Grand Canyon Education, Inc. Reports Second Quarter 2018 Results
Explanatory Note
On
Pursuant to the Asset Purchase Agreement, among other things:
- The Company transferred to New GCU the real property and improvements comprising the GCU campus as well as tangible and intangible academic and related operations and assets related to GCU (the "Transferred Assets"), and New GCU assumed liabilities related to the Transferred Assets. Accordingly, GCU is now owned and operated by New GCU; and
- In connection with the closing of the Asset Purchase Agreement, the Company and New GCU entered into a long-term master services agreement (the "Master Services Agreement") pursuant to which the Company will provide identified technological, counseling, marketing, financial aid processing and other support services to New GCU in return for 60% of New GCU's tuition and fee revenue.
See Note 3 to Consolidated Financial Statements in our Quarterly Report on Form 10Q for the quarterly period ended
Prior to
For the three months ended
- Net revenue increased 8.5% to
$236.8 million for the second quarter of 2018, compared to$218.3 million for the second quarter of 2017. - End-of-period enrollment increased 9.6% between
June 30, 2018 andJune 30, 2017 , as online enrollment increased 10.1% and ground enrollment increased 3.9% over the prior year. Ground enrollment atJune 30, 2018 only includes traditional-aged students that are taking Summer school classes, which is a small percentage of GCU's traditional-aged student body and professional studies students. As ofMarch 31, 2018 ground enrollment had increased 9.6% year over year to 17,386 students and the majority of that increase between years was residential students at GCU's ground traditional campus inPhoenix , Arizona. The Spring semester for GCU's traditional-aged student body ends near the end of April each year. - Operating income for the three months ended
June 30, 2018 was$58.5 million , an increase of 6.2% as compared to$55.1 million for the same period in 2017. The operating margin for the three months endedJune 30, 2018 was 24.7%, compared to 25.2% for the same period in 2017. The majority of our traditional ground students do not attend courses during the summer months (May through August), which affects our results for our second and third fiscal quarters. Since a significant amount of our campus costs are fixed, the lower revenue resulting from the decreased ground student enrollment has historically contributed to lower operating margins during those periods. - The tax rate in the three months ended
June 30, 2018 was 23.3% compared to 28.0% in the same period in 2017. The lower effective tax rate year over year is a result of the Tax Cuts and Jobs Act (the "Act") which was signed into law onDecember 22 , 2017. The Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate effectiveJanuary 1 , 2018. Additionally, the Company continues to receive the benefit of our adoption of the share-based compensation standard. This standard requires us to recognize excess tax benefits from share-based compensation awards that vested or settled in the consolidated income statement. The favorable impact from excess tax benefits was$1.2 million and$5.2 million in the three months endedJune 30, 2018 and 2017, respectively. The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the restricted awards vest, our stock price on the date an option is exercised, and the quantity of options exercised. - Net income increased 15.5% to
$46.0 million for the second quarter of 2018, compared to$39.8 million for the same period in 2017. - Diluted net income per share was
$0.95 for the second quarter of 2018, compared to$0.83 for the same period in 2017. - Adjusted EBITDA increased 7.2% to
$77.3 million for the second quarter of 2018, compared to$72.1 million for the same period in 2017.
For the six months ended
- Net revenue increased 9.9% to
$512.5 million for the six months endedJune 30, 2018 , compared to$466.5 million for the same period in 2017. - Operating income for the six months ended
June 30, 2018 was$148.6 million , an increase of 12.8% as compared to$131.7 million for the same period in 2017. The operating margin for the six months endedJune 30, 2018 was 29.0%, compared to 28.2% for the same period in 2017. - The tax rate for the six months ended
June 30, 2018 was 20.6% compared to 27.1% in the same period in 2017. The lower effective tax rate year over year is a result of the Act which was signed into law onDecember 22 , 2017. The Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate effectiveJanuary 1 , 2018. Additionally, the Company continues to receive the benefit of our adoption of the share-based compensation standard. This standard requires us to recognize excess tax benefits from share-based compensation awards that vested or settled in the consolidated income statement. The favorable impact from excess tax benefits was$6.5 million and$13.8 million in the six months endedJune 30, 2018 and 2017, respectively. The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the restricted awards vest, our stock price on the date an option is exercised, and the quantity of options exercised. - Net income increased 25.0% to
$119.7 million for the six months endedJune 30, 2018 , compared to$95.8 million for the same period in 2017. - Diluted net income per share was
$2.47 for the six months endedJune 30, 2018 , compared to$1.99 for the same period in 2017. - Adjusted EBITDA increased 12.3% to
$185.3 million for the six months endedJune 30, 2018 , compared to$165.0 million for the same period in 2017.
Balance Sheet and Cash Flow
The Company financed its operating activities and capital expenditures during the six months ended
On
Net cash provided by operating activities for the six months ended
Net cash used in investing activities was
Net cash used in financing activities was
2018 Outlook by Quarter
Q3 2018: |
Net revenue of $153.0 million; Target Operating Margin 30.8%; Diluted EPS of $0.98 using 48.6 million diluted shares |
Q4 2018: |
Net revenue of $175.0 million; Target Operating Margin 43.0%; Diluted EPS of $1.40 using 48.7 million diluted shares |
Full Year 2018: |
Net revenue of $840.5 million; Target Operating Margin 32.2%; Diluted EPS of $4.86 using 48.5 million diluted shares |
Forward-Looking Statements
This news release contains "forward-looking statements" which include information relating to future events, future financial performance, strategies expectations, competitive environment, regulation, and availability of resources. These forward-looking statements include, without limitation, statements regarding: the Transaction; proposed new programs; statements as to whether regulatory developments or other matters may or may not have a material adverse effect on our financial position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, and forecasts as to our business, financial and operating results, and future economic performance, as well as; and statements of management's goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to: the failure of the Company to operate successfully as a third party service provider to New GCU, and New GCU's failure to operate GCU as a university as successfully as it was previously operated by the Company; the occurrence of any event, change or other circumstance that could give rise to the termination of any of the key Transaction agreements; the effect of the announcement of the Transaction on the Company's ability to retain and hire key personnel, or on its operating results and business generally; our failure to comply with the extensive regulatory framework applicable to us either directly as a third party service provider or indirectly through our university client, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements; competition from other education service companies in our geographic region and market sector, including competition for students, qualified executives and other personnel; our ability to properly manage risks and challenges associated with strategic initiatives, including potential acquisitions or divestitures of, or investments in, new businesses, acquisitions of new properties and new university clients, and expansion of services provided to our existing university client; the pace of growth of our university client's enrollment and its effect on the pace of our own growth; our ability to, on behalf of our university client, convert prospective students to enrolled students and to retain active students to graduation; our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis for our university client; and other factors discussed in reports on file with the
Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Conference Call
A replay of the call will be available approximately two hours following the conclusion of the call, at 855-859-2056 (domestic) or 404-537-3406 (international), passcode 5065869. It will also be archived at www.gce.com in the investor relations section for 60 days.
About
GRAND CANYON EDUCATION, INC. |
|||||||
Consolidated Income Statements |
|||||||
(Unaudited) |
|||||||
Three Months Ended June 30, |
Six Months Ended |
||||||
2018 |
2017 |
2018 |
2017 |
||||
(In thousands, except per share data) |
|||||||
Net revenue |
$236,818 |
$218,301 |
$512,499 |
$466,507 |
|||
Costs and expenses: |
|||||||
Instructional costs and services |
102,237 |
95,030 |
213,264 |
197,604 |
|||
Admissions advisory and related |
34,254 |
31,085 |
69,108 |
63,057 |
|||
Advertising |
27,602 |
24,776 |
53,317 |
49,407 |
|||
Marketing and promotional |
2,268 |
2,264 |
4,952 |
4,724 |
|||
General and administrative |
11,969 |
10,058 |
23,278 |
19,999 |
|||
Total costs and expenses |
178,330 |
163,213 |
363,919 |
334,791 |
|||
Operating income |
58,488 |
55,088 |
148,580 |
131,716 |
|||
Interest expense |
(57) |
(495) |
(403) |
(1,075) |
|||
Interest and other income |
1,567 |
739 |
2,548 |
741 |
|||
Income before income taxes |
59,998 |
55,332 |
150,725 |
131,382 |
|||
Income tax expense |
13,960 |
15,485 |
31,006 |
35,623 |
|||
Net income |
$ 46,038 |
$ 39,847 |
$ 119,719 |
$ 95,759 |
|||
Earnings per share: |
|||||||
Basic income per share |
$ 0.97 |
$ 0.85 |
$ 2.52 |
$ 2.04 |
|||
Diluted income per share |
$ 0.95 |
$ 0.83 |
$ 2.47 |
$ 1.99 |
|||
Basic weighted average shares outstanding |
47,604 |
47,151 |
47,537 |
46,949 |
|||
Diluted weighted average shares outstanding |
48,411 |
48,192 |
48,422 |
48,131 |
Adjusted EBITDA
Adjusted EBITDA is defined as net income plus interest expense, less interest income and other gain (loss) recognized on investments, plus income tax expense, and plus depreciation and amortization (EBITDA), as adjusted for (i) the amortization of prepaid royalty payments recorded in conjunction with a settlement of a dispute with our former owner; (ii) contributions to
We believe Adjusted EBITDA allows us to compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses), the book amortization of intangibles (affecting relative amortization expense), and other items that we do not consider reflective of underlying operating performance. We also present Adjusted EBITDA because we believe it is frequently used by securities analysts, investors, and other interested parties as a measure of performance.
In evaluating Adjusted EBITDA, investors should be aware that in the future we may incur expenses similar to the adjustments described above. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine, or non-recurring. Adjusted EBITDA has limitations as an analytical tool in that, among other things it does not reflect:
- cash expenditures for capital expenditures or contractual commitments;
- changes in, or cash requirements for, our working capital requirements;
- interest expense, or the cash required to replace assets that are being depreciated or amortized; and
- the impact on our reported results of earnings or charges resulting from the items for which we make adjustments to our EBITDA, as described above and set forth in the table below.
In addition, other companies, including other companies in our industry, may calculate these measures differently than we do, limiting the usefulness of Adjusted EBITDA as a comparative measure. Because of these limitations, Adjusted EBITDA should not be considered as a substitute for net income, operating income, or any other performance measure derived in accordance with and reported under GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity. We compensate for these limitations by relying primarily on our GAAP results and only use Adjusted EBITDA as a supplemental performance measure.
The following table provides a reconciliation of net income to Adjusted EBITDA, which is a non-GAAP measure for the periods indicated:
Three Months Ended |
Six Months Ended June 30, |
|||
2018 |
2017 |
2018 |
2017 |
|
(Unaudited, in thousands) |
||||
Net income |
$ 46,038 |
$ 39,847 |
$ 119,719 |
$ 95,759 |
Plus: interest expense |
57 |
495 |
403 |
1,075 |
Less: interest income and other |
(1,567) |
(739) |
(2,548) |
(741) |
Plus: income tax expense |
13,960 |
15,485 |
31,006 |
35,623 |
Plus: depreciation and amortization |
13,950 |
13,515 |
27,823 |
26,708 |
EBITDA |
72,438 |
68,603 |
176,403 |
158,424 |
Plus: royalty to former owner |
74 |
74 |
148 |
148 |
Plus: asset impairment and other fixed asset write-offs |
8 |
92 |
8 |
214 |
Plus: costs related to conversion back to a non-profit status |
1,503 |
— |
1,990 |
— |
Plus: estimated litigation and regulatory reserves |
— |
10 |
3 |
10 |
Plus: share-based compensation |
3,265 |
3,298 |
6,734 |
6,229 |
Adjusted EBITDA |
$ 77,288 |
$ 72,077 |
$ 185,286 |
$ 165,025 |
GRAND CANYON EDUCATION, INC. |
||
Consolidated Balance Sheets |
||
ASSETS: |
June 30, |
December 31, |
(In thousands, except par value) |
2018 |
2017 |
Current assets |
(Unaudited) |
|
Cash and cash equivalents |
$ 221,632 |
$ 153,474 |
Restricted cash and cash equivalents |
— |
94,534 |
Investments |
76,522 |
89,271 |
Assets held for sale |
974,353 |
— |
Accounts receivable, net |
— |
10,908 |
Income tax receivable |
315 |
2,086 |
Other current assets |
8,748 |
24,589 |
Total current assets |
1,281,570 |
374,862 |
Property and equipment, net |
112,185 |
922,284 |
Prepaid royalties |
2,615 |
2,763 |
Goodwill |
2,941 |
2,941 |
Other assets |
657 |
723 |
Total assets |
$ 1,399,968 |
$ 1,303,573 |
LIABILITIES AND STOCKHOLDERS' EQUITY: |
||
Current liabilities |
||
Accounts payable |
$ 35,444 |
$ 29,139 |
Accrued compensation and benefits |
23,634 |
23,173 |
Accrued liabilities |
18,995 |
20,757 |
Income taxes payable |
46 |
16,182 |
Liabilities held for sale |
139,140 |
— |
Student deposits |
— |
95,298 |
Deferred revenue |
— |
46,895 |
Current portion of notes payable |
6,572 |
6,691 |
Total current liabilities |
223,831 |
238,135 |
Other noncurrent liabilities |
— |
1,200 |
Deferred income taxes, noncurrent |
19,218 |
18,362 |
Notes payable, less current portion |
56,619 |
59,925 |
Total liabilities |
299,668 |
317,622 |
Commitments and contingencies |
||
Stockholders' equity |
||
Preferred stock, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding at June 30, 2018 and December 31, 2017 |
— |
— |
Common stock, $0.01 par value, 100,000 shares authorized; 52,552 and 52,277 shares issued and 48,257 and 48,125 shares outstanding at June 30, 2018 and December 31, 2017, respectively |
526 |
523 |
Treasury stock, at cost, 4,295 and 4,152 shares of common stock at June 30, 2018 and December 31, 2017, respectively |
(113,757) |
(100,694) |
Additional paid-in capital |
241,169 |
232,670 |
Accumulated other comprehensive loss |
(515) |
(724) |
Retained earnings |
972,877 |
854,176 |
Total stockholders' equity |
1,100,300 |
985,951 |
Total liabilities and stockholders' equity |
$ 1,399,968 |
$ 1,303,573 |
GRAND CANYON EDUCATION, INC. |
||
Consolidated Statements of Cash Flows |
||
(Unaudited) |
||
Six Months Ended June 30, |
||
(In thousands) |
2018 |
2017 |
Cash flows provided by operating activities: |
||
Net income |
$ 119,719 |
$ 95,759 |
Adjustments to reconcile net income to net cash provided by operating activities: |
||
Share-based compensation |
6,734 |
6,229 |
Provision for bad debts |
8,669 |
7,830 |
Depreciation and amortization |
27,971 |
26,856 |
Deferred income taxes |
1,246 |
3,372 |
Other |
1,018 |
214 |
Changes in assets and liabilities: |
||
Accounts receivable |
(7,784) |
(8,458) |
Prepaid expenses and other |
(78) |
(1,719) |
Accounts payable |
(1,373) |
(1,708) |
Accrued liabilities and employee related liabilities |
2,502 |
(439) |
Income taxes receivable/payable |
(14,365) |
1,042 |
Deferred rent |
(189) |
(222) |
Deferred revenue |
6,880 |
11,265 |
Student deposits |
(7,288) |
(6,361) |
Net cash provided by operating activities |
143,662 |
133,660 |
Cash flows used in investing activities: |
||
Capital expenditures |
(78,836) |
(50,491) |
Purchases of land and building improvements related to off-site development |
(330) |
(9,374) |
Purchases of investments |
(21,265) |
(52,181) |
Proceeds from sale or maturity of investments |
32,996 |
25,363 |
Net cash used in investing activities |
(67,435) |
(86,683) |
Cash flows used in financing activities: |
||
Principal payments on notes payable and capital lease obligations |
(3,433) |
(3,400) |
Net borrowings from revolving line of credit |
— |
(25,000) |
Repurchase of common shares including shares withheld in lieu of income taxes |
(13,063) |
(9,657) |
Net proceeds from exercise of stock options |
1,768 |
5,895 |
Net cash used in financing activities |
(14,728) |
(32,162) |
Reclassification of restricted cash to assets held for sale |
(87,875) |
— |
Net (decrease) increase in cash and cash equivalents and restricted cash |
(26,376) |
14,815 |
Cash and cash equivalents and restricted cash, beginning of period |
248,008 |
130,907 |
Cash and cash equivalents and restricted cash, end of period |
$ 221,632 |
$ 145,722 |
Supplemental disclosure of cash flow information |
||
Cash paid for interest |
$ 379 |
$ 1,167 |
Cash paid for income taxes |
$ 44,234 |
$ 31,718 |
Supplemental disclosure of non-cash investing and financing activities |
||
Purchases of property and equipment included in accounts payable |
$ 14,361 |
$ 7,118 |
Reclassification of capitalized costs – adoption of ASC 606 |
$ 9,015 |
$ — |
Reclassification of deferred revenue – adoption of ASC 606 |
$ 7,451 |
$ — |
Reclassification of tax effect within accumulated other comprehensive income |
$ 156 |
$ — |
The following is a summary of GCU's student enrollment at
2018(1) |
2017(1) |
|||||
# of Students |
% of Total |
# of Students |
% of Total |
|||
Graduate degrees(2) |
39,552 |
48.5% |
35,702 |
47.9% |
||
Undergraduate degree |
42,068 |
51.5% |
38,783 |
52.1% |
||
Total |
81,620 |
100.0% |
74,485 |
100.0% |
||
2018(1) |
2017(1) |
|||||
# of Students |
% of Total |
# of Students |
% of Total |
|||
Online(3) |
75,372 |
92.3% |
68,470 |
91.9% |
||
Ground(4) |
6,248 |
7.7% |
6,015 |
8.1% |
||
Total |
81,620 |
100.0% |
74,485 |
100.0% |
(1) |
Enrollment at June 30, 2018 and 2017 represents individual students who attended a course during the last two months of the calendar quarter. Included in enrollment at June 30, 2018 and 2017 are students pursuing non-degree certificates of 1,562 and 1,190, respectively. |
(2) |
Includes 7,861 and 7,324 students pursuing doctoral degrees at June 30, 2018 and 2017, respectively. |
(3) |
As of June 30, 2018 and 2017, 50.9% and 50.3%, respectively, of GCU's working adult students (online and professional studies students) were pursuing graduate degrees. |
(4) |
Includes both GCU's traditional on-campus ground students attending Summer semester, as well as its professional studies students. |
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SOURCE
Investor Relations Contact: Dan Bachus, Chief Financial Officer, Grand Canyon Education, Inc., 602-639-6648, [email protected]