LOPE

Business Context and Reporting Period

Company: Grand Canyon Education, Inc. (Grand Canyon University)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: A regionally accredited provider of online and ground postsecondary education focused on education, business, and healthcare. The company targets working adults, with 91.7% of its 37,709 students enrolled in online programs as of year-end 2009. The company operates a traditional campus in Phoenix, Arizona, and offers programs onsite at employer facilities.

Key Financial Metrics

Note: Debt decreased due to the acquisition of the campus land and buildings, which replaced capital lease obligations with a lower-interest note payable.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 62.4% year-over-year, driven primarily by a 53.1% increase in enrollment and tuition price increases ranging from 2.3% to 15.5% across programs.
• Profitability Surge: Operating income increased 264% to $46.6 million, and net income increased 308% to $27.3 million. This was aided by operating leverage and a reduction in royalty payments to the former owner.
• Campus Acquisition: In April 2009, the company acquired its ground campus land and buildings for $50 million (financed partially by a $25.7 million note), eliminating previous capital lease obligations and reducing interest expense.
• One-Time Charges: The company recorded a $5.2 million estimated litigation loss related to a qui tam lawsuit settlement and $1.2 million in exit costs for closing a Utah student services facility.
• Faculty Classification: Effective July 1, 2009, online faculty were reclassified from independent contractors to part-time employees, increasing instructional costs by approximately $0.8 million due to employer taxes.

Guidance, Outlook, Risks, and Contingencies

Regulatory Risks (Critical):

• Title IV Certification: The company is currently provisionally certified to participate in federal student aid programs on a month-to-month basis. Recertification is pending a decision by the Department of Education (ED).
• OIG Investigation: The ED Office of Inspector General is investigating the company's compensation practices for enrollment counselors. This investigation is ongoing.
• Qui Tam Lawsuit: A whistleblower lawsuit alleges violations of the False Claims Act regarding enrollment counselor compensation. The company has reached a settlement in principle for $5.2 million, which is accrued but subject to government approval.
• 90/10 Rule: Approximately 82.5% of revenue in 2009 was derived from Title IV funds. The company notes that increasing reliance on federal aid makes compliance with the 90/10 revenue rule more difficult.

Operational Outlook:

• System Transition: The company is transitioning from a "term-based" to a "borrower-based" financial aid system (expected Q2 2010) to allow rolling start dates, requiring significant back-office system upgrades.
• Growth Strategy: Management plans to continue increasing enrollment counselors and expanding online programs, anticipating continued revenue growth.

Investor Verification Checklist

• Regulatory Status: Verify the current status of the Department of Education's recertification decision and the outcome of the OIG investigation.
• Litigation Settlement: Confirm whether the $5.2 million qui tam settlement has received final approval from the Department of Justice and the Department of Education.
• Title IV Dependency: Monitor the percentage of revenue derived from Title IV funds to ensure it remains below the 90% threshold required for eligibility.
• System Implementation: Assess the progress and potential disruptions associated with the transition to the new "borrower-based" financial aid and back-office systems.
• Debt Covenants: Review compliance with the financial covenants in the new $25.7 million campus loan agreement.