Grand Canyon Education, Inc. Reports Third Quarter 2015 Results

PHOENIX, Oct. 28, 2015 /PRNewswire/ -- Grand Canyon Education, Inc. LOPE, a comprehensive regionally accredited university that offers over 160 graduate and undergraduate degree programs across eight colleges both online and on ground at our 200+ acre campus in Phoenix, Arizona, today announced financial results for the quarter ended September 30, 2015.

For the three months ended September 30, 2015:

• Net revenue increased 10.5% to $193.4 million for the third quarter of 2015, compared to $175.1 million for the third quarter of 2014.
• End-of-period enrollment increased 10.2% to 75,073 at September 30, 2015, from 68,122 at September 30, 2014, as ground enrollment increased 19.9% to 15,473 at September 30, 2015, from 12,904 at September 30, 2014 and online enrollment increased 7.9% to 59,600 at September 30, 2015, from 55,218 at September 30, 2014.
• Operating income for the third quarter of 2015 was $49.0 million, an increase of 6.6% as compared to $46.0 million for the same period in 2014. The operating margin for the third quarter of 2015 was 25.3%, compared to 26.3% for the same period in 2014. 
• Adjusted EBITDA increased 8.5% to $64.7 million for the third quarter of 2015, compared to $59.6 million for the same period in 2014.
• The tax rate in the third quarter of 2015 was 31.8% compared to 36.1% in the third quarter of 2014.  The variance in the effective tax rate is attributable to non-recurring favorable items in the third quarter of 2015.  The tax rate for both periods is less than the annual effective tax rates due to the contributions made in lieu of state income taxes in the third quarter of both years.
• Net income increased 14.9% to $33.3 million for the third quarter of 2015, compared to $29.0 million for the same period in 2014. 
• Diluted net income per share was $0.70 for the third quarter of 2015, compared to $0.62 for the same period in 2014. 

For the nine months ended September 30, 2015:

• Net revenue increased 12.2% to $562.2 million for the nine months ended September 30, 2015, compared to $501.1 million for the same period in 2014.
• Operating income for the nine months ended September 30, 2015 was $147.2 million, an increase of 15.7% as compared to $127.3 million for the same period in 2014. The operating margin for the nine months ended September 30, 2015 was 26.2%, compared to 25.4% for the same period in 2014. 
• Adjusted EBITDA increased 13.7% to $186.2 million for the nine months ended September 30, 2015, compared to $163.7 million for the same period in 2014.
• The tax rate in the nine months ended September 30, 2015 was 36.5% compared to 37.9% for the same period in 2014.  The tax rate for both periods is less than the annual effective tax rates due to the contributions made in lieu of state income taxes in the third quarter of both years.
• Net income increased 19.0% to $93.3 million for the nine months ended September 30, 2015, compared to $78.4 million for the same period in 2014. 
• Diluted net income per share was $1.97 for the nine months ended September 30, 2015, compared to $1.67 for the same period in 2014. 

Balance Sheet and Cash Flow

The University financed its operating activities and capital expenditures during the nine months ended September 30, 2015 and 2014 primarily through cash provided by operating activities. Our unrestricted cash, cash equivalents and investments were $162.2 million and $166.0 million at September 30, 2015 and December 31, 2014, respectively. Our restricted cash, cash equivalents and investments at September 30, 2015 and December 31, 2014 were $64.7 million and $67.8 million, respectively. 

The University generated $169.0 million in cash from operating activities for the nine months ended September 30, 2015 compared to $156.7 million for the nine months ended September 30, 2014.  The increase in cash generated from operating activities between the nine months ended September 30, 2014 and the nine months ended September 30, 2015 is primarily due to increased net income.

Net cash used in investing activities was $152.9 million and $159.9 million for the nine months ended September 30, 2015 and 2014, respectively. Our cash used in investing activities was primarily related to capital expenditures.  Capital expenditures were $169.7 million and $141.2 million for the nine months ended September 30, 2015 and 2014, respectively.  During the nine-month period for 2015, capital expenditures primarily consisted of ground campus building projects such as the construction of four additional dormitories, an additional classroom building for our College of Science, Engineering and Technology, a new parking structure and land purchases adjacent to our Phoenix campus to support our growing traditional student enrollment as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.  During the nine-month period for 2014, capital expenditures primarily consisted of ground campus building projects such as the construction of an additional classroom building, additional residence halls, the expansion of our arena, and land purchases adjacent to our Phoenix campus to support our growing traditional student enrollment as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.  Also included in investing activities is the net short-term investment activity.   In the first nine months of 2015 proceeds from the sale of short-term investments exceeded purchases by $16.8 million whereas in the first nine months of 2014 purchases exceeded proceeds by $18.7 million. 

Net cash used in financing activities was $3.1 million for the nine months ended September 30, 2015 whereas net cash provided by financing activities was $3.8 million for the nine months ended September 30, 2014. During the first nine months of 2015 $4.2 million was used to purchase common shares withheld in lieu of income taxes resulting from restricted share awards while principal payments on notes payable and capital leases totaled $5.1 million. These uses were partially offset by proceeds from the exercise of stock options of $2.9 million and excess tax benefits from share-based compensation of $3.3 million.  During the first nine months of 2014, proceeds from the exercise of stock options of $7.0 million and excess tax benefits from share-based compensation of $7.2 million were partially offset by $3.6 million used to purchase common shares withheld in lieu of income taxes resulting from restricted share awards, $1.7 million used to purchase treasury stock in accordance with the university's share repurchase program and principal payments on notes payable and capital leases totaled $5.0 million. 

2015 Outlook by Quarter

Q4 2015: Net revenue of $211.9 million; Target Operating Margin 28.4%; Diluted EPS of $0.78 using 47.6 million diluted shares; student counts of 74,700

Full Year 2015: Net revenue of $774.1 million; Target Operating Margin 27.1%; Diluted EPS of $2.75 using 47.3 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: projections, predictions, expectations, estimates, and forecasts as to our business, financial and operating results, and future economic performance; 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: our failure to comply with the extensive regulatory framework applicable to our industry, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements; the ability of our students to obtain federal Title IV funds, state financial aid, and private financing; risks associated with changes in applicable federal and state laws and regulations and accrediting commission standards, including pending rulemaking by the Department of Education; potential damage to our reputation or other adverse effects as a result of negative publicity in the media, in the industry or in connection with governmental reports or investigations, lawsuits, or otherwise, affecting us or other companies in the for-profit postsecondary education sector; our ability to properly manage risks and challenges associated with strategic initiatives, including the potential conversion of our university operations to non-profit status, the expansion of our campus, potential acquisitions of, or investments in, new businesses, acquisitions of new properties, or the development of new campuses; our ability to hire and train new, and develop and train existing, faculty and employees; the pace of growth of our enrollment; our ability to convert prospective students to enrolled students and to retain active students; 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; industry competition, including competition for qualified executives and other personnel; risks associated with the competitive environment for marketing our programs; failure on our part to keep up with advances in technology that could enhance the online experience for our students; the extent to which obligations under our loan agreement, including the need to comply with restrictive and financial covenants and to pay principal and interest payments, limits our ability to conduct our operations or seek new business opportunities; our ability to manage future growth effectively; general adverse economic conditions or other developments that affect job prospects of our students; and other factors discussed in reports on file with the Securities and Exchange Commission.

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

Grand Canyon Education, Inc. will discuss its third quarter 2015 results and fourth quarter 2015 outlook during a conference call scheduled for today, October 28, 2015 at 4:30 p.m. Eastern time (ET). To participate in the live call, investors should dial 877-577-1769 (domestic and Canada) or 706-679-7806 (international), passcode 52780393 at 4:25 p.m. (ET). The Webcast will be available on the Grand Canyon Education, Inc. Web site at  www.gcu.edu.

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 52780393. It will also be archived at  www.gcu.edu in the investor relations section for 60 days.

About Grand Canyon Education, Inc.

Grand Canyon Education, Inc. is a comprehensive regionally accredited university that offers over 160 graduate and undergraduate degree programs across eight colleges both online and on ground at our 200+ acre campus in Phoenix, Arizona, at leased facilities and at facilities owned by third party employers of our students.  Our undergraduate programs are designed to be innovative and meet the future needs of employers while providing students with the needed critical thinking and effective communication skills developed through a Christian, liberal arts foundation. We offer master and doctoral degrees in contemporary fields that are designed to provide students with the capacity for transformational leadership in their chosen industry, emphasizing the immediate relevance of theory, application, and evaluation to promote personal and organizational change.  Approximately 75,100 students were enrolled as of September 30, 2015. For more information about Grand Canyon Education, Inc., please visit http://www.gcu.edu.

Grand Canyon Education, Inc. is regionally accredited by The Higher Learning Commission, Grand Canyon University, 3300 W. Camelback Road, Phoenix, AZ 85017, www.gcu.edu.

 

GRAND CANYON EDUCATION, INC.

Adjusted EBITDA

Adjusted EBITDA is defined as net income plus interest expense net of interest income, 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 Arizona school tuition organizations in lieu of the payment of state income taxes; (iii) share-based compensation and (iv) one-time, unusual charges or gains, such as litigation and regulatory reserves, impairment charges and asset write-offs, exit or lease termination costs or the gain recognized on the settlement of a third party note receivable. We present Adjusted EBITDA because we consider it to be an important supplemental measure of our operating performance.  We also make certain compensation decisions based, in part, on our operating performance, as measured by Adjusted EBITDA, and our loan agreement requires us to comply with covenants that include performance metrics substantially similar to Adjusted EBITDA.  All of the adjustments made in our calculation of Adjusted EBITDA are adjustments to items that management does not consider to be reflective of our core operating performance. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period.  Royalty expenses paid to our former owner, contributions made to Arizona school tuition organizations in lieu of the payment of state income taxes, share-based compensation, one time unusual charges or gains such as estimated litigation and regulatory reserves, exit costs, contract and lease termination fees are not considered reflective of our core performance.

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, and you should not consider it in isolation, or 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.  Some of these limitations are that it does not reflect:

• cash expenditures for capital expenditures or contractual commitments;
• changes in, or cash requirement 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 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:

 

 

 

The following is a summary of our student enrollment at September 30, 2015 and 2014 by degree type and by instructional delivery method:

 

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SOURCE Grand Canyon Education, Inc.