Good day, and thank you for standing by. Welcome to the Q1 2025 Grand Canyon Education Incorporated 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sarah Collins, General Counsel.

Joining me on today's call is our Chairman and CEO, Brian Mueller; and our CFO, Dan Bachus. 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 regards 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. With that, I'll turn the call over to Brian.

Good afternoon, and thank you for joining Grand Canyon Education's first quarter 2025 conference call. GCE had another strong quarter, producing online enrollment growth of 7.9% and hybrid growth, excluding the closed sites and those that are on teach-out, of 16.5%. We also continue to produce strong retention rates, while at the same time investing heavily in initiatives for our university partners. The investments GCE and its 22 partner institutions are making are based on the belief that there is a vast amount of untapped potential in today's workforce. Many recent high school graduates did not go to college this year because of exorbitant tuition rates, potentially exorbitant debt levels, and difficulty managing the FAFSA website. Many working adults who could benefit from higher education are not attending because of the lack of creative delivery models that take into account their life situations and what they need to learn. Grand Canyon Education will continue to grow at our stated goals over the long run, because we are addressing those challenges in ways that work for students and employers. With that, I would like to review the results of the four delivery platforms at Grand Canyon Education. First, the online campus at Grand Canyon University. New starts were up in the low-teens in the first quarter of 2025, which exceeded our expectations, and total enrollment growth was 7.9%, which slightly exceeds our long-term objectives. There are many reasons for this, but I want to highlight four. Number one, we have stayed focused on opportunities that exist in today's labor market and continue to roll out at least 20 new programs per year for our university partners. Since January 1, 2023, GCU has rolled out 48 new programs, emphases, and certificates across the 10 colleges, bringing a total of 353 programs, emphases, and certificates. These programs are tied directly to labor market opportunities for students. One of the responses of universities to declining enrollments is to reduce the number of programs they offer. Two, we continue to work with employers directly to address their workforce shortages. This effort is focused on the industries of education, healthcare, engineering technology, manufacturing, public safety, and the military. In the first quarter, new starts from this work increased 18.2% year-over-year. Three, retention of students in the first quarter increased, which we believe continues because of the relevance of the programs that students are handling and their direct ties to the students' career aspirations. Four, GCU has resisted responding to the slower growth in higher education overall by raising tuition significantly, which many institutions have done. While a few GCU online delivery programs have gone up approximately 1% per year, overall, online net tuition rates at GCU have gone down. GCU continues to build technology and deliver other services to its 22 partner institutions, resulting in efficiencies that address the financial crisis that exists in higher education today with regards to rising tuition and debt levels. Given the tough comps, we are still projecting new start growth will be in the mid-to-high single-digit rates during the rest of 2025. Second, the GCU ground campus for traditional students. As has been previously discussed, new and total traditional campus enrollments were down slightly year-over-year in fall 2024 for the reasons discussed on previous calls. Although the spring intake is much less than the fall, we did see an increase in new students starting at GCU in Spring 2025 as compared to Spring 2024, which helped offset the increasing number of students that graduated at the end of the fall semester. We believe GCU will reaccelerate growth in the ground campus because of significant advantages, including a very low price point, very low average debt levels, a high percentage of students completing in less than four years, and the relevance of GCU's academic programs. GCU still plans to grow its traditional campus to 50,000 students. It is our understanding that the Department of Education continues to work on fixes to the FAFSA issues and that the initial results have been positive. We believe that this, along with a number of strategy changes we have made to address this specific challenge for 2025 and '26, will help us meet the university's new enrollment growth goals. We remain ahead of last year in new student registrations for the fall of 2025. So, although it is still early in the recruitment cycle, the current trends are positive. Third, Grand Canyon Education's hybrid campus had an increase in enrollment year-over-year, 12.1% in the first quarter, excluding the closed sites and those that are on teach-out. Enrollment increased 16.5% year-over-year. We expect the new enrollment growth rate to maintain up in the low-to-mid-teens during the Spring and Summer of 2025 and the rest of 2025. There are two main reasons for this continued growth. One, almost all of our active ABSN partners have responded to the younger students interested in ABSN programs by admitting advanced standing students or are in the process of making that change. Students with partially completed degrees haven't accumulated a great deal of debt and are very interested in nursing careers, but didn't have an efficient way to earn the prerequisite science coursework. GCU created the science courses and some other GenEd courses so they can be delivered online in eight weeks. Students can access these courses from anywhere in the world. There are start opportunities almost every week. These courses have been made very affordable, are taught by experienced faculty, class sizes are low, and there's tremendous academic support, including an artificial intelligence project that provides students 24/7 access to tutoring. Since implementing these courses, we have already enrolled over 14,000 students. We have a waterfall report that allows us to know how students are progressing through their prerequisite courses and when they will be eligible to start at one of our ABSN sites. The success rate of students who successfully entered the ABSN program is in the high 80% range, and the first-time pass rate on the NCLEX exam is approximately 90%. We now have an efficient way to get students academically eligible and prepared to enter the program. These positive results, we anticipate, will continue. There has never been greater interest among potential students for entering the healthcare professions and specifically nursing. Because of the low unemployment rate, interest has shifted to these younger students who haven't accumulated a great deal of debt, are completing a bachelor's degree in another area, and are underemployed. Nearly all our partners have responded positively to the changes needed to serve the advanced standing students. Our goal is to still have 80 locations, non-GCU partners will have approximately 40 of those locations, and GCU will have approximately 40 of them. In 2025, we will open a total of five additional sites, including our second location in the Boston area in the fall, another site in New York City, and GCU will open three new sites in 2025 in Albuquerque, New Mexico, which opened in the first quarter of 2025, Lake Mary, Florida, near Orlando, and in Englewood, Colorado, south of Denver. In addition to GCU's three new site openings, this will bring its ABSN total locations to 11. We will also expand our programmatic offerings with our hybrid partners by adding graduate nursing programs with seven specializations with Northeastern University, including master's and doctoral-level degrees starting this summer at several East Coast locations. A hybrid occupational therapy bridge to master's program to our already successful St. Kate's Occupational Therapy assisted hybrid program. An online health science degree with Utica University, and GCU will launch a Bachelor of Science and Occupational Therapy Assistance program and Speech Language Pathology program in 2025 at our West Valley Phoenix location. Adding additional programs at our hybrid location is an important component of our business plan. Four, Center for Workforce Development at Grand Canyon University. In the 2022-23 school year, we started 80 students in GCU's electricians pre-apprenticeship program, in partnership with companies that are experiencing labor shortages in that area and are excited about hiring GCU graduates. The program consists of four core credit courses and runs one semester. 212 students successfully completed the program in 2024-25, including 11 in Austin, Texas. In fall 2023, we started GCU's manufacturing CNC Machinist Pathway in partnership with companies that are also facing labor shortages and are excited about hiring GCU grads. Programs consist of four core credit courses in one semester. 33 students completed this program in the 2024-25 fiscal year. These students attend school for 20 hours a week and work in a facility as a paid employee for 20 hours. At the end of the semester, they receive a manufacturing certificate and become eligible for employment in Arizona's fast-growing manufacturing industry. Students in GCU's growing engineering college are gaining experience in this manufacturing facility, which is adding to their engineering education. Recently, a manufacturing company owned and operated by a recent GCU graduate bought an additional manufacturing company, which has more than doubled its capacity and has the opportunity to significantly grow the number of students involved in this program. I started out talking about the relevant programs and creative delivery models that GCE has implemented with its 22 partner institutions. In the six-plus years since GCE became a service provider, this helped its partners accomplish the following: in that time, GCE has helped Grand Canyon University graduate 189,170 students. 51,381 in education, including 24,247 first-time teachers at a time when teacher shortages have created a national crisis. 50,615 in nursing and healthcare professions, including 2,836 pre-licensure nurses at a time when there is a huge shortage of nurses. 38,586 in the College of Humanities and Social Sciences, including thousands in counseling and social work, but there are also huge shortages. The College of Business could become one of the largest business schools in America and has produced 32,900 graduates. The College of Science, Engineering, and Technology has grown by 217% and provided 7,806 graduates. The Doctoral College, Honors College, and College of Theology also continue to grow. In addition, GCE has helped its other partners graduate 18,472 pre-licensure nurses and occupational therapist assistants. The numbers that I've just cited have all happened in the past six-plus years since the GCU-GCE transaction, and since GCE has become an education services provider. Service revenue was $289.3 million for the first quarter of 2025, an increase of $14.6 million or 5.3% as compared to $274.7 million for the first quarter of 2024. The year-over-year increase in service revenue was primarily due to an increase in partner enrollments of 5.8%, including an increase in GCU online enrollments of 7.9%, and university partner enrollments at our off-campus classroom and laboratory sites of 12.1%, partially offset by a decrease in revenue per student year-over-year, primarily due to last year being a leap year and previously discussed contract modifications. Operating income and operating margin for the three months ended March 31, 2025, was $88 million and 30.4%, respectively, as compared to $84.5 million and 30.8% respectively for the same period in 2024. Net income increased 5.3% to $71.6 million for the first quarter of 2025, compared to $68 million for the same quarter in 2024. GAAP diluted income per share for the three months ended March 31, 2025, is $2.52. And adjusted non-GAAP diluted income per share for the three months ended March 31, 2025, is $2.57, which is $0.05 above consensus estimates. With that, I'd like to turn it over to Dan Bachus, our CFO, to give a little more color on the 2025 first quarter, talk about changes in the income statements, balance sheet, and other items, as well as discuss the 2025 guidance.

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 March 31, '25 and '24. The non-GAAP amounts exclude the tax-effective amount of the amortization of intangible assets of $2.1 million in the first quarters of both 2025 and 2024. 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 March 31, 2025 and '24 is $2.57 and $2.35, respectively. Service revenue was higher than our expectations in the first quarter of 2025, primarily due to higher-than-expected enrollments. As we expected, revenue per student decreased slightly between years, primarily due to the additional day for leap year in 2024, which added additional service revenue of $1.5 million as compared to the current year and contract modifications for some of our university partners, in which the revenue share percentage was reduced in exchange for us no longer reimbursing the partner for certain faculty costs, both of which reduced revenue per student. This is partially offset by the service revenue per student for ABSN students at off-campus classroom and laboratory sites, generating a significantly higher revenue per student than we earn under our agreement with GCU. As these agreements generally provide us with a higher revenue share percentage, the partners have higher tuition rates than GCU, and the majority of our partners' students take more credits on average per semester. The first quarter operating margin was negatively impacted on a year-over-year basis as we expected due to the leap year impact, additional spend for 2025 partner initiatives, but also due to significantly higher-than-expected benefit costs as a result of an increase in the number of high-cost claims. Our effective tax rate for the first quarter of 2025 was 21.6% compared to 22.9% in the first quarter of 2024 and our guidance of 22.2%. The effective tax rate decreased year-over-year primarily due to an increase in excess tax benefits of $2.7 million compared to $1.5 million in the three months ended March 31, 2025 and 2024, respectively, partially offset by higher state income taxes. We anticipate this trend of higher state income taxes will continue. We repurchased 395,426 shares of our common stock in the first quarter of 2025 at a cost of approximately $68.4 million, and another 125,780 shares were purchased since March 31, 2025. We have $209.4 million remaining available as of today under our share repurchase authorization. The Board and the company intend to continue using a significant portion of its cash flows from operations to repurchase its shares, and we anticipate daily purchases will continue during 2025. Turning to the balance sheet and cash flows, total unrestricted cash and cash equivalents and investments as of March 31, 2025, was $304.7 million. GCE CapEx in the first quarter of 2025, including CapEx for new off-campus classroom and laboratory sites, was approximately $8.9 million or 3.1% of service revenue. We anticipate CapEx for 2025 will remain comparable with prior years at between $30 million and $40 million. Last, I would like to provide color on the updated guidance we have provided in our 8-K file today. As a reminder, the guidance that we have provided in the outlook section of our 8-K filed today is GAAP net income and diluted income per share, with the components to adjust the GAAP amounts to non-GAAP as adjusted net income and non-GAAP as adjusted diluted income per share. We have updated full year 2025 guidance to include the first quarter revenue and earnings beats, which have increased the second quarter revenue and earnings projections by increasing both the low end and the high end of our previously provided guidance due to the higher-than-expected enrollments at March 31. We continue to anticipate that new enrollments will be up year-over-year in the mid-to-high single-digits at each quarter during 2025 and that total online enrollments will remain in the mid-to-high single-digits over the prior year throughout 2025. Total online enrollments will continue to be pressured by increasing graduations and a continued decline in reentries, students returning to school after a break due to high retention rates. There could be some upside to our second half projections given the strong trends, but given the tough comps, we believe these estimates are appropriate. We continue to anticipate new and total student growth rates in the hybrid pillar to be in the mid-to-high teens, with the revenue growth rate for the hybrid pillar as a result of the enrollment growth continuing to be partially offset by changes made to the contracts for the university partners that are no longer being reimbursed for faculty costs. All ground traditional enrollment expectations remain the same as what was provided last quarter. On the expense side, as you'll recall, after a pause on certain investments, primarily in headcount, in the first nine months of 2024, we ramped up hiring and other spending in the fourth quarter of 2024 and anticipate this continued investment to continue in the second quarter to meet the growth goals of our partners. We also continue to absorb significant increases in both benefit costs and technology services, with benefit costs significantly exceeding our expectations in the first quarter and during the month of April. As it relates to the hybrid pillar, we will continue to incur additional costs for the new hybrid locations that have opened in the last six months or will open in '24 and '25, but we are experiencing increased site-level profitability due to the increasing enrollments. Last, we continue to anticipate an increase in legal fees again in 2025 over 2024, as we have a couple of lawsuits filed in prior years that are expected to go into the discovery phase and/or into trial during 2025. So to summarize, we continue to believe we will see a slight decline in margins in the second quarter as we did in the first due to the investments and other items noted, but are optimistic that margins will expand in the second half as long as we see year-over-year growth in the traditional campus enrollments. We are estimating that interest income will continue to be down year-over-year due to the declining cash balances from more aggressive stock buybacks and a declining interest rate environment. We have lowered interest income slightly for the rest of the calendar year due to the greater-than-expected stock buybacks during the first quarter, while decreasing the number of weighted average shares outstanding. We still believe the effective tax rate for the last three quarters of 2025 will be 24.9% and 24.1%, with a full-year tax rate now of 23.7%. The effective tax rate continues to rise due to higher state taxes as we continue to add new sites and states outside of Arizona, which have higher state tax rates and other factors. These estimates do not assume a contribution in lieu of state income taxes, but if one is made, that will increase G&A expenses in the third quarter and decrease the effective tax rate in the second half of the year. As mentioned earlier, our weighted average shares guidance has decreased slightly for each of the three remaining quarters due to the greater-than-expected purchases in the first quarter. The Board continues to authorize the repurchase of shares as it believes the stock remains undervalued based on the metrics it uses to evaluate, including the ratio of enterprise value to adjusted EBITDA and the free cash flow yield rather than multiples of other education companies, as although we can be viewed as being in the same sector, there are few, if any, appropriate comps. I will now turn the call over to the moderator so that we can answer questions.

Our first question comes from Jeff Silber at BMO Capital Markets. Your line is now open.

Thank you so much. In your prepared remarks, you mentioned a few times about the better-than-expected enrollment in the first quarter. I was wondering if we can get a little bit of color on where that came from? Is there any specific programs, etc.? Anything would be great.

Yes, it's two things. One, lead flow and the interest in what we're doing here continues to grow. I think a lot of that lead flow increase is because of new programs we're adding. Most of our competition can't compete with the number of programmatic offerings, and students increasingly, when they're going out and looking for academic programs as working adults, are not trying to just complete a degree; they're looking for a specific area. And so that's one of the reasons. The second reason is, we continue to sign contracts with school districts, hospitals, military bases, just signed with three large school districts in Florida, including Miami-Dade, and just signed a contract with a major military base in Missouri. So the work that we're doing directly with corporations, school districts, hospitals, military bases, engineering firms, and others are creating a lot of opportunities for working adults to go back to school. So it's a combination of those two things that increased the online enrollments, and we believe will continue to experience those things.

All right. That's very helpful. My follow-up question, I know there's been a lot of noise in the media about fears of potential funding cuts coming out of Washington. From a student perspective, I'm just curious, are you seeing students or parents worried about that? And I'm specifically interested in your fall enrollment at the ground campus, if you think that might have an impact.

I have been involved in some discussions in Washington concerning funding. Most conversations are focused on federal dollars that would be allocated directly to states as block grants. I don't anticipate any reduction in funding for higher education; in fact, it may remain stable or even increase. Some of this funding could be redirected back to states. Many recent news reports relate to research grants, particularly regarding Pell grant or loan levels, which has raised concerns among some universities. While we do conduct substantial research, especially at the graduate level, we primarily partner with companies, and we do not heavily depend on federal grant funding. Therefore, I understand why some universities might feel anxious about changes in research grant funding, but I haven't heard any concerns regarding Title IV programs. In fact, it seems that, despite cuts to the Department of Veterans Affairs, the Title IV programs will likely continue under the current administration. I believe these developments will not affect us at all.

All right. That's great to hear. Thanks so much.

Thank you. Our next question comes from the line of Alex Paris from Barrington Research. Your line is now open.

Thank you, and congratulations on the strong start to the new year. I have a couple of follow-up questions regarding the enrollment, which was above target and shows an acceleration from the fourth quarter. In your prepared comments, you mentioned exceeding the long-term target. I thought this would be a good time to get an update on the long-term targets for each item, specifically total partner enrollment, GCU online, GCU ground, and Orbis. I'm interested in the longer-term targets for these areas.

Well, we don't break them out typically, but our long-term enrollment goal is 7%. And so we're slightly above that at 7.9%. That's a combination of online enrollments, ground enrollments, some hybrid enrollments, and then we're starting to factor in our workforce development area. I can tell you that we're ahead in terms of new enrollments on the online site. We are running ahead in terms of hybrid enrollments. Both are very strong. And we're ahead of registrations on ground. Now the majority of that obviously doesn't start until September, late August, early September. So we won't know ultimately whether we're ahead or behind until we get to August or September. But our low guidance there and our high guidance, there's a pretty big gap there, and right now online is doing so well that if we do well from a ground standpoint, things are going to be very good. If we don't do quite as well, they are still going to be good because the other two areas are very strong, and the ground enrollment we have a lot of confidence in. There's been, as you know, a decrease in the number of high school graduates on an annual basis. The percent of them that are going to college is going down. So you're absolutely seeing a mix shift in the selections people are making. But the areas that are growing are mid-tier public universities. More students are staying closer to home and going to mid-tier institutions that have lower tuition. And so, those institutions are gaining. And in an institution like ours, we still have students from all 50 states, and students that want to travel will come to a destination city and state like Phoenix, Arizona, when you have the 21st ranked campus in the country. We haven't raised our tuition in 16 years, and our average student takes out less debt than the average state university student. And so people are making different choices, as 18-year-olds, in how they can best prepare for life and work. But we are in the sweet spot of that. We believe that this little two-year pullback that even we experienced is going to be reversed this year because of the value proposition that we represent. Does that help, Alexander?

Absolutely. Thank you. I appreciate the additional color. And then sort of the same question, looking for an update on expectations for this year from an enrollment perspective. I had kind of a bad connection for the prepared comments. So if you talked about this, I apologize. But you had said with regard to GCU online starts in the mid-to-high single-digits every quarter of 2024, you know, Orbis up low-to-mid-teens rest of 2025. Do those still stand?

Yes.

Great. And then last question, a question I haven't asked in a while, maybe because it's not particularly relevant, but I'll ask anyway. Thoughts on M&A? Grand Canyon Education has made acquisitions in the past, obviously, the hybrid line. Wondering what your thoughts are with regard to M&A? Do you look at them? Is there anything that you'd like to acquire, particularly with a new administration and different rules being proposed in Washington, D.C.?

It's a good question, but we continue to prefer building. We did make an acquisition with Orbis, which we like very much because of the market they were addressing. They had a bit of a head start and missed on some things, but we've corrected those issues, putting us in a strong position as a result of that acquisition. Overall, we're focusing on what we see as the real potential in higher education through building rather than purchasing. At this point, there's very little chance we'll be doing any more acquisitions, as we plan to continue investing in building initiatives. Our work in workforce development exemplifies this. I truly believe manufacturing is returning to this country, though it won't replicate the post-World War II model, as AI and robotics will have a significant impact. We're engaging with this manufacturing facility to find the right blend of engineering, technology, and manufacturing. Arizona is expanding with major Taiwanese chip manufacturers setting up here, creating a vast demand for skilled labor, from electrical engineering students to entry-level technicians and manufacturing specialists. We'll play a major role in that. We don't see any external opportunities that could speed up our progress. We believe we can advance more quickly by collaborating directly with companies and focusing on building rather than just planning.

Fair enough. I appreciate the color. I'll get back in the queue.

Thank you.

Thank you. Our next question comes from the line of Steven Pawlak of Baird. Your line is now open.

Yes. Thank you. Just wanted to ask about the process for converting the students that are in the prerequisite program into the hybrid ABSN programs. And like I said, the question is that it seems like there's 14,000 students that you've enrolled in the prerequisite program, but the ABSN enrollments sort of are in the mid-teens or single-digit thousands. So just kind of what's the process for converting those 14,000 into the 5,000?

Most students interested in a nursing career typically have around 30 college credits and are usually 19 to 21 years old. They often attend community college and are trying to enter a nursing program, but they find the path lengthy. Biology is available this semester, but not the next. Many of these students work part-time and have not accumulated significant debt. Although our courses are accelerated, students typically spend six to 18 months with us before completing their coursework and becoming eligible for an ABSN program. When we reach 80 locations, we aim for about 380 ABSN students per location, totaling 24,000 slots. To fill these slots, we will need more than 24,000 students taking prerequisite courses, as we anticipate this will be the primary method for preparing for these programs. While many of our partners have prerequisite programs, they are semester-long and cost $800 per credit hour, which makes it unrealistic for students to take on that debt. Over time, even our non-GCU partners are sending their students into these prerequisite courses. We monitor student progress to determine eligibility, which isn’t guaranteed, since the courses are challenging. We need to increase the number of students above 14,000 to eventually fill the 24,000 slots. Does that make sense?

No, it makes perfect sense. Regarding the non-ABSN hybrid program you mentioned, how quickly can you scale those to the point where they start contributing to the financial performance?

It's going to go a little quicker than maybe we even thought six months ago because what's going on at places like Northeastern and what's going on at GCU locations is influencing the thinking of our more conservative partners. Those that are a little slower to respond, I believe, are going to respond more quickly in the future because of the financial pressures they're under with their normal business, which is not getting better. These programs can be so profitable for them and have such an impact on their bottom line that especially those smaller schools are going to be a lot more open to taking a little risk and starting these programs sooner than I think in the past they would want to. So we've seen a lot of movement just in the last couple of months. And so I think things will accelerate over the next couple of years.

The thing I would like to add to that, I know Brian talked about this in his prepared remarks, but we're unbelievably excited about the startup of some of these additional programs with our other non-GCU partners. This is something we've been talking about for a few years, and it's coming to fruition this year. So I think, right to Brian's point, I think these partners are seeing the success that we're having with GCU and some of our other partners and are asking for additional programs. Some of those programs are actually starting up in 2025, which is really exciting.

Thank you very much.

We've reached the end of our first 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.