Grand Canyon Education, Inc. (LOPE) Earnings

Management highlights

- Strategic Industry Context * Management believes the higher education industry is undergoing major structural shift driven by AI adoption, economic pressure, and regulatory change, leading to accelerating closures of small private legacy institutions * GCE positions itself as an agile, tech-enabled competitor positioned to capture displaced market share from struggling incumbents, and notes investor valuations have not yet priced in this structural shift * Management attributes recent 12-month stock underperformance to investor misunderstanding of the new industry landscape, not poor financial performance, as GCE has delivered consistent results for 18 years - Online Campus Strategic Differentiators * Over 32% of new enrollments come from direct partnerships with over 6,000 organizations to develop internal talent, reducing reliance on external marketing lead generation * Over 70% of online enrollment growth is concentrated in licensure-required fields (education, healthcare, counseling, social work) that have persistent national labor shortages, stable accreditation requirements, and limited remote competition due to required clinical/field experience requirements * GCE has invested $300 million in a proprietary administrative system to support remote students' field requirements, building strong employer brand recognition * Long-term targets are mid-single digit new enrollment growth and 6-7% annual total enrollment growth - Ground Campus Expansion Initiatives * GCU has grown from under 1,000 to 25,000 ground students in 18 years, has not raised tuition in 17 years, and currently has the largest on-campus student housing footprint in the U.S. with average incoming GPAs over 3.5 * Three new initiatives are launched to grow ground enrollment to a target of 50,000 total students: (1) Sheila and Mike Ingram Honors College, targeting 7,000 students by 2030 with high-achieving incoming students from all 50 states, (2) new College of Construction and Industrial Technologies opening in fall 2026 to address labor shortages with 2 bachelor's and 11 certificate programs, (3) a new law school planned to open in fall 2027, targeting one of the largest footprints in the U.S. to address regional attorney shortages - Hybrid Campus Growth Strategy * GCE ended Q2 with 47 open sites, operating at slightly above 60% capacity, with a long-term target of 80 sites serving ~48,000 total students * One new site will open in fall 2026, with 3-5 additional new sites opening in 2027, with multiple new healthcare program offerings added across partner institutions in 2026-2027 - Corporate Update * The amended and restated 15-year master services agreement (MSA) with GCU went into effect July 1, 2026, eliminating early termination for convenience, restructuring service fees to 60% of tuition/academic fees only, and removing academic cost reimbursement provisions. Annual service revenue is expected to decline by ~$20 million, but annual operating income will only decline by less than $4 million (less than $1 million per quarter)

Guidance

- Full year 2026 adjusted non-GAAP diluted EPS is now expected to be 14 cents above consensus estimates, with second half 2026 EPS expected to be 3 cents above consensus after accounting for $1 million in Q3 revenue accelerated to Q2 2026 - Revenue guidance is adjusted down by $4 million in Q3 2026 and $6 million in Q4 2026 to reflect the amended MSA, offset by $3 million and $5 million respective reductions in instructional costs due to eliminated academic reimbursement - $8.3 million in revenue is shifted from Q3 2026 to Q4 2026 due to a 6-day delay in the start of GCU's fall ground semester compared to 2025 - New online enrollments are expected to grow mid-to-high single digits year-over-year in the second half of 2026, with total online revenue per student expected to decline slightly year-over-year due to mix shift to lower net tuition programs - Hybrid campus total enrollment growth is expected to remain in the teens for the second half of 2026; 14 existing locations are at or near capacity limiting near-term growth, but management expects capacity expansions and new site growth to meet long-term targets - Full year 2026 capital expenditure guidance is maintained at $30-35 million, with full year effective tax rate now projected at 23.2% (down from prior guidance due to $5 million in contributions in lieu of state income taxes) - Management expects full year 2026 margin expansion overall, offset by temporary margin pressure in Q3 2026 from the semester date shift, higher investment spend, and higher costs for licensure programs, technology, and employee benefits - Management intends to continue aggressive share repurchases, believing the stock is materially undervalued, and is working to secure a new line of credit by mid-August 2026 to accelerate repurchases

Segment performance

Total service revenue for Q2 2026 was $264 million, representing a 6.7% year-over-year increase from $247.5 million in Q2 2025. Operating income was $58.2 million (22% operating margin), up from $51.8 million (20.9% margin) in the prior year quarter. GAAP diluted EPS was $1.75, while adjusted non-GAAP diluted EPS was $1.81, a 14 cent beat over consensus estimates. By platform segment: 1) GCU Online Campus: Total enrollment grew just under 8% year-over-year, with new online enrollments growing low single digits against tough prior year comparisons. 7.8% year-over-year enrollment growth contributed to overall revenue gains, with 32% of students sourced from direct organizational talent development partnerships, and over 70% of enrolled students pursuing licensure-required degrees. 2) GCU Traditional Ground Campus: Current enrollment stands at just under 25,000 students. Q2 2026 revenue was reduced by $1 million due to a semester start date shift that moved one day of revenue from Q2 to Q1 2026 compared to 2025. Ground students generate higher revenue per student than online students, and year-over-year revenue saw a slight decline in ground student share. 3) Hybrid Campuses: Excluding closed/teach-out sites, enrollment grew 18.5% year-over-year, beating internal expectations. Current total enrollment across 47 open sites is almost 6,000 students, with revenue per student more than three times that of online campus students. The prerequisite general education program supporting hybrid ABSN programs has enrolled over 25,000 students to date.

Risks & headwinds

- 14 existing hybrid campus locations are at or near authorized capacity, limiting near-term enrollment growth at these sites, and 22 locations will not see year-over-year new enrollment growth in fall 2026 due to capacity constraints. Growth depends on future regulatory approval for capacity expansions at constrained sites - Growing enrollment in higher-cost, lower net tuition licensure programs creates ongoing margin pressure - The broader industry shift from traditional web search to AI-powered consumer search is reducing web lead volumes industry-wide, which could increase marketing acquisition costs - Expansion into new programs (law school, construction technology, new healthcare hybrid programs) requires upfront investment and carries execution risk related to accreditation, regulatory approval, and student enrollment - Increasing state income tax burdens as GCE adds new hybrid sites outside of Arizona, which has a lower state tax rate than many new locations - Declining interest income due to aggressive share repurchases reducing cash balances and broader falling interest rates

Analyst Q&A

• Q: What impact has generative AI had on customer acquisition and enrollment, and how is GCE adapting to the shift from traditional search to AI? /

  A: GCE is far less impacted by AI-driven shifts in lead generation than peers, because over 30% of new starts (growing to 40% long-term) come from direct organizational partnerships rather than marketing leads. While GCE has seen the same industry-wide decline in web leads, its diversified sourcing model reduces exposure. The company is actively optimizing its positioning to ensure GCE's key strengths (new honors college, law school, construction programs, industry partnerships) appear prominently in AI search results, and does not expect AI to impact its planned growth rates. The prior negative PR from the Biden administration's attack on GCE is fully resolved, removing a historical overhang on the brand.

• Q: How is GCE managing the transition to the new federal student loan rules that took effect July 1, 2026, particularly the new borrowing caps for graduate programs? /

  A: GCE has long supported these reforms, as the old loan rules allowed mid-career online graduate students (who already have salaries and benefits and do not need extra living expense loans) to overborrow, leading to higher default rates. GCE already promoted responsible borrowing by showing students the difference in monthly payments between borrowing only tuition costs versus maximum allowed loans, so the new rules align with existing practices. GCE's tuition levels are well below the new borrowing caps, so the rule change has had no impact on enrollment or operations to date, and management views the change as broadly positive.

• Q: Are competitors shifting to more licensure programs in response to AI disruption, and will we see increased tuition differentiation across programs going forward? /

  A: Management reports the opposite is happening: many existing competitors are exiting licensure programs because they lack the technology and infrastructure required to support required clinical and field hours for remote students. This creates more market opportunity for GCE, which has already invested heavily in this infrastructure. GCU already has differentiated tuition rates by program. Limited additional differentiation is expected, with the exception of new premium-priced programs like ABSN and the new law school, which have higher operating costs and deliver strong graduate earnings that justify premium pricing. GCE's core strategy remains tuition stabilization to drive enrollment growth and lower student debt.

• Q: What is the current profitability of hybrid programs and what margins can we expect as the segment scales? /

  A: Hybrid campuses are already profitable on a full year basis in 2026. While GCE does not allocate shared costs for standalone segment reporting, individual hybrid locations are expected to reach over 20% operating margins once scaled, as higher enrollment at existing sites drives increasing site-level profitability.