Grand Canyon Education, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Unaudited consolidated results. The company operates a single educational business, with online and on-ground programs.
Business context and performance
Grand Canyon Education offers more than 220 programs across nine colleges. Enrollment at September 30 was 91,230, up 10.7% year over year: online enrollment rose 11.0% to 72,188 and ground enrollment rose 9.5% to 19,042. Revenue growth reflected enrollment gains and ancillary revenue, including room and board. Management also cited favorable timing of campus instructional days.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $236.2 million | $210.4 million | $702.7 million | $628.7 million |
| Operating income | $59.7 million | $47.1 million | $191.4 million | $160.5 million |
| Operating margin | 25.3% | 22.4% | 27.2% | 25.5% |
| Net income | $39.3 million | $29.2 million | $135.1 million | $100.5 million |
| Diluted EPS | $0.81 | $0.62 | $2.80 | $2.14 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $269.9 million | $213.3 million |
For the quarter, revenue increased 12.2%, operating income 26.8%, and net income 34.4%. For the nine-month period, revenue rose 11.8%, operating income 19.3%, and net income 34.3%. Nine-month instructional costs were $301.9 million, advertising $74.9 million, and admissions advisory costs $94.5 million.
At September 30, cash and cash equivalents were $180.1 million, restricted cash $75.6 million, and investments $89.6 million. Unrestricted cash and investments totaled $269.8 million, versus $108.6 million at December 31, 2016. Total notes payable were approximately $68.3 million; no amount was drawn on the revolving credit line at quarter-end. Current assets were $386.8 million and current liabilities $285.1 million. Nine-month capital expenditures were $75.6 million, plus $10.2 million for off-site development.
Changes, outlook, and notable items
- Nine-month net income benefited from a lower effective tax rate: 29.6% versus 37.1% in 2016. Adoption of share-based payment accounting produced a $15.4 million reduction in income tax expense for the period from excess tax benefits. Management warned that this accounting treatment may increase tax-rate volatility.
- Operating cash flow increased year over year, supported by higher earnings and working-capital movements, including a $75.7 million increase in deferred revenue. Investing cash use declined to $112.1 million from $163.5 million, largely alongside lower capital expenditures. Financing cash use was $33.0 million, including $25.0 million to repay the revolver.
- Q3 instructional costs included the write-off of the remaining book value of two buildings planned for replacement by a classroom building for Fall 2018; the filing does not provide a clear amount for that write-off. The prior-year periods included $3.4 million of lease termination costs and a $2.5 million investment impairment.
- Management expects operating cash flow, cash and cash equivalents, and the revolving line of credit to fund operations, planned capital expenditures, and working capital for at least 24 months. This is a liquidity assessment, not quantified earnings guidance. The $150 million revolver was scheduled to run through December 2017; the term loan matures in December 2019.
- Management cited competition for working-adult students, enrollment growth and retention, staffing and campus expansion, and compliance with extensive federal and state regulation as risks. The university’s Title IV participation certification runs through December 31, 2020; management stated it believed the university was materially compliant. Accreditation was reaffirmed without monitoring or interim-report requirements.
- Seasonality affects quarterly results; management expects the summer effect to become more pronounced if the share of traditional ground students grows. No material changes to reported risk factors were identified, and the filing reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether enrollment growth continues and translates into revenue while student retention, bad debt, and scholarship levels remain manageable.
- How much of the nine-month earnings increase reflects the $15.4 million share-based compensation tax benefit, and how tax expense develops in subsequent periods.
- Campus investment needs and returns, including depreciation growth and the building write-off; verify the timing and cost of the planned Fall 2018 classroom building.
- The status and terms of the revolving credit facility after its stated December 2017 end date, alongside debt repayment and liquidity needs.
- Developments in Title IV, accreditation, and other regulatory matters, as well as competition from institutions expanding online offerings.