Grand Canyon Education, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless noted. The company operates a single university segment, delivering more than 200 programs online and at campus and employer locations.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net revenue | $248.2 million | $227.0 million; up 9.4% |
| Operating income / margin | $76.6 million / 30.9% | $68.7 million / 30.3% |
| Net income | $55.9 million | $43.7 million; up 28.1% |
| Diluted EPS | $1.16 | $0.93 |
| Operating cash flow | $109.7 million | $86.9 million |
| Capital expenditures | $21.7 million | $49.8 million |
- Net margin was 22.5%, versus 19.2% a year earlier. The effective tax rate fell to 26.5% from 38.0%, largely because adoption of a new share-based compensation accounting standard produced $8.5 million of excess tax benefits in Q1 2017.
- At March 31, 2017, cash and cash equivalents were $88.5 million, investments were $81.6 million, and restricted cash was $70.3 million. The company reported $170.1 million of unrestricted cash and investments.
- Notes payable totaled $71.6 million, including $6.7 million current and $64.9 million noncurrent. The credit facility included a $150 million revolver; the filing says no amount was drawn at quarter-end. Cash flow shows $25.0 million of net revolver repayments during the quarter.
- Total assets were $1.16 billion and stockholders’ equity was $826.5 million at quarter-end. Current assets were $277.9 million and current liabilities were $235.1 million.
Business trends and changes versus prior year
- End-of-period enrollment rose 11.0% to 83,352: online enrollment increased 10.8% to 67,495 and ground enrollment increased 12.0% to 15,857. Graduate enrollment grew to 41.9% of total enrollment from 40.6%.
- Management attributed revenue growth mainly to enrollment growth and, to a lesser extent, higher room, board, and other student fees. Revenue per student declined slightly, which management attributed to the spring term starting five days later and one fewer revenue day because 2016 was a leap year.
- Operating expenses rose 8.4%, slower than revenue growth. Advertising increased 16.7% to $24.6 million, primarily due to national brand advertising; instructional costs increased 8.4% to $102.6 million. General and administrative expense declined 7.3%, mainly due to lower legal and professional costs.
- Interest and other income fell from $2.0 million to near zero, primarily because Q1 2016 included a $1.8 million distribution related to the company’s LoudCloud investment.
- Operating cash flow increased, partly reflecting higher net income and timing of tax, employee, and other working-capital payments. Investing cash use was $48.6 million, including $21.7 million of capital expenditures and net purchases of short-term investments. Financing cash use was $33.1 million.
Outlook, risks, and notable items
- No specific revenue or earnings guidance was provided. Management said operating cash flow, cash and cash equivalents, and the revolving credit line were expected to provide adequate funding for operations, planned capital expenditures, and working capital for at least 24 months.
- Management expects seasonal pressure on Q2 and Q3 operating margins because most traditional ground students do not attend during summer while a significant portion of campus costs are fixed. It expects this effect to become more pronounced as the traditional ground student mix grows.
- Key risks include compliance with extensive Title IV, state, and accreditation requirements; students’ access to financial aid and financing; enrollment conversion and retention; competition, including from established universities expanding online offerings; marketing effectiveness; and managing growth and campus expansion.
- The Higher Learning Commission reaffirmed accreditation in February 2017 without monitoring or interim-report requirements. Management stated it believed the university was materially compliant with applicable regulations.
- The filing reports ordinary-course litigation but says potential losses for most matters could not be estimated with certainty and were generally not considered probable. Management did not expect pending matters to have a material adverse effect; no material changes to reported risk factors were noted.
- The company adopted share-based compensation accounting changes in Q1, increasing income tax benefits and potential tax-rate volatility. It also early adopted guidance including restricted cash in cash-flow reconciliations. Management expected the upcoming revenue-recognition standard to have no material impact on tuition revenue, while continuing to evaluate other fees and adoption effects.
- The $175 million share repurchase authorization had $99.2 million remaining at March 31, 2017 and was scheduled to expire December 31, 2017. No program repurchases occurred in the quarter; 147,330 shares were withheld for taxes on vested awards.
Investor verification priorities
- Assess how much Q1 earnings growth depended on the $8.5 million share-based compensation tax benefit, and the potential for future tax-rate volatility.
- Track enrollment, retention, revenue per student, and scholarship levels to test whether enrollment growth converts to sustainable revenue and margins.
- Monitor advertising growth and summer seasonality for their effects on operating margins and cash generation.
- Reconcile the quarter’s $25 million revolver repayment with the zero revolver balance reported at quarter-end, and review debt maturities and covenants.
- Follow Title IV and other regulatory developments, accreditation status, and any material changes in litigation or compliance exposure.