Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Grand Canyon Education Incorporated Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct 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 Mr. Dan Bachus, Chief Financial Officer. Please begin, sir.

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-K, quarterly reports on Form 10-Q and current reports on Form 8-K. We undertake no obligation to provide updates with regard to the forward-looking statements made during this call and we recommend that all investors review these reports thoroughly before taking a financial position in GCE. And with that, I will turn the call over to Brian.

Good afternoon. And thank you and welcome to Grand Canyon Education's fourth quarter fiscal year 2018 conference call. During the fourth quarter of 2019 enrollment increased 7.8% to $97,400. New working adult students attending GCU online grew in the low-teens year-over-year which exceeded expectations. I want to start by reviewing the size and scope of GCE services as they were delivered in the fourth quarter of 2018. First, from the curriculum development area two new programs were released to the universities for implementation. I want to remind you that GCU is responsible to select all new programs, is responsible for the content and learning outcomes of those programs, sets the admissions requirements for student and the academic requirements to faculty teaching the program. The new programs were a Bachelor of Science in elementary education with an emphasis in STEM and a Master of Education in school counseling. In addition, there were 11 programs and certificates that were revised or updated. Second, from the faculty services area, there were six full time and 245 adjunct faculty recruited and trained. There were also a 100 additional sessions of faculty training in professional development. These examples of these trainings include; boosting student success, the first year experience from theory to practice in creating collaborative classrooms. Third, in the admissions area, a total of 19,875 transcripts were evaluated, which provides prospective students the information they need in order to make a decision to start a program. Fourth, in financial laid, 154,339 files were touched. Fifth, in a scheduling area, 19,631 classes were scheduled with an average class size of 14.3. Sixth, our academic counselors performed 550,000 activities on behalf of students in the quarter, including activities such as welcome calls to new students, course reminder calls, GPA concerns, attendance, finance changes, missing documents, practicum…

Thanks, Brian. Service revenue slightly exceeded our expectations in the four quarter of 2018 primarily due to GCU's higher enrollment and higher ancillary revenues. Revenue per student decreased as expected in the fourth quarter of 2018 compared to the prior year due to shift in the timing of start date for our clients ground traditional students resulting in one less revenue producing day in the fourth quarter of 2018. GCU has not based its tuition for its traditional ground programs in 10 years and tuition increases for working adult programs have averaged 1% or less. Our effective tax rate for the four quarter of 2018 was 19.5% compared to 25.5% in the fourth quarter of 2017. The lower effective tax rate year-over-year is a result of Tax Cuts and Jobs Act which was signed into law on December 22, 2017. The Act reduced the corporate federal tax rate from a maximum of 35% to a flat 21% rate effective January 1, 2018. The Act also created the opportunity for GCE to submit method changes in conjunction with the filing of its 2017 federal tax return that resulted in a favorable impact to tax expense of approximately $1 million in the fourth quarter of 2018. Our increased contributions made in lieu of state income taxes from $2 million in Q3 2017 to $3.7 million in Q3 2018 also help reduce our expected tax rate. We receive a dollar-for-dollar state tax credit for these contributions, which are recorded in general and administrative expenses in the third quarter. 75% of these amounts are recorded as a reduction in the effective tax rate in the third quarter and 25% is recorded in the fourth quarter. As did the favorable impact from excess tax benefits of $2.6 million into quarter four 2018 compared to $1.1…

[Operator Instructions] Our first question comes from the line of Peter Appert from Piper Jaffray. Your line is open.

Thanks. Good afternoon. So Brian based on your comments based on the guidance, definitely feels like you’re seeing a tailwind in terms of the enrollment growth numbers from the conversion. Do you have a new target in terms of what you think would be a reasonable growth rate going forward for the online business in particular?

Well, we knew that would be the first question. We’re still say 6% to 7% from an online standpoint. Definitely it was a tailwind. We had a very strong fourth quarter especially in terms of no start. We’re off to a good start in the first quarter. The question is how long will that last? And so, we’re going to be conservative like we always are. We’ll try to under promise and over deliver. So yes, low-teens, new student online growth was more than we expected and I think its evidence that been out there now a million times a day saying, we’re non-profit has had an impact. We’ve had our competitors tell us openly. We believe you guys every single day for 10 years with the fact that you shouldn’t go to [Indiscernible] institution. We grew in spite of that and now we are benefiting from that non-profit status even though these locals haven’t change et cetera, but increasing our goals in the short run, we’re not ready to do that yet.

Okay. Fair enough. And then on the Orbis business the growth – enrollment growth numbers, Dan, that you gave, would that assume any new university clients. And then, sort of related to this and that if mentioned breakeven from an EBIT perspective, any thoughts in terms of the longer term financial model for Orbis?

Yes. So that does include as Brian said on the call, seven additional locations opening in 2019. Those partners have already been signed up locations have already -- all been determined and they are open at different times over the course of the year. They obviously continue to work on additional partners and additional locations for 2020 and going forward, but a lot of those locations and partners have already been determined for 2020 and going forward.

So the new locations in 2019 do not need additional university partners. They are going to be done with the current partners.

Right. Exactly. Okay.

In terms of margin, as we talked about before, their EBIT is basically breakeven which is actually slightly better than what we had thought going into the year, but as they’ve completed their budget process that’s where they got to. The margin profile of the business as a whole is highly dependent on the number of new locations that are open during the year in comparison to the number of existing or more mature locations. And so, as the percentage of new location – as a percentage of the total number of locations decreases over time you will see Orbis be profitable.

Okay. And then, last thing, Brian, in terms of the discussions with new potential OPM clients, it sounds like you're being obviously very thoughtful in this process which might imply that it still a ways off in terms of signing that first client. Is that how we should think about it?

We don’t have anything to announce in the next 30 or 60 days, although you’re right, the first, we are being very careful. This Orbis purchase for us gave us a lot to do and it’s a big – it fit so nicely into how we feel about the future of higher education that getting behind them and supporting has become a big priority now. It doesn’t mean we’re not looking for new partners because we are -- we've got something that we’re fairly excited about that we think could be very, very successful, but yes, I would say, not the next 30 or 60 days.

Great. Thank you.

Thank you. Our next question or comment comes from the line of Jeff Meuler from Baird. Your line is open.

Yes. Thank you. Just on the guidance, Dan, you gave us a ton of detail, but you ran through some of it pretty quick. Just on Orbis, I think you’re saying EBIT breakeven excluding amortization expense which is going to be excluded from adjusted EPS? And then we’ll have to layer on I guess the incremental interest expense, but then there’s some tax savings? I guess, can you net it all out for us, like what is the EPS impact under the new adjusted EPS methodology for 2019 in terms of the Orbis impact?

So the guidance we gave includes the interest expense – higher interest expense associated with the purchase. So that’s included in the guidance. The effective tax rate does not assume the tax deduction associated with the amortization of the intangible asset, because that actually turns out to be a temporary item, not a permanent items because we’ll have book amortization of that asset. So the plan to carve out in the adjusted EPS number, to carve out the intangible asset amortization along with the tax benefit of that intangible asset, amortization as well as the transaction expenses. But everything else associated with Orbis is in the guidance that we’ve given including the higher [Indiscernible].

And rolling that all together it is dilutive and that's fully embedded in this 510 [ph] EPS figure. I didn’t have it. My numbers I don’t think some of the others that could incorporate a consensus had it in, so I just trying to I guess make things as apples-to-apples is as possible?

Yes. I think what we try to do is give guidance that would be in line with that as adjusted EPS number that will give. Similarly to if you’re all familiar to Strayer and the Cabella acquisition, we’ll do something similar to that. And so the things that are carved out will be the intangible asset, amortization along with tax impact to that and the transaction cost. Everything else is embedded in the guidance that we gave including the higher interest expense.

Got it. And then, just the follow-up to Peter’s question on the school service or OPM clients for GCE as oppose to Orbis. Just if and when you eventually sign a client is there initial -- I would imagine there’s initial expense that runs ahead of revenue. So is that the case? Is there initial dilution when you are first ramping a client, any way to size up what you think that would be or the time like to get the client to free cash flow or adjusted EBIT profitable? And then are you embedding anything in the 2019 guidance for a potential additional client signing?

No, we haven’t embedded anything in either the revenue or the expense guidance associated with the new GCE client. The reason frankly is its going to be highly dependant on which client we sign and how aggressive that client wants to ramp up. So if it’s a client they want to take slow ramp it will have a smaller upfront expense impact, but the revenue obviously will ramp slower than if it’s a client that wants to ramp up at a faster rate. So until we have that client signed and know what – how fast they want to ramp up we just can’t even size that upfront loss and then the revenue impact.

Okay. And then just finally to the extent to which improved marketing efficiency persist and it’s a new normal, how do you think about reinvestment flow-through, I guess what I’m wondering, if each marketing dollar is more efficient do you spend even more on marketing to drive even more enrolment? Or at some point you just start to stretch your operation capabilities if you’re running at a clean slate of north of that?

Well, the answer to that is continue to build the quality of the students. And so, what’s currently happening continues to happen and it happens for a while with the same quality of students producing the high graduation rate, the low default rates and all of that, then we’ll continue to invest at the current rate which mean we would have additional dollars to invest and that would perfect in terms of us been able to go into a relationship with another client. Another way to talk about this new GCE client is – the discussions that we’re having, it becomes very apparent to people, because they tip their toe a little bit into online delivering education. They know they can’t do it. But they also know the power of their brand locally. And when they get a custom to what our ability to operationalize something is as compared to theirs, they get excited about combining the two things and we do too. We talk about the northeast for example, where our brand has the least amount of visibility. If you combined, I say to people all this time, has Grand Canyon University had any students in New Jersey for example? Well, it’s very simple. A teacher calls a local university and they might get a call back in 30 days and maybe something happens with financial late in 60 to 90 days. They get frustrated. They see our ad. They call Grand Canyon and then within 72 hours everything is done. Applications filled out. Transcripts are valuated, three different schedules are built, financial late is done. They go to our website. They see Grand Canyon University. Who is it and they say, okay, this just sound [Indiscernible]. That’s why we have students in the Northeast. We’re trying to convince people, if you take our ability to execute and combine it with the brand and sometimes three times the price point, one of those private universities you would have something that could be extremely productive and profitable for both groups. We just don’t want to do that with four or five institutions in Northeast. We like to do with one maybe two. And so that’s kind of – those are the kind of discussions that are evolving and we think based upon the direction of things are going now we’re going to find one or two really good partners. And GCU’s accelerated growth rate in the short term will produce revenues that allow us to get involved with somebody and minimize the negative impacting in the short run from a margin standpoint.

Excellent. Thanks and looking forward to see you guys.

Okay. Thank you.

Thank you. Our next question or comment comes from the line of Jeff Silber from BMO Capital Markets. Your line is open.

Thanks. Just to focus a little bit more on your potential partnerships with new university. You mentioned you walked away from a couple, I’m not asking for proprietary information, but at a high level I’m just curious what drove that decision to walk away?

Well, without giving specific names we had the state universities in the west that was really interested in. We had talks and we were getting down to the – they really wanted to be a partner of ours and we really wanted to be their partner. But as we got down to the nitty-gritty of modeling in out it just became apparent that at the price point of that state university system with then having programs so similar to ours, both having brands pretty visible in the west that wasn’t going to be enough differentiation to make it work a while if there was – there would have been just too much cannibalization there and it wouldn’t have make sense. And so, that is really what happened with the two that we walked away from. So in our mind geographic differentiation, branding differentiation, price point, those are all things that if we can find the right place and those things all work together it will be an optimal partner and rather than sign three or four suboptimal partners we’d rather sign one or two optimal partners with all those things are working. And we’ve got lots of data, the northeast and the southeast and what we convert lease ad and what price point we can charge versus what our competition is charging. And so we’re being careful and we’ll get there. We will get there. We’ll get there with the right people, but addition to that, I can’t tell you how excited we are about this Orbis thing. They’ve got a really, really good business. And it’s got tremendous scale potential and the class, the path to profitability is very clear. And so, we’ll continue with university -- with Grand Canyon University. We’ll continue with Orbis and we’ll actually find a right one or two partners that can really enhance Grand Canyon Education.

Okay. That’s great. I don’t mean to deflect tension away from Orbis. I know we’re going to be hearing a lot about it more you think. But just to go back to the other university partners. And again I’m not asking for proprietary information, but at a high level are you approaching them with a revenue share agreement similar what you have with Grand Canyon University. Is it more of a fee-for-service or you flexible on other pricing model?

We’re doing the same –we approaching them with the same model that we have here. Although, I will tell you that we’ve got one program that is a little bit different and that one that were -- we’ll come out and feel that we’re excited about. We’ll see if it happens. I can’t give you any more detail on that. Hopefully in 30 to 60 days I will be.

I think, Jeff, our preference will be revenue share similar to GCU, but that doesn’t mean we wouldn’t do a cost plus or some other type of arrangement.

Got it. And just have one more follow-up on the guidance and forgive I can’t read about this in the transcript, but did you say that if we take out the Orbis impact on your guidance that the pure business itself you’re looking for about 30 days points in margin expansion in 2019, is that what I heard?

Yes. That’s correct. The guidance includes 30 basis points the margin expansion for the core GCE business.

All right. Perfect. Thanks so much.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.