Good day, and thank you for standing by. Welcome to the Grand Canyon Education's Fourth Quarter 2023 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 is being recorded. I would now like to hand the conference over to your speaker today, Dan Bachus, CFO. 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'll turn the call over to Brian.

Good afternoon, and thank you for joining Grand Canyon Education's fourth quarter fiscal year 2023 conference call. GCE had another strong quarter, exceeding enrollment expectations by producing online new starts that were in the mid-teens over prior year and also continuing to produce greater-than-expected retention numbers, exceeding revenue guidance estimates at midpoint by $3.3 million, producing a $0.05 beat in adjusted diluted earnings per share to consensus while continuing to invest heavily in initiatives for our university partners. Judging by these results and the current organic lead flow, there has never been greater interest in what is happening at Grand Canyon Education and its 25 partner institutions. There is a vast amount of untapped potential in the American labor force today. There are still universities that chase after U.S. News & World Report rankings. Unfortunately, the criteria for attaining those rankings have nothing to do with tapping into the unmet potential. For example, the fact that there are nursing and teacher shortages is a direct result of misplaced university priorities. Our success is the result of trying to understand the life situation of students and the nature of what it is they need to learn. The combination of relevant programs and creative delivery models is what is driving the interest in what we are doing. GCU's traditional ground campus is designed around the needs of 18-year-old high school graduates who are able to spend three or four years on a college campus preparing for life and work as adults. Their learning is primarily in physical brick-and-mortar classrooms, in other on-campus venues and in internships in organizations throughout the Greater Phoenix area. Second, GCU's online campus is designed for working adult students who enter academic programs whose content can be learned totally in an online environment. The third platform is for…

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 December 31, 2023 and 2022. Non-GAAP amounts exclude the tax-affected amount of the amortization of intangible assets of $2.1 million in the fourth quarters of both 2023 and 2022 and the tax-affected amount of the losses on fixed asset disposals of $0.2 million and $0.1 million for the 3 months ended December 31, 2023 and 2022, respectively. We believe that non-GAAP financial information allows investors to develop a more meaningful understanding of the company's performance overtime. As adjusted, non-GAAP diluted income per share for the 3 months ended December 31, 2023 and 2022 is $2.77 and $2.36, respectively. Service revenue was higher than our expectations in the fourth quarter of 2023 due to higher than expected enrollments at GCU and some of our other university partners. 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 has a higher revenue per student 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, partners have higher tuition rates and the majority of their students take more credits on average per semester as they are in accelerated programs. The increase in revenue per student was negatively impacted in the fourth quarter of 2023 by year-over-year differences in the timing of the GCU traditional campus fall semester such that $1.2 million shifted from the fourth quarter of 2023 to the…

Thank you. [Operator Instructions]. And our first question comes from Jeff Silber with BMO Capital Markets. Your line is now open.

Hey good afternoon. This is Ryan on for Jeff. Just a question on some of the FAF SA delays. Have you seen any impact there in Orbis or GCU and just anything related to call out there?

We haven't -- where we're going to see it is on the ground campus, and that's where we'll see it more so than any place else. And what we have to do is stay in touch with students who are interested and give them as much information as we can about our programs, the cost of our programs, invite them to campus through discover GCU. And we believe that eventually the site will get fixed, and we will be able to get them the FAF SA-- they will be able to get the FAF SA information that they need to make a decision. And so our ability to stay with the students and keep them motivated is what's key here, and that's going to be true for every university. One of the things that we saw in the fall was that, again, enrollments in four-year institutions were down. Enrollments -- the only place the enrollments were really up was in community colleges. And that was significant given the reductions in community college enrollments during the pandemic. What this is a reflection of, we believe, is that inflation is real for middle-class Americans. And the whole idea of questioning the return on investment for higher education continues in this country. And if you're questioning the return you're going to get, you're going to look for less expensive options. And so in the short run, community colleges benefit from that. But we also eventually will benefit that from that, we believe, the reason we're over-investing in visits to the campus this year and are running 43% ahead is that as President of the University, I still believe that we have an incredibly strong value proposition that's still relatively unknown for the majority of Americans. And we are so excited about what we have to offer here. And what's happening with our graduates of this campus that we're going to continue to over-invest in that process even with some of the challenges from a FAFSA [ph] perspective. And so there are challenges related to that, but we believe that we are better positioned than everybody else to respond to those challenges, and we're looking forward to having a real successful fall semester here.

That's great. And sorry, just one more clarifying one. Can you go over the $6.1 million you called out? And when is that expected to be phased out? I'm assuming that's just the 2 partners and the other 1 closing down.

Yes, the $6.1 million is the net impact of -- if you remember, we changed the contract on some of the hybrid partners where they now are paying their own faculty costs, we're no longer reimbursing them. So that has the effect of reducing revenue and reducing our expenses and netting to basically 0. So a big portion of that $6.1 million is that. And some of that impact was obviously in last year as well. And then the rest of it is the impact of the closing of the sites. That amount is pretty minimal of the overall $6.1 million, and most of that is in the second half of the year.

Got it. Thank you.

Thank you. One moment for our next question. Our next question comes from Jeff Meuler with Baird. Your line is now open.

Yeah, thank you. It's Stephen Pollock [ph] on for Jeff. Just on the GCU Discover strength, obviously, good numbers there. But just maybe some more detail. Are you seeing that you have better reach or better conversion of students, I guess just kind of what are some of the driving forces behind some of those strong numbers?

The number of visitors, like we said, is strong. The number of students that eventually apply to the institution is strong. What's lagging behind a little bit is the number of students that are committing by putting a down payment down because many of them are waiting for FAFSA information. And so there's no question that we are -- again, I'll say this as President of the University. I'm so bullish on what we have here. And I think it's so -- the knowledge of what we have and the value proposition is still very under known in most of the country. We are becoming more well known. I mean currently, 25% of our ground students are from Arizona, 20% or so from California, but we're growing like crazy in the Midwest, in the Northwest and the Southeast. And so our ability to hang with these students and keep them as informed as we possibly can and then execute once they receive the FAFSA information that they're waiting for, and we think we'll be in a better spot to convert those students than others that we're competing against. And so obviously, we've got to prove that out. But again, our goal is 50,000 students on this campus. And we're going to continue to push through that goal because we're so excited about what's going on in Arizona and in the greater Southwest from the standpoint of these students getting jobs. We've got 25 advisory boards. We've got over 600 companies represented on those advisory boards and a lot of them are participating because they want access to our graduates. And the difference, our graduates are making in the workforce is really well understood by the hospitals, the school districts, the engineering firms, the technology firms. And so we are overspending to get students to campus. And we did go through the -- what happened last year with more students deciding to do it from home. But we really believe, and I talk to these people almost on an everyday basis that are actually doing the work, that we're one year now removed, further removed from COVID and the likeliness of students to be okay moving from home, parents being okay with them moving from home. We think that being one more year removed from it puts us in a different place. And we're excited about this investment and the return it could provide in the fall. So we know there's a little bit of a risk involved there but we are very bullish on what goes on here and its impact on students and families and the economy.

Do you have any -- Brian, I think he was asking, do you have any thoughts on why Discover visits are up so much? Is the university brand growing nationally?

Yes, absolutely. Absolutely. The value proposition that we have here is -- people are responding to that given inflation. And if you're doubting the return on investment for going to college, it's becoming really -- it's becoming more well known that you can get involved here, graduate in 3 years, graduate with less debt than the average state university students. Our parent loan amounts are 50% of the parent loan amounts for in-state, our in-state institutions. And so if you're at all questioning the value of going into $100,000 or $150,000 worth of debt or go to college, you don't have to do that going here. And so the interest -- that's what's primarily driving the interest and the willingness of people to take the time to come here and visit.

No, that makes sense. I appreciate the color. And then, Brian, I think you said start on a fifth pillar in terms of traditional age students being a program online, I guess -- did I hear that correctly? And then b, how would that be different than your GCU Online program?

We -- right now, the students that are 18 years old or 19 years old and want to earn a degree in business or earn a degree in education and they want to do it from home, they really start in the same program that our 35-year-old started, our working adult students. There's not much difference in those things. What we're working on is eventually a fifth platform that would take into consideration the students are younger, they have lesser work experience, they bring less to the classroom in terms of that work experience. And so over time, we might differentiate those 2 groups a little bit more than we do today. Today, we basically put them in the same program that, for example, a 32-year-old would go into if they were to return to college, they want to earn a degree in one of those areas. So there's not much difference today. But the fact that we are able to do it in the way that we do it differentiates us. If you're living in wherever state in the country, and you're thinking, I want to go to college, but I'm okay staying home. I've got a network of friends. I've got a good part-time job, I'm making $20 an hour. I can do this from home, at least for a year or maybe longer. There's not a lot of institutions that give you the ability to do that. And so as we look at traditional age students, we want to grow our ground campus to 50,000 students. But for those students that are that age that want to stay home, we have an opportunity to serve them as well, whereas most institutions don't. So we'll work on both those lines.

Thank you very much.

Thank you. One moment for our next question. Our next question comes from Alex Paris with Barrington Research. Your line is now open.

Thank you for taking my question. I just had a follow-up on the hybrid campus, a lot of information. I was writing as fast as I could. So hybrid, you had a 3.3% decline in total enrollment during the fourth quarter but fall, new student was up in the high single digits. You're expecting, and I'm just trying to get some clarification. New student enrollment growth in the spring and the summer are expected to be up over 20% and you expect total student enrollment to inflect positive in the first quarter among the hybrid campus.

Correct.

You got it right, Alex.

All right. Thank you. And then with regard to the site closures. Of your 24 partnerships, only two have not responded to the advanced standing students' proposition, and that led to the closure of these two sites and the discontinuing of business with these two institutions, right?

That's correct.

And then you had one other that you were closing just because it was below expectations, which then led to you discontinuing business with that. So you've gone from 24 partners to 21 partners within the hybrid pillar.

One point of clarification. The last one is a partner that had multiple locations and the decision was made this quarter to close one of their multiple locations. So we are only decreasing our partners -- a number of partners by two.

Okay. Good. Thank you for that. Now your goal is to have 80 site locations, 40 of which will be GCE locations with 25 partners. So you expect to add based on that target, three net new university partners in the hybrid pillar.

That's an approximate number. There are areas of the country and states where it's easier to operate with an existing institution in that state than for GCU to get in that state. And for those states, we will add an additional partner. The difference is this time, as we add additional partners, it will be with the common understanding that the place we really need to focus is on those 19-, 20- and 21-year old students who've earned 30 college credits. They don't have a lot of debt accumulated from a previous degree program. And so they're very open to doing their pre-requisite work online and then pay what they need to pay in order to earn the degree in nursing. And so we won't sign another partner who doesn't come with that understanding, in that agreement that they will admit those students. And when you -- back to your 20% increase, that seems dramatic given what we've done in the last year. But remember, we started over 6,000 students in these pre-recourses. And so the students being able to access those courses anywhere in the country and largely take them without the help of financial aid or without taking loans is another huge step in the right direction. If we can get 19, 20 and 21 year old students to understand that they can do the necessary academic work to prepare them without debt and they haven't already accumulated debt from a previous baccalaureate program, the investment in the ABSN program makes unbelievable amount of sense given the number of -- given the money they will make in their career as a nurse. And the shortages and all of that. So we think we've turned the corner from the standpoint of the hybrid programs, and we're very excited about where it's going in the future.

That's great. And then, obviously, there's a lag between new student enrollment and total student enrollment, although we expect total enrollment to be up in the first quarter. Yet, Dan, I think you said that you expect the hybrid pillar to still lose money in 2024. What level of revenue do we need or what level of enrollment do we need for it to break even? And do you expect it to be breakeven or better in 2025?

We're hopeful. I mean, we expect a significant decrease in the loss between '23 and '24, and we're hopeful it will get back to profitability in '25. The key, as I mentioned earlier, is to get these mature locations that were at capacity, pre-COVID and have seen significant declines in their enrollments back to or close to capacity. And so we're obviously very focused on that, working along with our university partners and the things that Brian talked about. We're on our way, but we have work to do to get those mature locations back to capacity.

Great. And then last question, unrelated. CAFTA [ph]. Brian, I think you said that you're watching it most closely for the ground campus. Why is it less of a concern for the online students or the hybrid students?

I guess I shouldn't say it's less concern. But it doesn't -- the -- our ability to work with online students given the delays in FASA [ph] is easier than it is with ground students who are first-time students entering college, coming from backgrounds where their parents haven't gone to college, understood college and that kind of thing. There's just a little bit of -- there's a greater amount of uncertainty with the traditional ground students versus online students. And then in addition to that, remember that 50% of our online students are grad students and not eligible for grant anyway.

Got you. That's helpful. And then does it also -- is it also easier with online students because of the frequent starts? So if you miss a start, you don't have to wait an entire semester to enroll that student and risk losing that student in the interim?

That's part of it, too. Yes, that is part of it.

Great. Well, thanks for the color, guys. Appreciate it.

Yes. Thank you. We've 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.

This concludes today's conference call. Thank you for participating. You may now disconnect.