Grand Canyon Education, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. GCE provides education services to 25 university partners; Grand Canyon University (GCU) is its largest partner. Figures below are in millions except per-share data and percentages.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Service revenue | $210.6 | $199.8 | $460.7 | $443.9 |
| Operating income | $35.4 | $33.8 | $109.9 | $111.3 |
| Operating margin | 16.8% | 16.9% | 23.9% | 25.1% |
| Net income | $29.0 | $25.6 | $88.5 | $83.6 |
| Diluted EPS | $0.96 | $0.80 | $2.91 | $2.51 |
| Operating cash flow | Not separately reported | Not separately reported | $157.1 | $146.1 |
- Q2 net margin was approximately 13.8%, compared with 12.8% a year earlier. Six-month net margin was approximately 19.2%, versus 18.8%.
- At June 30, cash and cash equivalents were $142.9 and investments were $90.4, totaling $233.4, up from $181.7 at December 31, 2022. Current assets were $279.5 and current liabilities $100.4.
- Total liabilities were $200.8, including $82.0 of lease liabilities. The filing reports no financing leases and only $0.026 of interest expense for the first six months; it does not identify material borrowing debt.
- Six-month investing cash outflow was $48.1, including $17.6 of capital expenditures; financing cash outflow was $86.6, chiefly share repurchases. Cash increased $22.5 over the period.
Changes and operating drivers
- Q2 revenue rose 5.4% year over year and net income rose 13.3%. Six-month revenue rose 3.8% and net income rose 5.9%, while operating income fell 1.2%.
- GCU enrollment was 95,972, up 4.1%; total partner enrollment was 99,526 versus 96,029. GCU online enrollment reached 88,645 and ground enrollment was 7,327.
- Management attributed revenue growth to higher GCU enrollment and revenue per student, including higher room, board and ancillary revenue. A later Spring semester shifted approximately $4.5 million of revenue from Q1 into Q2 2023.
- Q2 counseling and support costs increased 9.6%, faster than revenue; counseling expense rose to 34.4% of revenue from 33.1%. For the first half, it increased to 31.6% from 30.1%, reflecting staffing, compensation and travel costs. Marketing costs rose, but declined as a share of revenue.
- Investment interest and other income increased to $2.6 in Q2 and $4.7 for the half, attributed to higher investment balances and returns. Effective tax rates were 23.8% for Q2 and 22.8% for the half, compared with 25.2% in both prior-year periods; audits, refunds and stock-based tax benefits contributed to the reduction.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects available liquidity and operating cash flow to fund operations, planned capital spending and working capital for at least 24 months. It expects annual capital expenditures of approximately $30–$35 million.
- GCE opened one off-campus classroom and laboratory site in the first half, bringing the total to 36, and anticipated opening three to four more in 2023. Management said ABSN enrollment growth has been slowed by delayed site openings, smaller incoming cohorts, clinical-faculty constraints and a strong job market; program changes are intended to broaden eligibility and support growth.
- Management expects counseling costs as a percentage of revenue to remain higher in 2023 than in 2022, and technology and academic costs to rise as a share of revenue as sites open and partner enrollment grows. Results are seasonal, with lower summer revenue and margins.
- GCU accounted for 87.2% of Q2 service revenue, versus 85.1% a year earlier, creating substantial partner concentration risk. GCE also disclosed that approximately 75% of cash and cash equivalents were held at one financial institution, with balances exceeding FDIC limits; it identified potential loss exposure if a bank failed and government intervention did not occur.
- A securities class action concerning GCU’s 2018 conversion remains pending; the company’s motion to dismiss was denied in March 2023. GCE says it believes the claims lack merit, but cannot reasonably estimate a loss and has accrued no liability. The FTC has issued civil investigative demands concerning marketing services for GCU; GCE is cooperating.
- The company repurchased approximately 728,410 shares in the first half for about $80.2 million under its program; $115.6 million remained authorized at June 30, 2023, with authorization expiring December 31, 2023. Six-month net repurchases and tax-withholding share purchases used $86.6 million of cash.
Important facts for investors to verify
- Whether GCU enrollment, revenue per student and the high partner revenue concentration remain stable.
- Whether ABSN enrollment improves and planned site openings occur on schedule, given staffing, cohort-size and labor-market challenges.
- Whether counseling and site-related cost growth pressures margins as management anticipates.
- Developments in the securities litigation and FTC inquiry, including any change in potential financial exposure.
- Cash concentration and uninsured-deposit exposure, planned capital spending, and the pace and size of future share repurchases.