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LOPE > SEC Filings for LOPE > Form 10-Q on 29-Oct-2013All Recent SEC Filings

Show all filings for GRAND CANYON EDUCATION, INC.

Form 10-Q for GRAND CANYON EDUCATION, INC.


29-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes that appear elsewhere in this report.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, contains certain "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: 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, or forecasts as to our business, financial and operational 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;

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 or otherwise, affecting us or other companies in the for-profit postsecondary education sector;

risks associated with changes in applicable federal and state laws and regulations and accrediting commission standards including pending rulemaking by the Department of Education;

our ability to properly manage risks and challenges associated with potential acquisitions of, or investments in, new businesses, acquisitions of new properties, or the expansion of our campus to new locations;

our ability to hire and train new, and develop and train existing employees and faculty;

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 students and 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; and

general adverse economic conditions or other developments that affect the job prospects of our students.


Table of Contents

Additional factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as updated in our subsequent reports filed with the Securities and Exchange Commission ("SEC"), including any updates found in Part II, Item 1A of this Quarterly Report on Form 10-Q or our other reports on Form 10-Q. You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date the statements are made and 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.


Table of Contents

Overview

We are a regionally accredited provider of postsecondary education services focused on offering graduate and undergraduate degree programs in our core disciplines of education, healthcare, business, and liberal arts. We offer programs online, on ground at our approximately 115 acre traditional campus in Phoenix, Arizona and onsite at facilities we lease and at facilities owned by third party employers.

At September 30, 2013, we had approximately 59,900 students, an increase of 14.7% over the approximately 52,300 students we had at September 30, 2012. At September 30, 2013, 82.8% of our students were enrolled in our online programs, and of our online and professional studies students, 43.2% were pursuing master's or doctoral degrees. In addition, revenue per student for the nine month period increased between periods as a result of improved retention. We did not raise tuition in any of our programs for our 2013-2014 academic year and have not raised our tuition for our traditional ground programs in four years. This reflects a concerted effort to control tuition pricing for students so that debt levels assumed by our students are reasonable. Tuition increases have not historically been, and may not in the future be, consistent across our programs due to market conditions and differences in operating costs of individual programs.

The following is a summary of our student enrollment at September 30, 2013 and 2012 by degree type and by instructional delivery method:

                                                  2013(1)                                   2012(1)
                                      # of Students         % of Total          # of Students         % of Total
Graduate degrees(2)                           22,394               37.4 %               19,439               37.2 %
Undergraduate degree                          37,520               62.6 %               32,814               62.8 %

Total                                         59,914              100.0 %               52,253              100.0 %

                             2013(1)                               2012(1)
                  # of Students       % of Total        # of Students       % of Total
     Online(3)            49,584             82.8 %             44,849             85.8 %
     Ground(4)            10,330             17.2 %              7,404             14.2 %

     Total                59,914            100.0 %             52,253            100.0 %

(1) Enrollment at September 30, 2013 and 2012 represents individual students who attended a course during the last two months of the calendar quarter. Included in enrollment at September 30, 2013 and 2012 are students pursuing non-degree certificates of 552 and 542, respectively. The September 30, 2012 amount also included 223 high school dual credit students. We are no longer including these students in our enrollment.

(2) Includes 3,971 and 2,745 students pursuing doctoral degrees at September 30, 2013 and 2012, respectively.

(3) As of September 30, 2013 and 2012, 43.2% and 42.0%, respectively, of our online and professional studies students were pursuing graduate degrees.

(4) Includes both our traditional on-campus ground students, as well as our professional studies students.

Critical Accounting Policies and Use of Estimates

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. During the nine months ended September 30, 2013, there have been no significant changes in our critical accounting policies.

Financial Statement Presentation

Effective during the first quarter of 2013, the University made changes in its presentation of operating expenses and reclassified prior periods to conform to the current presentation. The University determined that these changes would provide more meaningful information and are consistent with changes recently made by a number of other regionally accredited for-profit universities. Additionally, this new presentation better classifies its costs consistently with the operational changes the University has made related to the roles and responsibilities of its admissions personnel. Specifically we have separated admissions advisory and related expenses from advertising, and marketing and promotional expenses as the admissions personnel role has evolved into one in which a substantial amount of their time is spent educating students not only during the admissions process but also through matriculation and during their program of study.


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Instructional Costs and Services

Instructional costs and services consist primarily of costs related to the administration and delivery of the University's educational programs. This expense category includes salaries, benefits and share-based compensation for full-time and adjunct faculty and administrative personnel, information technology costs, bad debt expense, curriculum and new program development costs (which are expensed as incurred) and costs associated with other support groups that provide services directly to the students. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of educational services, primarily at the University's Phoenix, Arizona campus.

Admissions Advisory and Related

Admissions advisory and related expenses include salaries and benefits for admissions advisory personnel and, revenue share expense as well as an allocation of depreciation, amortization, rent and occupancy costs attributable to the admissions advisory personnel.

Advertising

Advertising expenses include brand advertising, marketing leads and other branding activities. Advertising costs are expensed as incurred.

Marketing and Promotional

Marketing and promotional expenses include salaries, benefits and share-based compensation for marketing personnel, and other promotional expenses. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to marketing and promotional activities. Marketing and promotional costs are expensed as incurred.

General and Administrative

General and administrative expenses include salaries, benefits and share-based compensation of employees engaged in corporate management, finance, human resources, compliance, and other corporate functions. General and administrative expenses also include an allocation of depreciation, amortization, rent, and occupancy costs attributable to the departments providing general and administrative functions.

We have reclassified our operating expenses for prior periods to conform to the above disaggregation and revisions to our presentation. There were no changes to total operating expenses or operating income as a result of these reclassifications.

Key Trends, Developments and Challenges

The key trends, developments and challenges facing the University are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2013. During the three months ended September 30, 2013, there have been no significant changes in these trends. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Trends, Developments and Challenges" in our Annual Report on Form 10-K for our fiscal year ended December 31, 2012 and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Trends, Developments and Challenges" in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2013, which are incorporated herein by reference.


Table of Contents

Results of Operations

The following table sets forth income statement data as a percentage of net
revenue for each of the periods indicated:



                                        Three Months Ended           Nine Months Ended
                                           September 30,               September 30,
                                        2013           2012          2013          2012
   Net revenue                            100.0 %       100.0 %        100.0 %      100.0 %
   Operating expenses
   Instructional costs and services        42.5          42.9           42.8         43.7
   Admissions advisory and related         16.1          16.7           16.3         16.9
   Advertising                             10.2           9.7           10.5         10.3
   Marketing and promotional                0.9           0.9            0.9          0.8
   General and administrative               5.9           6.4            6.0          6.4

   Total operating expenses                75.5          76.6           76.5         78.2

   Operating income                        24.5          23.4           23.5         21.8
   Interest expense                        (0.3 )        (0.1 )         (0.4 )       (0.1 )
   Interest income and other income         1.0           0.0            0.8          0.0

   Income before income taxes              25.1          23.3           24.0         21.7
   Income tax expense                      10.3           9.4            9.6          8.6

   Net income                              14.8          13.8           14.4         13.1

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Net revenue. Our net revenue for the three months ended September 30, 2013 was $152.4 million, an increase of $18.8 million, or 14.1%, as compared to net revenue of $133.6 million for the three months ended September 30, 2012. This increase was primarily due to an increase in ground and online enrollment and, to a lesser extent, an increase in room and board and other student fees, partially offset by an increase in institutional scholarships. End-of-period enrollment increased 14.7% between September 30, 2013 and September 30, 2012, as ground enrollment increased 39.5%, and online enrollment increased 10.6% over the prior year. The majority of the ground enrollment growth between years occurred at our ground traditional campus in Phoenix, Arizona in late August 2013. Thus, we only recognized approximately five weeks of revenue in the third quarter of 2013, with respect to these ground traditional students. We attribute the significant growth in our ground enrollment between years to our increasing brand recognition and the value proposition that our ground traditional campus affords to traditional-aged students and their parents. After scholarships, our ground traditional students pay an amount for tuition, room, board, and fees often half to a third of what it costs to attend a private, traditional university in another state and an amount comparable to what it costs to attend the public universities in the state of Arizona as an in-state student. We are anticipating increased pressure on new and continuing online enrollments due primarily to increased competition for students from traditional colleges and universities as such institutions, including those with well-established reputations for excellence, increasingly seek to provide alternative learning modalities.

Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended September 30, 2013 were $64.7 million, an increase of $7.3 million, or 12.8%, as compared to instructional costs and services expenses of $57.4 million for the three months ended September 30, 2012. This increase was primarily due to increases in employee compensation and related expenses including share based compensation, faculty compensation, depreciation and amortization and occupancy expense, and other instructional compensation and related expenses, of $2.3 million, $1.9 million, $1.5 million, and $1.6 million, respectively. The increase in employee compensation and related expenses and faculty compensation are primarily due to the increase in the number of staff to support the increasing number of students attending the University. In addition, we continue to increase our online full-time faculty and have incurred an increase in benefit costs between years. The increase in depreciation and amortization and occupancy costs is the result of us placing into service two additional dormitories, an Arts and Sciences classroom building, and a parking garage for our ground traditional campus in the Fall of 2012 and two additional dormitories and a new administrative building in the Fall of 2013. Our instructional costs and services expenses as a percentage of net revenues decreased by 0.4% to 42.5% for the three months ended September 30, 2013, as compared to 42.9% for the three months ended September 30, 2012 primarily due to bad debt expense decreasing to 3.5% for the three months ended September 30, 2013 as compared to 4.2% in the three months ended September 30, 2012.

Admissions advisory and related expenses. Our admissions advisory and related expenses for the three months ended September 30, 2013 were $24.6 million, an increase of $2.3 million, or 10.0%, as compared to admissions advisory and related expenses of $22.3 million for the three months ended September 30, 2012. This increase is primarily the result of increases in employee compensation and revenue share expense of $1.7 million and $0.3 million, respectively. The increase in employee compensation and related expenses is primarily due to increased headcount and an increase in benefit costs between years. Our admissions advisory and related expenses as a percentage of revenue decreased 0.6% to 16.1% for the three months ended September 30, 2013, from 16.7% for the three months ended September 30, 2012 primarily due to our ability to leverage our admissions advisory personnel across an increasing revenue base.


Table of Contents

Advertising expenses. Our advertising expenses for the three months ended September 30, 2013 were $15.5 million, an increase of $2.6 million, or 20.1%, as compared to advertising expenses of $12.9 million for the three months ended September 30, 2012. This increase is primarily the result of increased branding advertising focused on the southwestern United States region. Our advertising expenses as a percentage of net revenue increased by 0.5% to 10.2% for the three months ended September 30, 2013, from 9.7% for the three months ended September 30, 2012.

Marketing and promotional expenses. Our marketing and promotional expenses for the three months ended September 30, 2013 were $1.3 million, an increase of $0.1 million, or 8.4%, as compared to marketing and promotional expenses of $1.2 million for the three months ended September 30, 2012. This increase is primarily the result of increases in employee compensation and related expenses of $0.1 million. Our marketing and promotional expenses as a percentage of net revenue remained flat at 0.9% for the three months ended September 30, 2013 and 2012.

General and administrative expenses. Our general and administrative expenses for the three months ended September 30, 2013 were $9.0 million, an increase of $0.4 million, or 5.5%, as compared to general and administrative expenses of $8.6 million for the three months ended September 30, 2012. This increase was primarily due to increases in employee compensation and related expenses including share based compensation of $0.6 million due primarily to increased headcount to support our increasing number of students and an increase in benefit costs. Our general and administrative expenses as a percentage of net revenue decreased by 0.5% to 5.9% for the three months ended September 30, 2013, from 6.4% for the three months ended September 30, 2012. Our costs as a percentage of revenue declined due to our ability to leverage the fixed costs structure of our general and administrative expenses across an increasing revenue base.

Interest expense. Interest expense for the three months ended September 30, 2013 were $0.5 million, an increase of $0.3 million, as compared to interest expense of $0.2 million for the three months ended September 30, 2013. This increase was primarily due to the expansion of our credit facility in December 2012. Our interest expense increased as a percentage of net revenue by 0.2% to 0.3% for the three months ended September 30, 2013, from 0.1% for the three months ended September 30, 2012.

Interest and other income. Interest and other income for the three months ended September 30, 2013 were $1.5 million, an increase of $1.5 million, as compared to interest income of nil in the three months ended September 30, 2012. The increase was primarily due to late penalty and default interest earned on a settlement of a note receivable purchased in 2012.

Income tax expense. Income tax expense for the three months ended September 30, 2013 was $15.7 million, an increase of $3.1 million, or 24.8%, as compared to income tax expense of $12.6 million for the three months ended September 30, 2012. Our effective tax rate was 41.1% during the third quarter of 2013 compared to 40.5% during the third quarter of 2012. Our effective tax rate in the third quarter of 2013 was higher than anticipated due primarily to certain non-recurring tax items.

Net income. Our net income for the three months ended September 30, 2013 was $22.5 million, an increase of $4.0 million, as compared to $18.5 million for the three months ended September 30, 2012, due to the factors discussed above.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Net revenue. Our net revenue for the nine months ended September 30, 2013 was $435.9 million, an increase of $65.9 million, or 17.8%, as compared to net revenue of $370.0 million for the nine months ended September 30, 2012. This increase was primarily due to an increase in ground and online enrollment and, to a lesser extent, increases in the average tuition per student as a result of improved retention, selective tuition price increases during 2012 and an increase in room and board and other student fees, partially offset by an increase in institutional scholarships. End-of-period enrollment increased 14.7% between September 30, 2013 and September 30, 2012, as ground enrollment increased 39.5%, and online enrollment increased 10.6% over the prior year. We attribute the significant growth in our ground enrollment between years to our increasing brand recognition and the value proposition that our ground traditional campus affords to traditional-aged students and their parents. After scholarships, our ground traditional students pay an amount for tuition, room, board, and fees often half to a third of what it costs to attend a private, traditional university in another state and an amount comparable to what it costs to attend the public universities in the state of Arizona as an in-state student. We are anticipating increased pressure on new and continuing online enrollments due primarily to increased competition for students from traditional colleges and universities as such institutions, including those with well-established reputations for excellence, increasingly seek to provide alternative learning modalities.


Table of Contents

Instructional costs and services expenses. Our instructional costs and services expenses for the nine months ended September 30, 2013 were $186.4 million, an increase of $24.8 million, or 15.4%, as compared to instructional costs and services expenses of $161.6 million for the nine months ended September 30, 2012. This increase was primarily due to increases in employee compensation and related expenses including share based compensation, faculty compensation, depreciation and amortization and occupancy expense, instructional supplies, bad debt expense and other instructional compensation and related expenses, of $8.5 million, $5.9 million, $3.9 million, $2.6 million, $1.4 million and $2.5 million, respectively. The increase in employee compensation and related expenses and faculty compensation are primarily due to the increase in the number of staff to support the increasing number of students attending the University. In addition, we continue to grow our online full-time faculty and we have incurred an increase in medical and other benefit costs between years. The increase in depreciation and amortization and occupancy expense is the result of us placing into service two additional dormitories, an Arts and Sciences classroom building, and a parking garage for our ground traditional campus in the Fall of 2012 and two additional dormitories and a new administrative building in the Fall of 2013. The increase in instructional supplies is primarily due to increased licensing fees related to educational resources, increased food costs due to increased food revenues and miscellaneous costs associated with curriculum and the continued development of new and enhanced innovative educational tools and new educational programs. Our instructional costs and services expenses as a percentage of net revenues decreased by 0.9% to 42.8% for the nine months ended September 30, 2013, as compared to 43.7% for the nine months ended September 30, 2012 primarily due to our ability to leverage our employees and the fixed costs structure of our campus-based facilities and faculty across an increasing revenue base. Bad debt expense decreased over prior year at 3.4% for the nine months ended September 30, 2013 as compared to 3.6% for the nine months ended September 30, 2012.

Admissions advisory and related expenses. Our admissions advisory and related expenses for the nine months ended September 30, 2013 were $70.9 million, an increase of $8.2 million, or 13.1%, as compared to admissions advisory and . . .

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