Grand Canyon Education, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. GCE provides technology, academic, counseling, marketing and administrative services to 23 university partners. Grand Canyon University (GCU) is its largest partner.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Service revenue | $274.7 million | $250.1 million | +9.8% |
| Operating income | $84.5 million | $74.5 million | +13.4% |
| Operating margin | 30.8% | 29.8% | +1.0 percentage point |
| Net income | $68.0 million | $59.6 million | +14.2% |
| Diluted EPS | $2.29 | $1.94 | +18.0% |
| Operating cash flow | $85.0 million | $63.0 million | +$22.0 million |
Net margin was 24.8%, compared with 23.8%. Investment interest and other income rose to $3.7 million from $2.2 million, attributed to higher investment balances and returns. The effective tax rate was 22.9%, versus 22.3%.
Liquidity, balance sheet and capital allocation
- Cash and cash equivalents were $196.2 million and investments were $94.5 million at March 31, for combined liquidity of $290.7 million, up from $244.5 million at December 31, 2023. Current assets were $444.5 million and current liabilities $160.1 million.
- The filing reports no borrowing debt; liabilities include lease obligations of $97.3 million, including $11.3 million current. Total liabilities were $276.1 million.
- Operating cash flow was $85.0 million; capital expenditures were $9.0 million. Investing activities used $5.3 million and financing activities used $30.0 million. Cash increased by $49.7 million during the quarter.
- GCE repurchased 171,670 shares for approximately $22.5 million under its program and used a further $7.4 million for shares withheld for taxes. $242.5 million remained authorized for repurchases at quarter-end.
Material changes and operating trends
- GCU enrollment was 116,952, up 7.7% year over year; GCU online enrollment rose 9.2% to 93,987. Total partner enrollment was 120,788, compared with 112,588.
- Revenue growth reflected higher GCU enrollment and revenue per student, including increased room, board and ancillary revenue. Timing added $2.1 million to Q1 revenue versus the prior year because the spring term started a day earlier, and leap year added $1.5 million.
- Counseling services and support costs rose 13.0% to $82.9 million, with expense increasing to 30.2% of revenue from 29.3%, mainly due to staffing, travel and occupancy costs. Technology and academic services costs rose 4.3% to $39.1 million, while their share of revenue declined to 14.2% from 15.0%. Marketing costs rose 4.6% to $55.4 million, but declined to 20.2% of revenue from 21.1%.
- Off-campus classroom and laboratory site enrollments were 4,486, up 4.0%. Management said some partners continued to experience smaller incoming cohorts; it cited a strong job market as a headwind for ABSN enrollment growth. GCE opened two sites in Q1, bringing the total to 42.
Outlook, risks and contingencies
- Management expects cash flows and available liquidity to fund operations, planned capital expenditures and working capital needs for at least 24 months. It expects annual capital expenditures of approximately $30–$40 million and intends to continue using a significant portion of operating cash flow for share repurchases.
- Management anticipates technology and academic services costs as a percentage of revenue may rise as sites are added, though contract changes reducing faculty reimbursements could offset some increases. It hopes to achieve 2024 leverage in counseling and marketing costs; general and administrative costs as a percentage of revenue could rise due to legal expenses.
- Results are seasonal: lower summer enrollment, especially among GCU ground students, typically pressures Q2 and Q3 revenue and margins. Q1 and Q4 are generally stronger.
- GCU represented 89.7% of Q1 service revenue, up from 88.5%. This partner concentration makes results sensitive to GCU enrollment, operations and agreement-related developments. Other cited risks include education regulation and Title IV compliance, partner agreement termination, enrollment conversion and retention, competition, technology and cybersecurity, and legal matters.
- A shareholder securities class action settlement was agreed to in March 2024; the company recorded a $25.5 million insurance receivable, and insurers are to fund the full settlement. The settlement remained subject to final court approval in the filing. A related derivative action is pending. In a separate False Claims Act case, trial was stayed while settlement terms were explored; the company said the outcome was uncertain, it could not estimate a loss range, and it had accrued no liability.
- The company reported no material changes to its previously disclosed risk factors, no material changes in internal control over financial reporting, and no off-balance-sheet arrangements with a material effect.
Investor verification priorities
- Track GCU’s share of revenue and enrollment growth, and assess the effect of its concentration on GCE.
- Separate underlying revenue growth from the $3.6 million combined timing and leap-year benefit, and monitor subsequent enrollment and revenue per student.
- Review the final approval and funding of the shareholder settlement, and developments in the derivative and False Claims Act matters.
- Monitor counseling expense growth, new-site investment, ABSN enrollment trends and management’s stated cost-leverage expectations.
- Reconcile ongoing repurchases and capital spending with liquidity, lease obligations and the remaining authorization.