Good day, and thank you for standing by. Welcome to the Second Quarter 2023 Grand Canyon Education Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your 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 a financial position in GCE. 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 2023 Conference Call. GCE had a very good quarter, exceeding enrollment expectations by producing new starts that were approximately 20% over prior year and also producing greater-than-expected retention numbers, exceeding revenue guidance estimates at midpoint by $3.1 million and producing an $0.11 beat in adjusted diluted earnings per share to consensus. An article that recently appeared in Fortune Magazine titled the labor shortage is pushing American colleges into crisis, with the plunge in enrollments the worst ever recorded. Author Collin Binkley says the following, "Nationwide undergraduate college enrollments dropped 8% from 2019 to 2022, with declines even after returning to in-person classes, according to data from the National Student Clearinghouse. The slide in the college going rate since 2018 is the steepest on record, according to U.S. Bureau of Labor Statistics. Economic -- economists say the impact could be dire. Fewer college graduates could worsen labor shortages in fields from health care to information technology." Grand Canyon Education and its 25 university partners are experiencing significant growth in spite of declines in the overall market, and that growth will continue for the reasons I will explain as I review the 4 platforms, we use to deliver higher education. First, the online campus at Grand Canyon University. New starts were up approximately 20% over the second quarter of the prior year and total enrollment has returned to positive growth again at 4.1%. There are many reasons for this, but I want to highlight 4. Number one, we have stayed hyper-focused on opportunities that exist in today's labor market and since the beginning of the pandemic have rolled out 66 new programs, emphases and certificates across the 9 colleges at GCU. These programs are tied directly to labor…

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 3 months ended June 30, 2023 and 2022. 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 2023 and 2022 and the tax-affected amount of the losses on fixed asset disposal of $0.1 million for the 3 months ended June 30, 2023. We believe the non-GAAP financial information allows investors to develop a more meaningful understanding of the company's performance over time. Adjusted, non-GAAP diluted income per share for the 3 months ended June 30, 2023, and 2022 is $1.01 and $0.85, respectively. Service revenue was higher than our expectations in the second quarter of 2023 due to higher GCU enrollments and the higher-than-expected ancillary revenues at GCU. Hybrid revenues were in line with our expectation. The hybrid enrollment growth rate is being impacted on a year-over-year basis due to the timing of site openings and the decline year-over-year and the enrollment at some of the mature sites due to the challenges previously discussed. Revenue per student continues to grow on a year-over-year basis, primarily due to the service revenue impact of the growth in the GCU traditional campus enrollments between years which is a higher revenue per student due to room, board and other ancillary revenues and the higher revenue per student at off-campus classroom and laboratory sites. Service revenue per student for hybrid ABSN 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 rates, and the majority of their students take more credits on average per semester…

[Operator Instructions] Our first question comes from Jeffrey Meuler with Baird.

Yes, thank you. Just maybe to make the guidance a little bit more apples-to-apples before we can -- so we can better like, assess some of the other changes. Can you just help us stand with the changes in the contract structure around the reimbursed costs, just roughly the sizing of that impact?

Yes. When you take the impacts -- unexpected impacts, including the contract change and the delayed opening of the Southern California, it's approximately a $2 million reduction in revenue and expense.

Okay. And Brian, the dynamic around the traditional-aged students electing to start online instead of on the campus. Just -- anything you can say about the geography of the students? Like is this mostly a dynamic with non-Arizona students? Or is that not the case? And then how does it impact from the university perspective, plans for how you're thinking about campus expansion over the next few years?

Yes. It's going to be very interesting because I talked about America changing, and it really is the desire of people to work from home, to educate their kids closer to home, to go to college closer to home. That's part of what's going on. There are a lot of students out there that are -- they have part-time jobs as high school students. They're making really good money, $20, $22 an hour. And inflation has definitely impacted middle-class families. And so when they see an opportunity to maybe finish their degree program from home in 2 or 3 years, keep their part-time job, maintain the friendships and church relationships they have and those kinds of things, that becomes attractive to them. There's something else happening though that I didn't talk about, which is there's a lot of panic out there with universities. And they're making incredible -- they're offering students incredible deals. Deals that unless they can significantly change their cost structure, expense structure, they're not going to be able to give those deals out again a second and third and fourth year. And so it's going to be interesting to see what happens about halfway through the second semester of next year when students find out the deal they got their freshman year, they're not going to get their second year. We didn't fall into that temptation. We're very transparent. We offer the student a deal that's very specific to what their grade point average is, and so as a result of that, we may have missed out on some students that otherwise we would have gotten. So how long is that going to last? I don't know. This is such an attractive place to be for a lot of reasons. Arizona's economy is growing so fast. Our…

And on the hybrid, is the expected acceleration in starts this fall and next Spring entirely about the pre-req program? I don't think that was a same-store sales number. So do the new campus launches play into that as well? And any sort of change in trends in the traditional career change or student demand?

It's really three things. Number one, it took a while for our partners to understand that the market changed. The unemployment is so low that students that have completed degrees -- the decision to leave a $60,000- or $70,000-a-year job to spend $50,000 or $60,000 to make a little bit more money is -- a lot of people backed away from that. But the number of students and the excitement of younger students who are just graduated from high school or have some community college experience, the opportunity for them now to have a clear path into an ABSN program, our partner institutions now know that that's where the market is, and there are really good students available in that area. And so the fact that we now have only one partner who is resisting what we call those advanced standard students, that's been part of the increase that you're going to see in third and fourth quarter. So that's one thing. The second thing is definitely the prerequisites. That was a major bottleneck. Students would come and they would ask for advice and people would send them to a community college or a state university where they could start maybe in the fall semester, which was still 3 months away or the Spring semester, which was 4 months or 5 months away. And then you had no look into how things were going for them. The fact that we now have these courses specifically designed around what a nurse needs to know about biology, chemistry, anatomy, physiology, et cetera, there are 8-week courses. They're priced very -- they're very affordable, and you can access them from anywhere in the world. That's completely changed the picture for students because they're not borrowing money to complete those -- most of them are not borrowing money to complete those first courses, not knowing whether they can get into the program. And so it's a much better deal for them. Once they see they're going to be able to complete their courses and finish them, the decision to borrow the money, because they're now only 12 to 16 months away from their Bachelor of Science and Nursing program, is really easy to make, given the job openings, the pay and all of that. And so I think we've eliminated a major -- I know we have eliminated a major bottleneck. Our counselors out there are very excited because when they refer students to these courses, they have a look into how they're doing all the way through. So they know that Student X has 5 courses to take. They've completed 3. They've got 2 to go, which means they're going to be eligible, for example, for the fall semester at one of our partner institutions. And so that's the second major reason that we now have a much brighter picture and things should accelerate from here and get back to where we'd thought they would be when we first bought the company.

Our last question comes from Jeff Silber with BMO.

Hey, this is Ryan on for Jeff. Last quarter, you had called out some issues with conversion in the funnel for the ground campus. And given your outlook, it looks like that had improved a lot during the quarter. Can you just explain what drove some of the upside from the last time we spoke?

On the ground side or the online side?

On the ground campus.

Since the last time we spoke, the only real difference is that we had a certain percentage of students who want to come to Grand Canyon that want to do it online. And so we're going to exceed the number of students in each category that we thought we would put into our program. But it's the continued inflationary pressures that families are experiencing that has caused certain students to say, would love to have that experience about being on your campus. But I'm going to hold off and I'm going to go online." So they begin their coursework, and they may come in second semester or they may come at the first of the year. So unlike what's going on in a lot of universities where they just have a declining enrollment because they don't have the flexibility to give people options, when changes like this happen, and there's a lot of things changing in America right now with people becoming comfortable working from home, educating their kids from home, going to college from home. I mean that's definitely changed things. People are getting more comfortable with that. But then, inflation. Inflation is very real for middle-class families and our ground campus is a big middle-class play. We have upper-class students and upper-middle-class students, and because of the work we're doing in our neighborhood, we have significant numbers of students that come from the lower socioeconomic strata, but we're mainly a middle-class play. And there's a significant amount of inflationary pressure on those families. And so they're taking more conservative approaches and they're holding off. Now the other thing that's changed, as I said since the last time we talked, is that we didn't anticipate schools making the kind of deals they're making. One of our issues is that we're extremely transparent and very objective. We don't change criteria. It's very specific around what your GPA is and there are other criteria, and that determines your scholarship amount and what you owe. And that amount historically has been really, really good. Still is, as compared to private universities. State universities have really started to make deals that don't make any sense to me. We know that they're getting declining subsidies from their state governments, that's happening all over the country. And so unless they can change their expense structure significantly, I don't know they can make those deals in years 2, 3 and 4, we'll see. Either way, we've got the ability because of our flexibility to offer students a lot of different options, which I think puts us in a great place.

Okay. And then just on the last pillar, some of those apprenticeship and the workforce development. Just thinking longer term, how big do you think those could be and how meaningful down the line do you think they are? And maybe additionally, what other corporates might make sense to partner with? I think you highlighted electricians before.

Well, it's very meaningful. How meaningful it's going to be to our financials, we'll see. But extremely meaningful in terms of the work we're doing. We've got -- now the 16th ranked campus in the country. We've got brand-new classrooms and laboratories throughout our campus. We're building it out so it can serve 50,000 people. But even with that said, we have 300,000 square feet of empty engineering space in the late afternoons and evenings. And so our ability to create these programs, mainly for the employers in the Southwest, I am very surprised by a couple of things. One, with the pre-apprenticeship program for electricians, it wasn't -- there wasn't a lot of expensive CapEx that we needed to spend to make that happen. We needed to teach the kids math in classrooms with whiteboards. And so that was surprising to me. That's extremely scalable. The machinist thing is equally as exciting because manufacturing is really coming back to this country. It's really coming back to Arizona. And so the potential for us to really scale that as a business is exciting. A couple of our former students brought the idea to me, and we -- they purchased -- I gave them the space for free, paid for their utilities. They bought 5 machines. We did -- they did so well in the first year that we now -- we've loaned them $1.5 million. They bought 15 more machines. And so we are running a business where we're actually selling parts to people like Honeywell. And they're going out to get the business or producing the parts. They're doing a fantastic job. And so being able to bring recent high school graduates into that kind of environment and have them learn while they're going to school has a tremendous…

That's great to hear. And then just last one for me. Anything to call out on the regulatory front, whether it's gainful employment or otherwise? And then any color on talks you might be having with the Department of Ed or any other commentary there?

No, not really. It's the same for us. Our metrics are so good. Graduation rates, very, very low cohort default rates. 90/10 calculation continues to go down. Gainful employment, we would potentially have an issue with our education programs, first-time teachers and we're working on that with our local state representatives. I don't think that would be ridiculous to stop that. We produced 19,000 first-time teachers in the next -- in the last five years. So it's the same thing. They're talking about maybe bringing back some of the same kinds of rules, which if they do, for the most part, we have no trouble with that. Our metrics are very good. Hopefully, we'll get this thing resolved with the Department of Ed. But in the meantime, it absolutely does not impact what's going on. It doesn't impact our growth. 99.5% of our students have no idea one way or the other. They just love the programs that they're in. And so no, nothing to really update you on from that standpoint.

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 for your time.

Thank you. This concludes the conference call. Thank you for participating, and you may now disconnect.