Grand Canyon Education, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the same 2015 periods. Financial statement amounts are in millions unless noted. The company operates a single university offering online and campus-based programs.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $191.3 | $174.7 | $418.2 | $368.9 |
| Operating income | $44.7 | $42.3 | $113.4 | $98.2 |
| Operating margin | 23.4% | 24.2% | 27.1% | 26.6% |
| Net income | $27.6 | $25.8 | $71.3 | $60.0 |
| Diluted EPS | $0.59 | $0.55 | $1.52 | $1.27 |
- Revenue grew 9.5% in Q2 and 13.4% year to date; net income rose 7.2% and 18.9%, respectively. Q2 net margin was 14.4%, versus 14.8% a year earlier; six-month net margin was 17.0%, versus 16.3%.
- Enrollment at June 30 was 67,424, up 7.1% year over year: online enrollment rose 7.5% and ground enrollment 3.3%. Graduate students represented 46.2% of enrollment.
- Six-month operating cash flow was $114.0, up from $81.7. Capital expenditures were $115.6; cash used in investing activities was $106.7. Cash and cash equivalents ended at $44.6, compared with $23.0 at year-end 2015.
- At June 30, cash and unrestricted investments totaled approximately $94.0; restricted cash, cash equivalents and investments were $70.8. Total notes payable were approximately $101.6, including a $25.0 revolver draw; capital lease obligations were $0.5. The revolving facility provides up to $150.0 through December 2017; the term loan matures in December 2019.
- Total assets were $1,005.0 and stockholders’ equity was $680.3. Property and equipment, net, increased to $794.0 from $667.5 at December 31, 2015.
Material changes and drivers
- Management attributed revenue growth mainly to higher enrollment and, to a lesser extent, room, board and other student fees; increased institutional scholarships partly offset growth. Six-month scholarships reduced revenue by approximately $85.3, versus $76.9 in 2015.
- Q2 instructional costs rose 12.3%, faster than revenue, and increased to 44.2% of revenue from 43.1%. Management cited staffing, faculty compensation, benefits, depreciation and occupancy costs, and instructional supplies. Advertising rose 20.3% in Q2 as the company expanded branding and media campaigns.
- Admissions costs declined as a share of revenue, reflecting leverage across a larger revenue base. Q2 general and administrative expense fell 7.6%, primarily due to lower legal and professional costs.
- Six-month interest and other income increased to $2.3 from $0.4, primarily because of $1.8 in first-quarter equity-method income related to LoudCloud. The company also received a $1.7 distribution related to its LoudCloud investment.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said operating cash flow, cash and cash equivalents, and the revolver were expected to fund operations, planned capital expenditures and working capital for at least 24 months.
- Campus expansion drove substantial investment spending. Projects included residence halls, a classroom building, a student service center, parking, and a nearby office building and garage expected to be completed in late 2016. Management noted that growth in traditional ground enrollment may make the seasonal summer impact on margins more pronounced.
- Key risks include Title IV and other education regulation, student access to financial aid, enrollment conversion and retention, competition, marketing costs, staffing, technology, and credit-agreement covenants. A June 2016 proposed Department of Education rule on borrower defenses to loan repayment could require loan relief, school reimbursement or financial protection in specified circumstances; the company said consequences could materially affect its business.
- In July 2016, the company appealed two Arizona Board of Nursing Notices of Deficiency concerning its BSN and APRN programs. The notices were not disciplinary actions, but unresolved issues could lead to discipline. Management expressed confidence in a favorable outcome.
- The company reported ordinary-course litigation; management said potential losses on most matters were not considered probable or estimable and did not expect pending matters to materially affect financial condition, results or cash flows. It cautioned that charges could exceed reserves.
- The company repurchased $14.6 of shares under its authorization during the first half, leaving $100.0 available. Separately, cash flows included $4.6 used for shares withheld for employee tax obligations.
Most important facts for investors to verify
- Enrollment growth and student retention, particularly whether online growth can offset seasonal and competitive pressures on campus-based programs.
- Progress and returns on the large campus and off-site capital program, including whether spending remains supported by operating cash flow.
- Developments in the proposed federal borrower-defense rules and the Arizona nursing-program appeals, including any resulting financial or operating requirements.
- Debt balances, revolver availability, covenant compliance and the timing of upcoming principal obligations.
- Whether higher instructional costs, scholarships and advertising spending affect margins, and how much earnings growth depends on non-operating LoudCloud-related income.