Grand Canyon Education, Inc. — Q1 2021 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. GCE provides education services to 26 university partners. Its largest partner, Grand Canyon University (GCU), accounted for 87.4% of service revenue in the quarter.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Service revenue | $236.9 million | $221.7 million | +6.9% |
| Operating income | $84.2 million | $80.8 million | +4.2% |
| Operating margin | 35.5% | 36.5% | Down 0.9 percentage points |
| Net income | $78.1 million | $71.4 million | +9.4% |
| Diluted EPS | $1.69 | $1.49 | +13.4% |
| Operating cash flow | $89.8 million | $85.7 million | +4.8% |
Revenue growth primarily reflected partner enrollment growth of 7.2%, partly offset by lower revenue per student. Total partner enrollments were 115,390, up from 107,591. GCU enrollment grew 7.2%; other partners’ enrollment grew 8.4%. Net income benefited from a lower effective tax rate: 20.4%, versus 24.2% in Q1 2020. Diluted weighted-average shares declined to 46.3 million from 47.8 million.
Technology and academic services expense rose 22.0% to $32.1 million, and marketing and communication expense rose 11.8% to $47.7 million, reflecting staffing, site expansion, and marketing costs. Counseling expense increased 1.7% to $61.2 million; general and administrative expense was approximately flat at $9.6 million.
Cash, debt, and liquidity
- At March 31, cash and cash equivalents were $225.8 million; investments were $36.4 million. Combined cash and investments were $262.3 million, compared with $256.6 million at December 31, 2020.
- Cash declined by $19.9 million during the quarter. Operating cash flow of $89.8 million was offset by $34.8 million of investing outflows and $74.9 million of financing outflows, mainly share repurchases and debt payments.
- Notes payable totaled $99.5 million, down from $107.8 million at year-end; the revolving credit facility was undrawn, with $150 million available. Debt bears interest at 30-day LIBOR plus 2.0%. The company reported compliance with its debt covenants.
- Lease liabilities totaled $62.6 million. Current liabilities were $152.8 million and current assets were $374.3 million.
- The $964.9 million net Secured Note receivable from GCU bears 6% interest and matures June 30, 2025; principal and accrued unpaid interest are due at maturity. GCE reported $14.5 million of related interest income this quarter.
Material changes, outlook, and risks
- COVID-19: Lower GCU housing, meal, and ancillary revenue continued to reduce GCE service revenue. GCU resumed on-campus doctoral residencies in Q1, but attendance remained below normal. Management estimated a $1.2 million reduction in Q2 2021 service revenue attributable to COVID-19, with a comparable reduction in operating profit. It expected some GCU housing and ancillary revenue effects to continue; the duration and magnitude remained uncertain.
- Expansion: GCE had 29 off-campus classroom and laboratory sites at quarter-end, versus 23 a year earlier. It opened one site in spring 2021 and planned five more during the remainder of 2021. Management cited approximately $1.5 million of leasehold improvements and equipment investment per site.
- Capital returns: The board raised total repurchase authorization to $500 million, expiring December 31, 2021. GCE repurchased 567,255 shares during Q1 for a reported aggregate cost of $56.3 million and had $191.9 million of authorization remaining. The $35 million accelerated share repurchase was finally settled May 4, after quarter-end.
- Seasonality: Management expects lower revenue and operating margins in summer quarters because fewer traditional GCU ground students attend during summer; fixed costs can amplify the margin impact.
- Concentration and operating risks: GCE depends heavily on GCU, which is also the Secured Note counterparty. Risks include partner agreement termination, enrollment and student retention, higher-education regulation and Title IV funding, competition, COVID-19 effects, and execution of site and program growth. About 90% of the workforce was working remotely, which management said could raise control and cybersecurity risks.
- Management said cash flows and available liquidity should fund operations, planned capital expenditures, and working capital for at least 24 months. No annual earnings or revenue guidance was provided in the filing.
- The company reported no material change to previously disclosed risk factors, no material legal proceedings, and no material change in internal control over financial reporting. Disclosure controls were deemed effective.
Important facts for investors to verify
- How GCU enrollment, housing, ancillary revenue, and the 87.4% revenue concentration evolve, including the credit quality and eventual repayment of the Secured Note.
- Whether planned new sites and partner programs generate sufficient enrollment and revenue to offset their higher operating, marketing, and capital costs.
- The persistence of COVID-19-related revenue and margin effects, particularly management’s Q2 estimate and any continuing impact on GCU operations.
- Share repurchase pace and funding relative to operating cash flow, debt repayments, and planned expansion investment.
- Exposure to variable interest rates and LIBOR transition, as well as compliance with credit-facility covenants.