Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2020 Grand Canyon Education, Inc. 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]. As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Mr. Dan Bachus, Chief Financial Officer. Please go ahead, sir.

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 welcome to Grand Canyon Education's fourth quarter conference call. GCE continues to gain real momentum as an educational services provider. We are building 3 unique and differentiated platforms that will provide significant growth for GCE and make a major impact on this country in the next 10 years. In 2021, GCE will assist its partners in producing over 35,000 new graduates at either the bachelor's, master's or doctoral level. The pandemic has been a serious challenge for universities and many are experiencing financial problems. In addition, recent college graduates who are new to the job market are having a difficult time. Many have degrees that aren't serving them well in the current economy. It has been GCE's goal to create educational models that address the real issues within higher education. I believe these issues are the following: one, the out-of-control rising costs for the university education. From the early 1980s to the late 2010, the price of college increased 8 times the increase in wages; number two, the increasing student debt levels that will seriously hinder graduates as they begin their adult lives; three, as tuition levels go up at universities, diversity on college campuses go down -- goes down; four, bachelor’s degree should not take 4 to 6 years to complete; five, programs and delivery models lack the creativity and the flexibility 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; seven, three-fifths of college graduates would change their measures if they were starting over; eight, prior to the pandemic, 43% of college graduates were underemployed in their first job, two-thirds remained in jobs that don't require college degrees 5 years later; nine, most professors have no formal…

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 and year ended December 31, 2020 and 2019. The non-GAAP amounts exclude the tax-affected amount of the amortization of intangible assets, the loss on transaction amounts and the impact of a large state tax refund received in the first quarter of 2019 related to taxes paid in previous years. The amortizable intangible assets acquired in the Orbis acquisition totaled $210.3 million and amortization expense in the fourth quarter of 2020 and '19 was $2.1 million and $2.2 million, respectively. 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 3 months ended December 31, 2020 and 2019, is $1.89 and $1.63, respectively. Service revenue exceeded our expectations in the fourth quarter 2020, primarily due to higher-than-expected enrollments at our university partners. The increase in revenue per share -- or revenue per student year-over-year was expected and is primarily the result of GCU moving back the start of its ground traditional fall semester such that there were 5 more revenue-producing days in the fourth quarter of 2020 as compared to the fourth quarter of 2019, which increased the service revenue we earned. Additionally, our revenue is growing faster at our other university partners than at GCU, and we generally generate a higher revenue per student on those services agreements than our service agreement with GCU, as these agreements generally provide us a higher revenue share percentage, the partners have higher tuition rates than GCU, and the majority of their students take on average more credits per semester as they're in accelerated programs. These increases in…

[Operator instructions] Our first question comes from the line of Jeff Silber from BMO Capital Markets. Your question, please.

Thanks so much. I want to first focus on the GCU ground campus. I know it's still a little early to talk about the fall and there's still a lot of uncertainty left. But any color that you can give in terms of recruiting? And I'm specifically interested if the issue with the Department of Education has impacted recruiting at all? Thanks, guys.

I'll answer the second one first. No, that has not impacted our recruitment at all. Our current students, 90% of them don't know anything about it, and really don't care much about it, both on the ground and online side. And so, no, there's been no indication that that has had any impact on GCU's recruitment. The metrics that we have used for the last eight years to determine where we might end up in the fall, obviously, are all different now because students and families are way behind in their campus visitations and in their decision-making. We're doing our best to look at reduced number of applications but increased conversion rates to registrations, and those kind of numbers look very good for us. Last year, our goal for new enrollments in the fall was 8,000, and we ended up with over 8,200, and we had some difficult months in there. This year, our goal is 9,000. And since the metrics are different, we have to do a little bit of guesstimating, but based upon very strong conversion rates, even with less applications, we believe that we have a very good chance to hit the 9,000, and we are really picking up in campus visitations. The first half of the year, it was a lot of the virtual tours and the virtual live labs and a lot of that interaction. And now, the actual visitations are really picking up, and we expect them to really pick up in April and May. The second semester of this year on our campus, we eliminated the spring break. And we are going to do the last two weeks of class online, which will, in essence, clear our campus out at the end of April. And that is going to -- I'm sorry, at the end of March and first week of April. That will free up our campus to be open to what we hope is mass visitations. In fact, we are actually going to probably combine for a lot of students their campus visitation with orientation. And so our activities are limited as compared to prior years but extremely active as compared to our competition, extremely active as compared to our competition. So given our low tuition rate, all the information now that parents are being bombarded with in terms of how much less our parents are taking out in terms of parent loans? How much less our students are taking out in terms of student loans? How many of our students are graduating in three and three and a half years? All of those things, we believe, will lead to very high conversion rates, and we believe that we have a very good chance to hit our number in the fall.

All right. That's really helpful. Let me shift gears over to Orbis. I appreciate the color you gave on profitability for both last year and what you're expecting this year. Can you just remind us when you get through the kind of ramp-up in terms of new partners? Where could Orbis go? What kind of profitability should we be expecting from that business longer term? Thanks.

The mature campuses, once a campus is mature, which is they start to reach maturity in year 3, we expect 30-plus percent margins on those locations for GCE. And that's proven to be true as campuses are maturing.

Thank you. Our next question comes from the line of Jeff Meuler from Baird. Your question, please.

Yes. Thanks. Hey, Brian, on the kind of changing the way you're talking about the platforms and consolidated 3 and 4 into 3. I guess, are you only open to doing non-healthcare online program management for university clients that you're also doing the Orbis model for? Or are you still open to that as a separate service? I guess, what's the ideal client look like? What are you willing to do in that regard?

Well, the ideal client would be one that -- and think about this in phases. As we open up these locations, we are really focusing on the ABSN program first. It's a proven model. We're going to need 1 million additional nurses in the next five years. The payoff, the value created for both the university and the student, and GCE/Orbis is known, and we just repeat what we've been doing through them for 11 years. Second, then, we will add some new healthcare programs to those campuses, occupational therapy, the nurse practitioner program, etc. As that's happening, we will start to open GCU locations, GCU/Orbis locations in the West. We'll start with the ABSN program, but those locations will grow faster, in terms of additional healthcare programs and potentially other non-healthcare programs. We think that we have -- as we prove that model out through the GCU/Orbis locations that other universities will want to take that up as well when they have the kind of programs that we have that prove to work. This is absolutely a play on the third major market now, we believe, in higher education. There are traditional students having an educational experience and a social experience on traditional campuses. That's our ground campus. There are students that are going back as working adults and doing their entire programs online. And then there are college graduates, and there's a lot of evidence that in the last 10 years, so many of them are underemployed, who are looking for a different format. One that combines delivering didactic material online with intense laboratory work in a physical brick-and-mortar location. And it's that market and those programs that we're going to build this third foundation on. And so it will go in phases. But I think it will accelerate when GCU opens up its campuses and is a little bit more aggressive in terms of additional programs and additional non-healthcare programs. I think I mentioned in the script about other universities are now seeing some of our partners progress to 13-plus percent of their revenues coming from these programs. And some of these partners haven't even been with us for a long period of time. Given the financial stress the universities are going to be experiencing, I think, they're going to be really open to this market and as we continue to prove the results that it will go fast. I don't know. Did that help?

Yes, it did. And then there was a comment, I think, from Dan, not sure who's best who could answer this. So on the potential for GCU to refinance the counterparty loan with GCE, I think you said a possibility of a partial refi. Can you just clarify that? Because I would think that with the counterparty load -- note having the campus and assets of the university securitized against it, that would be challenging. So any additional color there? And then am I interpreting you correctly, Dan, that on top of the significant percentage of the free cash flow that you're planning to use to repurchase stock that if there's proceeds from debt refi, that you would also use a significant part of that debt refi proceeds to repurchase stock?

Yes, Jeff. What you just said is correct. In terms of the refinance, we've had conversations on and off with GCU about what they would like to do. And we have talked to our legal counsel and bankers and their legal counsel and bankers. And if ultimately, they come to us and request to finance, let's say, half of the debt, we would be open to that if that's what's in their best interest. So I think it will be a significant portion or all if they do complete a refinance this year. And I know they're working really hard on it given the very low-interest rate environment that exists.

Thank you. Our next question comes from the line of Greg Pendy from Sidoti. Your question, please.

Hey, guys, just two questions. I think earlier in the commentary, you mentioned a bigger focus on certifications. Could you elaborate? I mean, we know the nursing has sort of the NCLEX pass rate, but are there any particular other pathways with certifications that we should be thinking that you're looking to grow your mix in?

Yes. What I was referring to is not kind of non-degree certifications but degree programs that require that a student meet state and local requirements. So when you think about first-year teachers, working adults that are recareering to become elementary and secondary school teachers, a lot of those things require specific state requirements. And if you don't have a huge infrastructure in place to manage that for students, you can't expect them to work that out on their own. There's just too many loose ends that they won't be able to tie together. And we put together technology to help them do that. The same is true for counseling programs, whether they're at the bachelor's level or the master's level. Many of those counseling programs, other things like light counseling require that students, from a state-to-state perspective, are able to meet the local requirements. And we are able to counsel students in very specific ways about how they can move through our programs and make sure they're doing what is necessary to meet their state requirement. That's a difficult thing to manage, but it's a huge advantage for us because most universities will just tell students. This is our program. You figure out whether this is going to meet the requirements in your state or not. But we don't do that. We take care of all that upfront for students. And then we make sure that they get their requirements fulfilled, that they are scheduled to do their internship hours, that they're scheduled to do their observation hours, that they're scheduled to do their student teaching. All those things give us a huge leg up when students are trying to complete degrees in those programs because we have the infrastructure to support it, and we don't put students out there on their own to make sure that those things happen. So it's more the licensure requirements specific to degree programs than it is non-degree programs.

Got it. Got it. And then just one more if I can add. You gave some metrics on Orbis, just the cost typically $30,000 to $60,000 and the starting salary is $50,000 to $100,000. But just given the change in administration, just kind of curious thoughts on if gainful employment were to come back given your traditional student at Orbis sometimes already incurred four years of a traditional college debt. And then if you -- not that your program is a lot, but if they were to add that on top of their four years of undergraduate debt, if that poses any sort of a risk given the way the gainful employment was under the prior -- or I should say, under the Obama administration.

Yes. It's so interesting. And it's such a new and emerging market. Students that are in their 20s, late 20s, they've completed academic degrees, they're underemployed. They are working at jobs that don't even require a degree. How do you help them get recareered? They don't want to have the experience of going back to campus as an 18-year-old, but the programs that they're interested in that really pay off frequently have not only requirements to study online but also have lab requirements associated with them. And the ABSN program is the most obvious. We're going to need 1 million additional nurses. Universities aren't going to step up to do that. And so we need new and creative and very flexible models to help students do that. And most of those students in our Orbis program are not taking out Title IV levels. They're taking out private loans and private companies are stepping up to do that because there's a 90-plus percent graduation rate, and students are passing the NCLEX at 90-plus percent rate, and they're stepping into jobs that pay between $60,000, $80,000. And so you probably can't get a better loan if you're a bank and that student than that loan. And so eventually, as GCU opens up these Orbis locations, we'll probably implement more Title IV, at least for partial of the money that they're going to need, but we're going to stay in programs, where the career path is clear, where the jobs are available and where the income levels are significant. As a result of that, we don't anticipate any issues there. This is a major new market that's emerging here. And it's going to have a big impact on students' decisions in the coming years that are 18 years old, in terms of what degree programs are they choosing. And what do they know about the investment they're going to make, the career path that's going to be available to them, the income that they can make, etc. Not as big a deal at GCU as it is other universities because our students graduate with such little debt. But we still are going to talk to them about -- even our students at GCU ground campus, we're going to talk to them about career earning potential and those kind of things because many universities are stuck in a faculty model that kind of forces them into offering certain programs that have a rich history to them but are not nearly as in-demand and lucrative as they used to be. But you got 10-year faculty to have those positions. And those courses have to be taught. And so we are in a very different place, don't have nearly that kind of pressure. And so we could do it at GCU, but we also believe that we could help other universities do it through GCE. But no, we don't anticipate any issue with regards to gainful employment.

Thank you. Our next question comes from the line of Brett Knoblauch from Capital Markets. Your question, please.

Thanks for taking my question. Just regarding the nursing shortage, where is the bottleneck there? Is that more on the university side from them not having capacity? Or is it maybe in the hospital side? Maybe they don't have enough capacity to employ nurses. I guess where is the bottleneck going up?

Yes. You know, it's the sacred cows that exists in the history of higher education. Nursing schools are heavily dependent on first-time pass rates on the NCLEX exam. Your nursing school rating is heavily dependent on those things. And the surest way and even or Dean would admit this at GCU, the surest way to make sure that you get the kind of first-time pass rate on NCLEX exams is to make it very -- your program very small and elite. And so in many programs, you come in for your first two years and you take biology and chemistry and physiology those kinds of courses, and you need to come out with a 3.9 GPA after your first two years to get into nursing school. When it's very obvious to us that a 3.6 student can absolutely get through the second two years of nursing school and become gainfully employed as a nurse. And so part of it is the desire for nursing school rankings on the part of the Dean. The second part of it is that nursing schools are very expensive to offer. Typically, they lose money. The laboratory investment is significant. The student-to-faculty ratio is very low. And so schools don't have any incentive to grow their nursing programs because they lose money on it. And so the incentive for nursing schools to take the operational risk to expand and grow to meet the demand is not there. We have never been afraid of that. This year, 2020, I'm glad you asked this question. I can't tell you I'm speaking on behalf of GCU now as its president. But in the middle of the pandemic, we produced far more nurses than any of the state universities that exist in Arizona, and we had a 95.6% first-time…

No, perfect. That helps a lot. And then maybe just one more question. Just curious to what you're seeing from the graduate side of things. Do you think we're going to have a maybe a change environment coming out of COVID where online is much more accessible from a graduate degree perspective? And do you expect that to result in maybe sustained growth there from the graduate online degrees exposure like that?

Yes. I think in large part, we've moved past where, did you earn a degree on a campus or did you earn your degree online? I think we've moved past a lot of that. The more appropriate question now is what area did you earn it in. The generalist kinds of degrees. At the undergraduate level, if you go back to complete your program in business management or if you go back and completed in another liberal arts area. That's not going to be nearly as impactful or necessary for people. And the same is going to be true at the graduate level. If you said to a person right now, do you think you'd benefit more by doing an MBA program or a master's degree in cybersecurity? Right now in this country today, there are 300,000 open jobs that pay on average $92,000 a year for master's degrees in cybersecurity. And so understanding where the economy is going, where the job shortages are, where the clear career paths are to good income is far more important than did you do it online or do it on the ground? And I think we're putting a major focus on understanding where the economy is going and growing those programs that specifically relate to where the jobs are going to be versus, is it delivered online or is it delivered on the ground? Now, I tell you the exciting thing for me is, yes, healthcare and even at the graduate level, but eventually, we would like to take these students that have baccalaureate degrees and help them earn second baccalaureate degrees in mechanical engineer in electrical engineering. In those areas, because that's going to be for a lot of people, a lot better than going back to earn a master's degree in business, for example. Not for everybody, but for a lot of people. You hear a lot of talk about it, but people that can do things, as well as know things are just going to be a lot more desired in the marketplace.

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.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.