Grand Canyon Education, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019. Amounts are in millions unless otherwise noted. The 2019 comparison includes Orbis Education only from its January 22, 2019 acquisition date, limiting comparability.
Business context
GCE provides education services to colleges and universities through long-term services agreements. Its largest partner is Grand Canyon University (GCU); GCE also serves university partners through Orbis Education, which focuses on healthcare education programs. Under its GCU agreement, GCE receives 60% of GCU tuition and fee revenue.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Service revenue | $221.7 | $197.3 | +12.4% |
| Operating income | $80.8 | $72.4 | +11.5% |
| Operating margin | 36.4% | 36.7% | -0.3 percentage points |
| Net income | $71.4 | $73.2 | -2.5% |
| Diluted EPS | $1.49 | $1.52 | -2.0% |
| Operating cash flow | $85.7 | $76.3 | +$9.4 |
Revenue growth reflected 5.8% growth in partner enrollments and higher revenue per student. At March 31, GCU enrollment was 103,592 (+5.4% year over year) and Orbis program enrollment was 3,999 (+18.2%). Operating income rose, but net income fell as income tax expense increased to $22.8 million from $11.5 million. The effective tax rate was 24.2%, compared with 13.5% in 2019.
Costs rose in technology and academic services (41.1%), counseling and support (13.4%), and marketing and communication (18.7%); these categories also increased as a share of revenue. General and administrative expense declined 16.1%, largely due to lower professional fees.
Cash and cash equivalents were $132.5 million and investments were $17.0 million, totaling $149.5 million in unrestricted cash and investments. The company reported $150.0 million available on its revolving credit facility, with no revolver borrowings. Notes payable were $132.6 million, including $33.1 million current; lease liabilities were $35.9 million. The net secured note receivable from GCU was $964.9 million. GCE said it was in compliance with debt covenants and expected available liquidity to support operations and planned needs for at least 24 months.
Investing activities used $1.9 million, primarily reflecting $6.1 million in capital expenditures offset by investment-sale proceeds. Financing activities used $73.9 million, including $60.7 million of share repurchases and $8.3 million of debt principal payments.
Material changes and unusual items
- Q1 2019 included $4.1 million of Orbis acquisition transaction costs; none were reported in Q1 2020.
- Q1 2019 income tax expense benefited from a $5.9 million favorable discrete item related to an Arizona tax refund. The higher tax rate in Q1 2020 also reflected lower excess tax benefits from share-based compensation.
- GCE adopted the expected-credit-loss standard in Q1 2020 and recorded a $5.0 million reserve on the GCU secured note, reducing retained earnings by $3.8 million after tax. Management said adoption did not materially affect financial condition, results, or cash flows.
- The company repurchased 786,503 shares for approximately $60.7 million during Q1; $66.6 million remained under the authorization at quarter-end. It subsequently repurchased 100,000 shares for $7.3 million.
Outlook, risks, and contingencies
COVID-19 had an estimated $1.8 million adverse effect on Q1 net revenue and operating profit. GCE expected lower service revenue and operating profit in Q2 and Q3 2020: estimated revenue reductions of $9–$10 million and $4–$6 million, respectively, with comparable operating-profit reductions. These were management estimates, not a guarantee; the filing emphasized uncertainty about duration and impact.
Campus restrictions, residential-student refunds, and closures of GCU ancillary businesses—including its hotel and golf course—reduced revenue. GCE warned that inability to fully reopen GCU’s campus for fall 2020, or university partners postponing or canceling semesters, could materially affect results. Summer and fall enrollment delays at Orbis partners were also a risk. Approximately 90% of GCE’s workforce was working remotely, increasing potential internal-control, cybersecurity, and operational risks. The company also cited partner concentration, regulatory and accreditation requirements, enrollment and retention, competition, and student access to funding as key risks.
GCE noted normal seasonality, with lower revenue and margins in summer quarters because many GCU ground students do not attend then. It reported no material off-balance-sheet arrangements. Legal proceedings arise in the ordinary course; management said potential losses generally could not be estimated with certainty and did not expect pending matters to have a material adverse effect.
Important facts for investors to verify
- Actual COVID-19 effects on GCU campus reopening, ancillary revenue, partner enrollment, and the Q2/Q3 estimates disclosed in the filing.
- GCU’s financial condition and ability to meet obligations under the $964.9 million net secured note, including the impact of the new expected-credit-loss reserve.
- Whether revenue growth and operating margins remain sustainable as partner-service costs and marketing expenses rise.
- Cash generation, debt amortization, covenant compliance, and the pace of share repurchases relative to liquidity needs.
- Comparability of year-over-year results given the partial-period inclusion of Orbis in Q1 2019 and the prior-year tax benefit and acquisition costs.