Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Grand Canyon Education Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Mr. Dan Bachus, CFO. Please go ahead, sir.

Thank you. 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 welcome to Grand Canyon Education's second quarter conference call. We are now almost 24 months into our existence as an education services company. I want to do three things on this call: first, continue to emphasize how we think GCE should be positioned with respect to the future of higher education; second, review the results that have been produced by each of the four pillars of our business in the second quarter 2020; third, talk about each pillar going forward in the context of the pandemic. I want to continue to emphasize that it is GCE's goal to create models that address the real issues within higher education that are going to be even greater challenges, given the impact of the pandemic. The challenges are: one, the out of control rising costs of the university education; two, the increasing student debt levels that will seriously hinder graduates as they begin their adult lives; three, as tuition level goes up, diversity on college campuses goes down; four, Bachelor's degree should not take four to six years to complete; five, programs and delivery models lacked the creativity necessary to address critical shortages in some industries; six, there are inadequate counseling and support services especially for first generation students or those studying at a distance. We are very excited about GCE's direction relative to the challenges facing students, families, and the industries we are serving. 2020 GCE's 25 partner institutions project to produce over 30,000 graduates, over 11,000 healthcare professionals, 7,700 education professionals, 4,600 in the business world, 3,600 in behavioral health, 2,500 in public service, social science and theology, and 600 in engineering and computer science. These students will graduate with less Title IV debt than the average state and private university students in this country. They will have…

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, 2020 and 2019. The non-GAAP amounts exclude the tax-affected amount of the amortization of intangible assets. The loss on transaction amount and the impact of a large state tax refund received in the first quarter of 2019 related taxes paid in previous years. The amortizable intangible assets acquired in the Orbis acquisition totaled $210.3 million and amortization expense in the second quarter of 2020 and 2019 was $2.1 million and $2.2 million. 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, 2020 and 2019 is $1.3 and $1.9 respectively. Service revenue significantly exceeded our expectations in the second quarter of 2020 primarily due to the acceleration in GCU's online enrollment during the second quarter. In addition to the high-teens new enrollment growth drops were down 6.1% year-over-year, which more than offset the year-over-year increasing graduation. As was anticipated, we realized a decrease in ancillary revenues between years at our primary university partner GCU. GCU moved all summer semester classes to an online environment in the last week of March, and limited residential students remain on campus during the summer semester. Most doctor residence fees were canceled through June, and ancillary businesses operated by GCU, such as the hotel and merchandise shops were closed due to the COVID-19 outbreak. We estimate the impact of all of these changes made by GCU as well as the Orbis new start shortfall reduced our revenues by $7.5 million in the second quarter. Included in both our 8K and the…

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

Thanks so much for a lot of information there. Let me start with the growth or the accelerated growth in your working adult students online, very impressive in this environment, can we get a little bit more color on that specifically? I'm just curious, is it more disproportionally graduate versus undergrad, and what is the mix between grad and undergrad? Thanks.

Yes, it is. We watch that very carefully. That's a big part of the GCU online strategy. We really want to keep the graduate to undergraduate mix. Well, if you think of graduate students, it's 50%. Then if you include RN-BSN students, which they behave a lot like graduate students, in terms of the outcome it's a great deal more than 50%. What happened as we had the high-teens growth rate of new starts in April, May, and June, is that the percentage weight of graduates went up, it's around 2%, but the fact that it went up was very, very significant because when you look at persistence rates between grad students and undergrad students, especially in the online environment, when you can engineer your student body that way, you're going to produce really, really high graduation or metrics, really good metrics. I didn't include it in our call, but it was interesting that this quarter our growth in graduates exceeded our growth in enrollment, which is a really, really significant number from the standpoint of the quality that we are producing from a student standpoint and from an academic perspective.

That's great. I'm sorry…

The other question was…

More focused -- on the undergraduate side, did you see the starts from undergrad go down, or they just didn't go up as much as the starts from grad?

No, they didn't go down. They didn't go down. They just didn't go up as much as the graduate student. We are talking, and now we are talking about online students.

Correct, correct.

Right, right.

Okay, good. Thank you for clarifying that. Moving on to how you are setting up the campus for the fall semester, obviously, we've seen your disclosure, a number of schools are doing a number of different things. From a health and safety perspective, can you give us a little bit more color what plans you have in place, if God forbid, there is an outbreak on the campus?

Well, so yes, what we thought was going to produce -- our students want to be back here, I was having student meetings, was having parent council meetings, and that was just our students want to be back on this campus, and so, given that huge demand, we thought the best thing to do was, number one, move back to start date. At the very time we were making this decision, Arizona was going through a --- there was an increase, and we became a hotspot. The governor did some things that we thought would work, and they have been working, they are working. So, the curve is starting to flatten, and things are looking better. So, we thought by moving this the actual move-in date to the last week of September, we would get two things happen. We would get a flattening of the curve, and second, we would get the majority of the heat behind us, so that we could take advantage of October, November, and December. So, students could be outside for all kinds of activities. What we're doing in addition to those things is, number one, each class will meet once on ground, and in a second time synchronously online during the course of the week, so that in every classroom, only half the classroom chairs will be filled. Every single classroom is now been equipped with technology, additional technology, so that if the faculty member doesn't feel well and needs to Zoom in or video in their lecture, they can do that, but if a classroom is equipped for 50 students, there will only be 25 students in that classroom. There will be social distance, masks will be required, and faculty members will be protected by with additional kinds of equipment. That's really, really important…

I'm sorry. I was going to say, I appreciate the details. I'll get back in the queue. Thanks so much.

Okay, thanks.

Thank you. Our next question comes from Jeff Meuler with Baird. Your line is open.

Yes, thank you. Good afternoon. So, curious on your comments about the online new enrollment growth potentially going from the really strong upper-teens to, I think you said mid to high single-digit in Q3, I understand the high-teens likely is not sustainable for an extended period of time, but just why would it normalize that quickly, because it seems like the demand environment for the population that you serve and your execution in this environment are good and not clear to me why that would kind of go back to the longer-term trend line as quickly as Q3?

Well, you have to remember that the pandemic hit at a perfect time for that high-teens to happen, because April, May, and June, are not as high of enrollment months as July, August, and September. And so, the fact that there was all this demand at a time when most people couldn't answer the phone, and we were answering the phone on the first ring, and this is both ground and online, caused a lot of students come here that maybe they were thinking about going someplace else, and it happened at a time when enrollments aren't typically as high as they are in the next quarter. And so, the timing of that was just very, very good. If people went back to work, to some extent, then things normalize a little bit, but we're still in a strong position. If we get high teens growth in the third quarter, given that toughness of those tops that would be very good. And that's going to be, as we said that's going to be also count by the fact that the persistence rates of the students that we are putting into the program are going to be high, and so, high-teens new enrollment growth will produce strong cold enrollment growth and we think put us in a strong position.

Other things I would add, Jeff, is obviously we are very early in the quarter, given that August and September are individually the largest starting month of the year. So, August is the largest, and September happens to be the second largest. So, we're early on, from a [Ross] [ph], new start perspective, the momentum is not slow, but when you take those huge, huge year-over-year comps, it's just a slight smaller year-over-year increase than a similar number attached to the second quarter number. So, we're not -- I don't want anyone to think that we're seeing a slowing in momentum. It's just a much, much, much more difficult count given that August is our largest start month of the year and September is our second month.

And we tend to open the years under promise, things like over deliver.

I've noticed. So, on Orbis, can we just revisit that? So, you know I know that previously you talked about the typical relocation wasn't occurring in the summer and you were thinking there might be an opportunity for your partners to make up some of those enrollments in the fall, and it sounds like you know, maybe some of them are, but there's some number of partners there that just are not increasing their expectations relative to what they were previously expecting to take in, in the fall, so still, so is that right, but so still good growth, but you're just not getting kind of that catch up from the deferred summer enrollment and then are those students at this point likely lost for your university partners?

The demand is there, the students want in, and university has the capability of bringing them in. They're concerned about the clinicals, and so, it's the second aspect of their education where they don't know that they can scale, and some are more conservative than others, and so yes, the opportunity for catch up is there, except for the cautiousness of -- but we might not be able to get an additional number of clinicals. Those things are all scheduled in advance, and a year out, and so, if you want more, those things are usually scheduled right up to them. What hospitals think are the maximum. That was a problem.

And as I said earlier, we expect our fall enrollment, our new start is on in the fall enrollment for Orbis to meet or exceed our original expectations, it just won't exceed enough to make up for the 20% shortfall in the summer start, because the -- Brian just talked about it.

Yes. That's helpful quantification. And then, so lots of moving parts and the guidance. On the option GCU campus affiliated students to go online only for this semester for some period of time, it sounds like 3,500 at this point have indicated that the preference at least for the first semester. Does the guidance assume 3,500, or does it assume a higher number, because I heard you say you'd expect it to go up over time, but you also kind of call that out as a risk factor on the guidance?

Yes, so as of today, we're not quite at 3,500, but the guidance assumes 3,500.

Okay, got it. Thank you.

Thank you.

Thank you. Our next question comes from Greg Pendy with Sidoti. Your line is open.

Hi, guys, thanks for taking my question. Just, I guess, in terms of the mix that you're seeing towards more graduate students, how should we be thinking about the impact, if any, on revenue per student that might have?

Yes. For us, Greg, revenue per student is on a specific quarter between graduate and undergraduate is pretty much the same, maybe a little bit higher for graduates and undergraduates, because tuition on average is a little bit higher, but undergraduate students historically have taken slightly more credits in a semester time period. So, they're pretty much the same. The big difference, as Brian alluded to, is just the persistence and graduation rates of graduate students, and degree completer undergraduate students is much higher.

Right, thanks. And then just one more, I mean, have you ever seen a period in time we're sort of the ground bay students, is there any -- it doesn't seems like you're seeing any today, but is there any sort of sensitivity to the economy you think that can work into a student's decision to maybe go purely online?

Yes. We think that there will be, there are changes right now to how people think about going to college because of the economy. Well, I speak at high school graduations, and it's amazing when I listen to the students moving across the stage, how many are going to community college first, and then they've already been accepted in a four-year institution two years down the line, and so, they're trying to save money. Some students are going online first at a local provider, and then going to a more expensive state university or private university. We are not seeing it, because the average student had GCU campus pays $8,600 a year for tuition, and we haven't changed our tuition amount level for 12 years, and so, like people say to me you're building out this 300 acre, which will become a 400 acre campus, you're going to put 500 more million dollars in four years into buildings, technology laboratories. What we've learned is that the appetite for students to go to college and have a residential community experience is greater than it's ever been. It just can't be $60,000 a year. If you could provide it for $8,600 a year, another $8,000 for room and board, students can graduate in three years, they love going to college, they love having that community experience, they love spending time with their professors and office hours, they love the network of friends that they make, and so, very honestly with all the things we share today the number that is really incredible, it will flatten out to some extent, but right now, for fall of 2021, our applications are 81% of where they were at the same time for 2020 last year, and so the demand, which is why we talk about our four pillars, this second pillar, GCU ground, historically in this country, it's always been assumed that you're going to lose money on a ground campus environment that you charge tuition, whatever you don't get, you got a raise and philanthropic donations, but you're going to lose money, and that's not the case. Now, it's only not the case if you have a hybrid campus, which means you're leveraging in your infrastructure across 80 some thousand online students, and then 24,000 at some point to become 35,000 ground students, but that this ground thing is hugely working in our favor, and is working in the student's behavior that are favoring a huge way. So, the demand to combine campus and to have this experience as long as it's affordable, that's not going to lay off, or up its increase.

That's helpful. Thanks a lot.

Yes.

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.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Everyone have a great day.