Business context and reporting period
Grand Canyon Education, Inc. (Nasdaq: LOPE) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. GCE provides education services to 25 university partners; its largest partner is Grand Canyon University (GCU). GCE generally earns a percentage of partner tuition and fee revenue under long-term services agreements.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Service revenue | $221.9 million | $208.7 million | $682.6 million | $652.6 million |
| Operating income | $41.5 million | $35.5 million | $151.5 million | $146.8 million |
| Operating margin | 18.7% | 17.0% | 22.2% | 22.5% |
| Net income | $35.7 million | $30.0 million | $124.3 million | $113.6 million |
| Diluted EPS | $1.19 | $0.96 | $4.10 | $3.47 |
- Q3 revenue grew 6.3% and net income 19.1% year over year; nine-month revenue grew 4.6% and net income 9.4%.
- Q3 net margin was 16.1% versus 14.4%; nine-month net margin was 18.2% versus 17.4%. Q3 operating margin improved, while the nine-month operating margin declined slightly.
- Nine-month operating cash flow was $127.3 million, up from $110.5 million. Capital expenditures were $34.2 million, implying operating cash flow less capital expenditures of approximately $93.1 million.
- Cash and cash equivalents plus investments totaled $154.4 million at September 30, 2023, versus $181.7 million at year-end 2022. Current assets were $274.7 million and current liabilities $99.5 million. The company reported no funded debt; lease liabilities totaled $96.5 million.
- Nine-month investing cash outflow was $70.5 million; financing cash outflow was $120.3 million, primarily reflecting share repurchases and shares withheld for taxes. Cash and cash equivalents declined by $63.5 million from the start of the year.
Material changes and operating trends
- GCU enrollment reached 118,227, up 6.6% year over year. Total partner enrollment was 123,165, up from 116,202. GCU online enrollment rose 8.3% to 92,995; ground enrollment was 25,232 versus 25,083.
- Enrollment at off-campus classroom and laboratory sites was 5,448, down 4.3%. Management cited delayed site openings, smaller incoming cohorts at some partners, and a strong job market; five sites opened during the first nine months, bringing the total to 40.
- Q3 counseling services and support expense increased 9.8%, faster than revenue, mainly due to staffing and compensation growth. General and administrative expense declined 21.8%, partly from lower state-tax-related contributions and legal costs. Higher investment balances and yields increased Q3 investment interest and other income to $2.7 million from $0.7 million.
- Q3 revenue benefited by approximately $1.2 million from the fall semester starting one day earlier than in 2022, shifting revenue from Q4 to Q3.
- GCE repurchased approximately 1.035 million shares for $114.0 million during the first nine months. After quarter-end, the board increased cumulative repurchase authorization by $200 million; the authorization available at September 30 was $81.9 million, rising to $281.9 million after the increase.
Outlook, risks and contingencies
- Management said operating cash flow and other liquidity sources are expected to cover operations, planned capital expenditures and working capital needs for at least the next 24 months. It expects 2023 capital expenditures of about $40 million, versus a longer-term annual range of approximately $30–$35 million.
- Management expects counseling costs to remain higher in 2023 due to travel, staffing and compensation, and technology and academic costs to rise as additional sites open. Results are seasonal, with lower revenue and margins historically in summer quarters.
- GCU generated 87.0% of GCE service revenue in the first nine months of 2023, up from 84.9% a year earlier, creating significant partner concentration risk.
- A securities class action related to GCU’s 2018 conversion remains unresolved; the court denied GCE’s motion to dismiss in March 2023. GCE says it intends to defend the claims, cannot estimate a loss range, and has recorded no liability. The company also received FTC civil investigative demands concerning marketing services provided for GCU and related activities and said it is cooperating.
- Approximately 75% of cash and cash equivalents was held at one financial institution and exceeded FDIC-insured limits. GCE disclosed the possibility of loss if a bank failed and government intervention did not occur. It also cited regulatory, enrollment, partner-termination, competition, staffing and student financing risks.
- The filing provides no specific earnings or revenue guidance. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether GCU enrollment growth and the high revenue concentration in GCU remain sustainable.
- Whether enrollment weakness at off-campus healthcare program sites improves and planned site openings proceed.
- Whether staffing, counseling and site-related costs pressure margins as the business grows.
- Cash balances and exposure above FDIC insurance limits across the three banking institutions.
- Developments in the securities litigation and FTC investigation, including any change in potential exposure.
- Future capital spending and share repurchases, including the use of the expanded authorization.