PERDOCEO EDUCATION Corp quarterly report, Q2 FY2023

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Perdoceo Education Corporation — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Unaudited results. Perdoceo operates Colorado Technical University (CTU) and the American InterContinental University System (AIUS), offering primarily online postsecondary education.

Key financial results

  • Q2 revenue: $186.6 million, up 11.3% year over year; tuition and fees were $184.5 million.
  • Q2 operating income: $48.1 million, up 41.7%; operating margin was 25.8%, compared with 20.2% a year earlier.
  • Q2 net income and EPS: Net income was $54.7 million versus $25.8 million. Diluted EPS was $0.80 versus $0.37. The quarter included a noncash $22.1 million gain on the sale of Le Cordon Bleu North American brand rights, which contributed materially to reported earnings. Adjusted diluted EPS, a non-GAAP measure, was $0.61 versus $0.42.
  • First-half results: Revenue was $382.2 million, up 9.0%; operating income was $91.4 million, up 17.8%; and net income was $89.2 million, up 54.1%. Diluted EPS was $1.30 versus $0.83; adjusted diluted EPS was $1.19 versus $0.93.
  • Cash flow: First-half operating cash flow was $66.2 million, compared with $54.8 million in 2022. Cash, cash equivalents and restricted cash increased $31.1 million to $150.0 million; short-term investments were $428.1 million.
  • Liquidity and debt: Cash, cash equivalents, restricted cash and short-term investments totaled $578.1 million. There were no borrowings under the $125 million revolving credit facility. The facility matures September 2024 and includes liquidity and other covenants.
  • Balance sheet: Total assets were $1.014 billion and stockholders’ equity was $792.4 million at June 30, 2023. Student receivables, net, totaled $43.5 million, against a $43.1 million allowance for credit losses.

Changes versus prior year and operating performance

  • CTU revenue increased 18.7% in Q2, reflecting organic growth, favorable academic-calendar timing and the Coding Dojo acquisition. AIUS revenue was nearly flat; excluding the 2022 CalSouthern acquisition, revenue would have declined.
  • At June 30, total student enrollment was 38,000, down 5.2% year over year: CTU was down 0.4% to 25,900 and AIUS was down 14.2% to 12,100. Perdoceo attributed AIUS’s decline primarily to changes in admissions, outreach and enrollment processes.
  • Management cited improved retention and engagement. Lower advertising and bad-debt expense helped operating performance, while educational-services costs and administrative expense increased. First-half bad-debt expense fell 22.4% to $18.9 million.
  • Reported earnings growth also reflects higher interest income and the Le Cordon Bleu gain. The $22.1 million gain was noncash: the company received 1.8 million of its own shares, recorded as treasury stock.

Outlook, risks and unusual items

  • Management expected full-year 2023 revenue to be slightly higher than 2022, supported by acquisitions, CTU’s academic-calendar redesign and retention improvements. It expected year-end enrollment to be lower than year-end 2022, citing the calendar redesign and AIUS operational changes. Management expected AIUS admissions and enrollment processes to return to normalized operating levels in Q4.
  • Management forecast a 2023 effective tax rate of 26.5%–27.5% and capital expenditures of approximately 1.5% of revenue. It expected operating cash generation and existing balances to fund needs for at least the next 12 months.
  • The board adopted a quarterly dividend policy after quarter-end and declared a first dividend of $0.11 per share, payable September 15, 2023 to holders of record September 1. The board retains discretion over future dividends. The share repurchase program was extended to September 30, 2024; approximately $24.1 million remained available at June 30.
  • Regulatory and enrollment risks: The company depends substantially on federal Title IV student aid and operates in a heavily regulated sector. Proposed federal rules, potential changes to state authorization reciprocity, and scrutiny of for-profit education could affect eligibility, operations or demand. The filing states that impacts of pending rulemaking were not yet determinable.
  • Contingency: A relator is pursuing a False Claims Act case alleging violations involving federal financial-aid credit-hour requirements at CTU and AIUS. The Department of Justice declined to intervene. The company disputes or contests the allegations; it said the outcome was uncertain, it could not estimate a potential loss, and it recorded no liability for this action.
  • Other notable items include a $13.7 million recorded fair value for Coding Dojo contingent consideration, potentially payable in 2024 and 2025, and a $5.3 million unfavorable tax adjustment associated with the Le Cordon Bleu gain. The company also reported ongoing requests for information from government agencies and accreditors.

Important facts for investors to verify

  • Whether enrollment trends—particularly AIUS’s decline—and management’s stated Q4 normalization expectation materialize.
  • How much reported earnings growth is sustained by core operations versus the one-time noncash brand-sale gain and investment income; review the company’s non-GAAP reconciliations alongside GAAP results.
  • Developments in the False Claims Act litigation, regulatory rulemaking, state authorization proposals and Title IV eligibility.
  • Student receivable collectability, bad-debt trends and the adequacy of the credit-loss allowance.
  • Future cash allocation among dividends, repurchases, acquisitions and technology investment, together with compliance with revolving-credit covenants.