Good day, ladies and gentlemen, and welcome to the Grand Canyon Education Fourth Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. Later there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Brian Roberts, General Counsel. Sir you may begin.

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

Good afternoon and thank you for joining Grand Canyon University’s fourth quarter 2017 conference call. In the fourth quarter of 2017 enrollments grew by 10.2% and revenues grew by 10.9%. New working adult students attending our online campus grew in the mid single digits year-over-year. Operating margins are at 33.7% for the quarter and 29% for the year. I want to again thank our faculty and staff for a great year. As you know our long-term goals are to grow enrollments 7% to 8% on an annual basis, 6% to 7% will come from online enrollments and the rest from our ground campus. Revenues will grow 8% to 9% without any anticipated tuition increases, primarily as a result of continued retention increases, traditional campus enrollment becoming a higher percentage of the total and the growth of ancillary revenues through new businesses. The room and board payments of ground students continue to drive up the annual revenue per student number. This academic year 2017-18, we have approximately 19,000 students on our ground campus. Recruitment for the 2018-19 academic year is going as expected. Last year at this time, we had 23,914 applications. This year we have 26,324 applications, which is up 10%. We expect about 7,250 new students, which would bring the total students on campus to 20,500. The average incoming high school GPAs of the new accepted students is 3.58. 28% are in science, engineering and technology, 16% are in humanities and social sciences, 22% are in nursing and healthcare professions, 20% in business, 6% in education, 5% in fine arts and 3% in theology. We expect our online campus to grow between 6% and 7% on an annual basis. We managed the quality of the online student body by keeping as a percent of graduate students plus our end…

Thanks, Brian. Revenue exceeded our expectations in the fourth quarter of 2017 due to higher than anticipated enrollment. Revenue per student also increased between years due to an increase in ancillary revenues resulting from the increase in the percentage of traditional student living on campus. This increase was partially offset by one last day of traditional campus revenue in the fourth quarter as compared to 2016 due to a shift in the timing of our residential traditional campus start date. Online revenue per student was up slightly year-over-year due to a positive shift in the timing of the Christmas break, such as the break was later in 2017 than it was in 2016. Scholarships as a percentage of revenue decreased from 18.7% in Q4 2016 to 18.3% in Q4 2017 due primarily to a decrease in ground scholarships as a percentage of revenue year-over-year. Bad debt expense as a percentage of revenue decreased 50 basis points from 2.4% for Q4 2016 to 1.9% at Q4 2017 primarily due to continued improvement with corrections, primarily with our ground traditional students. Our effective tax rate for the fourth quarter 2017 was 25.5% compared to 37.2% in the fourth quarter of 2016. This decrease was primarily due to the revaluation of our deferred tax assets and liabilities as a result of the Tax Cut and Jobs Act which was signed into law on December 22, 2017. The Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate effective January 1, 2018. Therefore the university’s net deferred tax liability was required to be revalued as of December 22, 2017, resulting in the university recording at $10.7 million income tax benefit. In addition excess tax benefits of $1.1 million from share based compensation awards that’ vested or settled…

Thank you. [Operator Instructions] Our first question comes from Alex Paris with Barrington Research. You may begin.

Good afternoon, great quarter.

Thank you.

I had a question in regards to new programs. And just can you kind of give a sense of what were the total programs perhaps in 2016 at the end of 2017 and what your expectations are for total programs at the end of 2018? So in other words how many new programs are expected to launch this next year? And how many were launched this past year? Maybe some color around that. Thanks.

So we started this academic year being in September with about 220 programs certificates et cetera and our plan is to end about 20 this year. So if we begin the next academic year, we'll have about 240 programs. Does that helps?

Yes, that helps. And then my other question was just kind of as I was going across the industry just observing online enrollments. And for the most parts your peers have had choppy results or it's been spotty at best. Can you just talk about the strength in this area that you're seeing and I guess what makes the value proposition that much better at Grand Canyon Education to which you're able to continue to grow online enrollments.

I think there are three things. One, we have been very diligent I think about making sure we're adding programs that are in areas that will be benefit to people, help them gain promotions and start new careers. And so, the 22 – 20 new programs we will start this year is down from the number we started in previous years. And so, new program is a significant part of it. We're tracking people because they believe that the investment in a degree they earn here is going to pay off in a new career or job et cetera. So I think that’s one. Secondly, we've been able to keep our tuition rates low. And so that has helped significantly. And then the third one is whether this is right or wrong, it's just very difficult to be in this space without having a brand rooted in a traditional university in a traditional campus that’s rooted in a physical location. It's very, very difficult. In 2008, I believe that this whole thing because the recession was going to change and because of a lost revenues that the universities would get through the state system and because private universities who have seen their endowments shrink that revenue sources would be sought and they have been. There are thousand private and state universities. Now they have got into this business, so it's a fragmented industry as compared to what it used to be. We've had the advantage of having been in the industry for thirty years. And so, we've got a lot of advanced capabilities around delivering education online. We don’t need a service provider, which helps us to keep tuition low. And we've had the good fortune of building a very strong university brand based up on what’s happening in our traditional campus. Phoenix, Arizona, Arizona is very different than for example California where there are 70 private universities. We've kind of burst on the scene here in an environment where there are only three state institution brands. And while they’re very good universities, really good universities, we were able to carve out a niche here because we used to lose thousands of students on a yearly basis that would go out of state to private universities that had a religious affiliation. We're keeping them here now that’s helped to build the brand of the university, which has really helped to attract online students. They want to be part of what's happening here.

Thank you, very helpful. And if I may reroute back to the first question. Just in regards to the 20 new programs for this next year. What is the mix between graduates versus STEM programs?

Although STEM, graduate versus undergraduate is probably 70% graduates and more than 50% of the programs are in STEM related areas whether graduate or undergraduate.

Okay, thank you.

Yep, thanks.

Thank you. Our next question comes from Peter Appert with Piper Jaffray. You may begin.

Thanks. So, Brian, you have mentioned that the HLC is going to meet later this week. How soon do you expect to hear from them after the meeting?

We just heard yesterday that it could be up to two weeks before we hear officially what their – what the result of the vote is.

And what would it be – what is the range of possibilities? Is it a yes no thing? Could there be contingencies? Or what might you expect to hear from them?

Well our range includes yes only. They might have a different range. Yeah, I guess, I guess the range is, it could be yes, it could be no or it could be – we're going to keep it down the road. It would be difficult for us to believe it would be the last two because the thing is so similar to what is going on everywhere in the industry. I mean…

Right

When we become familiar what – how this thing ends up is going to be so similar to what already exists that you will be surprised that how similar it is.

Got it. And then you had mention Brian beyond HLC some other approvals were needed. Can you outline what those are and how high those groups are that you need to jump through?

Yeah, DOE and IRS and state office.

And do you envision any particular difficulties with those?

No.

Got it. This is for Dan. The thought process – and you bought a tiny amount of stock here in the fourth quarter. Is there anything behind that? You’ve obviously not been made major buyers of shares historically.

Yeah, we put a purchase plan in place a while back that triggers buys if certain thresholds are met. And when those thresholds were met, we did buy, but fortunately unlike the market as a whole, our stock has been less volatility and that's we just haven't triggered those thresholds.

Got it, okay. And then cap spending; I am sorry if I missed this. Did you give a number for 2018, Dan?

Yeah, tax rate. I gave a number not only obviously for the year, but for by quarter.

I'm sorry, not tax rate, cap spending.

Oh, I am sorry, cap spending. I didn't specifically, but it is consistent with what we've talked about in the past. That will be probably around $120 million. So I appreciate you asking that question. We – as we set out a few years ago, we thought we'd average about $100 million a year excluding any land purchases adjacent to the campus. This year was roughly $80 million as we thought. And so, we anticipate next year will be about $120 million where we've got two dorms under construction. We have a new classroom building under construction and we have a new parking garage enter construction and then some miscellaneous other stuff, but that we believe will approximate $120 million.

Got it.

And still $100 million. So like 2019 will be $100 million plus or minus.

Yeah, yep. Got it. And then last question for me. On the – you’ve explained the thought process around margins contracting a little bit. I'm just wondering about drawing your longer term thought in terms of the appropriate margin leverage for the business. Is this sort of constant word is, is that the appropriate target to think about or do you think there are still some basis for it to move gradually modestly higher?

Yeah I think modestly we've been saying 20 basis points to 30 basis points on an annual basis and I think for the most part we’ll be able to do that.

Okay, great. Thank you.

Thank you. Our next question comes from Jeff Meuler with Baird. You may begin.

Yeah, thank you. Can you just walk me through kind of the process and the timeline for I guess setting up a third-party board for the not-for-profit university like does that start as soon as you hear the HLC decision and what is that process involved?

Well, currently we have two boards. The university has a board of trustee that’s responsible for overseeing the academic part of the university and obviously the public company has a publicly – a public board. And so, we already have the two boards. And those boards – if this transaction is successful, those two entities will separate as will the two boards. But there's other, Brian, there is no overlap between those two boards currently.

And what’s the – I guess have you started the third party pricing studies? And what level of dilution would be unacceptable to you as stewards of the ongoing for profit entity to – at which point I guess would be unacceptable or you would want to proceed with the transaction?

But I think we will – to your question about the studies and whatnot, we’re hoping that that will all be finalized very, very shortly. And once it does, we will timely release that information, so that you guys can all get a good sense of how we’re looking at this. We do want to manage the dilution. And so we’re hopeful that there will be very little dilution as a result of the transaction. But until those things are finalized, we can’t really talk in specifics.

Okay, fair enough. And then just on the online new enrollment growth in the quarter, I guess, it was mid single digit in 2018 – which I know is consistent with the long-term framework. For full year 2018, I think, mid to high, just any comments on the demand strength of pipeline. And was there any unusual dynamics around year end just given the way incentive compensation or enrollment [indiscernible] compensation works in the industry?

No, so, things went better than expected as they have in the previous three or four years. And we are staying very consistent with what we're saying we're going to be able to do the next three or four years. And so, from our perspective, the demand is equivalent to what we are holding ourselves accountable to do.

Okay. And then just on the 2018 margin outlook, I don’t know if you can bucket it out at all in terms of just headwinds that you would have been facing even without tax savings reinvestment. I think there was a call out on the Arizona minimum wage would be one pocket. A second bucket would be changes that you're making to your expense structure that you would expect so sustain like the 401k match or increased hiring. And then the third bucket would be the bonuses and any other expenses that you would expect to not recur beyond 2018?

Yeah, I think, absent – the investments that we talked about. I think we would have probably guided to flat margins this year. So that gives you a sense of kind of where the other pieces fall out. Those other pieces especially the revenue moves that were moved into 2017 and ultimately moved into 2019 I think would have had a little bit of pressure on that 20 basis points to 30 basis points margin expansion and then there's other things property taxes, the minimum wage increase et cetera would have – were unique that would have put a little bit of pressure on our margins. But I think without adding to the investment, I think we would have done everything we could to leasehold the margins that we realized this year. Obviously, our margin this year were much higher than what we anticipated when we started the year and I think to grow those given these headwinds would have been hard, but I think we would have been able to be least flat.

Okay.

I will add a little bit to that. It’s really, really important. This tax break came in at a really critical time. We've got I believe the most experienced people in the industry that are working for us and people know that and it's very important we keep them here. The people that build the technology, the people that build curriculum, the people that assess learning outcomes, the people that provides counseling, many of us have worked together for over twenty years. And that level of experience is very difficult to get, but the big reason for our success which is why we’re investing in those people. It's very important that we keep them here.

Understood, I appreciate the additional perspective. Thanks, guys.

We’ve reached the end of our fourth quarter conference call. We appreciate your time and interest in Grand Canyon Education. And if you still have questions, please contact either myself, Dan Bachus or Bob Romantic. Thank you very much for your time.

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation. Have a wonderful day.