Grand Canyon Education, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. GCE provides education services to 27 university partners. Grand Canyon University (GCU) is its largest partner.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Service revenue | $201.5m | $185.8m | $438.4m | $407.4m |
| Operating income | $50.2m | $48.3m | $134.5m | $129.1m |
| Net income | $49.5m | $47.0m | $127.6m | $118.4m |
| Diluted EPS | $1.09 | $1.00 | $2.78 | $2.49 |
- Revenue rose 8.5% in Q2 and 7.6% in the first half. Management attributed growth to higher partner enrollment and revenue per student. Enrollment was 101,808 at June 30, up 3.5% year over year; GCU enrollment was 97,774, up 3.3%.
- Operating margin was approximately 24.9% in Q2 (26.0% in 2020) and 30.7% for the first half (31.7% in 2020). Net margin was approximately 24.5% in Q2 (25.3% in 2020) and 29.1% in the first half (29.1% in 2020).
- First-half operating cash flow was $210.3m, versus $221.1m. Investing cash outflow was $240.1m, including $190m advanced to GCU and repaid in July, and $15.8m of capital expenditures. Financing cash outflow was $146.6m, including share repurchases and debt principal payments. Cash and cash equivalents ended at $69.4m, down from $245.8m at year-end 2020.
- At June 30, cash plus investments totaled $113.9m. Current assets were $147.1m and current liabilities $169.0m. Notes payable totaled $126.2m, including $35m drawn on the revolving credit facility; $115m of credit line remained available. GCE reported compliance with debt covenants.
- The Secured Note receivable from GCU was $1.155bn net, bears 6% interest, and matures June 30, 2025. First-half interest income was $29.3m. GCU accounted for 85.7% of first-half service revenue.
Material changes and management commentary
- Technology and academic services expense grew 24.0% in Q2, faster than revenue, reflecting staffing, occupancy, technology costs, and support for partner growth and new sites. Marketing expense rose 10.6%; counseling expense rose 5.8%. General and administrative expense declined 4.4%.
- GCE had 31 off-campus classroom and laboratory sites at June 30, compared with 23 a year earlier; ten opened in the past 12 months. Management expects additional sites to open over the next 15 months and reported related pre-opening costs.
- GCE repurchased approximately 1.55m shares during the first half at an aggregate cost of $151.7m; cash flow from financing also reflects tax-withholding share purchases and an unsettled ASR amount. In July, the board increased repurchase authorization by $970m. The program expires December 31, 2021, and future purchases remain discretionary.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided in the filing. Management said operating cash flow, cash and investments, and the revolver should fund operations, planned capital expenditures, and working capital for at least 24 months.
- Management noted that GCU was exploring refinancing the Secured Note. A refinancing could reduce or eliminate GCE’s interest income; proceeds, if received, were expected to be considered for repurchases, debt reduction, or general corporate purposes. No assurance was given that refinancing would occur.
- COVID-19 effects remained uncertain. GCU’s campus and ancillary revenues had improved, and doctoral-residency attendance returned to 2019 levels in Q2. However, online enrollment growth slowed in Q2 as new starts and returning students declined and student completions increased; management expected the year-over-year growth rate might continue to decline through 2021 before potentially reaccelerating. Professional studies enrollment had fallen but new cohorts were recently approved.
- Key risks include dependence on GCU, university partner enrollment and contract continuity, higher-education regulation and Title IV funding, competition, staffing and growth execution, and pandemic-related disruption, including remote-work cybersecurity and control risks. Legal proceedings were reported as none; management said pending matters were not expected to have a material adverse effect. Risk factors were unchanged from the 2020 Form 10-K.
- First-half tax expense declined to $35.0m from $38.1m; the effective tax rate was 21.5% versus 24.4%, benefiting from excess stock-compensation tax benefits and completed state audits. Interim results are unaudited and may not indicate full-year results; the business is seasonal.
Important facts for investors to verify
- GCU’s financial condition, repayment capacity, and any refinancing plans for the $1.155bn Secured Note, given GCU’s large share of revenue and interest income.
- Enrollment trends after the Q2 slowdown in online growth, and whether planned partner sites open and achieve expected enrollment.
- Cash and liquidity after substantial repurchases and the temporary $190m GCU advance; also monitor working capital and debt maturities.
- Actual capital spending, operating margins, and cash generation as new-site costs rise and pandemic-related effects evolve.
- Execution and settlement of the May 2021 accelerated share repurchase, and the scale and timing of future repurchases under the expanded authorization.