Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2020 Grand Canyon Education Incorporated Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Chief Financial Officer, Dan Bachus. Please go ahead, sir.

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 welcome to Grand Canyon Education's third quarter conference call. GCE is gaining real momentum as an educational services provider. We are building three platforms that will provide significant growth over the next 10 years. The pandemic has been a serious challenge for universities throughout the country and many are having financial problems. Recent college graduates who are new to the job market are also having a difficult time. Many have degrees that aren't serving them well in the current economy. It has been GCE's goal to create educational models that address the real issues within higher education. The first six I have talked about before: one, the out of control rising cost of university education; two, the increasing student debt levels that will seriously hinder graduates as they begin their adult lives; three, as tuition levels go up, diversity on college campuses go down; four, bachelor's degree should not take four to six years to complete; five, programs and delivery models lack the creativity necessary to address critical shortages in some industries; six, there are inadequate counseling and support services, especially for first generation students or those studying at a distance. In a recent article written by history Professor Steven Mintz at the University of Texas, Austin, entitled, Higher Ed's Dirty Little Secrets, he made the following observations. Three-fifths of college graduates would change their majors if they were starting over, 30% for better job opportunities and 20% to pursue their passions. Next, prior to the epidemic -- prior to the pandemic, 43% of college graduates were underemployed in their first job, two-thirds remained in jobs that don't require college degrees five years later and last, most professors have no formal training in teaching, learning or course design. Grand Canyon Education is a large organization, over 4,000…

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, 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 third quarter of 2020 and 2019 was $2.1 million and $2.2 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 September 30, 2020, and 2019 is $1.14 and $1.24, respectively. Service revenue exceeded our expectations in the third quarter of 2020 primarily due to slightly higher-than-expected enrollments at our university partners. GCU had a greater-than-anticipated number of students decide to take all of their courses online in the fall semester, but given the timing of the fall semester start, this only had a small impact on third quarter revenue. It will have a much greater impact on the fourth quarter. The decline in revenue growth rate in the third quarter was anticipated as we had a shift in tuition revenue from the third quarter to the fourth quarter as a result of GCU's decision to move its fall traditional start from August 24 to September 8 resulting in 13 less revenue-producing days in the third quarter of 2020 compared to 2019. GCU also shifted its move-in date for residential students back to September 21 resulting in lower room and board and certain ancillary revenues…

[Operator Instructions] Your first question is from the line of Jeff Meuler with Baird. Your line is open.

Yes. Thank you. Brian, could you just talk through the exploration of -- on the university side, of expanding the campus to 40,000 students and a potential East Valley campus? Like, what's -- is it -- has the decision been made at this point or what's the time line for it? And how would it be financed? Would it come from GCE or from other sources?

The decision to expand the West Valley campus to 40,000 students has been made. We were very close to 300 acres right now, and we have clearly, in our sights, 100 additional acres and the ability to build out classrooms and laboratories on those 400 acres that could accommodate 1,000 students that will all be GCU. But GCE will obviously be responsible to grow the student body. GCU will do the building out of the campus. We also have a significant amount of property at 27th Avenue and Camelback that we were using for our call center, and we're going to convert much of that to classroom building because we are going to continue to have a lot of people working from home. So space, dollars or all of that expansion is not going to be an issue. That's all planned for. It's a matter of just filling the space with the students, and the moment is very, very strong. As we continue to look at college enrollments over the next five or six years, people are going to be increasingly extremely practical about their decisions. Students want to live on campus. They want to have a college campus experience. There's no question about that. And there are very few options that look like us that are affordable. And so we see that path pretty clearly. In the East Valley which is the fastest-growing part of the valley, and where the most money is, the most industry is, we were looking serious -- GCU was looking seriously at that a number of years ago, and we've begun to do that -- they have begun to do that again. If I say we, it's because I'm University president. But we think that the there are some really interesting possibilities, especially around that growing group of young adults who are struggling in the marketplace -- job marketplace, last-in, first-out, many consider themselves unemployed, many consider themselves working in areas that they didn't study for in college, and that is a dirty little secret in higher education. There are far too many students studying in areas that aren't going to lead to productive careers. And so we have that group of people in our target. And some of the Orbis programs are part of that, but there are other programs, mainly in the stem areas that we also are watching closely. So, we haven't closed anything yet in the East Valley, but we're getting closer.

Okay. And then, apologies if I missed it, but any update on Valparaiso and moving that from an MOU to a contract?

So we did mention Valparaiso. We've got two large markets that we have pinpointed for them in the Midwest that we expect them to fill with the healthcare programs and then we also are in the process of finalizing the contracts so that we eventually will start marketing their other graduate programs.

Okay. And then just two questions that I continue to get asked from investors fairly frequently I guess in my perspective, were both yours in this forum. One would be, if there is a tuition free public university option for families making below a certain income threshold under Biden I guess election scenario. And then the second is just the impact of every -- or almost every university in the country having some form of online options now. So, just the potential impact on GCU, and I guess, your other partners from those two factors? Thanks.

Well, no, the second question is a very good one, and investors should be asking that question. There's a lot of people who are, interestingly enough, most of the entrants into the online world are pretty much still imitating what we did at University of Phoenix many decades ago. And the easiest way to get into that world is with the programs that are easiest to convert and to implement. And so you see a lot of -- it's very crowded in those places, and there's a lot of price pressure in those places. We continue to be successful there, and there's no lack of interest in GCU's programs, but we do tend to focus more on the more difficult programs to implement. That's why I talked about the licensure programs. We have been, for a long time, continue to be laser-focused on programs that have very clear career paths. And it's very clear that there are job openings in what they pay. And a lot of those programs are more difficult to offer because there are state-specific requirements around fingerprinting and internships and clinical placements and observation hours. I'm talking about education, healthcare, counseling, even in certain technology areas. And so that platform that we've built that is very state-specific from a requirement perspective is really advantageous to us because we don't expect the student to go -- to enroll in our programs and then take care of those issues themselves which many universities say -- tell them to do. We have that all covered for them. And there's a huge investment made in that by us in terms of personnel, technology automation, and so that still gives us a very strong positioning in the GCU online business. But you can probably tell from -- I hope you could tell from what we were saying, that fully ground offerings to traditional students can be extremely profitable and a combination program of attending online and doing higher end lab work on ground is also a -- that's a tough business to enter if you don't have the capital and know-how to do it which is why we're talking a lot about trying to get to 80 platforms. If we get to 80 of those, we'll be well positioned to -- and there's no shortage. I mean, the universities are calling us every day that want to get into that business. There's a need there; there's pretty defined metrics around what people are willing to pay, how long it takes them to complete. The other thing that's great about those areas, it's greater than 90% graduation rates. And so they're right to answer the question about it's getting more competitive, but we are well out in advance I think on all three of those platforms and can compete very well with both quality and from a price standpoint. The first question was about...

Free college.

Competing with free college.

Free college; what we have heard is the possibility of increasing programs. And so if you're going to make college free, the reality is that for low-income students, college already is free. The Pell Grant that you get more than covers tuition out of community college. And for -- in many cases, it will come close to covering what it cost to go to a state university for your last two years. And we're in that -- we're very close to that as well after scholarships. And so as a fully accredited institution, if Pell Grants are -- the Pell Grant level is raised, that would do nothing but help us. That would make us even more competitive. So, we would look forward to that if that happens.

Got it. Thanks, Brian.

Your next question comes from the line of Henry Chien with BMO. Your line is open.

Hey, everybody. Thanks for taking the question. I wanted to ask if you have any update on finding a larger partner for I guess for online and campus services that you had talked about before? And if -- or is it more of the priority now the university partners with Orbis. Just any thoughts there would be great.

Well, that's definitely the emphasis. I mean, the -- we're expanding so rapidly and the return on investment with -- of capital with that investment comes so quickly. It's not that -- and a larger kind of arrangement with the university other than eight to 10 healthcare programs will come. It's going to come -- it's coming through GCU, but it's also going to come through for Valparaiso and eventually others. But we are very anxious to invest in getting to those 80 locations because when you think about the investment, $1.5 million for the physical infrastructure, another $1.5 million to get it up and running in the first year and then becoming profitable at the level of 30% in year 3. When you compare that to the metrics in the other OPM markets, there's nothing that returns value to shareholders like that investment and to have footprints in 80 different locations in the next five or six years and then be able to build on that in each one of those in an area that is far less competitive because it's far more difficult to do. And so -- yes, that is our -- that and the ground campus, those things are platforms that we have that literally, hardly anybody else in the country has. And as more and more universities are seeking additional revenue streams. And get into the easy part of the business, and that becomes more competitive and the price -- the pressure on price becomes more significant, not that we're not doing well there because we are and we'll continue to do that. But these differentiated areas that are harder to do, they are much less competitive I think is exciting to us and should be for investors.

Yes. Got it. That makes sense. And I guess -- and in terms of like the broader environment, it seems like a lot of the universities are scrambling to go online or there's a lot of shift online. How does the strategy fit in that kind of environment? I mean, it sounds like it's not too much of a change, but I'm just -- would love to hear your thoughts there.

Yes. I mean that's a fascinating thing. The traditional students and how they're going to navigate this COVID thing. There's a number of things we've learned in the first three months or so, I think one of them is students really want to be at campus. They really want to be at campus. You can find -- you can walk through some universities during the day, and you hardly see any students. Literally, you see very few students because many universities, without saying it, have converted almost entirely online. But the students don't go home. The students want to be on the campus. We -- our experience is that the students absolutely want to be on campus. We were very cautious early, and we wanted them to make a decision based upon what was best for them and what was not best -- regardless of whether it was right for us from a revenue perspective. And so we were cautious, and we were conservative, and 4,900 stayed home. But our experience is not on what's going well, students are in classrooms. And so if you walk through our campus during the day, the campus is crowded. Students are out. They're in and out of classrooms. They're in and out of laboratories. They're in and out of eating facilities. And we are obviously testing students to know who's positive. We isolate and those that are in contact, right, we put in quarantine. It's a very small number compared to the 18,000 students that are coming here every day now. But -- and the positives that we have, they're absolutely not the result of class -- of being in a classroom. We are very confident of that. When students leave the campus in the evenings, that's when we get into trouble. But that trouble has been minimized. And so the total number of students that we're teaching, they are traditional age students, we beat by 600. We also beat our new enrollment goal. And so I think we found a balance. And we think the spring semester is going to be even stronger with a big percentage of those 4,900 students coming back to campus and living in the residence halls. I'm knocking on wood because who knows what's going to happen in the last four weeks here. But we've -- I think we found a really good balance and we've set ourselves up for the fall of 2021. 2021 could be really good. Obviously, we need a vaccine and more therapeutics and but we're expecting that to happen, and we think fall of 2021 could be amazingly good here.

All right. Yes, that's great. That's really interesting. Thanks.

Thanks, Henry. Thank you.

Your next question comes from the line of Greg Pendy with Sidoti. Your line is open.

Thanks for taking my question. Just kind of curious, correct me if I'm wrong, but there wasn't a demand issue, but it was a bit of a bottleneck at Orbis during a heightened wave of COVID I think with clinicals, if I'm not mistaken. And what is the risk that we see that again under a third wave or are hospitals more kind of prepared to operate and would that go much smoother even if there is a third wave?

The thing that will go smoother, we believe, is that the university, our university partners now know that most of our facilities, the 14,000 foot facilities that are heavily lab intensive are 45 minutes to one hour from the lead campus. And those facilities do not serve traditional age students. They don't serve residential students. And so I think they've gotten very comfortable with that that nurses run those facilities and nurses are doing the teaching in those facilities for the most part, and so they are -- they really know how to protect themselves and how to create a safe environment. And so even if there is a third wave that impacts the main campus, for example, at a place like Marquette or Loyola or one of those places, we believe that we know enough now that we can keep that Orbis campus and go through that. A lot of effort was put into replacing certain of the clinical requirements with simulation labs. And so there was a lot invested in the last four or five months. In building simulation experiences for students that nursing boards have considered to be effective and pass the requirements. And so that has improved the possibility that hospitals can take care of our clinical requirements going forward. So are we in a perfect situation though but we're in a better situation than we were in the summer because we've gone through it and we have made adjustments that we think will serve us well if there is a third wave.

Got it. Thanks a lot.

Thank you.

Your next question is from the line of Brett Knoblauch with Berenberg Capital. Your line is open.

Hi, guys. Thanks for taking my question. Maybe the first one for Brian. Given your rollout at GCU, would like to hear how you're thinking about maybe the current environment? Like, if you were present at another university that didn't already have such high exposure and maybe online efficiency as GCU does, how would you be going about trying to expand that university's online presence?

The faculty; you have to -- if I was at another institution, and we were faced with maybe another 12 months of this, who knows, I think you have to put a lot of resources into faculty training. You've got to get every facility member, not every, but 90% of the faculty members prepared to adjust immediately and be able to deliver online. There's so much technology available now that aside from the clinicals in nursing some of the lab intensive things in premed, in engineering, etcetera, aside from those things I would say I would want to be ready to be able to move on a dime through faculty training and providing them the infrastructure. So that in those areas that you can transition quickly do and then that would -- that seriously limits the number of people on your campus or the number of students in classrooms. And I think at that point, you can probably handle the engineering students and the nursing students and the premed students that have to be on campus. But the fact -- we are just -- we've got nine colleges. We've got nine deans and the level of cooperation that we've got from our faculty through this whole thing was the key for us. They were willing to -- and a lot of them had a big head start. So it wasn't like it was a big hill to climb -- a bigger hill to climb for us. But the truth is that a lot of these programs can get taught very well if the faculty are prepared from an online perspective.

Okay, got it. Very clear. And then maybe just notwithstanding maybe the potential for campus expansion to East Valley with residential programs. I guess what is the maximum capacity without additional expansion at the current moment?

On the traditional campus or?

Yes.

We're probably a little over 30,000 we could accommodate right now. And so for example, next year, we're building three new residence halls, a new parking garage, 50,000 additional square feet of space, classroom space. And from a classroom perspective, right now, we're good for the next three years which is really positive. We'll have to add -- continue to add residence halls, but that's one of the things that most differentiates the financials of our campus business, is that investors really want us to build residence halls. The retention rates and graduation rates of students that are on your campus are much higher. The residence halls, even though we build pretty nice stuff. I mean it's apartment style and students have their own bedroom and I think we're at 32 restaurants, five pools, five fitness areas. So this is a nice place to go to school, but the margins on those residence halls, even though we're very inexpensive, are significant, really significant. And really, investors want GCU to continue to build residence halls because GCE putting students in those -- the combination of the tuition and the room makes those students very valuable students. And I say that, but I also want to add, we've been able to do that without raising tuition on students. And so where we're trying to -- everybody is winning here in the model. I think that's very important. The average student -- and I need to keep saying this, the average student in our campus pays between $8,600 to $9,000 per tuition. And they are studying in state-of-the-art classrooms and laboratory. They're living in brand-new residence halls. They're eating in 32 different restaurants. And so you can see why this would be an attractive option for students, room and board for most students is about $7,000. So when you think about what is costing at other places, this is a very attractive option. Why is it profitable? Because it is part of a much larger business. We're leveraging an infrastructure across the 90,000 online students and the 22,000 students on-campus which creates huge efficiencies. Which is why another reason we think we're well positioned. If you think about the history of higher ed, it's always been small and elite that people prefer. We really think that the winners in the long term are going to be those that are large with a lot of flexibility in how you deliver. I think the K-12 world is learning that. And I think the pandemic has forced the hand of higher ed, that people have different lifestyles. They have different goals. They have different -- and being able to be flexible in how you can deliver what you do, those people are going to be the winners in the future, I think.

All right. Thanks so much. Appreciate it.

Yes.

We've reached the end of our third 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 participation and have a wonderful day. You may all disconnect.