Good afternoon, ladies and gentlemen. And welcome to the Grand Canyon Education First Quarter 2020 Earnings Conference Call [Operator Instructions]. As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dan Bachus, Chief Financial Officer.

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. Welcome to Grand Canyon Education's first quarter conference call. We are now almost 23 months into our existence as an education services company. I want to do three things on this call: first, continue to emphasize how we think GCU GCE should be positioned with respect to the future of higher education; second, review the results that have been produced by each of the four pillars of our business in the first quarter 2020 and third, talk about each pillar going forward in the context of the pandemic. I want to continue to emphasize that it is GCE's goal to create models that address the real issues within higher education, that are going to be even greater challenges given the impact of the pandemic. The challenges are: College cost too much. Secondly, students are taking on way too much debt relative to their income earning potential; three, as tuition goes up, diversity goes down; four, Bachelor's degree should not take four to six years to complete; five, programs are not tied directly enough to where jobs are and six, that are inadequate counseling and support services, especially for first generation students or those studying at a distance. We are very excited about GCE's direction relative to the challenges facing students, families and the industries we are serving. In 2020, GCE's 24 partner institutions project to produce over 30,000 graduates, over 11,000 healthcare professionals, 7,700 education professionals, 4,600 in the business world, 3,600 in behavioral health, 2,500 in public service, social science and theology and 600 in engineering and computer science. These students will graduate with less Title IV debt than the average state and private university students in this country. They will have less than a 6% cohort default rate on student loans. They'll graduate from programs that…

Thanks, Brett 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 March 31, 2020 and 2019. The non-GAAP amounts exclude the tax-affected amount of the amortization of intangible assets, the loss on transaction amounts and the impact of a large state tax refund received in the first quarter of 2019 related to taxes paid in previous years. The amortizable intangible assets acquired in the Orbis acquisition totaled $210.3 million, and amortization expense in the first quarter of 2020 and 2019 was $2.1 million and $1.7 million, 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 three months ended March 31, 2020 and 2019, is $1.53 and $1.52, respectively. Service revenue was slightly below our original expectations in the first quarter of 2020 due to the decrease in ancillary revenues at our primary university partner, GCU, due to the COVID-19 outbreak. This had the impact of reducing our revenues by $1.8 million in the first quarter. Included in both our 8-K and the 10-Q filed today is a detailed explanation of the actual and projected COVID-19 impacts on the university's spring and summer semesters, and I will discuss these in more detail in a few minutes. Excluding the COVID-19 impact on GCU's ancillary revenues, service revenues was slightly above our expectations. As we have discussed previously, overall enrollment growth has been pressured over the last few quarters by an increase in the graduation of online students year-over-year and the fact that professional study students and ground commuter students are flat to down year-over-year, but revenue per student continues to increase as we continue…

[Operator Instructions] And your first question comes from the line of Alex Paris with Barrington Research.

Good afternoon. This is Chris Howe sitting in for Alex. I just wanted to go through some of your comments earlier. Just about some of the things that you're seeing within the environment as it relates to partnership opportunities. Can you go into more detail on this as to perhaps how discussions have changed or been delayed? Or perhaps there's a higher number of inbound calls from viable candidates?

Well, let's start with Orbis because we're putting a huge focus there in terms of partnerships. It is so clear to people. In fact, we had one call from somebody we've been talking to for a while now, who have said they were approached by Orbis 10 years ago. And the university would be in a completely different position financially right now had they done that deal 10 years ago. And so they called us on two levels. One, the Orbis partnership and also a potential greater partnership with us. Two others, one state university and one of private university, both called. After the call, our discussion started and then kind of didn't get where we needed them to, and now they've called again. And so there's been a big increase in Orbis interest. And obviously, nobody wants to claim victory and benefit from the disaster that this is. But it has brought to the fore the tremendous opportunity within the healthcare occupation. It just it is such a great way for universities to make a contribution to the needs of the country right now to produce healthcare professionals in very cost-effective, innovative ways. And what Orbis is doing combined with GCE can provide is going to be a major solution to that problem over the next 10 years. And so it's not a surprise that those calls are increasing, and we're excited about that. We have a lot of room for expansion. We believe that there are at least 70 markets right now that could benefit from having these programs in their market. On the other side of it, we will continue to have talks with people, but we'll go back to my initial comments, which I think those are becoming more and more and more germane. The developments…

And to me, this just highlights the efficacy of the services that you offer as well as the quality of the institution that GCU is. In thinking of that, not to paint too much of a negative perspective, but if we look at some markets that you're targeting that have been the hardest hit by the pandemic, whether it be the Midwest, the Northeast, California. Any change or shift to your marketing strategy as you look to capture market share in these territories? And to me, it just highlights DCU and the online modality of the university.

Well, I think it's not really a shift. But I think and people are writing about it, it's going to be very difficult, it looks like, for universities to be successful in the future if they are in a growth mode, that size is going to be important. Leverage is going to be important. We'll come out of this, and there's going to be the top 1% or 2% that can go to the Ivy League schools. There's nothing wrong with that. I mean, it's fantastic. They'll benefit from it. It will all be fantastic. But when you think of Middle America and you think of smaller, both private and state institutions that are not in a growth mode, that haven't invested in technology to do things more efficiently, that are surviving a lot on international students that pay very high tuition rates and then out-of-state students that pay high tuition rates, that financial model is going to be stressed in the next 12 to 24 months. We've been pressured a lot about our international strategies. And our response has always been, we have got to be we've got to make sure that we are providing private higher education, it's affordable to all socioeconomic classes of Americans. And we need to get a greater percentage of our high school graduates involved in very affordable, high-quality programs. To us, that's a lot more important than those international strategies. And in this case, it's going to be so much to our benefit.

And your next question comes from the line of Jeff Meuler with Baird.

Thank you. Good afternoon. So I'll key off a few things that you said in some of your tone. But you said that interest in programs has improved, and you had a very good April. Can you just put some I guess, either numbers around it or qualitative detail, it sounds like demand is accelerating for GCU Online, if I'm hearing it correctly.

It is but it the one thing we did a couple of things that really helped us. One was our ground campus every [Technical Difficulty] set up system, and they do use it, even though classes are [Technical Difficulty] and so if we transitioned those students, that went very smoothly. And [Technical Difficulty] we've got those things back. So families were very excited and very happy about that. Online standpoint, 95% of our people were already set been able to work from home in almost every single one of our positions, and those processes have automated so nobody is involved. And when students are prospective students or even current students are calling, somebody is picking up on the first ring. And that person that is picking up somebody that is it's their counselor. And you can't underestimate any. Right now, a lot of businesses, including universities, they're hard to do business with because you can't get a hold of anybody. And so just think about all the electronic signatures and all that work we did on all of that, we started thousands of students in April. And we did all that admissions work and all that transcript evaluation and all that financial aid work and all that technical work, all the technical support work signing up the students on the system, building to scale, all of that was done through automation and technology. And so and we have the ability to look at the productivity levels of all those processes and productivity actually went up. Our staff was extremely excited to number one, they keep their job. They keep their income. They are at home, which means they can watch their children. And we then approved a merit increase, which that goes a long way with both faculty and our…

And in terms of the increased GCU Online demand, is it coming from individuals that are not currently enrolled in college? Or is there a sizable amount that's coming from universities that are current or students that are currently enrolled at other universities that, like you said, don't want to pay a high tuition to do online?

There's a little bit of that. We are getting stories. You know how it is on ground. Students apply to three or four different places, 3, or four or five different places, and they look to where they get the best deal and the whatever gets And so what's happening is they can't get a hold of other people. And so they're getting serviced by our person very well, and we get the student. So there's a little bit of that going on. But that's ground. Online, it's no, there's not a lot of students leaving other institutions coming here as a 19-year-old online. This is mainly our successful April was mainly the same kind of students that have always come to online, 33 years 32, 33 years old working adults, mid-career professionals, wanting to complete Doctorate, Master's or Bachelor's degree.

And then just on Orbis, can you help me better understand kind of what they've changed from an academic delivery perspective? And I guess, what are they still doing in person? And has there been disruption to the ability to get slots at hospitals for that part of the education?

Are you talking about Orbis now or...

Yes, Orbis.

Yes. Some of the work they did in the classroom setting is done through virtual simulation. A little bit more of it's done through virtual simulation than was done in the past. But and so that helped some. That's helped some. But I think what's going to happen is that now that they have two, three months to plan for the fall. The good thing about Orbis is even the lab work that happens in person happens in small groups. And so they will be able like we will be able to, here on our campuses, organize those simulation labs, organize the biology labs, the chemistry labs, so that there are groups of less than 15, maybe less than 10. There will be adequate spacing. There'll be protective equipment. There will, in many cases, there'll be a grad assistant in the classroom with the professor being Zoomed in. Those are all things that they will do and we will do here on this campus to make sure that the students get their work done in a safe environment. And we are very dialed into having to keep our professors safe because many of them are older and more vulnerable. But we're getting so good at Zoom and have been so good at those kind of things that those adjustments are not going to be hard for even lab programs.

And in terms of the in-hospital components, is getting that capacity a greater challenge as they focus on priority number 1, the COVID response?

In the short run, yes. But in the long run, they're figuring things out. It's just one of those things where the in the short run, there was such panic in terms of the hospitals and their utilization and the overcrowdedness that they were anticipating that hasn't really happened. And so adjustments are being made, and I think everybody will be in a good position in the fall. Now we are all understand and that the flu season comes back in November and December. And everybody's cognizant of that, I think everybody is anticipating that, and we're trying to make every preparation, put every preparation we can in place to make sure that we're better prepared for that.

And then last one. Just given that I understand everyone wants to be back on-campus this fall. But in the event that they're not, can you just give us a sense of how much ancillary revenue from GCU, GCE generate so that we have some sensitivity if the campus would remain closed on a more prolonged basis? Thanks.

Yes, GCU generates about $100 million a year or $50 million of semester from its ancillary revenues, including room and board so GCE would be 60% of those numbers.

Thank you. Your next question comes from the line of Jeff Silber with BMO Capital.

Hey, Jeff, maybe I have regional bias being in the Northeast, but we're seeing anecdotally a number of parents wanting to keep their college-age students closer to home. I'm curious if you're seeing any of that and if that might shift the mix of students we have to more local based students as opposed to folks coming in from out of town?

My honest answer to that is I was hoping to see more of that with we're clearly saying to students and families from our ground campus that if you are in any way uncomfortable with coming to campus, the classes that you're currently scheduled for, you can take online. And so if you have pre-existing conditions, if you have any kind of lung problem and you can stay home, where we would encourage you to do that. We have basically a mini hospital clinic of 450 beds set up here. So that any student that would test positive, we can quarantine them within professional nurses, if that would happen. But we would prefer that if they have conditions that make them susceptible that they do stay home, we're just not hearing a lot more to do that. We're hearing that many parents feel like this is a safe place for them to be. And I try to reemphasize that, listen, college campuses are very dense places, and we will do everything we can. But we're right now, as we sit here today, we are fully booked in our residence halls. And so as things change in the next 90 days, we think it's going to be a fairly full campus.

So let's assume that's the case, but there's still concerns about the virus, and there probably will be. How will the campus experience differ? I mean, how are you going to institute social distancing? Are you going to allow fans with the basketball arena? I'm just curious what your thought processes are.

Yes, there's going to be some significant differences. That's for sure. We're doing a lot of work around our classes in our classrooms and our professors. And there'll be some adjustments. If there's 30 students in a class that meets twice a week, they might meet once a week in group of 15, so we can keep better spacing. And then the professor could possibly be Zoomed in with the graduate assistant using running the class. So there'll be a lot there will be adjustments made with our classrooms, our classes and our processors. Right now, it just unless things change a lot in the next 90 days, we're not sure about large gatherings, which is a big part of what we do here. So chapel services of 7,000 basketball games that are sold out. I'm attending the president meeting in the NCAA. As I see things, I'm listening to what people are talking about, I think we're going to have athletics without fans for at least the first semester, and we'll have to make those adjustments. We've got a lot of very open space here and a lot of very open space for activities. And people if you are hearing that it's 20 times safer outside than it is inside. A lot of this is airborne stuff. And our weather is really nice after we get through a little bit of heat, but even the heat, we're thankful for now. And so we will organize activities outside and use our outside venues and more than we have in the past. And I think we're in a it's not going to be the exact experience, but we'll make it as close to that as we possibly can. And we'll know more in 90 days.

All right. Thank you. We have reached the end of our first 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.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect at this time.