Grand Canyon Education Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 2, 2023

Key Takeaways

  • Strong Q1 performance: Service revenue rose 2.5% year-over-year to $250.1 million, net income increased 2.6% to $59.6 million, and adjusted EPS of $2.00 beat consensus by $0.04.
  • Traditional campus growth: Fall 2022 new student enrollment increased 8.9%, residential housing rose 10.5%, and retention remains strong, with Fall 2023 new student guidance of 10,000–11,000.
  • Online adult student momentum: New online starts grew for a third consecutive quarter, driven by B2B partnerships (+24% y-o-y) and 138 new programs, with Q2 2023 online new enrollment expected to be up high single-digit to low-teens.
  • Healthcare partnerships in transition: Short-term ABSN growth was impacted by clinical capacity and student profile shifts, but over 1,200 students are now enrolled in new 8-week online prerequisite courses to fuel hybrid campus expansion.
  • Workforce development certificates: A new professional electrician apprenticeship certificate launched with a 98% completion rate and strong industry demand, demonstrating a scalable model for high-impact certificate programs.
AI Generated. May Contain Errors.
Earnings Conference Call
Grand Canyon Education Q1 2023
00:00 / 00:00

There are 4 speakers on the call.

Operator

Welcome to the Q1 2023 Earnings Conference Call for Grand Canyon Education, Inc. 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 speaker today, Chief Financial Officer, Dan Bachus. Please go ahead.

Speaker 1

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. 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.

Speaker 1

And with that, I will turn the call over to Brian. Good afternoon and thank you for joining Grand Canyon Education's Q1 fiscal year 2023 conference call. GCE had a very good quarter, Exceeding enrollment expectations, exceeding consensus revenue estimates at midpoint $5,600,000 and producing a $0.04 beat And adjusted diluted earnings per share to consensus. Given how most of higher education is coming out of the COVID years, These are excellent results. Most importantly, GCU Online produced significant new enrollment growth for the 3rd consecutive quarter over prior year and that momentum is expected to continue into the Q2 of 2023.

Speaker 1

I want to begin again I take a step back and explain why this is happening and briefly review of what has happened since the GCE GCU transaction took place almost 5 years ago. I have often said that the past small and elite has won the day in higher education, especially in areas like U. S. News and World Report rankings. In the future, it will be institutions who are large, scalable and flexible in how they offer higher education.

Speaker 1

We expect to impact adults across the lifespan using technology to build platforms that take into account the life situation of the student and the nature of the content and skills that need to be learned. GCE has invested approximately $300,000,000 producing its own learning management and administrative system that allows it and its partners to manage over 7,000 full time and adjunct faculty members, 112,600 students and over 320 academic programs, emphasis and certificates across 4 delivery platforms. This system has automated processes including admissions, transfer collection and evaluation, Schedule building, financial aid processing, faculty recruitment, faculty assignment and payroll, content acquisition, assessing learning outcomes, student teacher placement, counseling and social work internships and the list goes on. The administrative capability of the system allows these students to focus on the learning, which is still in a small group instructor led process that is highly interpersonal, collaborative, focused on writing, critical thinking and problem solving and produces outstanding outcomes. GCE currently employs approximately 4,000 full time professionals and approximately 1500 student workers as it continues to build out its capabilities to grow faculty, students, programs and delivery platforms for its university partners.

Speaker 1

Leveraging this infrastructure has allowed GCE's partners to expand programs that are critical to the economy, Maintain tuition levels in a period of rapid tuition increases across the country and make access to higher education affordable to all socioeconomic classes of Americans without any burden on the taxpayer. In the almost 5 years since GCE has become a service provider, it has helped its partners accomplished the following. In that time, GCEA South Grand Canyon University graduated 130,276 students, 35,815 in education, including 16,537 first time teachers. At a time, the teacher shortages have created a national crisis. 37,685 in nursing and healthcare professions, including 1767 pre licensure nurses at a time when there is a huge shortage of nurses.

Speaker 1

24,863 in College of Humanities and Social Sciences, including 1,000 in Counseling and Social Work, where there are also huge shortages. College of Business has become one of the largest business schools in America and has produced 22,151 graduates. The College of Science, Engineering and Technology has grown by 183% and provided 4,539 graduates. The Doctoral College, Honors College and College of Theology also continued to grow. The numbers that I have just cited have all happened in the almost 5 years since GCU has become a non profit institution and GCE has become an education services provider.

Speaker 1

Our partnership with GCU has given it the ability to invest $576,000,000 additional dollars in academic and residential like infrastructure for its ground traditional campus, bringing the total investment to almost $2,000,000,000 Currently, the campus is ranked 16th in the country by niche dot Very importantly, GCE has assisted GCEU in opening 138 new academic programs, emphasis and certificates during the almost 5 years. 12.9 percent of the new students enrolled in the Q1 enrolled in these new programs. During this time, GCU has not raised tuition on its ground traditional campus with only nominal increases in certain programs online. As a result, GCU students take out less debt than the average state university student. GCU students take out only 50% in parent loan amounts compared to students at our 3 state universities.

Speaker 1

GCU students have a 1.5% cohort default rate on student loans compared to the almost recently released national average of 2.3% and has a ninetyten calculation of 66.2% for GCU's audited financials. In addition, GCU has accumulated over $400,000,000 in cash and investment reserves While going through with annual salary increases every year for all faculty and staff. Compared to the declining enrollments and negative financial trends in higher ed across a country that accelerated during COVID, this model has produced significant results through results for GCU, the State of Arizona and the country. Grand Canyon University was also ranked as the 3rd best employer in Arizona in the 2022 Forbes America's Best Employers by State report. During this same time period, GCU has established 26 traditional university partnerships.

Speaker 1

These partnerships along with our partnership with GCU have created 36 locations to produce healthcare professionals, especially baccalaureate prepared nurses. This is extremely important work as the country is expected to need 1,300,000 additional nurses in the next 5 years alone. A number of existing and new partners will eventually lead to 80 locations across the country. Since January 2019, 9,318 students have graduated from our other university partners, ABSN or OTA programs. I wanted to include this brief summary because there is currently a lot of about the future of higher education.

Speaker 1

Regardless of political or ideological positions, discussion sheets focus on where the economy is going and where the new jobs Careers are going to be models that can scale and offer opportunities for access to all socioeconomic classes in the market at no expense to the taxpayer should be supportive. Critics point to the revenue share model of bad for universities. The past 2 years have proven them wrong and we expect in the next year this will become even more apparent. Inflationary periods like the one we are currently experiencing or when demand declines as it has, GCE as the service provider absorbs the majority of the Financial risks and our expertise, technology and processes have allowed our university partners to continue to benefit during these challenging times. Now I want to review the 4 pillars of delivery platforms at Grand Canyon Education.

Speaker 1

1st GCU's traditional campus saw an increase of 8.9% in new students in the fall 2022 over prior year, an increase of 8% in total Brown traditional enrollment And an increase of 10.5% in residential enrollment. Approximately 70% of Brown Traditional Students lived on campus. The average incoming GPA for the 2022, 2023 class growth to 3.6% and the prestigious honors college has grown 8.3% year over year with average incoming GPAs of 4.1%. Traditional campus spring enrollment was slightly better than expected due to better than expected fall to spring retention. These are remarkable results given the fact that undergraduate enrollment declined by 4.2% nationally between fall 2020 fall 2022, where during the same period of GCU's ground conditional enrollment increased by 18.3%.

Speaker 1

We expect fall 2023 new enrollments to be between 10,011,000. The quality and irrelevancy of GCU's academic programs, the low class sizes in support of its faculty that has less than a 6% turnover rate, The quality of counseling services, the 20 advisory board with over 500 companies represented who are creating internships, employment opportunities for GCU students and the very Affordable tuition, which hasn't been raised in 15 years are all important contributing factors. I also want to mention, unlike the national trend, Over 2,600 of the 9,300 fall 2022 new students this year were 1st gen college students. The average incoming GPAs of these 1st gen students is 3.55 or almost identical to the incoming class overhaul. These students are largely from lower socioeconomic strata, but their enrollment at the university because of very affordable tuition rate is going directly against the national trend is a very positive part of the GCU GCE story.

Speaker 1

As I said before, the fall of 2023, we are anticipating between 10,011,000 New students. We are under construction at 2 new residence halls that will increase the number of beds on campus by 1500. The number of new students will ultimately depend on the retention of continuing students and their desire to remain on campus and the competitive environment given the trends we have discussed previously, less high school graduates and less graduates directly going to college. Pillar 2, working adult students attending GCU online. As with traditional students attending universities across the country, 20 We saw a downturn in working adult students attending online.

Speaker 1

Unlike with traditional students attending GCU's campus, we experienced a downturn in online students as well. GCU has worked with GCU on 2 main strategies to combat the downturn and we are now seeing positive growth again. Number 1, we have invested in B2B strategies that are well timed for this post COVID period. The supply and demand, At least in the short run for educated labor has flipped since the country has reopened. We are working with over 26,850 industry partner locations In K-twelve education, healthcare, financial services, social service agencies, technology and engineering companies, military bases, etcetera, Developing custom strategic initiatives that are helping organizations grow their talent from inside.

Speaker 1

The number of new students that started through these strategies grew 24% over the prior year in the Q1. Number 2, GCE continues to work with GCU to roll out new and relevant programs. Since the transition almost 5 years ago, GCU has rolled out 138 new programs and the season certificate, 12.9% of new students enrolled in these programs in the latest in this latest quarter. This has resulted in 1st quarter new online enrollments growing in the low teens over the prior year, and we are currently projecting new enrollment growth in the Q2 of 2023 to be similar, High single digit to low teens. Based on these trends, we returned to total online growth this quarter.

Speaker 1

It's important to note that this return to positive growth has been accomplished with no loss of strength in the quality of GCU's online student body And as a result, no degradation of the quality metrics, including good graduation rates, low cohort default rates and continued low debt amounts, student debt amounts. We anticipate new enrollment growth to again be in the high single digit low teens in the second quarter and then we'll begin to refer to our long term objective A mid single digit growth in the back half of the year as the comps get much tougher. This should allow us to grow total enrollment on a year over year basis in the low to mid single digits by the end of the year. Next, I would like to discuss GCE's 3rd pillar of healthcare partnerships. Short term COVID has had a negative impact.

Speaker 1

Hospitals were extremely busy, preoccupied with COVID patients and many clinical placement opportunities were canceled. Despite these very significant challenges, many instructional assignments required 1 on 1 clinical interaction in the hospital were replaced by simulations. Some of our university partners requested that we reduce the cohort sizes due to concerns about the lack of clinical capacity And some of the new sites that we hope to open, especially in large markets, have been pushed back to the fall of 2023 or 2024. Although positive signs are emerging on this front, the tight labor market has had a significant impact on the type of student interested in re career into nursing. When we acquired Orbis in 2019, their partnership were predominantly focused on post baccalaureate students.

Speaker 1

Those that had already completed a bachelor's program and having a completed bachelor's degree was a requirement to start in the ABSN program. Students that did not have a bachelor's degree returned away. Today, the majority of the students interested in re career into nursing have not completed a bachelor's degree. Thus, we have been working with our partners and their state boards to adjust these programs to allow students with 60 plus college credits to gain admittance into the ABSN program. In addition, In partnership with GCU, we have created a much less expensive and more efficient way for these students or students that do not have a bachelor's degree, but don't have the science pre reqs to complete the coursework necessary to start in the ABSN program.

Speaker 1

These challenges have in the short run caused some of our mature locations that we're at capacity to shrink and some of our newer locations did not grow as fast as we would have expected, while other mature locations remain at or near capacity. And some newer locations are meeting our new enrollment expectations. We believe that these strategies will reaccelerate growth. As we work through this, we will be much more selective in the new locations that we open. We plan to open 2 new sites with GCU in the Phoenix area in in the fall of 2023.

Speaker 1

And our hope is that we will be opening a new site with a new partner in Southern California in the fall As well, although permitting issues continue to hold up our ability to start construction on that site. We also plan to open a couple of smaller sites with new partners that were committed to previously. I'm very pleased to announce that the GCU locations grew 27.2% year over year from 283 to 360 students. This is extremely important because GCU would ultimately like 40 of our 80 locations to be GCU locations. This relationship is good financially for GCU, but is also good for GCE given GCU's national footprint and brand recognition, The essence of its nursing program and its proven ability to scale.

Speaker 1

As with GCU's traditional campus, the long term environment is very positive For these GCE Healthcare Partnerships for the following reasons. Number 1, the country needs 1,300,000 additional nurses in the next 5 years alone. Nursing programs are very expensive to operate and given the financial pressures facing many universities, they will be unable to invest the dollars it will take to scale the programs. Number 2, GCE has the capital to invest in the continued build out to eventually 80 locations. Number 3, in addition to the runway of 80 locations, Up from 36 locations currently, our enrollment budget for the coming year is only 50% of the actual spots that exist today.

Speaker 1

50% shortfall this year was largely due to the lack of efficient and highly supportive prerequisite course environments, Regulatory issues creating slowdowns in opening plan locations and the lack of clinical placements due to COVID issues. Most important, there are now over 1200 students in GCU's accelerated online science courses Preparing to earn spots in one of our 36 locations. These are 8 week courses taught mainly by full time faculty members and provide Tremendous academic support services. There are multiple start opportunities on an every month basis. We expect that 1200 number to continue to grow and be a leading indicator of our ability to reestablish growth on the hybrid campuses.

Speaker 1

DCE is working hard and investing in new enrollment, Simulation, virtual reality and prerequisite strategies to be in the future fill all the spots that are available. This is a transitional year for the healthcare partnerships. However, there is a 10 year runway that is very promising. It creates a winning scenario for students that went into a promising career, healthcare providers desperately needing professional nurses and universities who want a low risk way to help solve the nursing shortage, while at the same time creating additional revenue streams. Last, we continue to see good results in our 4th pillar certificate programs.

Speaker 1

We are extremely excited because these programs are desperately needed in higher education today. This past September, we launched a certificate program in partnership with GCU's newly formed Institute For Workforce Development. This certificate is referring students for a professional electrician's apprenticeship program. This is a 16 credit hour, 1 semester program heavily focused on the mathematical concepts necessary to prepare for a career as an electrician. This program has been designed with a major industry partner who is offering apprenticeship to the students successfully completing this program.

Speaker 1

Its partner needs 1,000 electricians for their business in Arizona alone. Its partner also indicates that the country is short the minimum 100,000 electricians necessary to 39 of 40 students from MacFest completed their program successfully and the feedback that we have received from our industry partner has been very positive. Additional 200 submitted applications for the spring semester and we accepted another 40 in the spring. 35 of those students completed their program successfully. Once the concept is proven, there is the potential to scale this program in a significant way.

Speaker 1

We have had many additional industry partners who have expressed interest in participation. Service revenue was $250,100,000 for the Q1 of 2023, an increase of 6,000,000 or 2.5% as compared to $244,100,000 for the Q1 of 2022. The increase year over year in service revenue was primarily due to an increase in GCU traditional campus enrollments and an increase in revenue per student year over year, partially offset by a decrease in hybrid enrollments, primarily students and our Universities Partners Occupational Therapy Assistance Program. Operating income for the 3 months ended March 31, 20 dollars 23 was $74,500,000 a decrease of $3,000,000 as compared to $77,500,000 for the same period in 2022 as we continue to invest to meet our clients' enrollment goals. The operating margin for the 3 months ended March 31, 2023 was 29.8% compared to 31.7 percent for the same period of 2022.

Speaker 1

Net income increased 2.6% to $59,600,000 for the Q1 of 2023 compared to $58,100,000 for the same period in 2022. GAAP diluted income per share for the 3 months ended March 31, 2023 is 1.94 As adjusted non GAAP diluted income per share for the 3 months ended March 31, 2023 is 2 point or stands for consensus estimates. With that, I would like to turn it over to Dan Bachus, our CFO, to give a little more color on 2023 Q1, to talk about changes in the income statement, balance sheet and other items as well as to discuss the updated 2023 guidance. 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 3 months ended March 31, 2023, 2022.

Speaker 1

The non GAAP amounts exclude the tax affected amount of the amortization of intangible assets of $2,100,000 in the 1st quarters of both 2023 2022 and the tax effective amount of the losses on fixed asset disposal of $100,000 $700,000 for the 3 months ended March 31, 2023 2022 respectively. We believe the 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 March 31, 2023 and 2022 is $2 $1.72 respectively. Service revenue was higher than our expectations in the Q1 of 2023 due to the higher than expected ancillary revenues at TCU and higher than expected number of and the nursing prerequisite courses. Other online and hybrid revenues were in line with our expectations.

Speaker 1

The ground enrollment growth rate continues to be impacted by a decline in professional studies students. The hybrid enrollment growth rate is being impacted on a year over year basis due to the timing of site opening, a 19.9% year over year decline in occupational therapy assistant enrollments And a decline year over year in the enrollment at some of the mature sites due to challenges previously discussed. 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 enrollment for 2 years, which has a higher revenue per student due to room, board and other ancillary revenue and the higher revenue per student at off campus classroom and laboratory sites. Service revenue per student for hybrid ABSM 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, partners have higher tuition rates, The majority of these of their students take more credits on average per semester as they are in accelerated program. But the increase in revenue per was negatively impacted by year over year differences in the timing of the GCU traditional campuses spring semester such as $4,500,000 shifted from the Q1 to the 2nd as compared to last year.

Speaker 1

Our operating margin was higher than our expectations primarily due to the higher than expected revenue. As I discussed on prior quarter, earnings calls we have been aggressively hiring in which headcount had mostly been flat since March 2020 to meet our partners' expected future growth, which is driving increased compensation costs and technology and academic services and counseling services and support costs. We also plan for significant increase year over year in travel and employee benefits as those 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 expectation.

Speaker 1

Our effective tax rate for the Q1 of 2023 was 22.3% compared to 25.2% in the Q1 of 2022 and our guidance of 22.3%. The decrease in the effective tax rate year over year is due to excess tax benefit of $900,000 the Q1 of 2023 as compared to $100,000 in the Q1 of 2022. The 2022 effective tax rate was also unfavorably impacted by higher state income taxes. And in 2023, the effective tax rate was favorably impacted by state tax refund. We repurchased 309,978 shares of our common stock in the Q1 of 2023 at a cost of approximately 34,900,000 and another 96,547 shares since March 31, 2023 of the purchase.

Speaker 1

We have $149,700,000 remaining available as of today under our share repurchase authorization. The Board of the company intends to continue using a significant portion of its cash flows from operations to repurchase its shares. The share repurchases in future years will be less than in 2021 2022 as we have utilized all the proceeds from the repayment of the secured note during the past 2 years. Turning to the balance sheet and cash flows, total unrestricted cash and short term investments on March 31, 2023 were 194,500,000 GCE CapEx in the Q1 of 2023 including CapEx for new off campus classroom and laboratory sites is approximately $8,600,000 or 3.4 percent of service revenue. We expect CapEx for 2023 to be similar to 2022 at between $30,000,000 $35,000,000 I'd like to provide color on the updated guidance we have provided in our 8 ks filed today.

Speaker 1

As a reminder, the guidance that we have provided in the outlook section of our The K filed today is GAAP net income and diluted income per share with components to adjusted GAAP amounts to non GAAP as adjusted net income and non GAAP as adjusted diluted income per share. And we will continue to provide both GAAP net income and diluted income per share and the non GAAP amounts with a reconciliation between the two where we report actual results. We have updated full year 2023 guidance to include the Q1 revenue and earnings beat and are reaffirming the second, third and fourth quarters previously provided guidance. A couple of reminders, timing differences in the start and end of the traditional campus semester dollars 4,500,000 from Q1 2023 to Q2 2023 in comparison to 2022 and $1,300,000 from Q4 20 20 to Q3 2023 in comparison to 2020. We anticipate that new online enrollments will be up year over year in the high single digits to low teens in the 2nd quarter.

Speaker 1

As a reminder, the comps get much more difficult in the second half as new enrollments were up year over year in the mid teens and the 3rd and 4th quarters of 2022. Thus our guidance provides a wide range of potential outcomes in the second half of between low and high single digit growth. Given that our long term objectives started grow new enrollments in the mid single digits, the midpoint of this range would meet our long term objective. Based on this, we anticipate that total online enrollment will end this year with a low to mid single digit year over year growth. As Brian discussed earlier, hybrid growth will remain below our long term objectives during the first half of twenty twenty three, but we are hopeful that we will start to see some acceleration beginning in the fall semester due to new site openings and the impact of the prerequisite initiative on the number of eligible students that could start in our partners' program.

Speaker 1

We estimate the effective tax rate in the The last three quarters of 2023 will be 24.9%, 24.9% and 24%. The effective tax rate will be higher in 2023 than in 2022 because of the impact of state income taxes as revenues continue to grow at the off-site locations outside of Arizona, driving our tax rate increase. These estimates do not assume a contribution in lieu of state income taxes, But if one is made, that will increase G and A expense in the Q3 and decrease the effective tax rate in the second half of the year. Assuming that a contribution of $5,000,000 is made in July of 2023 as was made in July of 2022, This would decrease net income by $1,300,000 in Q3 of 2023 and increased net income by 1,300,000 in the Q4 of 2023. But again, no decision has been made yet on this contribution.

Speaker 1

Our weighted average shares guidance assumes that we purchased most of the remaining amount authorized by our Board evenly over the rest of the year. The Board continues to Authorize the repurchase of shares as it leaves 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 the multiples of other education companies as although we can be viewed as being in the same sectors, there are few if any appropriate comps. On an enterprise value to adjusted EBITDA basis, the stock is currently trading at roughly 12.5, 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 of 2.8 whereas company's free cash flow yield is approximately 5.5%. The guidance we have provided does not include any reduction in revenue or expense associated with the Dear Colleague letter issued last year that I have discussed on previous calls.

Speaker 1

However, it is likely that a number of our university partners contracts will be adjusted prior to the fall term such that we will no longer reimburse them for certain costs and thus will be reducing our revenue share. As a result, we do anticipate the full term revenue and expense will be reduced but cannot currently quantify these amounts. It's important to note that these changes made will not have a material impact on revenues and operating profit as the Dear College letter does not impact our relationship with GCU as GCU provides all faculty for their course, pays them and receives little or to no reimbursement from us or any other outside sources for the faculty costs and because the contract modifications are being made to make both parties whole. Last, as I get this question often, I wanted to highlight The named executive officers have signed extensions of their employment agreement. Brian's agreement has been extended through June 2020.

Speaker 1

I'll now turn the call over to the moderator so that we can answer questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from the line of Jeff Meuler with Baird. Your line is now open.

Speaker 2

Yes. Thank you. For the hybrid pre req initiative, I guess, have you had any students graduate from that program at this point? When Do they apply for the ABSN experience? Just like how much of a lag between completing the pre reqs and enrolling in ABSN would you expect?

Speaker 1

Well, when they expressed interest in our program and we determined they need prerequisite courses, How many there are that they need to take, we immediately begin a schedule in terms of how they'll transition to the ABSN program. So depending upon how many courses they need to take, we'll determine the schedule, we'll determine when they'll finish their last course. And then for most of them, they will begin very soon after that attending one of the sites that they selected even before they start their pre reqs. And so for many of the students, they will be selecting a site very near their home. For some, they'll actually select And then we determine what courses they need.

Speaker 1

Course schedule is built. We have a lot of students completing courses. They're completing courses at a very, very high rate, the one that we're very satisfied with. We haven't had a student Complete them all and go into the, maybe a program yet, but we're very close to that happening. And so the preliminary results have been very good And I can't underestimate how important that is.

Speaker 1

When you apply to get into a nursing program And it's determined you don't have the prerequisites necessary. I'm sorry to say this, but If they refer you to a community college, that could literally be a 2 or 3 year timeframe before you're going to get the courses you need. And if you don't select that route, the other routes are extremely expensive. And so what we realized is that you can't expect A student to take out a massive loan to get the pre reqs done, not knowing whether that will be successful and they'll actually get into an ABSN program. On the other hand, if we get students into an ABSN program, if we get them to the door, there is a universal 90 completion rate and a greater than 90 percent first time class rate on the NCLEX exam.

Speaker 1

And so we absolutely believe that a centralized process, No matter where you are in the country, to enter into the correct pre req courses, 1 at a time, 8 weeks long with lots of faculty and and tutorial support will put us in a position to create a pool Of those graduates who could step into the ABSN program and we believe that's the key to reaccelerating the growth. And obviously, each quarter we'll be providing updates on that. But what we're experiencing to this point Is that the students are doing well in the coursework. They're getting a tremendous amount of support. And I think this is by far the most important part of adjusting to this market change.

Speaker 1

And when you go back to the change, it's just the supply and demand of the labor force. You've got a $60,000 or $70,000 a year job and You've already completed your degree. You've already taken out sizable amounts of loans to do that. It's very difficult for that person to decide if they're going to Quit their job, invest $50,000 to $60,000 and re career in nursing to make $75,000 or $80,000 And so There's no lack of interest in people wanting to be nurses. It's just that the market now has shifted to people who haven't already taken out massive amounts And then our base was doing that a second time.

Speaker 2

Got it. And then for the fall 23 ground campus enrollment. I just want to make sure I'm interpreting the comments correctly. You gave us the new starts. I feel like there was a little bit of a caveat 2 to 3 months ago about registrations tracking behind.

Speaker 2

I guess, has visibility on that front And trends on that front improved. And then this quarter, I don't know if this was a new caveat or not, but I thought there was a reference to like some uncertainty around retention of students from spring to fall and increased competition. So is there any reason to believe that retention could be lower this year?

Speaker 1

No, retention is good. Retention is very good. We will come in with more than we budgeted for in terms of returning students to the campus. So that's really good news. On the other front, things have changed dramatically in higher education with regards to traditional students.

Speaker 1

This has been coming, but COVID accelerated it. The reason we're staying between 10,011,000 students and that's a wide range for Usually we can target a number and be much closer. Our applications are up significantly. Our campus visitations, our 1 on 1 appointments with students and parents are up. What's lagging behind is the students' commitment to register.

Speaker 1

So they're not saying they're not coming, they're not committing to register. We have had a number of institutions visit us, well branded Private universities within the last couple of months and explore potential relationships because they're looking at their fall numbers and they're seeing, I'm not going to say Armageddon, but this what happened last year is Probably going to be worse this year for many institutions. Students and families know that they're in the driver's seat now. Unlike in the past where you tried to apply the schools you were interested in, hoping to get an acceptance and celebrate that, Right now what they know is that the thing is flipped and if they hold out, people are making increased offers in order to get them to attend their campus. We are not doing that.

Speaker 1

We don't think we have to do that And we're still positive about how we fit into this whole situation because of our low tuition rate. Parents and families, students are actually absolutely questioning the value of higher education if it requires $200,000 worth of debt Or even $100,000 if you attend a state university. We think that as they get Letters and deals submitted by other institutions, ours as they have in the past will look very favorable In addition to the fact that we've got over 40% of our students graduated in 3 years because of our dual credit programs and all of that. So we still think we Even though the trend is fewer high school graduates, fewer as a percent of the college, if you're questioning The value of higher ed, this is a very good investment because number 1, you're going to graduate with very little debt. Number 2, you're going to graduate in less years.

Speaker 1

And so it's a much lower risk proposition if you're questioning that. So We are hanging in there and expect it will still do real well in the end as compared to others. And just to clarify that caveat, Jeff, You might recall this, we had a similar issue last year, but the university built 1500 new beds And if retention rates were flat as a percentage to last year, we could recruit for them 1500 additional new students or 1300 I think roughly, additional new students this year than last year. Based on current registrations for continuing students, they're taking up the entire 1500 additional beds. Now with that said, Once students go home for the summer, we expect some attrition as we've seen in the past.

Speaker 1

But Right now, sitting here today based on current or prior trend, we will have a much higher retention rate than we projected or we've had in the past And continuing students will take up some of that increased fed situation that the university built, if that makes sense.

Speaker 2

Makes a lot of sense.

Speaker 1

But from a total enrollment standpoint, it won't change the total enrollment. It will just change the pieces between new and contingent.

Speaker 2

Yes. Got it. Thank you.

Operator

Yes. All right. One moment for our next question. Our next question comes from Jeff Silber of BMO. Your line is now open.

Speaker 3

Thanks for sneaking me in. I Apologize, I joined late. Brian, and forgive me if you mentioned this, and I'm sure you did. You talked about the hybrid business being in a transitional year this year. At a high level, can you just review why that's the case?

Speaker 1

Yes. The market absolutely changed because of the flip in the labor market. There are unemployment is so low that 3 or 4 years ago, Most of the students were students that had completed a baccalaureate degree. Their careers were not going anywhere and they want to re career into nursing. And so their transition into the program was pretty simple, much simpler because they'd already completed a degree.

Speaker 1

Right now, you've got people making dollars 70,000 a year in the 1st couple of years out of college. And it doesn't make sense for many of them to put their $70,000 a year job and spend 60,000 To make $80,000 It's those recareering post frac students have kind of dried up. Now that might change again if the employment Which it might, but what's happened is that there's still a huge interest in people becoming nurses, but it's Students that are at a community college or pretty new out of high school, they've earned 30 or 40 credits, maybe 60 credits. And they haven't accumulated much debt. What we needed to do for them is create a very efficient way for them to get the science pre req courses done so they can get you to do an ABSN program.

Speaker 1

We needed to make the scheduling of those things very efficient. We needed frequent start times. So we built those courses at GCU, and they quickly rose to 1200 students In those courses, they're taking anywhere from 2 or 3 to as many as 7 or 8 science courses, chemistry, biology, anatomy, physiology, Those courses in they're completing at a high rate. We've reduced the tuition significantly, so most are paying cash. And they don't have the difficult decision of accumulating a lot of debt, not knowing if I'm going to get in.

Speaker 1

The reason we're very bullish on this thing going forward is how quickly the enrollments grew in those courses and how Well, the students are doing. The decision then to spend the $50,000 or $60,000 into a key program is a pretty easy one given the number of jobs in nursing, what they pay, etcetera. And so the transition is mainly That. Now there was a little bit of some sites opened later because in certain situations, in Certain markets, we couldn't get the right number of clinical placements. So there was a little bit of that, but it mostly had to do with The uncertainty of how do I get those prerequisite courses done.

Speaker 1

And so as that number builds, as students Identify a site they want to go to as they get into the prerequisites. We know after we've been done on schedule when the pre reqs will be completed, everything goes well and therefore what program, what site they'll attend when they finish. And so it's that transition that's taking place right now And we're extremely bullish on the fact that it doesn't matter where you are in the country now. It doesn't matter what program you're interested in of our 20 Different partners. You can come to GCU, you can do the programs, you can do the courses online and you can do it in a very efficient way.

Speaker 3

Okay. That's helpful. If I could shift gears to GCU Online. Can you just give us an update in terms of acquisition cost? I know it's been a competitive market.

Speaker 3

You guys are doing a great job, but I'm just curious if acquisition costs have come down or how they're tracking?

Speaker 1

When you look at us historically, and I know you know this, but if you look at the 5 or 6 years, our Acquisition costs, that's where we were getting margin expansion. Now we've been in a position where they've stayed pretty flat. It's we haven't experienced the difficulties a lot have had, and mainly because 24% We were 24% over this Q1 of this year over Q1 of prior year in Starts that we accumulated through our industry partnership. That's taken the pressure off of our marketing plan immensely. And so where other people have had to spend more marketing dollars, which as you spend more, you get deteriorating results, We've been able to keep our actual advertising expense pretty much the same slight increases because we're getting the starts out of The school districts, hospitals, counseling centers, military bases where we are putting custom programs together to help them grow their talent from inside.

Speaker 1

I'll tell you, we have got so many partnerships now with school districts Where we're taking paraprofessionals who are making $25,000 a year, putting them into baccalaureate programs that lead to License here that allows them to become full time teachers at $70,000 a year, in some of the biggest cities in America, New York, Chicago, Philadelphia, Boston. I mean, So those are it's a great story because it's really lifting people to a middle class job. At the same time, it's giving human resource departments within large school districts an HR plan that they can count on and Gives us some level of predictability, and it's a way for us to offer programs without having to buy leads. So Yes. So we really haven't had the issue that you probably heard from a lot of other groups.

Speaker 3

Okay. Appreciate the color. Thanks so much.

Speaker 1

We have reached the end of our Q1 conference call. We appreciate your time and interest in Grand Canyon Education. If you still have questions, please contact myself, Diane Backus. Thank you very much.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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