Good afternoon, ladies and gentlemen and welcome to the First Quarter 2022 Grand Canyon Inc. 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 your host, Mr. Dan Bachus, Chief Financial Officer.

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 position in GCE. And with that, I'll turn the call over to Brian.

Good afternoon and thank you for joining Grand Canyon Education's first quarter 2022 conference call. 2021 was a difficult year in higher education. Grand Canyon Education came through the year amazingly well as compared to the rest of higher ed. Most important, the overall trends predicted for 2022 in the sector continued downward, while Grand Canyon Education will resume its consistent upward trend for 14 years and is positioned to do very well the next 10 years. COVID 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 is GCU traditional campus. Both the number of high school graduates per year and the percentage of them going to college has declined in recent years and that has resulted in lower enrollments at many universities and community colleges. It has also caused some universities to lower their admissions requirements in order to boost their enrollments. In the fall of 2021, GCU's traditional campus actually saw an increase of 6.2% in new students over the prior year, an increase of 9.5% in total enrollment and an increase of 25.8% in residential enrollment. Approximately 70.3% of GCU's ground traditional students now live on its residential campus. The momentum continued as spring new enrollments were up 39.6% over the prior year. 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 in support…

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 March 31, 2022 and '21. The non-GAAP amounts exclude the tax-affected amount of amortization of intangible assets of $2.1 million in the first quarters of both 2022 and 2021 and the loss on fixed asset disposals of $0.6 million in the first quarter of 2022, primarily related to the write-down of our former learning management system. 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 both of the three months ended March 31, 2022 and '21 is $1.72. Service revenue exceeded our expectations in the first quarter of 2022, primarily due to higher-than-expected GCU room and board and ancillary revenues and slightly higher-than-expected spring semester hybrid revenues. Enrollments for all three student types were in line with 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 GCU students as compared to the prior year period and the growth in 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, partners have higher tuition rates than GCU and the majority of their students take more credits on average per semester as they are in accelerated programs. Our operating margin, excluding the fixed asset disposals, was in line with our expectations. As I discussed on last quarter's earnings call, we have restarted hiring in which head count has mostly been flat since March 2020…

[Operator Instructions] Your first question is from Jeff Silber from BMO Capital Markets. Your line is open.

Thanks so much for taking my questions. Just wanted to clarify one of the statements, I think, Brian, you made in your opening remarks. I think you were talking about enrollments at Grand Canyon online looking for growth by year-end. Are you talking about new enrollments, total enrollments? If you could just clarify that, that would be great.

New enrollments. If we get new enrollment growth towards the end of the year, three or four percentage points over prior year, that will be the thing that will obviously accelerate and eventually result in total enrollment growth.

Okay, that's helpful. Some of the others in the [indiscernible] -- sorry, please go ahead. Yes.

Just to clarify, from a guidance perspective, again, our guidance assumes that total enrollment -- the high end of the guidance assumes that total enrollment will grow in each of the second, third, fourth quarter. The bottom end of the range assumes that we'll still be down mid-single digits second, third and fourth quarter. We're hopeful that we'll be able to grow new enrollments before the end of the year. But to be conservative, given the head count things and the other things we're talking about, I think that's where Brian's commentary is. That's a conservative assumption.

Okay. I appreciate the explanation on that, Dan. Moving on to a different topic. There have been some others in the space that have talked about students being maybe less rigorous in terms of their coursework given the job markets, maybe taking fewer classes or not enrolling enough. Is that something you're seeing at any of your institutions?

Well, at our ground campus at GCU, absolutely not. The trend is actually the opposite. Students are coming in, number one, enrolling in with our very rigorous academic programs. I mean, 65-plus percent of our students are in STEM areas. So the natural sciences, engineering, computer science, information technology, those areas are really growing. So students are choosing rigorous academic areas. And secondly, they're very intent on graduating in three years or 3.5 years. And so they're taking full loads and some even stay in the summer because our partner -- we have 8,000 high school partnerships. And so many of our students who are coming with -- GCU students are coming with 20, 30 college credits already earned that they can actually double major and do other kinds of things and graduate in three years and many will stay to do a master's degree program. So we're not -- no, we are not seeing that.

And online, are you seeing that at all?

No. And I think the reason we're not is because if you look at the major players online, one thing -- the one way that we're really different is that we've got a lot more programs. And our students tend to come -- and 50% of our students are studying at the graduate level. So they are not people that are just coming to complete a degree just to say they have completed a degree. They really have more specific objectives that they're trying to achieve. And so our retention numbers are strong and we're not seeing any reduction in revenue per student on an annual basis as a result of them taking fewer classes.

Okay, that's great. If I could just sneak in one more. Really intrigued about the accelerated certificate program that you're talking about, I know it's still kind of in the launch phase. But can you talk about maybe the economics of that? How it compares to some of the other programs you have?

Yes. I am excited about it, too. And I'm trying to downplay it because we've got to prove it, obviously. But the more you get into this nursing thing, the more you get frustrated by it but you also see the opportunity. It's really a crazy situation. We need 1.3 million additional nurses and there are unbelievable numbers of people out there that want to be a nurse and yet we have this shortage. And so there are bottlenecks in this thing that are incredibly frustrating. We've talked a lot about the clinical placements and what we are doing to replace some clinical placements with simulations and other instructional activities. And we're also rectifying that to some extent by having 80 locations. And we're -- so we're not having to double amount of clinical placements in any single marketplace. We just need a few more in 80 marketplaces and we can produce a lot more nurses. But then, the other bottleneck that is very -- became very clear to me is the one about preparing in the first two years. It's a crazy thing. Thousands of kids attend universities all over the country, hoping to be a nurse and literally thousands pile into universities. And then 5% or 10% of them get a shot at becoming -- getting into the nursing college as a junior. And the specific requirements to get in as a junior --they're not the same requirements. They change based upon the luck of the draw in terms of the strength of the applicants that particular year. And so it's really an exasperating experience for students and families. What we want to do is really give students the chance at a very high-end way to prepare in those pre-nursing years for a nursing college. There are students…

Thanks so much for the color.

Your next question is from Jeff Meuler from Baird. Your line is open.

That one just if you could continue on with it for me. The -- so what are you telling the students? Like what's the transferability of credit to the Orbis partner network? And since you're talking about the concern of going through couple of years of undergrad and then not getting into a nursing degree, what are you planning on telling the candidates for the certificate nursing program?

Well, the courses that we've developed have been approved by our partners. Now every partner has a different set of courses, slightly different set of courses that are necessary to get into their program. And so the students have to take the courses in the GCU prereq program that are required for those potential partners that they're targeting. We obviously can't guarantee entry. There are no guarantees of entry anywhere in the country today. But what we can tell them is that currently, we have double the number of slots available than we're currently filling. And we're going to add eight to ten locations -- or I should say, four to eight locations on an annual basis. And so the number that we're at currently, we're only 50% filling and the -- those slots are going to keep growing. And so obviously, you can't guarantee anybody anything but we're going to get a lot closer to that. Then they're guaranteed anything today and in a lot more efficient, we believe, cost-effective manner. So does that help?

It does. And then for GCU Online new enrollment trends, is it basically that the digital channel trends are stable and the overall improvement is coming from the normalization of the partner channel? And then to drive the growth once it normalizes, that's where you need the head count growth, is that accurate?

Yes. Yes. We really have normalized in terms of the advertising campaign and the inside counselors. We just don't want to grow that significantly because we think the big opportunity to work with companies directly to provide their employees the chance to move up within their organizations which is a big emphasis, is a better way to do this long term. And that's the place that we're behind. And it's geographic. We're behind in those areas of the country where it's toughest to find people given the cost of living, California, New York, places like that. We're up to speed in places like Tennessee but in those other places where the cost of living is really high, we're a little behind.

Sure. And then on Orbis, I get that you're saying that the new internal enrollment was in line with your expectations. It was lower than I would have guessed and it decelerated to pretty low levels. So help us out with the leading indicators for that business in terms of either like student level, lead gen or where you are with working through the process for regulatory approvals for new sites or resolving some of the clinical capacity constraints, either in a more traditional way or with some of the alternatives that you've been coming up with, just so we can kind of monitor when that business should turn.

Yes. so the total enrollment number and this is why we sometimes don't love giving out enrollment, even though I know it's something important but I think it's very misleading in terms of how that business is really growing. Number one, you've got the huge tail -- headwind of the occupational therapy which is down roughly 30% year-over-year because they weren't allowed -- we weren't allowed to recruit any new students into that program for a very long time. So the graduations are -- we're now recruiting students but the graduations still continue to outpace the new enrollments allowed into that program. So that's hurting the overall enrollment. On the pre-licensure nursing as at -- just looking at pre-licensure nursing, it's misleading for two reasons. One, we really don't have any new locations that -- we opened one new location between the spring of last year and the spring of this year. We opened a location in Dallas in the spring of this year but there was nothing opened in the summer or fall of last year. So you don't have any growth coming from new locations. And there are some existing locations that have been at capacity for a number of years that, as we've talked about before, have taken a step back in their total enrollment because of the clinical challenges and prereq challenges, et cetera. And so all you have from really a growth rate standpoint is those locations that have opened in the last few years that weren't at capacity, that continue to grow. And so it looks like that business is not really growing. Again, I think that's very misleading. We're very excited about getting a number of locations open here in the second half of the year. Las Vegas will open. Salt Lake City will open. We're optimistic about a couple of MLS sites, the first MLS site opening. There is an outside chance that some of those other locations, like Seattle, that might open but those could be in 2023. So the pipeline is really good from new locations and new partners. And it's -- just to get back to the 20% growth rate that we want for that business, we have to get those existing mature campuses back to the full capacity which is where they've been up until the last six months. I don't know, Brian, anything to add to that?

Only that the -- just to reiterate what we've already been talking about which is the bigger that Orbis got, the more it became clear that there were two major hurdles. One was the clinical placements but the other one was this prereq thing. The counselors were very frustrated when they had somebody that really wanted to be a nurse but they needed 30 or 40 additional credits and they would say go to a community college. Well, they might not even be the courses you need that are available for two semesters. I mean you're talking about a year to two years before you have a chance to do anything. That bottleneck has to be fixed for us to reach full capacity. And I think we have a plan that can bring a drastic change to that, improvement to that. That's what we're hoping.

Got it. 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 very much.

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