Good day, ladies and gentlemen. Thank you for standing by and welcome to the Fourth Quarter 2021, 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 may be recorded. [Operator Instructions] I would now like to turn the conference over to your speaker host, Mr. Dan Bachus the CFO. 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 the call. And we recommend that all investors review these reports thoroughly before taking a financial position in GCE. And with that, I'll turn the call over to Brian.

Good afternoon. And thank you for joining Grand Canyon Education Fourth Quarter Fiscal Year 2021 Conference Call. 2021 has been a difficult year in higher education. Grand Canyon Education came through this year amazingly well as compared to the rest of the higher-ed. More important, the overall trends predicted for 2022 in the sector continued downward while Grand Canyon Education will resume its remarkably consistent upward trend for 14 years and is positioned to do very well the next 10 years. COVID has had a negative short-term impact on all three of our pillars. However, long term, the negative impacts on the rest of the sector have turned into positives for GCE because of how it has positioned itself, especially the last three years. I will explain as I talk about each pillar individually. First, the GCU traditional campus. Both number of high school graduates per year and the percentage of them going to college has declined recently. And that has resulted in lower enrollments at many university and community colleges. GCU's traditional campus actually saw an increase of 6.2% in new students year-over -- over the prior year. An increase of 9.5% in total enrollment, and an increase of 36.1% in residential enrollment. The average incoming GPA of this year's class rose to 3.6. And the Prestigious Honors College grew 8.4% to almost 2,800 students with average incoming GPAs of 4.1. These are remarkable results given the overall trends, the quality, and especially the relevancy of GCU's academic programs, the low class sizes and support of its faculty who have less than a 2% turnover rate, the quality of counseling services, a new very modern campus that is ranked 18th in the country by niche.com, the 20 advisory boards with over 500 companies represented who are creating internships and…

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 December 31, 2021 and 2020. The non-GAAP amounts exclude the tax affected amount of the amortization of intangible assets of $2.1 million in both the fourth quarters of 2021 and 2020, the reversal of the credit loss reserve of $5 million in the fourth quarter of 2021 and the write-off of deferred loan costs of $1.1 million in the fourth quarter of 2021, as a result the credit facility payout. As you will recall, all but $2.5 million of the reversal of the credit reserve was included in our fourth quarter guidance, as at that time only 50% of the secured note had been repaid. 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 December 31, 2021 in 2020 is $2.11 and $1.89 respectively. Service revenue was generally in line with our expectations in the fourth quarter of 2021 as expected, the GCU online enrollment growth rates slowed in the quarter due to the items we have discussed previously. All semester traditional enrollments and hybrid enrollments were in line or exceeded our expectations. Revenue per student continues to grow on a year-over-year basis primarily due to increased room board and other ancillary revenues from traditional students as compared to the prior year and the growth in the enrollment for hybrid students. Service revenue per student for hybrid students generates a significantly higher revenue per student than we earn on the other students. As these agreements generally provide us with a higher revenue share percentage, the partners have higher tuition…

[Operator Instructions] Please stand by while we compile the Kenny Roster. I'm showing we have a question coming from the line of Jeff Mueller with Baird. Your line is open.

Yes. Thanks. Apologies if you gave it, but I didn't catch it. What was the online new enrollment growth in Q4? And can you talk through digital versus partner channel trends and assuming that the Q1 outlook, I guess at the high end for only down slightly reflects improvement from that. Just what are you seeing f that is improvement to make those comments. Thanks.

Fourth quarter was just a little bit worse than third quarter in terms of new enrollments, but January looks good as we anticipated. We anticipate that will be down, give us a tough comp, but far less than we have been in the third quarter and fourth quarter, and we also expect that to be true for the entire first quarter. From a digital perspective, we are doing well, we are not seeing an increase in lead cost. If you compare what we do to other players in the industry, we just have so many academic programs and we're able -- that are delivered online and we're able to move money around depending upon where we can get the most efficient leads. And in order to get new enrollment growth, we haven't had to add significantly to our online spend because we've transitioned more to working with the 8,000 partner institutions. Right now, we're trending in January for our outside people to be delivering a little over 70% of what they did at their historical highs before COVID, which is an extremely positive trend from our perspective. The Company's not -- the country is not completely reopened, although it is reopening faster than it had been, and so that 70% number is a good number for us, extremely encouraging. It was below 50% during the worst parts of COVID. And so, our digital online lead system is doing well. We're not seeing the increase in course per lead that others are because of our abilities to spread our spend across such a large array of programs. And we're very happy with what's going on on the outside. And it's particularly encouraging because we are so well received. Everybody is having a significant pallets shortage. This thing has really flipped and hospitals can't get professionals, school districts can't get teachers, military bases can't get cyber security experts because they can't compete, social service agencies can't get social workers. And our abilities to take people that are operating at a lower level in all those organizations, get them in cohort groups, and get them moving towards licensure is going to be -- is and is going to continue to be a very successful B2B strategy that's differentiated us and it's very difficult to replicate because the investment that you have to make into people. But that investment in people long-haul is extremely significant from a profitability perspective, because you don't have to buy in leads. And they're creating things that are very, very well received by businesses that are in its current environment where there is this huge lack of talent.

Jeff, the only thing I would add on the fourth quarter new enrollment is that October, November, December is not a typical go back-to-school time and so the numbers are a little bit misleading. We had a really -- because of COVID, a really strong fourth quarter of 2020. And so it's not really a great indication of how things are trending. The first quarter -- our thoughts on the first quarter of '21 is much better example of how new enrollments are trending from an online perspective.

Got it. And then on the expense base, hopefully you get the gist of the question. But is there a way to kind of breakout? How much new initiative spend there is because it sounds like there's also just some need to resume hiring, some normalization of T&E. But then there were some comments about like what sounds like a step function in initiative spend and some of that sounds like it's in the partner channel. Just if I'm characterizing that correctly, but if you can help me understand how much is normalization, how much of this is like net new initiatives in the spend against it.

I would probably say about half is initiative spend and half is getting caught up in the last few years. I don't know if that's exactly how you're thinking about it. But when I look at -- and obviously, the increased spend gave a lot of heartburn to all of us. But when you look at it by the actual categories, it's a lot of things like benefit expenses being up significantly. It's just the trend that started in the tail half of '21 has continued through January and we expect to continue travel. We basically cut off travel, as you know, for a long, long time. It started to come back in the second half of '21. So, a big piece of the travel is just the continuation of that. But another big piece is the initiatives Brian talked about which are new and so there's a mixed bag in all of this. As I mentioned before, we haven't really added heads across the company since March of 2020 and it's time to get caught up to where we should have been had COVID never happened. And so that's -- it's probably about half and half.

I would just add, Jeff. This might be a good time to say we are -- you probably noticed that we have, for a long time, been talking about 40,000 students on our campus. Today, I said 50,000. Number one, we're underestimating what we're capable of given the other trends in higher education with students who come here for three years or four years, but we also are working on a fourth platform. And I don't want to say much about that platform right now, but it's a response that we're making to a whole bunch of companies who have come to us and said that they've got significant talent needs in certain areas and people just aren't scaling to meet those needs and would we consider doing it. You'll hear more about that fourth platform over the course of the rest of the year.

Got it. Look forward to that. And then just the last one for me, you gave us a metric that I just didn't understand and I want to make sure that the investing community is because I think you think is important. The 50% of spot in terms of the enrollment budget at Orbis programs, just what exactly was that metric?

Well, if you if you think about what our new enrollment goal for the university, the healthcare partnerships, it's around 4,000 for this upcoming year. If every single one of the locations that we were planning had been built out fully, and if the -- if there were no issues with regards to clinical placements, we could actually have put in almost 8,000 students. And the third thing that is a little bit of a wrench in that whole thing is there really is not an efficient operator from a prerequisite perspective. There are some people out there that are partners, send their students were trying to qualify to get into the program too, but none of them come close to offering the quality of online instruction, the level of support, the level of faculty that are really necessary to get students successfully through the difficult courses that are in that pre situation, the sciences, biology, chemistry, anatomy, physiology. All of those things. And we intend to be a major player because I don't think there's anybody better in the world at doing that than we are. And so, as we make those improvements, as we open up new locations, they will be concentrated at two things. One, hitting the optimum number in our current number of locations and then opening up new locations. And so, we've got opportunity -- the good news is that we've got considerable opportunity for growth in both those areas. And given the revenue per student of those students and given the retention rate of those students once they're in the nursing program and the first-time pass rates on the end flex exams, that's an extremely exciting thing to consider, both because of the needs that this country has and also because of the return that's going to provide for GCE, it's going to be considerable.

Okay. Thank you.

Yeah.

Our next question coming from the line of Jeff Silber with BMO Capital. Your line is open.

Hi, good afternoon. This is Ryan Griffin on for Jeff. I just was wondering with the majority of students, as on campus during the quarter, to what extent are on the incremental revenues from room and Baird factored into the updated guidance? Thank you.

It's factored in. It's factored in. We are very excited about how things are progressing on the campus and how the -- those type of -- room-and-board primarily is coming out at the university. There are some revenues that the university historically have that they don't currently have and currently don't have plans to have those revenues in the future for various university-related reasons, so there has been some revenue loss. But the vast pass majority of that -- the revenue is back and is included in the guidance.

But that's -- I'm glad you brought that up because the trends nationally with less high school students graduating and less as a percent, Arizona is one of those states. It is going to college it's because people are really questioning the value of a considerable investment in higher education with so many jobs out there. But when you have a chance to come onto a campus like this, graduate in high-end programs with very little debt, many students, because of dual credit in our partnerships, graduate in three years. And then the exciting employment opportunities; we just met with a major Taiwanese chip factory that's building a huge factory in North Phoenix. They're going to need 10,000 people. They are hiring our electrical engineers like crazy. It's just -- there is all of -- for all of the reasons people are questioning investing in higher ed as an 18-year-old student, we present an alternative that is very inviting. And so when we say 10,000 new students in 2022 but we're really trying to set ourselves up for a much higher number than that in to 2023, the momentum is just so strong for what we have here, that it's going to be a big part of the story and it's becoming a big part of the economic story of Arizona because the first thing companies want to know is what is the talent pipeline that's coming out of the universities, and our growth is creating a lot of excitement for the companies that want to move here.

I want to correct one thing; I'm just going through my notes. About a third -- to just question about a 1/3 of the expenses are kind of historical catch-up and about 2/3 or new initiatives. So I'd said 50, 50, that's not quite correct. I apologize.

Got it. And then as my follow-up, I was just wondering, are there any incremental one-time costs or expenses built into the 2022 outlook.

No, I don't think there's any what I would say one-time costs. As we just talked about, I'd say there's some catch-up costs from historical perspective, which is about 1/3 of the increase. The rest is I don't know if I would call one-time costs, but the costs associated with opening new offsite locations that, as you all know that, that costs about $2 million in OpEx spend in the year that it opens and we incurred a lot of expense related to the 2021 openings in 2020, but there was very little in 2021 because most of the locations are going to be opening in September. There was a little bit in '21, but not nearly what you would expect. And so there's not a good apples-to-apples comparison from that perspective and then headcount increases, et cetera. I don't think there's any one-time cost.

Got it. Thank you.

Our next question coming from the line of Philip Matthews with Berenberg. Your line is open.

Hey, guys. Thanks for taking my question. I hope to focus a little bit more on Orbis. What are you expecting about the nursing enrollments in 2022? And I recall in the prior call you had some delays of opening key locations, are there any updates on maybe when those locations can be open?

We think that Orbis will have enrollments, and again, this includes all -- not Orbis, but offsite campus locations, classroom and laboratory locations, will have around 5,000 students by the end of the fourth quarter. Again, you've got ABSN growing at a very nice clip and you've got Occupational Therapy which, this year, was down 47% from the previous year. We're hoping that will level off by the end of 2022. So you should have that. In terms of new locations, we're still working through the regulatory side of things in California, both in the Northern California, Southern California, in Seattle, in New York City. We're hopeful that we'll get the approvals to start working towards opening those locations. So we're hopeful that those locations will open in 2023. They are not in the 2022 guidance.

That's helpful. And one more from me. On the cost increases, I know there's some questions, but I just wanted to understand like, what type of hiring are you planning to do in 2023 was that the lower margin year in relative to 2022, based on the comments you guys have provided so far?

I think 2023 will be a more normal year from a margin standpoint. I mean, obviously we're looking way out in advance here, but I think the investments that we are making in 2022, we expect to be getting the benefits from a revenue standpoint in 2023. Will margins as a whole increase? I think that will be very dependent on the timing of new offsite campus locations openings and the growth of that business as a comparison for the business as a whole. I think -- but it shouldn't be another stair step like what you are seeing this year. Like we've talked about this year's expenses are partially impacted by lower expenses from the last almost two years us feeling comfortable and us to begin the hiring, begin the traveling, all that to reaccelerate growth. And then some of these investments that we think will really start paying off in 2023. Anything to add, Brian?

Yeah. Another way to think about that is that if you look at the industry, what's really hurting people is the cost to acquire a student. Everybody is talking about increased lead cost and they're basically trying to get more out of what is a very crowded environment that has been -- the metrics have been deteriorating for years, and I think it's been exasperated by COVID. What we are doing, we've been planning for this for 4 years or 5 years now, and we're responding to employers that need to grow their talent from within that requires us to increase the hiring of those outside people to do that really important work. And so, we got to -- we have to hire them, we have to pay for their travel expenses, and we're continuing to spend on the digital side. But as they get up and running and we already have evidenced that this was coming back in a really strong way. As they get up and running the cost to acquire a student from their perspective, has historically been way less and the quality of the students, there is been a much -- they recruit a lot higher percentage of graduate students. And so, we think that the investments we're making there, while we're continuing with our digital strategy over the course of this year, will set us up to be in a very strong place in 2023. And if you look at us historically before COVID, our margin expansion continued -- month -- or quarter-after-quarter we had margin expansion from lowering the cost to acquire a student. And I think if you're not -- if you're somebody in this industry that can't do that, if you can't, through programmatic expansion, through partnerships, through specialized strategies, if you can't lower your cost to acquire a student, it's going to be very difficult to last in this place. And that's why I think we are in a very strong spot, because I think we can do that. But it's going to take a little bit of investment in 2022 for us to set that up.

One other comment I want to make really quick about Orbis, sorry, off campus locations students, the hybrid students. Because of the anomaly of not having any stats in the fourth quarter, but having graduations, the third -- the enrollment number tops out and I want to make sure everyone understands is at the end of the third quarter. The end of the third quarter, we're projecting to be just under 6,000 students. So when we talk about that 5,000, that might seem low, but it's the anomaly no starts in the fourth quarter but graduations. Operator, I think if we have one more question.

Our next question coming from the line of Alex Paris with Barrington Research. Your line is open.

Hi, guys. I just have a quick wrap up question. Very thorough call as usual. Just with post - licensure nursing. In the news a lot here lately with some of the other publicly-traded players ' pressures in enrollment due to working nurses not having the time to continue their education, RN, the BSN programs and so on. What percentage of your nursing stand at GCU and/or at Orbis partner programs are post - licensure?

So, if you look at online students, roughly 30% of the students are in nursing or other healthcare programs. With the vast majority of them being in which you're talking about the post licensure programs are into BSN math, nursing, etc.

I got you. Okay. So RN to BSN as well as the graduate programs like masters and so.

RN to BSN and masters and nursing. But also we have a doctorate -- the university has a doctorate in nurse practitioner as well, which I think would fall into that category you're referring to.

And then are the hybrid programs --

No.

-- which we formally -- those are all pre - licensure?

Those are all pre - licensure or OTA. And this year, there will be some medical lab sciences students. So yes, no post - licensure.

Okay. Great. That's good for me. Thank you.

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 for your time.

Ladies and gentlemen. That concludes our conference for today. Thank you for your participation. You may now disconnect.