Grand Canyon Education, Inc. (Nasdaq: LOPE) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report; Q4 figures are included below where useful.
Business context
GCE provides education services to colleges and universities. Its largest partner is Grand Canyon University (GCU); it also acquired Orbis Education on January 22, 2019, adding healthcare-program services for 22 university partners. GCE reported 106,861 students at year-end across the populations shown in its filing.
GCE sold GCU to an independent nonprofit entity effective July 1, 2018. Since then, GCE has earned service fees rather than university tuition revenue; under its GCU agreement, it receives 60% of GCU tuition and fee revenue. Consequently, reported year-over-year revenue comparisons are distorted by the change in business model and the partial-year 2018 transition.
Key financial metrics
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Net revenue | $778.6 million | $845.5 million | Down 7.9% reported; on GCE’s adjusted comparable basis, revenue was $778.6 million versus $640.5 million, up 21.6%. |
| Operating income | $265.1 million | $258.1 million | Up 2.7% reported. Adjusted operating income was $281.3 million versus $248.6 million; adjusted operating margin was 36.1% versus 38.8%. |
| Net income | $259.2 million | $229.0 million | Up 13.2%. |
| Diluted EPS | $5.37 | $4.73 | Up from the prior year. |
| Adjusted EBITDA | $311.3 million | $274.1 million | Up 13.6%; non-GAAP measure. |
| Operating cash flow | $306.3 million | $199.1 million | Increase attributed mainly to higher net income and working-capital changes. |
| Cash and investments | $143.9 million | $189.3 million | Unrestricted year-end balance; 2018 figure includes investments. |
| Notes payable | $140.9 million | $59.9 million | Higher following acquisition financing. |
2019 investing cash outflow was $405.9 million, including $361.2 million, net of cash acquired, for Orbis and net funding to GCU for capital expenditures. Capital expenditures were $22.4 million. Financing cash flow was positive $40.1 million.
GCE held a $969.9 million secured note receivable from GCU at year-end. It bears 6% interest, is secured by GCU assets, and matures June 30, 2025, with principal and accrued unpaid interest due at maturity. Interest income on the note was $59.3 million in 2019. This is a significant source of reported income and represents exposure to GCU’s ability to pay.
Fourth-quarter 2019 revenue was $213.2 million, operating income $82.0 million and net income $76.7 million, compared with $177.5 million, $80.1 million and $75.5 million, respectively, in Q4 2018.
Material changes versus the prior comparable period
- Orbis contributed $85.9 million of service revenue from its acquisition date through year-end; its reported net loss, including acquired-intangible amortization, was $2.6 million.
- Comparable service revenue growth reflected the Orbis acquisition and a 5.9% increase in GCU enrollment. Orbis agreements generally generate higher revenue per student than the GCU agreement.
- Technology and academic services expense rose 107.7%, mainly to support Orbis partners and expanded services. Marketing expense increased 21.7%; counseling expense increased 9.2%.
- Interest expense increased to $11.3 million from $1.5 million, primarily due to acquisition borrowing and the expiration of an interest-rate corridor in December 2019.
- The effective tax rate fell to 18.4% from 20.2%, including a $5.9 million favorable tax item related to an Arizona tax refund agreement.
Liquidity, outlook and risks
Management stated that operating cash flow and available liquidity, including cash and the revolving credit line, should fund operations, planned capital expenditures and working capital for at least 24 months. At year-end, GCE reported $140.9 million of debt and was in compliance with its debt covenants. Its credit facility carries variable-rate debt based on 30-day LIBOR plus 2% and includes financial and operating restrictions.
The filing provides no specific 2020 revenue or earnings guidance. Management cited continued enrollment growth and the ability to leverage operating expenses across a growing revenue base. Results are seasonal: GCU’s traditional ground enrollment is lower in summer, while first and fourth quarters typically benefit from academic-calendar patterns.
- GCU concentration and note exposure: GCU is expected to remain GCE’s largest partner. Loss of the services relationship, enrollment weakness, or inability to collect the secured note could materially affect results.
- Regulatory uncertainty: GCU received provisional Title IV certification through September 30, 2022. ED also determined it would continue treating GCU as proprietary for Title IV purposes, potentially affecting GCU’s positioning and enrollment. GCU’s reported composite score was 2.2 under the proprietary-school methodology; future certification and regulatory outcomes remain uncertain.
- Business-model compliance: GCE’s tuition-linked service fees rely on federal guidance concerning bundled services and incentive compensation. The company said it had requested ED guidance on its specific model and was awaiting a response.
- Acquisition and execution: Integration, growth, partner retention, competition, student recruitment and retention, and technology/cybersecurity are identified risks.
- Legal and unusual items: GCE reported ordinary-course litigation and said management did not expect pending matters to materially affect financial position, results or cash flows. The filing also records acquisition costs, amortization of acquired intangibles, and the prior-year GCU transaction effects.
Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- GCU’s Title IV certification status, its treatment as a proprietary institution, and any ED response to GCE’s request concerning its service model.
- GCU’s enrollment trends, the durability of the GCU services agreement, and its capacity to meet the 2025 secured-note obligations.
- Whether Orbis partner growth and integration deliver sustainable revenue and margins, considering acquired-intangible amortization.
- Cash generation and liquidity after acquisition spending, GCU capital-expenditure lending, share repurchases and debt service.
- Exposure to variable interest rates and the transition away from LIBOR, as well as compliance with credit-facility covenants.
- The assumptions underlying adjusted revenue, adjusted operating income and Adjusted EBITDA, which are non-GAAP measures and are not substitutes for GAAP results or cash flow.