Grand Canyon Education, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions except per-share data and enrollment figures. GCE provides education services to 27 university partners; its largest partner, Grand Canyon University (GCU), represented 84.8% of nine-month service revenue.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Service revenue | $208.7 | $206.8 | $652.6 | $645.2 |
| Operating income | $35.5 | $45.3 | $146.8 | $179.8 |
| Operating margin | 17.0% | 21.9% | 22.5% | 27.9% |
| Net income | $30.0 | $47.7 | $113.6 | $175.2 |
| Diluted EPS | $0.96 | $1.08 | $3.47 | $3.86 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $110.5 | $208.9 |
- Q3 revenue increased 0.9%, while operating income fell 21.6% and net income fell 37.0%. Nine-month revenue rose 1.1%, while operating income declined 18.3% and net income declined 35.1%.
- Expense growth outpaced revenue growth. For the first nine months, technology and academic services rose 10.7%, counseling services and support 8.9%, and marketing and communication 7.8%. Each of these costs also rose as a share of revenue.
- A major year-over-year comparison item was interest income on the GCU Secured Note: $15.0 million in Q3 2021 and $44.4 million for the first nine months of 2021, with none in 2022 after GCU repaid the note in Q4 2021. The credit facilities were also repaid and terminated in 2021.
- Cash, cash equivalents and investments totaled $108.3 million at September 30, 2022, down from $600.9 million at December 31, 2021. Nine-month cash use included $571.6 million for share repurchases and $26.3 million for capital expenditures; operating cash flow was $110.5 million.
- The company reported no notes payable at September 30, 2022. Operating lease liabilities totaled $79.3 million, including $8.6 million current; future operating lease payments were $91.5 million before $12.2 million of imputed interest.
Material changes, outlook and risks
- GCU traditional campus enrollment increased 8.0% year over year, while GCU online enrollment declined 4.7%; total GCU enrollment declined 2.2%. Total partner enrollment was 116,202, down from 118,832. Off-campus site enrollment growth was constrained by delayed site openings, clinical faculty availability, and reduced cohort sizes; one partner’s occupational therapy assistant enrollment declined 22.7%.
- Management reported that online new-student enrollment increased in Q3 and said online growth had begun to re-accelerate. It expects professional studies cohorts to begin growing as recruitment resumes. GCE opened six off-campus sites in the first nine months and anticipates opening six to eight more in 2023, which management expects to support ABSN enrollment growth.
- Management expects annual capital expenditures of approximately $30–$35 million and said available liquidity, operating cash flow and other sources should fund operations, planned capital expenditures and working capital for at least 24 months. It expects counseling costs as a percentage of revenue to remain higher in 2022 than in 2021, and technology and academic service costs to rise as more off-campus sites open.
- The board increased the share-repurchase authorization by $200 million on October 26, 2022, to an aggregate $1.845 billion, with authorization expiring December 31, 2023. The company had $223.9 million available after the increase. Management said future repurchases would be less than those made in 2021 and 2022.
- Key risks include dependence on GCU and the continued performance of university-partner agreements; enrollment and student-retention trends; Title IV, state and accreditation requirements; competition and recruitment costs; and clinical-placement and faculty constraints affecting healthcare programs. The filing also cites potential COVID-19 effects and remote-work cybersecurity and control risks. Management said there were no material changes to previously disclosed risk factors.
- Part II reports no legal proceedings. The notes describe ordinary-course claims for which potential exposure generally cannot be estimated with certainty; management does not believe resulting charges would materially harm the company’s financial condition, results or cash flows.
Most important facts for investors to verify
- Whether GCU’s online enrollment declines and its 84.8% contribution to nine-month revenue create sustained concentration risk.
- Whether enrollment recovery, planned site openings and healthcare-program clinical capacity translate into service revenue growth.
- Whether expense growth, especially counseling, marketing and technology costs, continues to pressure operating margins.
- How the loss of Secured Note interest income affects comparisons and future earnings, and whether operating cash flow remains sufficient after repurchases and capital spending.
- The pace and price of future share repurchases, remaining authorization, and the effect of buybacks on cash balances and share count.
- The maturity, fair-value and credit profile of the $68.4 million available-for-sale investment portfolio; it carried $559,000 of gross unrealized losses at quarter-end.