Grand Canyon Education Inc. Reports Operating Results (10-Q)

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May 04, 2010
Grand Canyon Education Inc. (LOPE, Financial) filed Quarterly Report for the period ended 2010-03-31.

Grand Canyon Education Inc. has a market cap of $1.15 billion; its shares were traded at around $25.08 with a P/E ratio of 36.3 and P/S ratio of 4.4. LOPE is in the portfolios of Wallace Weitz of Weitz Wallace R & Co.

Highlight of Business Operations:

At March 31, 2010, we had approximately 38,900 students, an increase of 36.8% over the approximately 28,400 students we had at March 31, 2009. At March 31, 2010, 92.1% of our students were enrolled in our online programs, and 43.4% of our online students were pursuing masters or doctoral degrees. In addition, revenue per student increased between periods as we increased tuition prices for students in our online and professional studies programs by 2.3% to 15.5% for our 2009-10 academic year, depending on the program, with an estimated blended rate increase of 5.0%, as compared to tuition price increases of 5.0% to 5.3% for the prior academic year. Tuition for our traditional ground programs increased 6.6% for our 2009-10 academic year, as compared to a tuition price increase of 11.2% for the prior academic year. In addition, we experienced an increase in the number of students taking 4 credit courses between years. Operating income was $19.6 million for the quarter ended March 31, 2010, an increase of $10.6 million over the $9.0 million in operating income for the quarter ended March 31, 2009.

Instructional cost and services expenses. Our instructional cost and services expenses for the quarter ended March 31, 2010 were $31.8 million, an increase of $13.8 million, or 77.0%, as compared to instructional cost and services expenses of $18.0 million for the quarter ended March 31, 2009. This increase was primarily due to increases in instructional compensation and related expenses, faculty compensation, instructional supplies, depreciation and amortization, share-based compensation, and other miscellaneous instructional costs and services of $4.3 million, $3.5 million, $1.1 million, $0.8 million, $0.3 million, and $3.8 million, respectively. These increases are primarily attributable to the increased headcount (both staff and faculty) needed to provide student instruction and support services, including increased occupancy and equipment costs for the increased headcount, to support the increase in enrollments. Our instructional cost and services expenses as a percentage of net revenue increased by 3.2% to 35.6% for the quarter ended March 31, 2010, as compared to 32.4% for the quarter ended March 31, 2009. This increase was a result of an increase in employee compensation and related expenses as a percentage of revenue as we have increased the support personnel to student ratios to further improve the customer service to our students and increased instructional supplies and miscellaneous instructional costs due to increased licensing fees related to educational resources and continued improvement in curriculum development and new and enhanced innovative educational tools, partially offset by our ability to leverage the fixed cost structure of our campus-based facilities and ground faculty across an increasing revenue base.

Selling and promotional expenses. Our selling and promotional expenses for the quarter ended March 31, 2010 were $26.9 million, an increase of $7.3 million, or 37.3%, as compared to selling and promotional expenses of $19.6 million for the quarter ended March 31, 2009. This increase was primarily due to increases in selling and promotional employee compensation and related expenses and advertising of $4.6 million and $3.2 million, respectively, partially offset by a decrease in other selling and promotional related costs of $0.5 million. These increases were driven by a continued substantial expansion in our marketing efforts, which resulted in an increase in recruitment, marketing, and enrollment staffing, and expenses related to our revenue sharing arrangement. Our selling and promotional expenses as a percentage of net revenue decreased by 5.2% to 30.1% for the quarter ended March 31, 2010, from 35.3% for the quarter ended March 31, 2009. This decrease occurred as a result of an increase in the productivity of our enrollment counselors that were hired during 2008 and 2009, coupled with our efforts to focus on pursuing higher quality leads to increase enrollment. In this regard, we incur immediate expenses in connection with hiring new enrollment counselors while these individuals undergo training, and typically do not achieve full productivity or generate enrollments from these enrollment counselors until four to six months after their dates of hire. We plan to continue to add additional enrollment counselors in the future, although the number of additional hires as a percentage of the total headcount is expected to remain flat or decrease.

General and administrative expenses. Our general and administrative expenses for the quarter ended March 31, 2010 were $10.9 million, an increase of $2.1 million, or 23.2%, as compared to general and administrative expenses of $8.8 million for the quarter ended March 31, 2009. This increase was primarily due to increases in bad debt expense, employee compensation, and other general and administrative expenses of $1.5 million, $0.5 million, and $0.1 million, respectively. Bad debt expense increased to $4.8 million for the quarter ended March 31, 2010 from $3.3 million for the quarter ended March 31, 2009 as a result of an increase in net revenues and the increase in aged receivables between periods. Employee compensation increased primarily as a result of additions in 2009 and the first quarter of 2010 resulting from our continued growth. Our general and administrative expenses as a percentage of net revenue decreased by 3.7% to 12.2% for the quarter ended March 31, 2010, from 15.9% for the quarter ended March 31, 2009. This decrease was primarily due to a decrease in bad debt expense as a percentage of revenue from 5.9% in the first quarter of 2009 to 5.3% in the first quarter of 2010. As a result of current economic conditions, a higher percentage of aged receivables are not being paid. However, this deterioration in collections of aged receivables has recently been more than offset by changes that have been implemented with respect to our student accounts receivable collection process, which has resulted in fewer accounts reaching aged status.

Liquidity. We financed our operating activities and capital expenditures during the quarter ended March 31, 2010 and 2009 primarily through cash provided by operating activities. Our unrestricted cash, cash equivalents, and marketable securities were $97.9 million and $63.1 million at March 31, 2010 and December 31, 2009, respectively. Our restricted cash, cash equivalents and investments at March 31, 2010 and December 31, 2009 were $6.2 million and $3.2 million, respectively.

Investing Activities. Net cash used in investing activities was $14.0 million and $3.3 million for the quarter ended March 31, 2010 and 2009, respectively. Capital expenditures were $11.6 million and $4.5 million for the quarter ended March 31, 2010 and 2009, respectively. In 2010, cash used in investing activities primarily consisted of purchases of computer equipment, and software costs to complete our transition from Datatel to CampusVue and Great Plains, other internal use software projects, furniture and equipment to support our increasing employee base and headcount and ground campus building projects such as a new dorm and recreational center to support our increasing traditional ground student enrollment. In 2009, capital expenditures primarily consist of computer equipment, leasehold improvements, and office furniture and fixtures to support our increasing employee headcounts.

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