Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2019 Grand Canyon Education Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today's conference is being recorded. I'll now like to hand the conference over to your speaker today, Dan Bachus, CFO. Thank you. Please go ahead, 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.

Thank you. In today's conference call, I want to spend some time discussing the future of higher education and how GCE is the vision to be significant long-term contributor. Much has been written about higher education but our opinion is in the context of the challenges facing students, families and communities and the economy. The challenges have been building for decades. Since 1990 the cost of living has gone up in this country 95%, while the cost of higher education is gone up 393%. This happens in the midst of rapidly changing economy requiring knowledge and skill sets that are significantly different than those required in post-World War 2 America. Except for cost, many things have not changed inside the academy. The challenges are not hard to identify. One, college cost way too much. Whether students cover the cost directly to private universities or cover some of the costs to community colleges or state universities and taxpayers are paying the difference. Two, students are taking on way too much debt. Three, as tuition goes up typically the diversity of student bodies go down. Four, bachelors programs take four to six years in too many instances adding to the total cost. We believe many programs should be completed in three years. Five, many times programs are not tied directly enough to where the jobs are. And six, there are not enough counseling and support services backed by technology and artificial intelligence to assist especially first-generation college students. In the past and still to this day, US News and World Report rankings measured things like number of applications rejected. Subject of peer evaluations and dollars raised through development offices. Brands were built partially on rankings derived from those criteria none of which relates directly to the relevance of programs, the quality of…

Thanks Brian. Included in our Form 8-K filed with the SEC, we have included non-GAAP net income and non-GAAP diluted income per share for the three months ended September 30, 2019. The non-GAAP amount excludes the tax effective amount of new amortization and intangible assets and the loss on transaction amounts included in our consolidated income statement. The amortizable intangible assets acquired in the Orbis acquisition totaled $210.3 million in amortization expense of the third quarter of 2019 was $2.2 million. We believe that non-GAAP financial information allows investors to develop more meaningful understand the company's performance over time. As adjusted non-GAAP diluted income per share for the three months ended September 30, 2019 is $1.24. Service revenue exceeded our expectation in the third quarter of 2019 due to slightly higher revenue per student from GCU, partially offset by slightly lower revenue for students and expected from Orbis partners. GCU online, GCU ground residential and Orbis enrollments met or exceeded our expectations. Our effective tax rate for the third quarter of 2019 was 20.7%, compared to 20.5% in the third quarter of 2018 and our guidance of 21%. The slightly lower rate is due to lower excess tax benefits of $0.4 million in Q3, 2019 from $1.4 million in Q3, 2019. We repurchased 64,335 shares of our common stock in the third quarter of 2019 at a cost of approximately $7 million and another 77,622 shares at a cost of $7.7 million in October. We had $70.8 million available under our share repurchase authorizations as of September 30, 2019. We extended our expiration date on our share repurchase authorization to September 31st, 2020, Turning to the balance sheet and cash flows. Total unrestricted cash in short-term investments at September 30th of 2019 were $133.9 million. Restricted cash and cash equivalents…

[Operator Instructions] Our first question is from Jeff Meuler from Baird. Your line is now open.

Yes. Thanks. So first just one to ask about the online enrollment growth, the new enrollment growth at GCU. I know that you said across the institutions that enrollment met or exceeded your expectations, but mid-single digit is slower than it's been the last few quarters. So I don't know if this is rounding air but just if you can talk about, I guess, is the constraint enrollment advisor headcount and I think this is a seasonally busier time of year but just any comment on the GCU online new enrollment growth.

No. Just third quarter is a - it's a big quarter. The comps are -those also the toughest comps, third quarter times are the toughest comps and so we expected that it would be a little bit lower than in the other quarters. And so it came out about as we expected.

Okay and then just as we start to see the repayment of the counterparty CapEx by GCU, just maybe as the President of GCU, can you just comment on the financial health of the university? And is the expectation that your GCE has done providing counterparty financing and we should continue to see some level of repayment.

Yes. We are now a year into this transaction and both GCU and GCE from a financial perspective are doing very well, coming out about as we expected which is very, very good news. The fact that we've already repaid a $100 million on that note is a very, very positive sign and we will continue as GCU's President I am speaking that we will continue to pay that note down. And so that the worry about the health, the financial health of Grand Canyon University is not even close to being a reality. Grand Canyon University is doing well. In fact, and so we paid back $100 million down we had gone -we had $350 million in cash already. So things are going well.

Okay and then just last for me, on the other OPM, the fourth pillar. I get that you want to be disciplined and sign the right partnership, but there was something in your language about some of these partners have existing programs. And just I don't know, is that a meaningful barrier or what were you getting at there?

No. It's just been very interesting to us that many of the people that we are speaking to have had a partner in the past. And in many cases, it has not lived up to their expectations, things have not worked out as they had hoped which that provides a little bit of an obstacle to us, a challenge to us because with faculty and others want to know is what's going to be different this time. And so there are two issues to be worked out there. One is what's going to be different this time. And so you have to explain that and the other is there's a little bit of hesitancy in terms of some of those back end things like financial aid. And so it takes us a while to walk through how automated we've built, the systems that we built how automated they are and how tremendous, the tremendous results that they're providing. We just finished an audit from a financial aid perspective and it was amazing. We just finished an audit from a VA perspective and there wasn't a single finding and the VA said they've never ever seen that. But it's because we've eliminated a lot of potential and those things for human error. We think that a lot of the reason that these institutions have not been successful with other partners is that scale is difficult when you can't do the backend functions. And what we're trying to convince them we're not -we're not talking about something that hasn't been proven. GCE has a partner with 100,000 students. And so it's been proven and so we will continue to work at that. And we'll find the right partner, but I think the most important thing is we already have 21 additional partners through Orbis. And those are in very non-competitive areas and we will continue to work at and invest in that part because it's meeting a huge need. It's doing it in a very high-quality way with very high quality metrics. It's completely non-competitive with GCU offerings. And so it's -that's another thing it's going better than we even anticipated originally for the most part.

Our next question is from Jeff Silber from BMO Capital Markets. Your line is now open.

Thanks so much. Just a quick follow-up on that last question from Jeff. Also in your prepared remarks I think you specifically stressed that with the partners that you may have turned away some because you need faculty buy in, has that been an issue? This is something that I don't remember you bringing up that much in the past beforehand?

In a couple of cases, definitely. Definitely, the faculties have been resistant and we understand that. It's - you have -it's really is the beginning of a new era for an institution when you think about scaling it. It's not if you're going to add 100 students in a particular program. But if your student body today has let's just, I'm just throwing out numbers has 5,000 students and the goal is to add 5,000 students. That makes people nervous. Now the impact of that when you leverage a common infrastructure like it's happened at GCU is huge. It can be really impactful, but you have to - we've got a finding institution that really wants to do that. And we will eventually, but we don't want to sign a deal with an administration that realizes how impactful this could be, but the faculties are not going to be on board. That's - that was my only comment. And so if it takes that long then it will.

All right. That makes sense. I appreciate the color. Let me go back to the other three colors. You've got a pretty sizable upside surprise in the quarter. Can you kind of rank what drove that?

From an earnings perspective?

Correct, yes. I'm sorry.

It's a continuation of what we've seen this entire year where we've been able to hit our new and total enrollment goals without significantly increasing staffing. And so that's obviously very, very exciting to us and frankly something that's probably different than what most universities are seeing. And so if you look at headcount per student across GCE, it's down and so but that continued, that's been a trend that continued over the course of this year. As we look into next year, I'm not sure we'll be able to continue to drive that kind of upside. We'll probably have to start increasing staffing and so I think 30 basis points or what not increase in margin next year is probably a lot more reasonable to think about than what you've seen this year. But that's what's driven. Anything, Brian, to add to that.

Okay. You had a perfect segue for my next question. Anything, I know you're not going to give 2020 guidance until next quarter, but anything else we should be aware about that might be different in 2020 than from what we've seen in 2019.

No. I mean I think Brian has stated goals very clearly that on the pillars we want to grow GCU online 6% to 7%. GCU ground, they want to grow roughly 1,500 net students most of them, if not all will be residential and then Orbis, we want to be a 30 plus percent revenue growth next year. And feel good about our ability to do that given the partnerships that they've signed this year in locations that we'll be opening. Although, I will say most if not all of those new locations will be open in the fall of next year. We don't believe any of them will be open before the fall. And so that's something to be factored into the guidance for next year.

I'll now turn the call back over to Brian for one final statement.

As we have discussed previously, on January 18th, 2018 in connection with our proposed sale of Grand Canyon University to an independent 501 (c) (3) non-profit entity, Grand Canyon University voluntarily filed a request for pre-acquisition review of the transaction with the US Department of Education, seeking the department's review of the proposed transaction and input as to any regulatory limitations. Such as a letter of credit or growth restrictions that the department might choose to impose on Grand Canyon University following a closing of the transaction. While GCU had ongoing engagement with the department about the transaction throughout the ensuing months, the department failed to respond to the request. However, based on this engagement and a number of other factors including the historical financial strength and performance of GCU, the importance to GCU of completing the transaction and reverting to its historical nonprofit status and advice from the respective counsel to the company and GCU about the risk involved in closing the transaction prior to receiving the department's feedback. The Board of Directors of the company and the Board of Trustees at GCU concluded that the benefits of consummating a transaction at that time were numerous and any regulatory limitations imposed by the department could be managed particularly since GCU's regional and creditor and state regulator had already approved the transaction. The transaction closed on July 1st, 2018. GCE has operated, since operated as a service provider to GCU in following its acquisition of Orbis Education in January 2019 to 20 other university partners. While GCU has since operated as an independent private university according a quoted non-profit 501 (c) (3) status by the IRS and treated as a nonprofit entity by the State of Arizona among others. We are pleased to report that approximately one hour ago in…

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.