Business context and reporting period
Grand Canyon Education, Inc. (GCE) reported unaudited results for the three months ended March 31, 2023, compared with the same 2022 period. GCE provides technology, academic, counseling, marketing and administrative services to 27 university partners; its largest partner is Grand Canyon University (GCU). Under its GCU master services agreement, GCE receives 60% of GCU tuition and fee revenue.
Unless otherwise stated, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Service revenue | $250.1 | $244.1 |
| Operating income | $74.5 | $77.5 |
| Operating margin | 29.8% | 31.7% |
| Net income | $59.6 | $58.1 |
| Diluted EPS | $1.94 | $1.66 |
| Operating cash flow | $63.0 | $70.3 |
| Cash, cash equivalents and investments at March 31 | $194.5 | $181.7 at Dec. 31, 2022 |
Cash and cash equivalents were $105.0 million and investments were $89.5 million at quarter-end. GCE reported $75.5 million of lease liabilities; the filing does not report conventional borrowing debt. Management said cash flow and other liquidity sources should be adequate for operations, planned capital expenditures and working capital for at least 24 months. It expects annual capital expenditures of approximately $30–$35 million.
Material changes versus the prior comparable period
- Revenue increased 2.5%, primarily reflecting 6.6% growth in GCU traditional ground enrollments and higher revenue per student, partly offset by lower Occupational Therapy Assistant (OTA) program enrollment.
- Operating income declined 3.9%, and operating margin fell about 1.9 percentage points. Counseling expense rose 8.6%, marketing expense 4.0%, and technology and academic services expense 3.3%, reflecting staffing, travel, advertising and site costs.
- Net income increased 2.6% despite lower operating income, supported by investment interest and other income of $2.2 million versus $0.2 million and a lower effective tax rate of 22.3% versus 25.2%. The tax rate benefited from excess share-based compensation tax benefits and state tax refunds.
- Diluted EPS rose to $1.94 from $1.66; weighted-average diluted shares fell to 30.6 million from 34.9 million, reflecting the lower share count following repurchases.
- Operating cash flow decreased to $63.0 million, principally due to working-capital movements. GCE used $37.1 million in investing activities and $41.2 million in financing activities, including $34.9 million of share repurchases.
Outlook, risks and unusual items
- Management expects technology and academic services costs as a share of revenue to rise as additional off-campus sites open, and counseling costs as a share of revenue to remain higher in 2023 amid staffing and travel increases. GCE anticipated opening three to four additional off-campus classroom and laboratory sites during 2023; it opened one in Q1.
- Management said the spring ground semester calendar shifted approximately $4.5 million of service revenue from Q1 into Q2. Results are also seasonal, with lower revenue and margins typically in summer quarters.
- GCU accounted for 88.5% of Q1 service revenue, up from 87.6% a year earlier, creating significant partner concentration risk. Total partner enrollment was 112,588, up from 110,217; GCU enrollment was 108,633, while off-campus site enrollment declined 4.0% year over year.
- A securities class action concerning GCE’s 2018 GCU transaction and the Department of Education’s regulatory treatment of GCU had its motion to dismiss denied on March 28, 2023. GCE disputes the claims, says the outcome is uncertain, cannot estimate a loss range, and has not accrued a liability.
- The FTC issued civil investigative demands in May 2022 and January 2023 concerning marketing services provided for GCU and related activities. GCE said it is cooperating.
- GCE disclosed that a substantial portion of cash is uninsured and concentrated at three financial institutions; it moved most operational banking services to one regional bank in Q1. The company identifies potential loss of uninsured deposits as a risk.
- The share repurchase authorization expires December 31, 2023; $160.9 million remained available at March 31. Management said repurchases will continue to depend on market and business conditions and that future repurchases will be lower than in 2022.
Investor facts to verify
- Whether GCU enrollment, revenue per student and the concentration of revenue from GCU remain on track.
- Whether OTA and ABSN enrollment trends improve, and whether planned site openings and program changes deliver the expected growth.
- Whether higher counseling, marketing and site-related costs continue to pressure operating margins.
- Developments in the securities litigation and FTC inquiry, including any change to loss estimates, regulatory exposure or business practices.
- Cash and investment balances, uninsured deposit exposure, capital spending and the pace of share repurchases.
- The sustainability of Q1’s lower effective tax rate and higher investment income.