Grand Canyon Education, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. GCE provides education services to 27 university partners; its largest partner is Grand Canyon University (GCU). Revenue is earned under services agreements, including a GCU agreement entitling GCE to 60% of GCU tuition and fee revenue.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Service revenue | $206.8m (+4.2%) | $198.4m | $645.2m (+6.5%) | $605.8m |
| Operating income | $45.3m | $51.0m | $179.8m | $180.1m |
| Net income | $47.7m | $52.0m | $175.2m | $170.4m |
| Diluted EPS | $1.08 | $1.11 | $3.86 | $3.60 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $208.9m | $180.1m |
Q3 operating margin was approximately 21.9%, down from 25.7%; nine-month operating margin was approximately 27.9%, versus 29.7%. Q3 earnings fell despite revenue growth, as operating costs grew faster than revenue. For the nine-month period, lower tax expense helped lift net income despite essentially flat operating income. The nine-month effective tax rate was 21.2%, compared with 23.1%.
Nine-month capital expenditures were $21.4m. Cash from operations less capital expenditures was approximately $187.5m. Cash and cash equivalents declined to $61.0m from $245.8m at year-end 2020; investments were zero at September 30. Current assets were $173.4m and current liabilities $203.8m. Notes payable were $82.9m, all classified as current, and lease liabilities totaled $60.7m.
Changes and operating drivers
- Q3 revenue increased 4.2%, principally from higher enrollment and revenue per student, including recovery in GCU room, board and ancillary revenue. Total partner enrollment was 118,832, up from 117,772; GCU enrollment rose 0.6% to 113,466.
- Off-campus classroom and laboratory enrollment grew 12.1% to 5,652, and GCE operated 31 such sites. Growth and new-site costs contributed to higher technology, academic and marketing expenses.
- Q3 technology and academic services expense rose 15.7% and marketing and communication expense rose 11.5%. Nine-month increases were 20.3% and 11.3%, respectively. Counseling expense rose 6.9% in Q3 but declined as a share of revenue for the nine-month period.
- Nine-month operating cash flow improved by $28.8m, primarily reflecting year-over-year changes in working capital, including accounts payable and receivables.
- GCE repurchased approximately 3.9m shares for $354.2m under its buyback program during the first nine months. The program had $864.1m remaining authorization at quarter-end; cash used for financing activities was $382.4m.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said cash flow and other liquidity sources were expected to fund operations, planned capital expenditures and working capital needs for at least 24 months.
- COVID-19 continued to affect GCU ancillary activities and enrollment patterns. GCU’s Fall 2021 residential students increased 36.1% year over year to 15,570, while working-adult enrollment declined. GCE said online enrollment growth could continue to slow through the rest of 2021 before potentially reaccelerating as comparisons normalize.
- At other university partners, some healthcare-program students delayed clinical courses because of hospital-partner vaccine mandates, reducing revenue per student in Summer and Fall 2021. Remote work also presents potential internal-control and cybersecurity challenges.
- GCU accounted for 85.0% of GCE service revenue in the first nine months of 2021. GCE also held a $964.9m net secured-note receivable from GCU, making partner concentration and collectability material considerations.
- Subsequent event: On October 29, 2021, GCU repaid $500m of the secured note using refinancing proceeds. GCE released its first-priority lien; the remaining obligation continues at 6% interest, matures June 30, 2025, and is secured equally and proportionally with other obligations under GCU’s master trust indenture. GCE also repaid and terminated its credit agreement using the proceeds; remaining funds were intended for general corporate purposes, including possible repurchases.
- Management reported no material adverse effect expected from pending legal matters; the filing’s Legal Proceedings item states “None.” No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, with no material changes in internal control identified.
Important facts for investors to verify
- How GCU’s post-refinancing trust obligation ranks and is collateralized relative to other master-trust obligations, and the remaining principal balance after the $500m repayment.
- Whether GCU’s revenue contribution and enrollment trends, especially working-adult and online enrollment, stabilize or weaken further.
- Whether new off-campus sites generate sufficient enrollment and revenue to offset rising technology, academic and marketing costs.
- Whether clinical-course delays, pandemic-related disruptions, or regulatory and cybersecurity risks affect partner operations or GCE’s results.
- The pace and funding of future share repurchases given the substantial cash decline and remaining authorization.