Earnings Call Transcript - LOPE Q4 2020

Operator, Operator

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. 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.

Daniel Bachus, CFO

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.

Brian Mueller, CEO

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 three 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 university education. From the early 1980s to the late 2010s, the price of college increased eight 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 goes down; four, bachelor’s degrees should not take four to six years to complete; five, programs and delivery models lack the creativity and 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 majors 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 five years later; nine, most professors have no formal training in teaching, learning or course design. Grand Canyon Education is a large organization with over 4,600 staff, is in a very strong financial position and can invest in educational infrastructure to help institutions address some significant challenges and opportunities in the employment marketplace. One of our partner institutions now derives 13% of their total revenues from GCE/Orbis Healthcare programs, and they want to do more. The combination of institutions looking for additional revenue streams and our ability to help them, launch programs locally that prepare students for in-demand occupations, is creating rapid partnership growth and a very bright future for GCE. Let me explain how GCE is in a great position to support the three main pillars or platforms of our business. The first pillar, Grand Canyon University Online has 89,439 students as of December 31, 2020, and in the quarter just completed, new students grew on a comparable start basis in the high single-digits, while total students grew by 8.3% year-over-year. The total number of GCU Online students continues to exceed our expectations, driven by very strong start growth and continued strong retention rates. We continue to see strong interest in GCU Online programs, and the number of students attending at the graduate level continues to go up, which is why retention and graduation rates are so high. GCE continues to work with GCU to ensure that student growth takes place at levels and in programs that will produce high-quality outcomes. The university's cohort default rate is 5.8%, which is well below the national average of almost 10%. However, this is the pillar of our business that is the most competitive. I have spoken previously about our strength in new program development. Understanding where the economy is going and where the jobs are going to be and creating programs that help students get those jobs is a differentiating factor for us. Most OPMs can't create new academic programs at near the rate that GCE/GCU can build them. A second differentiating factor is offering programs that lead to professional licensure. Programs in education, counseling, healthcare, etc., that lead to licensure tend to have more clearly defined career paths and higher retention and graduation rates. Those programs are far more difficult to offer because it's challenging to manage at scale and at a distance the many details and requirements that are often state-specific. Most OPMs aren't equipped to assist their partner institutions in managing the operational details of those programs, which are very important to students. GCE has invested heavily in personnel, technology and automation that allows GCU to offer those programs and to ensure that students meet all state-specific requirements. Of GCU's 89,400 online students, approximately 38,000 are in those programs. The second pillar or platform of our business is the GCU traditional campus. As many of you know, GCU shifted its start date for the fall semester for its ground students from August 24, 2020, to September 8, 2020, which resulted in five more revenue-producing days in 2020 compared to the fourth quarter in 2019. Approximately 4,900 of GCU's traditional campus students elected to attend the fall semester entirely in the online modality, resulting in approximately 11,500 residential students compared to a bed capacity of approximately 14,500. Although this resulted in less room and board revenue in the fall semester at GCU, and thus impacted our service revenue, the number of students electing to take all of their classes online had the effect of increasing total capacity, allowing the university to exceed its enrollment expectation by roughly 600 students to a total of 22,185. This is in stark contrast to many universities in the country, which are experiencing declines. Ground enrollments in the spring 2021 semester are also strong. The university had its largest spring new start cohort and a better-than-expected retention rate resulting in spring enrollment of approximately 20,250, which includes an increase of 11.4% in ground traditional students. Universities typically see a significant decline in residential students between the fall and spring semesters due primarily to graduations, but a large number of students return to campus in the spring, increasing the residential enrollment to approximately 11,600. About 3,500 students did choose to attend the spring semester entirely in the online modality, which is higher than we predicted at the time of the last conference call. This was primarily due to the spike in COVID-19 cases in the Phoenix area around Christmas. Currently, on GCU's campus, there are fewer than 30 active positive COVID cases. The university recently put out a message stating that the campus intends to be fully up and running in the traditional manner in the fall semester of the 2021-2022 academic year. GCU's traditional campus is in a very strong position and is becoming a bigger part of the strategy every day. GCU's goal is now to have 40,000 students on its traditional campus in West Phoenix. The pandemic has made it abundantly clear that 18-year-old students desire to have a campus experience as much now as they ever have. It just needs to be affordable. The combination of GCU and GCE in building out the traditional campus has many strategic advantages. One, Phoenix is a destination city; Arizona is a destination state. Two, GCU has invested $1.5 billion in educational infrastructure and the campus is currently ranked 19th in the country. Number three, GCU hasn't raised tuition in 12 years, and their students take out less debt than the average state university student. In addition, the Wall Street Journal recently released average parent PLUS debt amounts. GCU parents take out approximately 50% of the debt amount taken out by the three heavily subsidized state universities in Arizona. Four, GCU now has nine colleges that have over 200 academic programs, emphases, and certificates. Five, GCE is adding more than 20 new programs per year targeted at growing occupational areas. Six, the university will invest $500 million additional dollars in the next four years with the plan to grow its campus to accommodate 40,000 students. The university is in a strong financial position in the aftermath of a split from GCE to become a non-profit institution. It is financing all its current CapEx and has $317 million in cash as of December 31, 2020. In addition, during the pandemic, GCU/GCE has had no layoffs, gone through the annual increase in salaries for its faculty and staff, and has hired 461 new employees. Those that predicted the transaction would produce financial ruin to the university were very, very wrong. Seven, GCE has almost 200 people involved in the recruiting process. Eight, GCE has a state-of-the-art marketing and advertising agency to develop efficient and productive campaigns. Nine, GCE has invested heavily in building out virtual tours of campus and live lab classroom demos to expose current high school students to GCU during the pandemic when travel is limited. Ten, GCU's Christian and free market position makes it attractive to a large national audience with very few affordable, scalable options. The third pillar or platform of the business is Grand Canyon Education/Orbis. Going forward, we are combining how we talk about what we used to refer to as the third and fourth pillars in order to simplify and better explain our strategy. Our goal is to continue the rapid expansion of partners, some of which want to provide both healthcare and non-healthcare programs. GCE bought Orbis 23 months ago. Since that time, we have expanded to 25 partners and 30 locations. The goal is to have over 40 locations by the end of 2022, 50 locations by the end of 2023, and eventually to grow to 80 locations. This is a huge national platform in which to enroll students and to produce graduates. GCE now not only has the largest partner in the OPM space, but GCU is also rapidly adding partners. This is happening because first, many quality universities are experiencing financial stress and looking for options to increase their revenues. Second, there are important healthcare and other technology careers that are experiencing serious shortages. Third, universities don't have the resources to scale many of those programs. Fourth, GCE has the capital and the know-how to scale those programs and create opportunities for thousands of underemployed young adults while helping universities create important additional revenue streams. Most locations start with the ABSN program, but most have the ability and desire to scale up to as many as 10 additional programs. Sites will eventually accommodate between 250 to 1,000 students in multiple programs. Programs will cost between $30,000 and $60,000, take between 12 and 24 months to complete, and lead to jobs paying between $50,000 and $100,000. Most of the students in those programs will have already completed a bachelor's degree but consider themselves underemployed. GCE will fill many of the sites in the West and will continue to expand into additional healthcare and non-healthcare academic areas. We continue to have conversations with Valparaiso, but due to recent changes in administration, the completion of the contracts has been delayed. We are excited to have signed an LOU similar to the one with Valparaiso with another university and have reached verbal agreements on the structure of the healthcare and non-healthcare components, which include a revenue share arrangement for the healthcare component, consistent with our other healthcare partners, and a cost-plus component to provide services for some of their graduate online programs. Grand Canyon Education has three large well-financed, highly professional platforms to grow with in the next five years. Each platform is addressing real needs in the market and is producing high-quality outcomes for our partners and the economy. I have never been more excited about the future of GCE. I want to speak just for a moment on corporate and university social responsibility. For a full description of our efforts, please refer to the 10-K that was just put out prior to this conference call. I want to talk briefly about one part of these efforts. Our primary purpose at GCE is to work with our university partners to develop human capital to serve the economy and the culture we live in and to maximize human flourishing. We spend most of our time describing those efforts. We also, however, want to have a direct impact, as organizations are on a challenge of poverty in the neighborhood that GCU and GCE link in. It is an area comprised of many immigrant populations. There are over 40 languages spoken within five square miles of GCU and GCE. In the last eight years, we have had many university administrators visit the GCU campus to learn about its efforts in an attempt to replicate them in some fashion. We put in place what we call a five-point plan eight years ago. The goal was to transform the university neighborhood into a thriving middle-class community. The first point was to grow the university and GCE in this community, creating jobs and providing an economic catalyst. Together, GCU and GCE now have 14,000 jobs between full-time and adjunct faculty, staff and student workers. We are hiring many in the neighborhood into entry-level positions where they get salary benefits and their children can go to college for free if they meet the admissions requirements. This can change the long-term trajectory of a family living in poverty. The second point is to spin as many new businesses off of this one as possible. GCE and GCU have started 10 new businesses that employ now over 500 people, many of whom live in this immediate neighborhood. Those jobs also provide families with a salary and benefits and the opportunity for their children to attend college. The third point is safety. The students were having trouble getting to school. K-12 students were having trouble getting to school and back home, and their parents were having trouble getting to work safely. Together, we continue to invest in a major partnership with the City of Phoenix police to eliminate gang activity, prostitution and drug dealing. Over $2 million have been invested in this initiative. It has produced remarkable results as just this year, violent and property crime are down 20% over the prior year. The fourth point is homes and real estate values. Together, we formed a partnership with Habitat for Humanity seven years ago and have worked on improving over 300 homes since that time. We have raised over $4 million to support this effort and 26,000 hours of volunteer help have been provided by our faculty, staff, and students. Housing values are up in this ZIP code area by more than 300%, which is more than in any other ZIP code area in the Greater Phoenix Metropolitan area. The fifth point is, seven years ago, we started a free tutoring program that now impacts K-12 students in the city in over 300 different schools. GCU has over 1,200 students volunteering between 3:00 and 8:00 PM Monday through Friday in non-COVID times and between 10 AM and 6:00 PM on Saturday. Out of this program has grown a scholarship effort that we have now raised over $4 million to support. GCU has awarded 360 full tuition scholarships to students that have come out of this tutoring program and achieved a minimum 3.5 GPA in high school. 100% of these scholarships have gone to students living below the poverty line, of which 95% are students of color. These efforts are continuing to gain real momentum and producing measurable results. As I said earlier, for a full description of the social responsibility efforts coming out of GCE and all of our partners, please refer to the 10-K that has been recently released. With that, I would like to turn it over to Dan Bachus, our CFO, to give us a little more color on our 2020 fourth quarter and talk about changes in our income statement, balance sheet and other items to provide 2021 guidance.

Daniel Bachus, CFO

Thanks, Brian. In our Form 8-K filed with the SEC, we have presented non-GAAP net income and non-GAAP diluted income per share for the three months and year ending December 31, 2020, and 2019. The non-GAAP figures exclude the tax-affected amount of the amortization of intangible assets, the loss on transaction amounts, and the impact of a significant state tax refund received in the first quarter of 2019 related to prior taxes paid. The amortizable intangible assets acquired in the Orbis acquisition amounted to $210.3 million, with amortization expenses in the fourth quarter of 2020 and 2019 being $2.1 million and $2.2 million, respectively. We believe the non-GAAP financial data provides investors with a clearer understanding of the company's performance over time. Adjusted non-GAAP diluted income per share for the three months ended December 31, 2020, and 2019 is $1.89 and $1.63, respectively. Service revenue exceeded our expectations in the fourth quarter of 2020, mainly due to higher-than-anticipated enrollments at our university partners. The year-over-year increase in revenue per share or revenue per student was anticipated and is largely due to GCU postponing the start of its traditional fall semester, resulting in five additional revenue-generating days in the fourth quarter of 2020 compared to the same quarter in 2019, thereby increasing the service revenue we earned. Additionally, our revenue is growing at a faster rate at our other university partners than at GCU, where we typically generate higher revenue per student on those service agreements, as these partnerships usually offer a greater revenue share percentage, have higher tuition rates than GCU, and their students tend to take more credits per semester due to being in accelerated programs. However, these increases in revenue per student were partially countered by around 4,900 of GCU's traditional campus students choosing to attend the fall semester entirely online due to COVID-19 concerns. Consequently, fees for the 2020 fall semester, including room and board and other ancillary revenues for the fourth quarter of 2020 at GCU, were lower than in the same period last year, which decreased the service revenue we earned. We estimate the shift in service revenue due to the change in the traditional fall start date for GCU students between the third and fourth quarter of 2020 was $9.9 million. We also estimate that the decrease in service revenue resulting from reduced tuition fees and ancillary revenue for our university partners due to COVID-19 amounted to $7.3 million in the fourth quarter of 2020. Our 8-K and the 10-Q filed today include a detailed account of the actual impact on all of our university partners’ spring, summer, and fall 2020 semesters, as well as our projected impacts for the spring 2021 semester. I will provide more details on this shortly. Our effective tax rate for the fourth quarter of 2020 was 22.1% compared to 18.7% in the fourth quarter of 2019 and our guidance of 22.4%. The 2019 effective tax rate was lower due to some large one-time favorable discrete items related to state income tax. We repurchased 437,544 shares of our common stock in the fourth quarter of 2020 at a cost of approximately $36.7 million, and another 147,000 shares at a cost of $13.2 million subsequent to December 31, 2020. At the January Board meeting, the Board approved a plan to utilize a significant amount of our 2021 cash flows from operations to repurchase shares. And in the last few months, our Board of Directors increased the authorization under our existing stock repurchase plan by $200 million, such that as of today, we have $235.1 million available under our share repurchase authorization. Turning to the balance sheet and cash flows. Total unrestricted cash and short-term investments at December 31, 2020, was $256.6 million. Our credit facility has an available line of credit of $150 million as of December 31, 2020. GCE CapEx in the fourth quarter of 2020, including CapEx for our new offsite classroom and laboratory sites, was approximately $7.3 million or 3% of net revenue and was $29.4 million for the year, which was slightly below the $30 million to $35 million we had expected. Some of the CapEx for the new offsite campus classroom and laboratory sites that will be opened in 2021 was not incurred in 2020 as was expected but will be incurred in 2021. We anticipate CapEx for 2021 to be similar to 2020. Last, I'd like to provide color on the guidance we have provided for 2021. The guidance we have provided continues to be non-GAAP as adjusted net income and as adjusted diluted income per share as we exclude the amortization of acquired intangible assets. As you have probably noticed, we have again provided estimates for each quarter of 2021. We do this because our financial results, including GCU and the other partners that we service, are seasonal. Our enrollment guidance assumes GCU enrollment growth will moderate slightly over the course of the year to approximately 6.7% at the end of 2021. This assumption consists of total online enrollment growth rate moderating over the course of the year to 7% by year-end. Online new enrollment growth is projected to be up mid to high-single-digits depending on quarter with the exception of the second quarter, which we predict will be flat year-over-year due to a very difficult comp caused by COVID. Total online enrollments will be pressured over the course of 2021, but especially the first quarter, due to graduation year-over-year increases that exceed total enrollment growth as a result of acceleration in new start growth 15 to 18 months prior and lower reentries as a percentage of total enrollment than in the prior year due to the higher retention rates in 2020. Ground enrollment is projected to grow to 20,200 in the spring and 23,400 in the fall, while we are currently anticipating summer ground enrollments will be down slightly year-over-year to 6,400. The ground enrollment growth rate continues to be pressured by a significant decline year-over-year in professional study fees, working adults taking courses on the ground primarily at GCU's traditional campus as we have not had entry points for these potential students due to COVID. Residential students will be down 3% year-over-year to approximately 11,600 in the spring, as 3,500 students chose to take all of their courses online due to COVID-19 concerns. Our guidance assumes residential enrollment will be up 38% in the fall to approximately 15,800. Other partner enrollments will grow to 4,500, 4,200, 5,800, and 5,100 at the end of the first, second, third quarter and end of the year. As a reminder, GCU's off-campus healthcare students, which we anticipate will grow to over 200 by the end of 2021, are included in the GCU number, and are not included in the other partner enrollment, and year-over-year other partner enrollment growth rates will be impacted by the non-renewable contract, which I will speak about in a second, and accelerating OTA graduates. These other partner estimates assume that three new sites are opened in the first half of 2021, and another four to five new sites are opened in the second half of 2021. An OTA program that was planned to be opened in the spring 2021 has been moved back to the fall of 2021. We estimate that the revenue per student from our contract with GCU will be up year-over-year primarily due to growth in residential students in the fall semester, but this will be partially offset by the impact of the lower residential enrollment in the spring semester due to COVID-19 concerns of $5.7 million, $4.5 million in the first quarter and $1.2 million in the second. We anticipate offsite healthcare partner revenues, including GCU offsite healthcare locations, will grow to $136 million in 2021 due primarily to the enrollment growth partially offset by the fact that we and a former partner mutually agreed that their service agreement would not be extended upon its termination. This partner was one of Orbis' initial partners, and it had a financial arrangement that was different than Orbis' other clients. Excluding the revenue in 2020 from that contract, this would represent 25% revenue growth year over year. On the expense side, we anticipate expenses will accelerate beginning in the second quarter compared to the last nine months of 2020 as expenses such as travel and medical benefits return to normal. These expenses were significantly below our expectations beginning near the end of the first quarter of 2020 through the first quarter of 2021. We anticipate that Orbis will be EBIT profitable excluding intangible amortization of approximately $4 million. Orbis' EBIT, excluding the intangible amortization in 2020 was approximately $2 million, which was better than the EBIT breakeven that we anticipated. This is primarily due to approximately $2 million of investment for new site openings in the first half of 2021 that we expect to be incurred in 2020 being pushed back to 2021. In addition, Orbis' EBIT is impacted by the non-renewal of the contract discussed earlier and the planned seven to eight new site openings in 2021 and another one to three in spring 2022. The timing of site openings is heavily dependent on the timing of regulatory approvals. We anticipate technology and academic services, counseling services and support, marketing and communications and general administrative expenses will be approximately 14.9%, 27.3%, 19.5%, and 4.2% of net revenues, and thus consolidated operating margin will be 34.1% of net revenue. The second-half margins assumptions could prove to be conservative, but given the continued uncertainty caused by COVID, we believe they are appropriate. Included in our guidance is the interest income on a note from GCU of approximately $59 million in 2021, down slightly from $59.2 million in 2020. We are aware that the university is working on refinancing part or all of that note, but no paydowns are factored into our guidance. If the university does refinance part or all of the notes, it will have the effect of lowering interest income, but we hope to offset the impact on earnings per share with lower shares outstanding. We estimate interest expense will be approximately $3.1 million, compared to $4.4 million in 2020 due to our paydowns on our outstanding loans. We anticipate very little other income due to the lower interest rate environment. Our guidance assumes an effective tax rate, excluding potential contributions made in lieu of state income taxes to be 21.7% in Q1, 24.7% in both Q2 and Q3, and 24.5% in Q4, which excluding contributions in lieu of state income taxes made in 2020 is down slightly from 2020 due to a slightly higher estimated excess tax benefit deduction in the first quarter of 2021 and in the first quarter of 2020. As was mentioned earlier, the board of directors has approved a plan to increase the repurchase of shares. The weighted average shares outstanding amount takes into account our best estimate of the stock that will be repurchased but does not take into account any shares that will be repurchased on a refinance by GCU. I will now turn the call over to the moderator so that we can answer questions.

Operator, Operator

Our first question comes from Jeff Silber from BMO Capital Markets. Please go ahead with your question.

Jeff Silber, Analyst

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.

Brian Mueller, CEO

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. 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 a reduced number of applications but increased conversion rates to registrations, and those kinds 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 fewer applications, we believe that we have a very good chance to hit the 9,000, and we are really picking up in campus visitations. In the first half of the year, we focused on virtual tours and live labs, fostering a lot of interaction. Now, actual visitations are increasing significantly, and we expect a further rise in April and May. For the upcoming semester, we've decided to eliminate spring break and will move the last two weeks of classes online, effectively clearing our campus at the end of March and the first week of April. This will allow us to welcome what we hope will be a surge in visitations. We are likely to combine campus tours for many students with orientation. Although our activities are limited compared to previous years, they are highly active compared to our competitors. Given our low tuition, along with the information parents are receiving about lower parent loans and reduced student loans, and considering that many of our students are graduating in three to three and a half years, we believe these factors will contribute to high conversion rates. We are optimistic about achieving our enrollment target in the fall.

Jeff Silber, Analyst

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.

Brian Mueller, CEO

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

Operator, Operator

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

Jeff Meuler, Analyst

Yes. Thanks. Hey, Brian, on the kind of changing the way you're talking about the platforms and consolidated three and four into three. 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?

Brian Mueller, CEO

The ideal client would be one that we consider in phases. As we open up these locations, we are prioritizing the ABSN program first, which is a proven model. We will need 1 million additional nurses in the next five years. The payoff and value for both the university and the student, as well as for GCE/Orbis, are well-established, and we will continue to replicate our success over the past 11 years. Subsequently, we will introduce new healthcare programs at those campuses, such as occupational therapy and the nurse practitioner program. While this is happening, we will begin to establish GCU locations, GCU/Orbis locations in the West, starting with the ABSN program. These locations are expected to expand rapidly to include additional healthcare programs and possibly other non-healthcare programs. We believe that as we validate this model through the GCU/Orbis locations, other universities will also want to adopt it when they see the success of our programs. We see this as a significant opportunity in the third major market in higher education. There are traditional students experiencing education and social life on traditional campuses, which represent our ground campus. There are also working adults completing their programs entirely online. Additionally, many college graduates are underemployed and are looking for alternative formats, such as combining online didactic learning with hands-on laboratory work in physical locations. This market is where we plan to establish our third foundation, and the rollout will occur in phases. However, we anticipate acceleration once GCU opens its campuses and becomes more proactive in launching additional programs, including non-healthcare ones. I previously mentioned that other universities are noticing some of our partners achieving more than 13 percent of their revenues from these programs, and some of them have not been with us for very long. Given the financial challenges that universities will face, we believe they will be more receptive to this market. As we continue to demonstrate successful results, progress will be swift. Did that clarify things?

Jeff Meuler, Analyst

Yes, it did. There was a comment from Dan regarding the possibility of GCU refinancing the counterparty loan with GCE, specifically mentioning a partial refinance. Could you clarify that? I would think that since the counterparty loan is secured against the university's campus and assets, it would be difficult. Any additional information on this would be appreciated. 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?

Daniel Bachus, CFO

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. We have talked to our legal counsel and bankers and their legal counsel and bankers. 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. I know they're working really hard on it given the very low-interest rate environment that exists.

Operator, Operator

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

Greg Pendy, Analyst

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 nursing has sort of the NCLEX pass rate, but are there any particular pathways with certifications that we should be thinking that you're looking to grow your mix in?

Brian Mueller, CEO

Yes. What I was referring to is not kind of non-degree certifications but degree programs that require that a student meets 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. 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 are just too many loose ends that they won't be able to tie together. 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 or other things like light counseling require that students, from a state-to-state perspective, are able to meet the local requirements. 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.

Greg Pendy, Analyst

Got it. And then just one more thing to add. You provided some metrics on Orbis, noting that the typical cost is between $30,000 and $60,000, with starting salaries ranging from $50,000 to $100,000. Given the change in administration, I am curious about your thoughts on the potential return of gainful employment, especially considering that traditional students at Orbis may have already accumulated four years of standard college debt. If your program were to add to that debt, do you think it poses any risk based on how gainful employment was managed under the previous administration?

Brian Mueller, CEO

Yes, it's really fascinating, and it's a rapidly developing market. Students in their late 20s who have completed their degrees are often underemployed, working in jobs that don’t require a degree. We need to find ways to help them transition into new careers. They prefer not to return to college like an 18-year-old, but the programs that attract them often require online study along with lab work. The ABSN program is a clear example of this need. We will require an additional million nurses, and universities aren't prepared to meet that demand. Therefore, we need innovative and flexible models to support these students. Most individuals in our Orbis program are not utilizing Title IV funding; they are resorting to private loans, which are being offered by private companies due to the high graduation rate of over 90% and NCLEX pass rates that exceed 90%. Graduates typically enter jobs earning between $60,000 and $80,000, making these loans highly favorable for banks. As GCU opens more Orbis locations, we are likely to integrate more Title IV funding at least for part of the necessary financial support, but we will focus on programs with clear career paths and good job availability. We don’t foresee any issues in this regard. This emerging market will significantly influence the choices of 18-year-olds regarding degree programs and their understanding of the investment, the potential career paths, and earning possibilities. GCU students graduate with minimal debt, so the financial burden is not as significant here compared to other institutions. However, we will still discuss career earning potential with our GCU ground campus students, as many universities are tied to faculty-driven programs that, while historically significant, are not as lucrative or in demand today. These programs are often maintained by tenured faculty, creating a structural inertia. GCU operates with more flexibility and less pressure, allowing us to adapt. We believe we can assist other universities in this regard through GCE. Ultimately, we do not anticipate any challenges related to gainful employment.

Operator, Operator

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

Brett Knoblauch, Analyst

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 on the hospital side? Maybe they don't have enough capacity to employ nurses. I guess, where is the bottleneck going up?

Brian Mueller, CEO

Yes. There are longstanding traditions in higher education that influence nursing schools, particularly the importance of first-time pass rates on the NCLEX exam. The reputation of nursing programs hinges on these rates, and one of the most effective ways to ensure high pass rates is to keep the programs small and selective. Typically, students spend their first two years taking foundational courses like biology and chemistry, and many programs require a 3.9 GPA for admission into nursing school. However, it is evident that a student with a 3.6 GPA can successfully complete nursing school and find employment. This focus on rankings partly stems from the goals of the deans. Additionally, operating nursing schools is costly, often resulting in financial losses due to significant laboratory investments and a low student-to-faculty ratio. As a result, there is little incentive for schools to expand their nursing programs despite demand. At GCU, we have not shied away from this challenge. In 2020, amidst the pandemic, we produced more nurses than any state university in Arizona, achieving a first-time pass rate of 95.6% on the NCLEX exam. It was a remarkable year, and while some programs struggle to scale due to limitations in clinical placements, GCU took proactive steps. We collaborated with the nursing board to implement simulations to compensate for certain clinical hours, showing our commitment to our nursing students during the pandemic. These efforts are things I take great pride in as we address the nursing shortage and related issues through our Orbis program, which we believe will greatly benefit the healthcare workforce, particularly in nursing and occupational therapy, where there are significant shortages.

Brett Knoblauch, Analyst

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?

Brian Mueller, CEO

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. 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. 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 did you do it on the ground? I'm excited about 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 engineering 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.

Daniel Bachus, CFO

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.

Operator, Operator

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