Grand Canyon Education, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. GCE provides education services to 25 university partners. Grand Canyon University (GCU) remains its largest partner.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Service revenue | $198.4 | $193.3 | $605.8 | $565.4 |
| Operating income | $51.0 | $59.7 | $180.1 | $183.2 |
| Operating margin | 25.7% | 30.9% | 29.7% | 32.4% |
| Net income | $52.0 | $58.2 | $170.4 | $182.5 |
| Diluted EPS | $1.11 | $1.20 | $3.60 | $3.78 |
| Operating cash flow | Not separately stated | Not separately stated | $180.1 | $195.1 |
- Q3 revenue grew 2.6%, while operating income fell 14.5% and net income fell 10.5%. Revenue growth reflected partner enrollment growth, partly offset by lower revenue per student and COVID-related reductions at GCU.
- For the first nine months, revenue rose 7.1%, but operating income declined 1.6% and net income declined 6.6%. Diluted EPS was $3.60 versus $3.78.
- Q3 costs rose faster than revenue, notably technology and academic services (up 26.9%) and marketing and communication (up 13.1%). Management attributed higher costs to staffing, expanded partner and site support, and marketing. Operating margin figures above are calculated from reported operating income and service revenue.
- Nine-month net cash provided by operating activities was $180.1 million. Investing used $13.7 million, including $22.2 million of capital expenditures; financing used $122.0 million, including $92.3 million for share repurchases and $24.9 million of debt principal payments.
Liquidity, debt and other financial metrics
- At September 30, 2020, cash and cash equivalents were $167.0 million and investments were $12.8 million, or $179.8 million combined. Current assets were $291.8 million and current liabilities were $122.7 million.
- Notes payable totaled $116.1 million, including $33.1 million current; no revolving credit balance was outstanding, and $150.0 million of revolving capacity was available. The company reported compliance with debt covenants. The facility bears interest at 30-day LIBOR plus 2% (2.16% at quarter-end).
- GCE held a $964.9 million net secured note receivable from GCU, bearing 6% interest and maturing June 30, 2025. Nine-month interest income on the note was $44.3 million. GCU’s $75 million June borrowing was repaid in July.
- GCE repurchased 1.164 million shares for $92.3 million during the first nine months. At quarter-end, $85.0 million remained under the $300 million repurchase authorization, which expires December 31, 2021.
Material changes and management commentary
- Partner enrollments reached 117,772, up 8.2% year over year: GCU enrollments rose 7.6% to 112,781 and other-partner enrollments rose 25.6% to 4,991. GCE opened seven off-campus classroom and laboratory sites during Q3, bringing the total to 30; four more were planned for the first half of 2021.
- GCU represented 86.5% of GCE’s service revenue for the first nine months, down from 89.0% a year earlier, leaving the company materially dependent on one partner.
- COVID-19 reduced GCU room, board and ancillary revenue through campus and business closures, fewer residential students, canceled or relocated doctoral residencies, and a delayed Fall semester start. Approximately 4,900 traditional campus students chose online study; Fall residential enrollment was approximately 11,500 against capacity of approximately 14,500. Other partners experienced delayed Summer starts, partly offset by Fall starts and retention.
- Management estimated that the shifted GCU Fall start moved $9.9 million of revenue from Q3 to Q4. It also estimated an $8.5 million Q4 reduction in service revenue attributable to COVID-19, with a comparable reduction in operating profit. These are estimates, not formal full-year guidance; the filing does not provide a clear full-year earnings forecast.
- Management said cash, operating cash flow and available credit should fund operations, planned capital expenditures and working capital for at least 24 months. Approximately 90% of the workforce was working remotely, which management said could increase internal-control, cybersecurity and technology risks.
Risks, contingencies and unusual items
- The duration and financial effects of COVID-19 remained uncertain. Further campus closures, refunds, reduced enrollment or clinical placement constraints could weaken partner revenue, GCE margins and collections. Management said the impact could be material in future quarters.
- GCU concentration exposes GCE to a sustained decline in GCU operations and affects both service revenue and secured-note interest income. The company also faces higher-education regulatory, accreditation, Title IV funding, competition, student retention and technology risks.
- GCE adopted the expected-credit-loss standard in 2020 and recorded a $5.0 million reserve on the secured note; the $3.8 million after-tax cumulative effect reduced opening retained earnings. Management reported no material effect on the period’s results and said it would continue monitoring COVID-19 credit risk.
- Nine-month 2019 results included a $4.0 million acquisition transaction loss and a $5.9 million favorable discrete tax benefit from an Arizona tax refund. The effective tax rate for the first nine months was 23.1% in 2020 versus 18.3% in 2019, partly reflecting the prior-year benefit and lower excess tax benefits from share-based awards.
- The filing reports no legal proceedings in Part II. Management stated that potential losses on most pending ordinary-course matters could not be estimated with certainty and did not expect them to have a material adverse effect; charges could exceed existing reserves. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether GCU’s residential, room-and-board and ancillary revenues recover, and whether COVID-related Q4 estimates or later-period effects differ materially from management’s expectations.
- Whether enrollment growth at GCU and other partners translates into revenue and margin growth as new sites and support costs expand.
- GCU’s capacity to meet secured-note payments and the credit quality of the $964.9 million receivable, including the adequacy of the expected-credit-loss reserve.
- GCE’s continued covenant compliance, debt repayment and liquidity position, and the capital-allocation trade-off between buybacks, site investment and other uses of cash.
- Changes in the company’s dependence on GCU, regulatory or accreditation developments, and risks arising from remote operations and cybersecurity.