Business Context and Reporting Period
Company: Grand Canyon Education, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: A regionally accredited provider of postsecondary education services offering graduate and undergraduate degrees in education, business, healthcare, and liberal arts. The company operates online programs and a 100-acre ground campus in Phoenix, Arizona. As of June 30, 2010, total enrollment was approximately 36,300 students, a 31.5% increase year-over-year, with 96.8% enrolled in online programs.
Key Financial Metrics
| Financial Metric (in thousands) | Three Months Ended June 30, 2010 |
Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
|---|---|---|---|---|
| Net Revenue | $97,522 | $62,905 | $186,848 | $118,364 |
| Operating Income | $20,512 | $13,006 | $40,109 | $22,015 |
| Net Income | $12,396 | $7,643 | $23,876 | $12,718 |
| Diluted EPS | $0.27 | $0.17 | $0.51 | $0.28 |
| Operating Margin | 21.0% | 20.7% | 21.5% | 18.6% |
| Cash and Cash Equivalents | $43,420 (as of June 30, 2010) | |||
| Restricted Cash/Investments | $30,658 (as of June 30, 2010) | |||
| Total Debt (Notes Payable + Capital Leases) | $27,343 (as of June 30, 2010) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 55.0% for the quarter and 57.9% for the six-month period compared to the prior year, driven primarily by a 31.5% increase in online enrollment and tuition price increases (blended rate increase of 3.5% for 2010-11).
- Profitability: Operating income grew 57.7% for the quarter and 82.2% for the six-month period. Net income increased 62.2% for the quarter and 87.8% for the six-month period.
- Expense Trends:
- Instructional Costs: Increased 77.2% (quarter) and 77.1% (six months), partly due to $4.0 million in non-capitalizable system conversion costs related to the transition from DataTel to CampusVue.
- Selling & Promotional: Increased 39.8% (quarter) and 38.6% (six months) due to expanded marketing and recruitment staffing, though as a percentage of revenue, this decreased from 32.9% to 29.7% (quarter) and 34.0% to 29.9% (six months).
- Bad Debt: Bad debt expense increased to $5.5 million for the quarter and $10.3 million for the six months, reflecting an increase in aged receivables.
- Liquidity: Unrestricted cash decreased from $62.6 million to $43.4 million, while restricted cash increased significantly from $3.4 million to $30.7 million due to the transition to a "borrower-based" financial aid system (BBAY), which requires funds to be held until courses begin.
Guidance, Outlook, Risks, and Contingencies
- Regulatory Risks (Critical):
- Qui Tam Litigation: The company is involved in a False Claims Act lawsuit regarding enrollment counselor compensation. A settlement of $5.2 million was accrued in 2009. A court hearing on the settlement occurred in June 2010, with a final hearing scheduled for August 13, 2010. The outcome remains uncertain.
- DOE Program Review: The Department of Education initiated a program review in July 2010 covering 2008-2009 and 2009-2010. Preliminary findings of concern include incentive compensation practices and "gainful employment" standards for liberal arts programs. Significant non-compliance findings could result in fines, repayment of funds, or loss of Title IV eligibility.
- Rulemaking: Pending Department of Education rules on "gainful employment" and incentive compensation could materially impact the business model and program eligibility.
- Operational Changes: The company successfully converted its back-office system to CampusVue and Great Plains to support rolling start dates for online students. This transition incurred one-time costs and temporarily increased restricted cash balances.
- Debt Covenants: The company amended its loan agreement in June 2010 to reduce the interest rate to 30-day LIBOR plus 2.25%. The company is currently in compliance with all debt covenants.
- Outlook: Management expects continued enrollment growth and believes cash flow from operations will be adequate for the next 24 months. However, they caution that regulatory outcomes and the results of the ongoing program review could materially affect future results.
Investor Verification Checklist
- Regulatory Status: Verify the final outcome of the August 13, 2010 court hearing regarding the $5.2 million qui tam settlement and the status of the Department of Education program review.
- Restricted Cash: Confirm the timing of the release of the $30.7 million in restricted cash as the new financial aid system stabilizes.
- Bad Debt Trends: Monitor the allowance for doubtful accounts and collection rates, as bad debt expense has risen significantly relative to revenue.
- System Conversion Costs: Assess whether the $4.0 million in system conversion costs were truly one-time or if further integration expenses are anticipated.
- Enrollment Quality: Evaluate the sustainability of the 31.5% enrollment growth in the context of increased regulatory scrutiny on for-profit education recruitment practices.