Grand Canyon Education, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. The university offers more than 160 degree programs online and at its Phoenix campus. End-of-period enrollment rose 12.9% to 69,552: ground enrollment increased 25.3% and online enrollment 10.6%.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $194.1 million | $167.4 million | +15.9% |
| Operating income | $56.0 million | $43.4 million | +29.8% |
| Operating margin | 28.8% | 25.9% | +2.9 percentage points |
| Net income | $34.2 million | $26.3 million | +30.0% |
| Diluted EPS | $0.72 | $0.56 | +28.6% |
| Operating cash flow | $68.2 million | $53.7 million | +$14.5 million |
| Capital expenditures | $45.7 million | $27.2 million | +$18.5 million |
Net margin increased to 17.6% from 15.7%. Instructional costs were 40.5% of revenue versus 42.2%; admissions advisory costs were 14.6% versus 15.7%. Advertising expense rose 19.9% to $20.0 million and increased slightly as a share of revenue, to 10.3% from 10.0%. The effective tax rate was 38.8%, compared with 38.9%.
At March 31, cash and cash equivalents were $86.2 million, unrestricted investments were $101.0 million, and restricted cash and investments were $57.9 million. Management reported $187.2 million in unrestricted cash and investments and no borrowings on its $50 million revolving line. Notes payable totaled $84.8 million, including current and long-term portions; capital lease obligations were approximately $0.5 million. Current assets were $278.1 million and current liabilities $202.4 million. Total assets were $815.6 million and stockholders’ equity $513.2 million.
Changes, outlook, and risks
- Management attributed revenue growth chiefly to enrollment gains and, to a lesser extent, room, board, and other student fees; increased scholarships partly offset growth. Tuition was not raised for the 2013–14 or 2014–15 academic years, and traditional ground tuition had not been raised in six years.
- Operating cash flow improved, driven primarily by higher net income and timing of tax-related payments and deferred revenue. Investing cash use was $46.0 million, including substantial campus expansion spending; projects included dormitories, a classroom building, and a parking structure.
- No specific financial guidance was provided. Management said cash flow, existing liquidity, and the revolving credit line should fund operations, planned capital spending, and working capital for at least 24 months. It expects seasonal fluctuations to continue; the summer revenue and margin effect may become more pronounced as ground enrollment grows.
- Key risks include compliance with Title IV and other education regulation, student access to financial aid, enrollment growth and retention, competition for students, and execution of campus expansion. Management said it believed the university was materially compliant with applicable regulations. It reported no material changes to previously disclosed risk factors.
- The university reported ordinary-course litigation and said outcomes for most pending matters could not be estimated with certainty; management did not expect resulting charges to have a material adverse effect. Separately, a court ruled for the university in January 2015 on disputed amounts under a note receivable; it was awaiting the formal written appellate decision.
- Q1 2015 included no open-market share repurchases under the authorization; $25.9 million remained available. Cash outflow of $4.2 million for shares withheld to cover taxes on restricted-stock awards was reported separately.
Important facts for investors to verify
- Whether enrollment growth, especially the rapidly growing ground student population, persists and translates into revenue and margins after scholarships.
- Whether campus construction spending and related commitments support sustainable returns; contractual obligations totaled $207.7 million, including $96.7 million of purchase obligations.
- The composition and availability of cash and investments, particularly the $57.9 million restricted balance, and compliance with debt covenants and variable-rate debt exposure.
- Developments in federal student-aid rules, regulatory reviews, and the pending appellate decision concerning the note receivable.
- The effect of seasonality, including the anticipated summer enrollment and margin impact, on results for the remaining quarters.