Grand Canyon Education, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts below are in millions of dollars unless stated otherwise. GCE is now an education-services provider, not a university owner-operator: it provides services to university partners, including GCU. Results include Orbis Education from its January 22, 2019 acquisition.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $193.3 | $155.5 | +24.3% |
| Operating income | $59.7 | $29.4 | +103.1% |
| Operating margin | 30.9% | 18.9% | +12.0 percentage points |
| Net income | $58.2 | $33.8 | +72.3% |
| Diluted EPS | $1.20 | $0.70 | +$0.50 |
| Net margin | 30.1% | 21.7% | +8.4 percentage points |
For the nine months, revenue was $565.4 million and net income was $182.5 million. Comparisons with 2018 are not like-for-like: the prior-year period included university operations through June 30, 2018, followed by service revenue from GCU. Management presents adjusted non-GAAP revenue of $463.0 million for the comparable 2018 nine-month period, versus $565.4 million in 2019, an increase of 22.1%.
For the nine months, operating cash flow was $195.1 million, compared with $96.5 million in 2018. Investing cash outflow was $431.1 million, principally reflecting the Orbis acquisition and funding of GCU capital expenditures; financing cash inflow was $174.0 million. Cash and cash equivalents were $119.7 million and investments were $14.2 million at September 30. Unrestricted cash and investments totaled $133.9 million.
Total notes payable were $256.4 million, comprising $161.4 million of term debt and $95.0 million drawn on the revolver. The company reported $1,009.9 million due under its secured note receivable from GCU. Current assets were $237.5 million and current liabilities were $124.0 million. GCE said it was in compliance with debt covenants.
Material changes and operating drivers
- Q3 service revenue increased by $37.8 million, primarily from Orbis and 6.2% GCU enrollment growth. Total end-of-period enrollment in serviced programs rose 10.2% year over year to 108,821, including 3,975 Orbis-serviced enrollments.
- Orbis contributed $62.3 million of service revenue and a $1.3 million net loss for the nine months, including $6.0 million of acquired-intangible amortization. Acquisition consideration was $361.2 million, net of cash acquired.
- Q3 operating expenses rose, including technology and academic services costs, which more than doubled versus Q3 2018, reflecting the service requirements and staffing for Orbis partners. Counseling and marketing costs also increased, though those costs declined as a percentage of Q3 revenue.
- GCE’s 6% secured note to GCU increased as capital expenditure advances were made. GCU repaid $60.0 million in Q3; additional repayments of $40.0 million were reported in October.
- The company repurchased $17.3 million of shares during the first nine months and reported $70.8 million remaining under its $175 million authorization at September 30.
Outlook, risks, contingencies, and unusual items
- No specific financial guidance was provided. Management said operating cash flow and other liquidity sources were expected to fund operations, planned capital expenditures, and working capital for at least the next 24 months. Results are seasonal, with lower revenue and operating margins generally in the summer months.
- On October 31, 2019, GCE amended its credit facility, increasing the revolver commitment to $150.0 million and reducing the term loan by the same $68.8 million. It repaid $26.25 million of revolver borrowings in October and elected to repay a further $68.75 million on November 1.
- A first-quarter Arizona tax settlement generated a $7.5 million refund and a favorable $5.9 million tax impact, contributing to the lower nine-month effective tax rate of 18.3%, versus 20.6% in 2018.
- Principal risks include reliance on university partners, especially GCU; partner enrollment and student retention; education-sector regulation, including Title IV requirements; competition; and the ability to meet debt obligations and covenants. Management identified no material change to the risk factors in its 2018 Form 10-K.
- The filing reported no legal proceedings in Part II and stated that pending matters were not believed to have a material adverse effect, while noting that ultimate exposure in most matters could not be estimated with certainty. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of growth and profitability is attributable to Orbis, and whether its partner programs sustain enrollment and margins after acquisition-related costs.
- GCU’s financial capacity to service the $1.01 billion secured note, including future capital-expenditure advances and the note’s 2025 maturity.
- Post-quarter revolver repayments, the amended credit facility’s final balances and terms, and ongoing covenant headroom.
- The comparability of reported results across the 2018 university sale and 2019 service-provider periods; the adjusted 2018 revenue comparison is a company-defined non-GAAP measure.
- Potential impact of regulatory or partner-agreement changes, given GCE’s reliance on university partners and their students’ access to financial aid.