Grand Canyon Education, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in millions, except per-share data, percentages, and enrollment. GCE now provides education services to university partners; it sold Grand Canyon University (GCU) on July 1, 2018. It acquired Orbis Education on January 22, 2019, and included Orbis results from that date.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $174.8 | $236.8 | $372.1 | $512.5 |
| Operating income | $51.0 | $58.5 | $123.4 | $148.6 |
| Net income | $51.1 | $46.0 | $124.4 | $119.7 |
| Diluted EPS | $1.06 | $0.95 | $2.57 | $2.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $189.3 | $143.7 |
Reported year-over-year revenue and operating income are not directly comparable because the 2018 periods reflect GCE owning and operating GCU, while 2019 reflects its service-provider model. On management’s adjusted comparison—60% of 2018 university-related revenue, approximating GCE’s GCU service-fee share—service revenue rose 23% in Q2 and 21% for the six months. GCE reported net income growth of 11% in Q2 and 4% for the six months.
Calculated from reported figures, operating margin was 29.2% in Q2 2019 and 33.2% for the six months; net margin was 29.2% and 33.4%, respectively. These reported-revenue margins are not comparable with 2018 because of the business-model change.
- At June 30, cash and cash equivalents were $65.8; investments were $14.2; restricted cash was $0.3. Cash plus investments totaled $80.0.
- Net cash provided by operations was $189.3 for the six months. Management attributed part of the increase to GCU paying its estimated June service fee before quarter-end, which increased operating cash flow by $41.1.
- Investing cash outflow was $485.8, including $361.2 for the Orbis acquisition and $169.8 in advances to GCU for capital expenditures. Financing cash inflow was $180.5.
- Notes payable totaled $256.3, including $48.4 current and $207.9 noncurrent; debt bears interest at 30-day LIBOR plus 2% and matures in 2024. The company reported compliance with debt covenants.
- The secured note receivable from GCU was $1,069.9. It bears 6% interest, is interest-only through its June 2025 maturity, and is secured by GCU assets. GCE had advanced $199.8 for GCU capital expenditures by June 30.
Material changes and management commentary
- GCE’s partner-program enrollment was 90,906 at June 30, up 11.4% from 81,620. GCU enrollment was 87,590, up 7.3%; Orbis-serviced enrollment was 3,316.
- Orbis contributed $38.5 of service revenue and a net loss of $0.8 for the period included in GCE’s six-month results. Acquisition-related transaction costs were $4.0 for the six months; acquired partner relationships generated $3.9 of amortization expense.
- Operating costs increased with the expanded partner base and service requirements. Management cited higher technology and academic services, marketing, staffing, facilities, and acquisition-related costs; counseling expense declined as a share of adjusted comparable revenue.
- The six-month effective tax rate was 17.1%, versus 20.6% in 2018. A settlement with the Arizona Department of Revenue produced a $7.5 refund and a favorable $5.9 net tax impact recorded in Q1. Arizona tax-law changes and share-based compensation tax benefits also affected the rate.
- GCE said seasonal enrollment patterns—particularly lower summer attendance among GCU traditional ground students—typically reduce revenue and operating margins in the second and third quarters. Management expects operating cash flow and other liquidity sources to cover operations, planned capital expenditures, and working capital needs for at least 24 months.
Outlook, risks, and contingencies
The filing provides no specific revenue, earnings, or enrollment guidance. Management’s liquidity statement is its principal near-term outlook. Key stated risks include dependence on major university-partner agreements, especially GCU; enrollment and student-retention trends; regulatory and Title IV compliance; changes in laws and accreditation standards; competition; execution and integration of acquisitions; and debt service and covenant restrictions. The company said there were no material changes to the risk factors in its 2018 Form 10-K. It reported no legal proceedings in Part II and stated that pending matters were not expected to have a material adverse effect, while noting that potential losses in most cases could not be estimated with certainty. No material off-balance-sheet arrangements were reported.
Investor verification priorities
- Review the adjusted revenue comparison: it uses 60% of pre-sale GCU revenue and is not the same as reported GAAP revenue.
- Assess GCU concentration and the credit quality and repayment terms of the $1.07 billion secured note, including further capital advances.
- Check Orbis integration, partner enrollment growth, acquisition economics, and the final purchase-price allocation, which remained subject to adjustment.
- Reconcile operating cash flow with the $41.1 million timing benefit from GCU’s June payment and the substantial acquisition and GCU funding outflows.
- Monitor variable-rate debt, required quarterly principal payments, covenant compliance, and the company’s remaining liquidity and repurchase activity.