get out. And so, I think the combination of all the new programs we opened, there's so much interest in the new programs.

Speaker 2

The work that we're doing directly with companies to help give people opportunities to move up, para professionals becoming teachers And people moving up in the nursing profession, cybersecurity specialists on military basis. It was that plus the efficiency of the marketing spend that drove The increase and at this point, we absolutely think it's sustainable. The months of September, October November from a lead post standpoint, just the amount of interest and so much of it is really, really high quality People doing their own searches, looking for opportunities, and there just isn't anybody out there that has the breadth The programmatic offers that we do. So does that help?

Speaker 3

Yes. No, that's actually very helpful. Maybe if you can switch over to the hybrid program. You cited the strong new fall enrollment growth and your expectations for spring to be even higher. What are you seeing that's giving you that confidence?

Speaker 2

Man, it's primarily the university's adjusting, our university partners adjusting to the fact that the market changed, And there's a significant amount of interest in people becoming nurses, but it's really for people who are younger and that have partially completed Degrees. There it's not mainly for people who have completed degrees and are looking to re career in nursing. There's still some of that, But there's a but the huge growth is in people that are at community colleges that have 20, 30, 40 college credits. They haven't accumulated much debt And they're very interested in a nursing career. And so that adjustment And then the prerequisite course offerings.

Speaker 2

I mean, that was just a huge challenge, because there was no efficient way That was affordable for people to get into those courses, especially the science courses, other gen ed courses as well, but especially the science courses. And GCU put together really 10 courses are the big part of it, but there are some additional ones. Put a lot of time and energy into those courses, hiring full time faculty to teach them, providing tremendous levels of academic support, And we've already had over 5,000 students take those courses. And so now, no matter where you are in the country, you can enroll in those courses Within a week or 2, and one of the things that surprised us is that there are a lot of 20, 21 year olds that are Only part time employed that aren't taking one of those courses at a time. They're taking multiple courses at a time because most of them are only working part time jobs.

Speaker 2

But it's the clear path from getting that science coursework completed, getting into an ABSN program to do the 60 credits At the upper division level, that clear path has really changed this thing tremendously. If you're in a market and somebody tells you to Go to the community college and see what they have to offer or that's just A long difficult arduous process that de incense people. And so we think now we've Got a great solution to the first obstacle was the clinical placements and we fixed a lot of that in the last couple of years. And now the second Was that science prerequisite coursework, we believe we've impacted that significantly and so we're excited now about the next couple of years.

Speaker 3

All right. That's really helpful. I'll jump back in the queue. Thanks.

Speaker 2

Thank you.

Operator

Please standby for our next question. Our next question comes from Jeff Meuler with Baird. Jeff, please go ahead with your question. Jeff Meuler with Baird.

Speaker 2

We can move

Speaker 1

to Yes, there's another Baird, so maybe it's he's on the next try the one that says Gabriel.

Operator

Our next question comes from the line of Gabriel Dietrich with Baird. Gabriel, go ahead with your question. Sure. Thank you for the call today. I actually work in a different department than Jeff, but really appreciate the comments and was just curious on Your thoughts regarding the recent fine with the Department of Education.

Operator

Any thoughts on impacts

Speaker 2

We've been dealing with the department for 5 years, and so we'll continue to deal with it. It's a we knew that there was a the fine was coming, and so we got out in front of it and made sure that we told our part of the story. None of what's going on makes any sense from a logic perspective. We went through a very lawful process to return to a non profit institution That went really, really well. The department for some reason denied our non profit status.

Speaker 2

We don't know what the reason is. They don't tell us. And then for 4 years, we tried to fix it. Eventually, I had to file a complaint. And as a result of that, the retaliation started.

Speaker 2

And so it's Something we have to deal with, but it's not going to stop what we're doing. Things are going unbelievably well here. The desire for what we have, which is 4 very, very creative platforms where we can deliver education to students based on What their living situation is, their life situation based upon what the nature of it is they need to learn, we can deliver it extremely efficiently. We can do it without major tuition increases, without huge debt levels. We can just do it in extremely high quality way.

Speaker 2

And the focus on free speech at a Christian university is very, very attractive to Americans throughout this country. And so, we're in a great spot And we're going to continue to focus on delivering to students, delivering to organizations, Making sure that people are in a position to get a great return on their investment of time, energy and money. And so it's something we have to deal with, but it's not something that's going to slow this thing down at all. Thank you. We have

Speaker 1

reached the end of our Q3 conference call. We appreciate your time and interest in Grand Canyon Education.

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Key Takeaways

  • Grand Canyon Education reported Q3 service revenue of $221.9M (+6.3% YoY) and adjusted EPS of $1.26, beating consensus by $0.18.
  • GCU’s online campus saw new starts rise ~20% year-over-year and total enrollment climb 8.3%, driven by 116 new labor-market-focused programs, a 33% jump in employer-partner enrollments and stable ~1% annual tuition increases.
  • Traditional-aged student engagement shifted online, with 5,631 new online starts (+21.5% YoY) and on-campus fall 2024 visits up 30%, as GCU positions both ground and remote delivery for younger cohorts.
  • Hybrid ABSN enrollments accelerated through newly launched online prerequisite science courses, enrolling ~5,500 students with a 90% success rate into nursing programs and strong first-time NCLEX pass rates.
  • Management raised and narrowed Q4 revenue and margin guidance, lifting EPS estimates by $0.11 at midpoint, and extended its share repurchase plan with $272.4M remaining authorization.
A.I. generated. May contain errors.
Earnings Conference Call
Grand Canyon Education Q3 2023
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