Business Context and Reporting Period
Company: Grand Canyon Education, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A regionally accredited provider of online postsecondary education services focused on graduate and undergraduate degrees in education, business, and healthcare. The company operates online programs, a traditional campus in Phoenix, Arizona, and onsite programs at employer facilities.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Net Revenue | $59,400 | $34,566 | $118,364 | $70,275 |
| Operating Income | $9,960 | $386 | $22,015 | $6,326 |
| Net Income | $5,815 | $(80) | $12,718 | $3,224 |
| Net Income Available to Common Stockholders | $5,815 | $(348) | $12,718 | $2,703 |
| Diluted EPS | $0.13 | $(0.02) | $0.28 | $0.08 |
| Cash and Cash Equivalents (End of Period) | $24,742 (as of June 30, 2009) | |||
| Operating Cash Flow (Six Months) | $26,982 (2009) vs. $(1,743) (2008) | |||
| Total Debt (Notes Payable + Capital Leases) | $27,686 (Current + Non-current as of June 30, 2009) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 71.8% for the quarter and 68.4% for the six months ended June 30, 2009, compared to the prior year periods. This was driven by a 67.3% increase in student enrollment (from 16,510 to 27,622) and tuition price increases.
- Profitability: Operating income surged from $0.4 million to $10.0 million for the quarter, and from $6.3 million to $22.0 million for the six-month period. Net income turned from a loss of $0.1 million to a profit of $5.8 million for the quarter.
- Expense Ratios: Selling and promotional expenses as a percentage of revenue decreased from 43.1% to 34.7% (quarterly) due to improved enrollment counselor productivity. Instructional costs as a percentage of revenue decreased from 35.9% to 33.7%.
- Debt Restructuring: In April 2009, the company acquired its ground campus land and buildings for $50 million, financed partly by a new $25.7 million loan. This replaced a capital lease obligation with a variable rate debt, reducing the effective interest rate from approximately 8.7% to 4.0%.
- Share Repurchase: As part of the campus acquisition, the company repurchased 909,348 shares of common stock for approximately $14.5 million.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects continued enrollment and revenue growth. Selling and promotional expenses as a percentage of revenue are expected to continue declining as new hires reach full productivity.
- Regulatory Risks: The company is subject to extensive regulation under the Higher Education Act. A significant risk involves the "cohort default rate" of students; exceeding 30% for three consecutive years could result in loss of Title IV eligibility.
- Legal Proceedings:
- OIG Investigation: The Department of Education's Office of Inspector General is investigating enrollment counselor compensation practices. The outcome is uncertain.
- Qui Tam Lawsuit: A former employee filed a lawsuit alleging violations of the False Claims Act regarding enrollment counselor compensation. The company plans to contest this vigorously.
- SunGard Dispute: Resolved in January 2009 with a settlement; no reserves remain.
- Unusual Items:
- Share-Based Compensation: Expenses of $0.8 million (quarter) and $1.6 million (six months) were incurred following the IPO, compared to zero in the prior year.
- Public Company Costs: Incremental annual costs of $3.0 million to $4.0 million are expected due to compliance with Sarbanes-Oxley and SEC regulations.
Key Facts for Investor Verification
- Enrollment Quality: Verify the sustainability of the 67.3% enrollment growth and the mix shift toward online programs (95% of students).
- Regulatory Compliance: Monitor the status of the OIG investigation and the qui tam lawsuit regarding Title IV incentive compensation laws, as adverse outcomes could result in substantial fines or loss of federal funding.
- Debt Servicing: Confirm the company's ability to service the new $25.7 million variable-rate debt and meet covenants, particularly given the reliance on Title IV funds for cash flow.
- Bad Debt Trends: Review the provision for bad debts, which increased to $6.6 million for the six months ended June 30, 2009, reflecting higher aged receivables.
- Capital Expenditures: Assess the impact of significant capital outlays ($47.7 million used in investing activities for the six months) on future liquidity.