Grand Canyon Education, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2015; interim financial statements are unaudited. Grand Canyon Education operates a regionally accredited university offering more than 160 programs online and at its Phoenix campus and other locations. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $193.4 | $175.1 | $562.2 | $501.1 |
| Operating income | $49.0 | $46.0 | $147.2 | $127.3 |
| Net income | $33.3 | $29.0 | $93.3 | $78.4 |
| Diluted EPS | $0.70 | $0.62 | $1.97 | $1.67 |
| Operating margin | 25.3% | 26.3% | 26.2% | 25.4% |
| Net margin | 17.2% | 16.6% | 16.6% | 15.6% |
- Revenue grew 10.5% in Q3 and 12.2% year to date. Net income increased 14.9% in Q3 and 19.0% year to date.
- For the nine months, operating cash flow was $169.0, capital expenditures were $169.7, investing cash flow was negative $152.9, and financing cash flow was negative $3.1. Cash and cash equivalents ended at $78.2, up from $65.2 at December 31, 2014.
- At September 30, unrestricted cash and investments totaled $162.2; restricted cash, cash equivalents and investments were $64.7. The company reported no borrowings on its $50.0 revolving credit line.
- Notes payable totaled approximately $82.5, including $6.7 current; capital lease obligations totaled $0.6. Total current assets were $263.2 versus current liabilities of $238.8. Deferred revenue rose to $86.7 from $36.9 at year-end 2014.
- Property and equipment, net, increased to $639.6 from $478.2, reflecting significant campus investment. Total assets were $912.6 and stockholders’ equity was $579.6 at quarter-end.
Material changes versus prior comparable periods
- Enrollment at September 30 increased 10.2% to 75,073 students: ground enrollment rose 19.9% and online enrollment 7.9%. Ground students were 20.6% of enrollment, compared with 18.9% a year earlier.
- Management attributed revenue growth mainly to enrollment and related room, board and student fees; increased institutional scholarships partly offset growth. Tuition was not increased for 2014–15; approximately 1% increases applied to most online programs for 2015–16. Traditional ground tuition had not increased in seven years.
- Q3 instructional costs rose 16.0%, faster than revenue, and their revenue share increased to 43.0% from 41.0%, contributing to the lower quarterly operating margin. Year-to-date instructional costs rose 12.8% and were 42.2% of revenue versus 42.0%.
- Advertising increased 17.4% in Q3 and 18.1% year to date, as the company increased digital and regional brand advertising. Admissions expense grew more slowly than revenue, lowering its revenue share.
- Cash provided by operations increased from $156.7 to $169.0 year to date, while capital expenditures rose from $141.2 to $169.7. The company said investment focused on dormitories, classrooms, parking, land and technology.
Outlook, commentary, risks and unusual items
- Management said available operating cash flow, cash and the revolving credit line should fund operations, planned capital spending and working capital needs for at least the next 24 months. No specific earnings or revenue guidance was provided.
- Management expects the seasonal summer enrollment decline and lower operating margins in the second and third quarters to become more pronounced as the proportion of traditional ground students grows; many related costs are fixed.
- Key risks include compliance with Title IV and other education regulations, students’ access to financial aid, regulatory changes or investigations, competition for students, enrollment retention and growth, marketing effectiveness, and execution of campus expansion and other strategic initiatives.
- Management reported compliance with applicable regulations in all material respects. It also noted ongoing ordinary-course legal matters whose ultimate exposure generally could not be estimated; management did not expect them to have a material adverse effect, but said charges could exceed reserves. Part II reports no legal proceedings.
- Q3’s effective tax rate was 31.8%, versus 36.1% a year earlier, due to non-recurring favorable items; the year-to-date rates were 36.5% and 37.9%. The company contributed $2.8 million in each Q3 to private school tuition organizations in lieu of state income taxes.
- Fixed-asset disposals related to campus building replacement included $1.2 million of Q3 2015 instructional expense, versus $0.4 million in Q3 2014. The company also disclosed a disputed note receivable matter with funds held in court escrow; an appeal was pending, and additional amounts remained subject to possible appeal.
- The $75.0 million share-repurchase authorization was extended through September 30, 2016. No plan repurchases occurred in the first nine months of 2015; $25.9 million remained authorized. Separately, $4.2 million was used for shares withheld for employee tax obligations.
Important facts for investors to verify
- Whether ground enrollment growth and campus investment translate into sustained revenue and margins, particularly through seasonal quarters.
- Whether higher advertising, instructional and facilities costs continue to outpace revenue growth, and whether enrollment retention and bad-debt trends remain favorable.
- The funding, timing and returns of the large capital program, alongside operating cash flow and contractual obligations, including $86.4 million of purchase obligations.
- Exposure to Title IV, accreditation and other regulatory developments, and any material changes in litigation or the disputed escrowed note receivable.
- The sustainability of reported earnings growth given the non-recurring favorable tax items in Q3.