Grand Canyon Education, Inc. (LOPE) Earnings Call Transcript & Summary

Good afternoon. My name is Greg Pendy. I'm an analyst at Sidoti, and I'm happy to be here today to present Grand Canyon Education. We have a full team here. We have Brian Mueller, the CEO; Daniel Bachus, the CFO; and Stan Meyer, the COO. They're going to go through their presentation fairly quickly, and we will get to some questions at the end, so please feel free to put any questions that pop up into the Q&A. With that, I'll hand it over to Grand Canyon Education.

Well good morning. This is Brian Mueller, the CEO. Thank you very much for your interest in Grand Canyon Education. We are doing everything in light of what we think are the challenges in higher education because we want to be in this thing for the long term. One, university education is too expensive. Students are taking on too much debt. Degrees are taking too long to complete, which adds to the debt. Programs are not targeted directly enough to where careers are, current careers are. As tuition increases, which it continues to do almost everywhere, diversity declines. And there are inadequate counseling and support services, especially for first-generation college goers and distance learners. U.S. News & World Report rankings are more about inputs than outputs. They're outdated, they're archaic and they're really counterproductive in terms of helping families. We've got 4 pillars to Grand Canyon Education. Those are the 4, and I'll talk about each one, so we'll just move to the next one. Pillar 1 is Grand Canyon University Online, which has been the primary growth of value in the company in the past. We have about 85,000 students in Grand Canyon University Online. Our goal is to grow at 6 to 7 percentage points a year. Revenue would be 7 to 8 percentage points, slight margin expansion. Average tuition is a little over $10,000. We've exceeded those goals recently. We had a very big second quarter where enrollments grew in the mid-teens. Part of that is -- a big part of that was because of the pandemic, which we can talk about. Strategic advantages. To scale an online program to 85,000-plus students, you have to have a lot of technology. We put $250 million into our technology platform in the last 10 years. We're able to operate with a lot of expertise at scale. Very experienced management team, 2,700 very experienced staff. A $100 million-plus advertising budget. And unlike universities that are doing this with a lot of OPMs, we have over 150 programs, emphases and certificates, and our goal is to average to add 20 per year. We're very competitive from a tuition pricing perspective and for a full-service offering. So second pillar is GCU traditional campus, which is a very unique asset. Most people don't think that you can make money on a traditional university campus. You absolutely can. If you have a hybrid campus, in fact, the margins on your traditional students can be close to the margins on your online students if you have large student bodies in both markets. Our traditional campus at GCU on the ground campus, the goal is to grow 30,000 students and 22,000 of those being residential students. That's a little bit outdated, and now we're thinking closer to 40,000 students in GCU's traditional campus over the next 7 or 8 years. Average revenue per student is greater than $12,000 for commuter students but it's almost $18,000 for residential students. Really important point, we haven't raised tuition on GCU's ground campus in 12 years. The average student pays about $9,000, the average student. Room and board is about $7,000 but the margins on that $7,000 are higher than 50%. And so the board -- the room part of operating a traditional campus, if you own and operate the residential halls, is very, very profitable, even at very modest rates. Strategic advantages. Price point as compared to private and now even state universities, huge strategic advantage. Over 240, now it's over 270 academic programs. We are greater than 50% in STEM areas. We've been ranked as high as the sixth nicest campus in the country by virtue of classrooms, laboratories, residence halls, et cetera. Currently, we're ranked at 19th best. High-quality teaching faculty. Phoenix is a destination city, Arizona is a destination state. We have an infrastructure of over 4,000 high school partners that we recruit from. 40% of our graduates graduate in 3 years. And so when you think about that as a value proposition, the average student takes out less debt than the average state university student and far less than the private university students. Extremely vibrant campus culture, which is gaining a reputation nationally. So that's our second pillar. Our third pillar, we're very excited about and one that we would ask investors really to seriously consider as a significant part of our strategy over the next 5 years. We made a purchase of a company called Orbis. The country is going to need 1 million additional nurses in the next 5 years. Universities are very reticent to scale their nursing programs. They're expensive, they lose money. They're highly regulated and so they tend to keep their programs very small. They're just not going to scale those programs in order to meet the need. Goals with Orbis -- so what Orbis does is they go into a community and kind of deal with the health care provider, guaranteeing clinical placement opportunities, then they cut a deal with the local university to build a campus -- small campus, 14,000-square-foot building about an hour away from the main campus. They're really targeting people that have completed baccalaureate degrees in their 20s that want to re-career into nursing. They're experienced students, they're proven students. They take their prerequisites online, which they pay for. If they meet the minimum requirements, they get admitted into the program. And then it's a premium-priced program. It's very intense. It's somewhere between 12 and 18 months and like depending upon the university, and it's between $55,000 and $60,000. It's a licensure program. Increasingly, in this country, people are willing to pay a premium price for a licensure program, especially one like an ABSN program because the value proposition is very clear. They know what they're going to make. They know the demand that there are for nurses. And so our goals the next 5 years is to grow from 23 to 70 locations, including 11 in the next 6 months, grow revenues by an average of 20% over the next 5 years. Average revenue per student is $59,000. GCE or Orbis gets 70% of that revenue. And those programs become profitable in the second year and very profitable in the third year. So as compared to the typical OPM contract, the return to investors is much sooner. We talked about the need in the country. Very unique delivery. It's online for didactic material. It's on ground for lab work. None of these students are cannibalized in terms of the GCU product, both ground and online. They've got 11 years head start in the industry so they have a proven program with proven outcomes. Not only is the revenue per student very high, for example, nearly 4x as high as a GCU online student is, but they have 90% graduation rates and over 90% first-time pass rates. We will be using GCU's nursing program to open up locations in western markets. And GCU's nursing program has NCLEX pass rates that exceed 95%. Very experienced management team at Orbis, a very unique product, very uniquely positioned with very -- it's very difficult to compete against that product. And so that will be a big part of our growth going forward. The next pillar is a more typical OPM relationship. We signed our first 1 with Valparaiso a couple of weeks ago. We've been saying for now 6 months that our entry into this market will be done primarily through a combination of an Orbis partnership with a more traditional GCE partnership. Universities are calling us from all over the country now wanting an Orbis partnership. They want a greater partnership with us, which we are willing to do, but we do want to start with the Orbis partnership because the investment in that part of it is less and the return in terms of getting to profitability is much sooner. That gets the overall partnership off to a much better start. That gives us time then to take a look at the university's other offerings to see which ones have the greatest potential in their region. But it ensures that the partnership gets off to a great start economically, and then we can add to it where we see we can do it profitably. And so those first 3 pillars are going to be where we put the greatest amount of investment. They all have really good runways. They're all fully up, established and profitable, and we have a unique position with each of them, especially the second and third pillars. I think that's the end of the -- I think you'll probably ask questions about the COVID pandemic impact on GCU's main campus. And so we can talk about that as we answer your questions. So with that, we'll open it up.

Okay. So the first question we have here, historically, the online business has been countercyclical, and GCU Online saw above-trend new starts in Q2. Should the new starts continue to grow above our targets during this period of higher unemployment?

There was some -- I'll just speak from the standpoint of GCU's acceleration in the second quarter with both online students and then in the fourth quarter with -- or the third quarter with ground students. A lot of it had to do with, yes, people went home. Many of them were working from home, if not unemployed. They were looking for productive ways to spend their time and going back to school online, if that was something they were thinking about, it kind of accelerated their process towards starting that. But if you watch, most of the big players didn't accelerate during that time. We think the big part of our acceleration was availability. We had put a lot of dollars into technology. Part of that was at GCE, well both GCE and GCU. We set up the majority of our people to be able to work from home. It was considered a fringe benefit. So if you were doing admissions work or if you were doing financial aid work or technical support or faculty support, we had set you up to work from home. So for a day or 2 a week, that was considered a fringe benefit. But when the pandemic hit, we moved 95% of our people instantly to their home office setups and productivity across the board went up. Our lead generation went up, our inquiries went up, our conversions went up. All of the metrics related to admissions work, financial aid work, technical support, course completion, all of that went up. And we were available. And so a lot of people struggled to get a hold of universities and to do business with them, and we were picking up the phone on the first ring. And so you saw that real acceleration for about 6 months, really, beginning in March and then running through to today. Now that's going to come back to more traditional growth rates as we move forward. The countercyclicality with education traditionally has been at the lower levels, the people completing baccalaureate degrees or vocational technical schools, because those people, when unemployed, will go back to school. When not -- when jobs are -- there's a lot of them, they'll go to work and therefore, go to school. We've never been impacted by that. Our ground students, our students that are going to go to college whether the economy's good or bad. Our online students, 50% of them are at the graduate level. They're going back to school for a specific reason, and they're going to go back whether the economy is good or bad. And so we tend to be not as impacted from economic countercyclicality, but we were impacted, unfortunately, positively because of the pandemic.

Great. Next question. Some traditional universities like George Washington University have reported a significant number of students taking a semester off due to COVID. What have you seen on your campus in Phoenix?

Yes. That was a tremendous benefit to us. Unfortunately, the pandemic was a benefit to us in that way, too. Number one, our tuition is very affordable. And we have a vast array of -- we have 9 colleges, 270 academic programs. And so as people were thinking about this fall, well number one, we finished the spring semester very positively because we're pretty adept in delivering education online. Students were very satisfied with their experience and so our summer enrollments actually went up. But then the fall, as people were thinking about what should we do in the fall, a couple of things happened. One, if you were a private university that charged $50,000 to $60,000 to $70,000 a year, people weren't willing to invest that if there was a chance you were going to be sitting on your couch, paying that kind of money and doing it online. And so when they looked at Grand Canyon, when that was one of their options, they said, "$8,600 a year, whether I'm doing it online or on ground is still a very good -- the value prop is very strong. I'll go because even if I have to go home and it's online, I'm still not spending $50,000." So that was good. Secondly, we gave every student a choice. And so whether to stay home and do the first semester completely online and they could get all the classes they needed or they could come to campus. Where most universities are down 10% to 20%, our new enrollment goal was 8,000. We actually hit 8,200. And our total enrollment goal, we exceeded by almost 600, and it was because we gave those students who wanted to stay home a choice at a reasonable price point. So they didn't take the semester off or, for example, go to a community college. And then the students that came, came knowing that if something happened, they were confident they could go home and finish online and not lose credit hours. And so we actually are up and our applications for enrollment in the fall of 2021 are way up. And so our ability to be flexible with students in a difficult time kind of our reputation was enhanced in a sense and we prospered as a result.

The other thing I would add is we use -- GCU usually turns away students to its ground campus at the end of the cycle because of capacity constraints. Because of the pandemic and a certain percentage of students choosing to go online for the fall semester, in effect, it increased GCU's ground campus capacity, i.e., they had more commuter students than they've had historically. And so that helped as well, and the reason that we were able to be 600 over our expectations versus probably right at our expectations.

Which creates a really interesting scenario for fall of '21.

Yes.

Could be very good.

And investors probably should really consider that. The way we -- the only place we got hurt in this first semester was in the room and board that we would have gotten from the -- we had about 4,700 students that decided to stay home. Now they stayed with us, they're fully enrolled. They're paying their full tuition, but we lost some room and board revenue, which we factored into our guidance. And so that's been taken care of from that standpoint. But in the fall -- if we get this thing fixed, meaning the pandemic, the fall of 2021 could see the return of those 4,700 students in addition to a record-setting set of incoming students, which we are now building 3 new residence halls in anticipation of we having a record fall enrollment, both in terms of tuition-paying students and residential students.

Great. Next question. Could you just review briefly the accounting mandate for public online education? Given the pandemic, have you accounted for a greater percentage dropping out?

We accounted for a greater percentage of our online students dropping out because of the pandemic?

I believe that's what the question is kind of referring to is just the graduation rate. And if you've kind of taken any, I guess, precautions in terms of a greater percentage of students dropping out.

No. Actually, the opposite has happened. We -- what we call drops or temporary outs has actually decreased and reenters has increased, which has really impacted our total enrollment. Now -- and yes, we always make the adjustment from a graduation rate perspective, which will go up. Dan, do you want to talk about that?

Yes. I think as Brian said, what we really saw in the second quarter that continued into the early part of the third quarter is a dramatic decline in students taking time off or completely dropping, which ultimately will result in higher retention rates and higher graduation rates, as Brian said. As we get into the back half of the year, what we've had to do and we accounted for this in the guidance, is lower our expected reentry amounts because if the students never drop out, you can't reenter them. And so you'll see total enrollment get closer to where we thought it would be as we get to the back half of the year because reentries will be less than what we had budgeted, but only again, that's because they never dropped out. And so from a revenue standpoint and a total enrollment standpoint, having much lower -- and from a regulatory standpoint, having much lower drops leads to much higher retention and graduation rates and higher revenue over the second and third quarter. But again, we expect that to normalize as we get to the end of the year as we won't have as much potential reentries as what we had forecasted initially.