Grand Canyon Education, Inc. (LOPE) Q4 2018 Earnings Report, Transcript and Summary

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 or license for follow-up and schedules built or changed. Seventh, in technical support, 57.3% of the calls were answered with no hold time, and if placed on hold, the average time was less than a minute and 26 seconds. Eighth, our advertising work was very efficient and provided the necessary coverage to significantly exceed our enrollment goals. Ninth, we continued to enhance our technology platform during the fourth quarter. We are currently working over 80 software projects. We have successful pilot of our cloud resource platform doing GCUs full term. GCU has increased use of a platform. During spring term when we are jointly modifying GCU curriculum to use the platform in additional IT, cybersecurity, and programming courses going forward in both traditional and online course delivery. We continue to use deep analytics platform to improve student support. One key area we use this information is in automating the scheduling and tracking a field experience required in several of our programs including education and counseling. GCE has invested over $200 million in advanced technologies resulting in automated services and artificial intelligence to support students, faculty and counselors over the last 10 years. I’ll review just some of these. The objective going forward is to implement those capabilities over six core growth strategies. The goal is to work with partners to provide high quality academic services that will produce quality outcome metrics for the university and career opportunities for the students. The metrics include but are not limited to high graduation rates, low debt amounts and low default rates on student loans. First, GCU’s traditional ground campus will continue to grow both at quantity and quality of the students. GCU’s new non-profit guidance has provided a tailwind from a new student growth perspective. In the fall of 2018 the ground campus produced a record 7000 new students, given the current flow of applications, registrations and deposits for fall of 2019 we expect approximately 8000 new students. The average incoming GPAs will again be over 3.5 and the Honors College will grow to 2400 with average income GPAs exceeding 4.1. The campus will grow to 30,000 students with over 300 academic programs over the next five to seven years. Average revenue per student will continue to rise because of percent of all students living on campus will continue to go up. Second, the goal is to grow GCU’s online campus at 6% to 7%. However, the non-profit status of university has created a tailwind impact for online students as well. In the fourth quarter of 2018 new enrollments grew in low-teens which is well above goal. GCE will continue to support GCU’s goal of growing the online campus with 60% of the students working on graduate degrees or RN to BSN degrees. This will enable the university to continue to produce quality metrics around graduation rates, loan amounts and default rates on student loans. Third, GCE will support Orbis, as it grows with existing 18 locations with his partners BSN licensure programs -- Pre-Licensure programs. Orbis will expand a number of locations through his partners by adding seven new locations in the 2019 calendar year. Orbis will continue to focus on the high quality outcomes it has produced with his partners including a 90% graduation rate and a 93% first-time pass rate on the exams [ph]. Four, Orbis will use GCUs pre-licensure program to add a limited number of locations in certain Western market places worth make sense. There are still over 70 markets in the U.S. where Orbis can expand. Fifth, Orbis will work with his partners to expand the number of programs it offers in the healthcare area on its existing locations. Program such as nurse practitioner, occupational therapist and physical therapy will eventually be added. There’s going to be huge shortage of healthcare professionals in the next 10 years as the baby boom generation ages and it requires increase levels of care. Orbis has established an outstanding reputation for working with its university partners to produce high quality outcomes. Sixth, GCE will continue to work to gain additional university partners. The goal is to find partners that want to combine the strength of their local or regional brand with GCE’s capability to execute at high levels from an operational perspective. We continue look for partners that are clearly differentiated based on geography, brand, programs, price point et cetera. We have walked away from several opportunities to date, because we haven't found the right amount of differentiation. In last quarters call, indicated we were considering five options. We have walked away from two of those. Continuing to have discussions with three and entered into discussions with two additional entities. Now turning to the results of operations. As a reminder beginning July 1, 2018, results of our operations do not include the university operations of GCU. It rather reflects the operations of GCE as a service technology provider. Therefore for comparability purposes we will discuss amounts on an adjusted basis as is discussed in a minute. Service revenues were $177.5 million in the fourth quarter of 2018 compared to $271 -- $271.4 million of university-related revenue in the prior year. Added transaction occurred on July 1, 2017, comparable service fee revenue would have been $162.9 million in the fourth quarter of 2017. This represents an increase of 9% between fourth quarter of 2017 and fourth quarter of 2018 on a comparable basis. The increase year-over-year in comparable as adjusted revenue was due to a increased in GCU's enrollment and an increase in GCU's ancillary revenue, resulting from increased traditional student enrollment. Enrollment at GCU increased 7.8% between December 31, 2017, and December 31, 2018. Our adjusted operating income and our adjusted operating margin for the three months ended December 31, 2018 were $80.5 million and 45.3% respectively. As adjusted operating income and adjusted operating margin for the three months ended December 31, 2017 were $69.7 million and 42.8% respectively. Technology and academic services grew from $10.7 million in the fourth quarter of 2017 to $11.1 million in the fourth quarter of 2018, an increase of $0.4 million or 3.3%. This increase was primarily due to increases in employee compensation and related expenses compensation due to the increase number of staff you need to support our client GCU and its increased enrollment, tenure based salary adjustments and increased benefit costs between years. As a percent of comparable revenue these costs decreased 30 basis points to 6.3%, primarily due to our ability to leverage our technology and academic services personnel across an increasing revenue base, partially offset by the planned reinvestment of a portion of the savings provided by our lower tax rate and increased employee compensation and benefit costs. Counseling services and support expenses grew from $50.2 million in the fourth quarter of 2017 to $52 million in the fourth quarter of 2018, an increase of $1.8 million or 3.5%. This increase is due to increased employee compensation and benefit cost between years to service GCU and its enrollment. As a percentage of comparable revenue, these costs decreased 150 basis points to 29.3% from 30.8%, due primarily to our ability to leverage our counseling services and support expenses across an increasing revenue base, partially offset by the plan reinvestment of a portion of the savings provided by our lower tax rate and increase employee compensation and benefit costs. Marketing and communication expenses as a percent of comparable revenue decreased 80 basis points from quarter four 2017 to quarter four 2018. General and administrative expenses increased $0.7 million between years, and as a percentage of comparable revenue, increased 10 basis points to 3.8% in quarter four of 2018 from 3.7% in quarter four of 2017. This increase was primarily due to increases in employee compensation and benefit cost between years as our staffing increased to service GCU and its enrolment growth. With that, I’d like to turn it over to Dan Bachus, our CFO to give a little more color on our 2018 fourth quarter. Talk about changes in the income statement, balance sheet and other items as well as to provide 2019 guidance.

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 million in quarter four of 2017, given that the effective tax rate included in our fourth quarter guidance was $21.7%, $0.05 of the earnings fee [ph] is due to the lower effective tax rate. We’ve repurchased 52,784 shares of common stock in the fourth quarter of 2018 at a cost of approximately $5.5 million. We had $88.1 million available under our share repurchase authorization as of December 31, 2018. In January 2019 under previously executed 10b5-1 plan, we purchased an additional 107,527 shares of our common stock at a cost of approximately 10 million. Turning to the balance sheet and cash flow, total unrestricted cash and short term investments at December 31, 2018 were $120.3 million. Restricted cash and cash equivalence were $61.7 million as of December 31, 2018 and represents the cash collateral on the credit agreement which was release in January with amended restated credit agreement which I will describe in a minute. GCE CapEx in the fourth quarter of 2018 was approximately $4.4 million or 2.5% of net revenue. We estimate GCE’s 2019 CapEx including Orbis should range between $20 million and $25 million consisting primarily a software development and the build out of Orbis partner location. We’re anticipating funding CapEx on behalf of GCU through the secured note of approximately a $100 million in 2018. This funding is to finish the 2018 and 2019 school year project and three additional apartment style residence halls and a parking garage for the 2019/2020 school year. Based on recent conversations with GCU is likely that the university will not request us to continue to fund its CapEx after this year as a university anticipates that will be able to fund its own CapEx moving forward. On January 22, 2019 in conjunction with the closing of the Orbis acquisition, GCE entered into amended and restated credit agreement and two related amendments that together provide a credit facility of $325 million comprise of a term loan facility of $243.7 million and revolving credit facility of $81.25 million both with the five year maturity date. The term facility is subject to quarterly amortization principal commencing with the first quarter – with the fiscal quarter ended June 30, 2019 and equal installments of 5% of the principal amount of the term facility per quarter. Both the term loan and revolver have monthly interest payments currently at 30-day LIBOR plus an applicable margin of 2%. The proceeds of the term loan, together with $6.25 million drawn under the revolver and cash on hand were use to pay the purchase price of the acquisition. Concurrent with the acquisition and credit agreement we repaid our $60 million in term debt and the cash collateral of $61.7 million was released. Last, I would like to provide color on guidance we have provided for 2019. As you’ll probably notice, we are again providing estimates for each quarter of 2019. We do this because our financial results including GCU and the universities that Orbis services are seasonal. The guidance that we have provided includes Orbis’s financial results with the exception of intangible assets, amortization, transaction cost associated with the acquisition and the tax impact for those items. We plan to provide a non-GAAP as adjusted net income beginning with the first quarter of 2019 that reconciles as reported GAAP net income to as adjusted non-GAAP net income to reflect these adjustments. Although the intangible asset valuation is not yet finalized, we estimate that annual book and tangible asset amortization expense will be approximately $11 million, and we anticipate transaction cost recorded in the first quarter of 2019 to be approximately $5 million. Our enrollment guidance assumes high single-digit GCU online new start growth. Our guidance assumes an increase in GCU graduates between years of approximately 13%. The significant retention gains and accelerated start growth GCU has experienced in recent years continues to result in year-over-year increases in graduate that exceed its total enrollment growth rate. As we have discussed previously, enrollment growth rates for GCU ground students are impacted by a high percentage of its students are graduating in less then four years. We anticipate that GCU revenue per student will continue to grow year-over-year as a result of the growth of GCUs ground traditional student body. GCU revenue per student will be impacted by changes between 2018 and 2019, but when the traditional campus semesters begin and end and when online breaks occur. The spring summer and fall semester start one day earlier in 2019 and 2018, pushing revenue from Q2 to Q1, from Q3 to Q2 and from Q4 to Q3. The 2018 Christmas break had a net impact of pushing one day of revenue from 2018 to 2019 and the 2019 Christmas break has a net impact to pushing one day of revenue from 2019 to 2020. We estimate the effect of these changes are $900,000 of more revenue in quarter one, $600,000 of less revenue in quarter two, $700,000 or more revenue in quarter three, and $1.1 million of less revenue in quarter four. The net loss of revenue about $100,000 is relating to the timing of the online Christmas breaks. We estimate that Orbis revenue will be approximately $87.7 million in 2019 which represents a 40.3% growth over 2018 revenue of $62.5 million. Given that the close of the transaction occurred on January 22, 2019, $3.7 million of this revenue will not be recognized in our financials. Total enrollment would be approximately a 101,900 at March 31, 91,000 at June 30, a 109,400 at September 30 and 108,000 at December 31. With Orbis enrollment being approximately 3200 at March 31, 3300 at June 30, 3800 at June – at September 30, and 3800 at December 31st of those amounts. One the expense side, we anticipate the core GCE business to see increased margin of 30 basis points year-over-year excluding $2 million of these incurred in Q1, 2019 related to a discrete tax item that will have the effect of lowering our quarter one 2019 effective tax rate. This item is included in the guidance provided. Orbis will be approximately breakeven from an EBIT standpoint excluding the intangible asset amortization and transaction cost. We anticipate technology and academic services, counseling services and support, marketing and communications and general and administrative expense will be approximately 11%, 29.8%, 18.5% and 6.1% of net revenues respectively and thus consolidated operating margin will be 34.6% of net revenues. We estimate interest income on the note from GCE will be approximately $58.2 million as the note continues to grow over the course of 2019 as GCE funds GCU’s CapEx. We estimate interest expense will be approximately $10.5 million declining slightly over the course of the year due to principal paydowns and that other interest income will approximately $2.3 million, a substantial portion of which will be in Q1, 2019. Our guidance this year assumes an effective tax rates excluding contributions made in lieu of state income taxes to be 17.3% in Q1, 24.5% in Q2, 24.6% in Q3 and 24.1% in Q4. The lower rate in Q1 is due to the majority of restricted stock vesting occurring in that quarter each year and the decrease when the prior year is due to the discrete tax item I mentioned earlier. The year-over-year increase in the effective tax rate especially in the fourth quarter is due to higher estimated state income tax as a result of the transaction, the one-item method change benefit received in the fourth quarter of 2018 and due to the contributions in Lieu of state income taxes not being factored into our guidance. If a contribution in Lieu of state income taxes is made in the third quarter of 2019 it will have the effect of increasing general and administrative expenses and decreasing income tax expense. Although we might repurchase additional shares during 2019, these estimates need not assume repurchases other than those made in the first quarter. I will now turn the call back over to Brian to share a few final thoughts. In this conference call, we have referred to three organizations; Grand Canyon Education, Orbis and Grand Canyon University. Prior to the recent transaction, Grand Canyon University and what is now Grand Canyon Education was a single entity. We operated as a single entity for 10 years and during that time develop a culture or ethos that came to the finance. Our goal was to make Private Christian Higher Education affordable for all socioeconomic classes of Americans. Using the public market to get access to capital and building a hybrid campus consisting of traditional students on our campus and non-traditional students online leveraging a common infrastructure created huge efficiencies. The greater or common goal was clearly been served. We were able to grow to 97,000 students, invest over $1.2 billion in educational infrastructure and not raise tuition in 10 years on a traditional campus with less than one percent increases in the online campus. This has led the huge diversity on the campus, with 28% of our students being Hispanic,7% Africa and American and over 40% student of color. Again the greater or common goal being served. Grand Canyon University is now a non-profit institution with its own board and mission. Grand Canyon Education is now an educational services company with its own board and mission. There’s no overlap from a board perspective. However, the culture or ethos of the greater or common goal lives on in both organizations. This can best be witnessed in a continued commitment from both organizations to transfer the intercity neighborhood where we both reside. I’ll now joint five-point plan continues to make amazing progress. We have created 10,700 jobs between the two organizations and another 400 jobs through eight new businesses. Our partnerships in investment with the City of police has crime dropping in the neighborhood. Our appetite program has improved over 220 homes and housing values are up over 50% since we started the program. We now have over 1200 students providing tutoring to over 100 local schools between 3 and 8 pm Monday through Friday and 10 am to 6 pm on Saturday. In addition, there are dozen of student led projects going on the neighborhood on a daily basis to support this advantage population and drive increased levels of prosperity. We like the business at Orbis, but also like their culture or ethos. They are serving a greater or common goal as they create a win-win relationship with healthcare providers and universities in order to service students and communities in a very unique way. Orbis will continue to move forward with the full support and resources of Grand Canyon Education. Grand Canyon Education will continue to look for partners to create win-win situations. There are sound and productive from a business perspective for both parties, but also all we serve the greater or common goal. I will now turn the call over to the moderator, so we can answer questions.

[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.