Good afternoon, and thank you for standing by. Welcome to the Second Quarter 2022 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 note that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Dan Bachus, Chief Financial Officer. Please go ahead.

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 any position in GCE. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our Form 8-K filed today. And with that, I will turn the call over to Brian.

Good afternoon, and thank you for joining Grand Canyon Education's Second Quarter Fiscal Year 2022 Conference Call. Service revenues was $199.8 million for the second quarter of 2022, a decrease of $1.7 million or 0.9% as compared to the $201.5 million for the second quarter of 2021. The decrease year-over-year in service revenue was primarily due to a decrease in online enrollments at GCU and to a lesser extent, students in a university partners Occupational Therapy Assistance Program of 34%, partially offset by increases in GCU's traditional campus enrollments, university partner enrollments in the accelerated Bachelor of Science in Nursing programs and revenue per student year-over-year. Operating income for the three months ended June 30, 2022, was $33.8 million, a decrease of $16.4 million as compared to $50.2 million for the same period in 2021. The operating margin for the three months ended June 30, 2022, was 16.9% compared to 24.9% for the same period in 2021. The operating margin was negatively impacted by the investments that are being made to grow our partner enrollments. Net income decreased 48.3% to $25.6 million for the second quarter of 2022 compared to $49.5 million for the same period in 2021. The decline in net income was partially due to a significant reduction in interest income between years due to GCU paying off the secured note in the fourth quarter of 2021. GAAP diluted income per share for the three months ended June 30, 2022, is $0.80. As-adjusted non-GAAP diluted income per share for the three months ended in June 30, 2022, is $0.85 or $0.01 over consensus estimate. I want to start by putting our current performance within the context of the overall trends that exist in higher education to date. While the trends I'm about to discuss are not positive, Grand…

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 June 30, 2022, and '21. The non-GAAP amounts exclude the tax-affected amount of the amortization of intangible assets of $2.1 million in the second quarters of both 2022 and '21. 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 June 30, 2022 and '21 is $0.85 and $1.12, respectively. Service revenue was generally in line with our expectations in the second quarter of 2022. Revenue from traditional campus students slightly exceeded expectations due to higher summer school enrollment, whereas revenue from online students were slightly lower than we expected, primarily due to slightly higher-than-expected graduations and students taking more time off from class during the quarter. Hybrid revenues were in line with our expectations. The hybrid enrollment growth rate is being impacted on a year-over-year basis due to the timing of site openings, a 34% year-over-year decline in OTA enrollments and the closing of sites. Excluding enrollments from closed sites, ABSN enrollments grew 6.6% year-over-year, which was slightly below our expectations as a few sites had lower-than-expected summer enrollments due to the challenges Brian has discussed previously. The revenue impact of this had little impact on second quarter revenues but will have an impact on revenues in the second half, which I will discuss further in a minute. 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 the enrollment of ABSN students. Service revenue per…

Thank you. At this point, we'll conduct a question-and-answer session. [Operator instructions] Our first question comes from Ryan Griffin with BMO Capital Markets.

This is Ryan on for Jeff. I was just wondering if you can provide any additional details on the ABSN closures. It seems like those classrooms and labs were quite large? Thank you.

Did you ask the closures?

Yes. Florida.

Yes. Yes.

Yes. There were two locations, one in -- both of them in Florida. And as we've talked about in previous quarters, it was a joint decision between GCE and that university partner, that university partner wanted to refocus their efforts on locations closer to their campus. And so this fall, they're actually opening a second location in Albany, New York. So we exited the Florida market. We will be reentering the Florida market, hopefully, in the next 12 to 24 months, most likely with Grand Canyon University as our partner. So we will be back in Florida. We think it is a good market, and so that will happen. But yes, it did have an impact on our year-over-year enrollment growth, although one of the reasons that we were happy closing those locations is that those locations, even though they had been open for multiple years, were still losing money. And so from a profitability standpoint, that was a good decision for both partners.

Got it. And then how would you expect your business to perform in a recessionary environment?

I think it's going to -- I think we're going to do really well. The ground campus is just going better than we could have even expected. We've become a national institution. And even though the number of students graduated from high school is going down and the percent of those going to college is going down, increasingly, people are looking for affordable high-quality options, and we represent that in a destination city and state. So whether there's a recession or not, we won't be impacted from a ground perspective, I think that's just going to keep going really, really strong. Online, we have turned the corner, and we've turned the corner mainly because we've put such a great focus on licensure programs. The fastest-growing programs now are in teacher education, people preparing to be teachers for the first time, where there's a huge shortage of teachers in the country social work, there's a huge shortage of social workers in the country, counseling, etc. And so even if there is a recession and the job market gets tighter, the people wanting to get in those occupational areas, there doesn't seem to be a decline in that. And you have to have licenses to operate, which means you have to earn degrees. And so we think we've positioned ourselves in a very strong place. The same is true with regards to the makeup of our online student body with regards to graduate students. Most of our graduate students are studying in licensure areas or areas that require licensure. And those people are currently operating in an area where they want to get promoted, they want to move up. And so we don't anticipate a downturn there. And I think from a healthcare perspective, if there is a recession and the job market gets tighter, the likelihood that people will want to go spend 16 months re-careering into a nursing program to earn a nursing degree as well as it pays and as good as the benefits are, I think that will increase the number of potential candidates for that program. So we think we're really -- we're well positioned if there is a recession. If the job market gets tighter, we think we're really well positioned if that happens.

Thank you, Ryan. [Operator instructions].

I think we have a question from Alex.

Yes, our next question does come from Alex Paris with Barrington Research. Go ahead Alex.

Hi, thank you. And thanks for taking my questions. I just had a couple questions about the new certificate programs within the fourth pillar. Brian, I think you said that you have rolled out or will roll out soon. What has been rolled out? How is it being rolled out? Is it across the online? And how do you charge for these things? Is it the same cost per credit hour? Or is there a difference?

Well, the -- well, I'll talk about three of the certificates. The first one will be rolled out through with our ground campus enrollment counselors, mainly the people that work within high schools throughout the country that send students to GCU. They're identifying students who would like to stay home and save money, earn the first 60 credit hours of their undergraduate degree to prepare for a nursing program, earn those online for approximately the same tuition rate as you would pay if you are another online student. And so that's being rolled out in September. The second one is also being rolled out in September, and that's for students who have a partially completed degree or a completely completed degree and want to take the science courses necessary as prereqs to get into one of our accelerated Bachelor of Science in Nursing programs. That -- those courses are all completed. The faculty have been hired, and we will roll out that opportunity to people starting into September. We are informing all of our partners and the people that represent those programs about that program, and they will have that as an option to send students to. Right now, most people that express an interest in -- they have a part discipline in giving a complete degree, they will be referred to a community college. That can be a very long process. If they refer them to GCU's program starting in September, we have eight-week courses. If you need to take five or six of those courses, you can take them within two or three weeks of saying that you're interested. And then each course is eight weeks. You can take them consecutively. And so in a period of eight to nine months, you can be through your prerequisite programs…

That sounds very exciting. And I presume then by your comments that the first three are successful could lead to other certification programs offered by GCU.

Yes. There are already people that are hearing about the electricians program that are approaching us as potential partners that want to talk about others.

All right. Then last one for me, just kind of big picture. Grand Canyon has historically grown organically. What are your thoughts with regard to M&A? Are there any capabilities out there that might make sense to buy rather than grow organically, particularly given what's happened with ad tech valuations and valuations in general over the last six months or so, say?

There's a lot of stuff out there, and we have people call us all the time. We will take a look at things. But the likelihood that we're going to do something in the next 12 to 24 months is not very great. We are so enthusiastic about this ground campus and our ability to grow it from the current 25,000 students to 50,000. Now that online appears to be -- we've got that moving again in a positive direction. We want to really focus on continuing to build out programs in that area. And then a potential to grow to 80 locations with our hybrid campus partners, that is a lot of work. And the return on the investment there is so significant, especially in light of the fact that we've really stayed focused on where the gaps in the workforce development are. And that nursing thing has been historically so difficult for people to scale. And the shortage is putting this country at such a significant risk area that if we can build out all 80 locations and be producing 24,000 nurses on an annual basis, there's not a whole lot more that we could do that would be -- it would meet those -- a specific need better than that. It would very much be like what we're doing in teacher education. There's a huge shortage -- most people don't know this, but we have 25,000 students in our teacher ed program, the majority of whom are studying to become first-time teachers because we put in place the infrastructure that they can do that at a distance, not only do the studying at a distance, but we can help them with their internship hours, their observation hours. We can schedule their student teachings and so we are really excited about the areas that we currently have in place and the potential growth of those over the next 10 years. So the likelihood that we would do something else right now is not great.

Good. Thank you. I appreciate that color. Last one that just occurs to me, just to clarify. GCU online, did you mention new student enrollment for the second quarter. I realize you're projecting mid single-digits growth in the second half. How did it turn out in the second quarter?

Yes. It was down in the mid single-digits, which is what we kind of expected going into the quarter given where the head count was. The momentum is good, but also you know historically that the comps become different now. And it's those -- the combination of those two things that now put us in a very favorable position going forward.

Great. Thanks for that. That's all I have for now.

Thank you, Alex. Okay our next question will be coming from Jeff Meuler with Baird. Your line is open now.

Hi, thank you. So I heard that enrollment advisor head count is 10% behind plan. Can you help us understand how much you grew it during the quarter? And then just anything else you can say to give us confidence in going from down mid single-digits to up single -- mid single-digits on GCU online new enrollment beyond kind of the easier comps. And I know you referenced kind of better partner channel. I don't know if there's any additional color you can give us there?

No. The big thing there is over -- almost 35% of our counseling staff is working on B2B strategies out in the marketplace. We're working with school districts. We've had some big school districts visit just recently, Boston, Chicago. And they're really asking us to help put together programs for their paraprofessionals to become licensed teachers. Military bases are asking us to prepare undergraduate students for cybersecurity careers because they can't compete with the outside world to get cybersecurity specialists. Those are just a couple of examples. But that productivity, which during the pandemic was completely shut off, that comes back slowly because you have to get back out there and you have to meet with people. You have to understand what it is they're trying to accomplish, and you have to put together programs to help them accomplish that. But that's the main reason we're regaining momentum. Those people are out again, and they are -- we've now gone through a period of about six months where they're reestablished and rebuilding relationships. And now they're starting to start students. The starting of the students' lags behind, but that's now starting to happen. Our inside counselors, our advertising is -- for those people is still productive at about the same level that it has been, but we had to split those leads among everybody for a period of time. And so they're coming back down to historical rates. The outside people are getting back to their historical productivity rates. And as that continues to happen, combined with the comps becoming easier, those are the things that are putting us in a strong position. The other thing that is important to note is that the RN to BSN program and the Master of Nursing programs almost throughout the industry has taken…

Got it. And then is the clinical instructor -- just was there regulatory changes that were temporary during COVID in terms of how much simulation could be used for clinical experience that is now normalizing? Or just is there a partner pushback on simulations, just how they understand the clinical instructors and the ability -- was there regulatory changes that were temporary during COVID in terms of how much simulation could be used for clinical experience that. Is now normalizing or just is there partner pushback on simulations. How I understand the clinical instructors and the ability to use simulations in lieu of live in-person experiences?

Well, there's definitely a trend in many places, not all with the board's loosening -- not loosening requirement but being more open to get this work done without a one-on-one nurse professors involvement. And so in some states, for example, as much as 40% of the work that used to get done one on one is now being done through simulations or other virtual reality exercises. So that's part of it. A bigger part of it is just faculty availability. And the Masters prepared nurses were reluctant to take one-on-one clinical opportunities because they were getting paid so much in over time to work on the floor. And so we've had to increase what we pay to make it attractive. And increasingly now, as nurses have been paid to be traveling nurses, we will start paying traveling professors, people that are willing to move to travel and take these assignments. And so the thing is evolving, but hospitals are also being a lot more cooperative in terms of wanting to work with us to create clinical spots and to induce faculty members to want to do that work. In Arizona, for example, with the explosion of population on the west side, we've already got a west side location, but we've got new cities coming to us and saying, would you put another location in our city because we got a growing healthcare area, and we want to hire local -- we want our local high school graduates to go be nurses in our local hospitals. And so we've been, I think, through the toughest part of this. And going forward, I think there's going to be a great deal more cooperation with the nursing boards, with the hospitals, with clinical faculty. I think there'll be greater levels of cooperation going…

Got it. And then the last one for me, the 14 planned locations, where are you in terms of regulatory approval process on those 14?

Most of them have already been approved. There are some, especially the fall of 2023 once, and we mentioned one, which is Southern California that are going through the regulatory process, but I think we're more optimistic today than we were even three months ago that that will get approved and be able to get open. There's no guarantees on a few of them, but we're feeling that the things are moving in the right direction.

Okay. Thank you.

We have reached the end of our second-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.

Thank you for your participation in today's conference. This concludes the program, and you may now disconnect.