Item 2. Management’s Discussion and Analysis
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” within the meaning of Section 27A of Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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, the negative of these expressions, as well as statements in future tense, identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management.
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. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the continuing, and potential future, adverse effects of the COVID-19 pandemic, and federal, state and/or local regulatory guidelines and private business actions to control it, on the global economy and the financial markets, the higher education industry in which we operate, our university partners, and, ultimately, on our financial condition, operating results and cash flows. The extent to which the COVID-19 pandemic will continue to impact us, and our university partners will depend on future developments, including the scope, severity and duration of the pandemic, and the resulting economic impacts and potential changes in behavior, among others, all of which are highly uncertain and cannot be predicted with confidence. Important factors that could cause our actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements, and which may be further heightened by the COVID-19 pandemic, include, but are not limited to:
● the harm to our business, results of operations, and financial condition, and harm to our university partners resulting from epidemics, pandemics, including the COVID-19 outbreak, or public health crises;
● the occurrence of any event, change or other circumstance that could give rise to the termination of any of the key university partner agreements;
● 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 partners, and expansion of services provided to our existing university partners;
● 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 partners, 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 university partners’ students to obtain federal Title IV funds, state financial aid, and private financing;
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● 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 education services 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 applicable to us directly or indirectly through our university partners;
● competition from other education service companies in our geographic region and market sector, including competition for students, qualified executives and other personnel;
● our expected tax payments and tax rate;
● our ability to hire and train new, and develop and train existing, employees;
● the pace of growth of our university partners’ enrollment and its effect on the pace of our own growth;
● fluctuations in our revenues due to seasonality;
● our ability to, on behalf of our university partners, 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 partners;
● risks associated with the competitive environment for marketing the programs of our university partners;
● failure on our part to keep up with advances in technology that could enhance the experience for our university partners’ students;
● our ability to manage future growth effectively;
● the impact of any natural disasters or public health emergencies; and
● general adverse economic conditions or other developments that affect the job prospects of our university partners’ students.
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 (the “2021 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) for the fiscal year ended December 31, 2021, as updated in our subsequent reports filed with the 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.
Explanatory Note
Grand Canyon Education, Inc. (together with its subsidiaries, the “Company” or “GCE”) is a publicly traded education services company dedicated to serving colleges and universities. GCE has developed significant technological
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solutions, infrastructure and operational processes to provide services to these institutions on a large scale. GCE’s most significant university partner is Grand Canyon University (“GCU”), a comprehensive regionally accredited university that offers graduate and undergraduate degree programs, emphases and certificates across nine colleges both online and on ground at its campus in Phoenix, Arizona, and at two off-campus classroom and laboratory sites.
In January 2019, GCE began providing education services to numerous university partners across the United States, through our wholly owned subsidiary, Orbis Education, which we acquired on January 22, 2019. Since the acquisition, GCE, together with Orbis Education, has continued to add additional university partners. In the healthcare field, we wo rk in partnership with a growing number of top universities and healthcare networks across the country, offering healthcare-related academic programs at off-campus classroom and laboratory sites located near healthcare providers and developing high-quality, career-ready graduates who enter the workforce ready to meet the demands of the healthcare industry. In addition, we have provided certain services to a university partner to assist them in expanding their online graduate programs. As of June 30, 2022, GCE provides education services to 27 university partners across the United States.
We plan to continue to add additional university partners and to introduce additional programs with both our existing partners and with new partners. We may engage with both new and existing university partners to offer healthcare programs, online only or hybrid programs, or, as is the case for our most significant partner, GCU, both healthcare and other programs. In addition, we have centralized a number of services that historically were provided separately to university partners of Orbis Education. Therefore, we refer to all university partners as “GCE partners” or “our partners”. We do disclose significant information for GCU, such as enrollments, due to its size in comparison to our other university partners.
SIGNIFICANT DEVELOPMENTS
Impact of COVID-19
Since March 2020, the world has been, and continues to be, impacted by the COVID-19 pandemic. This contagious outbreak, which has continued to spread, and the related adverse public health developments that have occurred at various times since March 2020, including orders to shelter-in-place, travel restrictions and mandated non-essential business closures, have adversely affected workforces, organizations, customers, economies and financial markets globally. It has also disrupted the normal operations of many businesses, including ours, and that of our university partners.
Pursuant to the Master Services Agreement, GCE provides education services to GCU in return for 60% of GCU’s tuition and fee revenues, which includes fee revenues from room, board, and other ancillary businesses including a student-run golf course. GCU has four types of students: traditional ground university students, who attend class on its campus in Phoenix, Arizona and of which approximately 70% have historically lived on campus in university owned residence halls; professional studies students, who are working adult students who attend class one night a week on the Phoenix campus; online students who attend class fully online; and students who are studying in hybrid programs in which the ground component takes place at off-campus classroom and laboratory sites.
The COVID-19 outbreak, as well as measures taken to contain its spread, has impacted GCU’s students and its business in a number of ways. A full description of those impacts is described in our 2021 Form 10-K. Below is an explanation of those impacts from the COVID-19 pandemic, that had an effect on GCU’s tuition and non-tuition revenue during 2021 and the first six months of 2022 and, consequently, the service revenues we earned under the Master Services Agreement:
● Room, board and certain fee income was negatively impacted in the Spring semester of 2021 for GCU’s traditional students as the first week of the Spring 2021 semester was completed in an online modality to provide greater flexibility for students returning to campus after the holidays. Face-to-face instruction for the semester commenced on January 11, 2021 and ended April 1, 2021 for approximately 80% of classes, followed by two weeks of online instruction. Approximately 3,500 traditional ground students elected to complete the Spring 2021 semester entirely in the online modality. GCU’s ground traditional students residing on campus in
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GCU’s residence halls returned to historical levels in the Spring semester of 2022 and the entire semester was conducted face-to-face. Thus, GCU experienced a significant year over year increase in these revenues in the first half of 2022 and thus the service revenues earned by GCE;
● During the second quarter of 2020, GCU’s online enrollment growth accelerated significantly into the high single digits. The increased level of online enrollment at that time resulted from a combination of factors including an acceleration of new students starting programs, a higher-than-expected number of students returning to the university that had taken a break from their program (“re-enters”) and a lower-than-expected number of students deciding to drop out of or take a break from their program. We believe these trends were primarily caused by the shutdowns precipitated by the COVID-19 outbreak as greater numbers of working adults decided to return to school to finish undergraduate degree programs that they had previously started or to start new graduate degree programs during this time. These trends generally continued through the first quarter of 2021. Beginning in the second quarter of 2021, online enrollment growth rates as compared to the prior year period began to slow as both new enrollments and re-enters were down year over year, the numbers of students dropping out of school or taking periodic breaks in their program returned to historical levels and students completing their programs increased significantly on a year over year basis. These trends continued through the rest of 2021 and thus the year over year online growth rate continued to decline. The decline in new enrollments as compared to the prior year beginning in the second quarter of 2021 was also the result of recruitment challenges caused by the reduced access to schools, hospitals, and businesses where our potential students work. We believe that as the year over year comparables return to historical levels and schools, hospitals and businesses fully reopen, our online enrollment growth rate will begin to re-accelerate; and
● Professional studies students have declined significantly since the onset of the COVID-19 outbreak. Professional studies students at that time were converted to the online learning environment; since then, most have completed their programs while no new cohorts have been started until very recently. Now that the university has approved the recruitment of new professional studies cohorts, we anticipate that the number of these students will begin to grow.
The changes described above at GCU have impacted or will impact GCE’s service revenue under the Master Services Agreement. In addition, due to the limited operating expenses that we incur to deliver those services, there has been or will be a direct reduction in our operating profit and operating margin.
GCE also provides services to numerous university partners across the United States, including GCU, at off-campus classroom and laboratory sites. The majority of these university partners’ students are studying in the Accelerated Bachelor of Science in Nursing (“ABSN”) program which is offered in a 12-16-month format in three or four academic semesters. Beginning with the Summer 2021 semester we experienced a decline in revenue per student from students in these programs caused primarily by some students delaying their scheduled clinical courses due to vaccine mandates at hospital partners and we started to see a reduction in our off-site classroom and laboratory student enrollment growth rate due primarily to delays in the opening of scheduled new sites and requests by some of our university or hospital partners or their state regulatory boards to reduce cohort sizes due to concerns over potential clinical faculty availability caused by nursing and other healthcare employee shortages. This is especially true with one of our university partner’s Occupational Therapy Assistants (“OTA”) program in which enrollment declined 34.0% between June 30, 2021 and 2022 as the university partner stopped admitting new students for most of 2021 due to clinical placement backlog. None of our ABSN partners have stopped admitting new students but some locations that were scheduled to open in 2021 and 2022 have been pushed back and some existing partners have reduced incoming cohort sizes due to the concern that there are not enough nurses to serve as clinical faculty.
No other changes are currently anticipated with our other university partners that would have a material impact on GCE’s service revenue, operating profit and operating margins. However, if one of our university partners were to close an off-campus classroom and laboratory site or take some other action that adversely impacted program enrollment, such an event would reduce the service revenues earned by GCE.
Beginning at the time of the COVID-19 outbreak a large percentage of our workforce began to work remotely and is expected to continue doing so for the foreseeable future. This degree of remote working could increase risks in
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the areas of internal control, cyber security and the use of remote technology, and thereby result in interruptions or disruptions in normal operational processes.
It is not possible for us to completely predict the duration or magnitude of the adverse results of the COVID-19 pandemic and its effects on our business, results of operations or financial condition at this time, but such effects may be material in future quarters.
Critical Accounting Policies and Use of Estimates
Our critical accounting policies are disclosed in the 2021 Form 10-K for the fiscal year ended December 31, 2021. During the six months ended June 30, 2022, there were no significant changes in our critical accounting policies.
Results of Operations
The following table sets forth certain income statement data as a percentage of net revenue for each of the periods indicated. Amortization of intangible assets has been excluded from the table below:
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Costs and expenses
Technology and academic services
19.1
%
16.7
%
16.8
%
15.0
%
Counseling services and support
33.1
30.2
30.1
27.9
Marketing and communication
24.9
22.6
22.7
21.3
General and administrative
4.9
4.5
4.4
4.3
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Service revenue . Our service revenue for the three months ended June 30, 2022 was $199.8 million, a decrease of $1.7 million, or 0.9%, as compared to service revenue of $201.5 million for the three months ended June 30, 2021. The decrease year over year in service revenue was primarily due to a decrease in online enrollments at GCU of 7.5% (see - Impact of COVID-19 above) and to a lesser extent, students in a university partner’s OTA program of 34% (see - Impact of COVID-19 above) partially offset by increases in GCU traditional campus enrollments, university partners enrollments in ABSN programs and revenue per student year over year. Additionally, GCU’s traditional campus Spring semester moved forward one day and Summer semester moved back six days compared to the second quarter of 2021, which reduced service revenues earned in the second quarter by $1.3 million. The increase in revenue per student between years is primarily due to the service revenue impact of the increased room, board and other ancillary revenues at GCU in the second quarter of 2022 as compared to the prior year period (see - Impact of COVID-19 above) although the impact of this growth is not as significant in the 2 nd and 3 rd quarters of each year as it is in the 1 st and 4 th quarters as the majority of GCU’s traditional ground university students do not attend courses during the summer months, and the increase in students at off-campus classroom and laboratory sites. Service revenue per student for ABSN students at off-campus classroom and laboratory sites generates a significantly higher revenue per student than we earn under our agreement with GCU, as these agreements generally provide us with a higher revenue share percentage, the partners have higher tuition rates than GCU and the majority of their students take more credits on average per semester. Partner enrollments totaled 96,029 at June 30, 2022 as compared to 101,808 at June 30, 2021. University partner enrollments at our off-campus classroom and laboratory sites were 4,120, a decrease of 2.1% over enrollments at June 30, 2021, which includes 324 GCU students at June 30, 2022. This growth rate has slowed over the past year primarily due to the 34.0% decline in OTA students. Year over year ABSN students grew 1.2% at June 30, 2022. As is discussed above in Impact of COVID-19, none of our ABSN partners have stopped admitting new students due to clinical faculty challenges that began during the pandemic, however some locations that were scheduled to open in 2021 and 2022 have been pushed back and some existing partners have reduced incoming cohort sizes which has slowed the growth. In addition, in a joint decision between us and one of our university partners, two ABSN off-campus classroom and laboratory sites were closed at the beginning of this year to allow the university partner to focus its resources closer to its home location. Excluding the prior year enrollments from locations that have been closed in the past twelve months, ABSN students
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grew by 6.6% year over year. We did open three new off-campus classroom and laboratory sites in the first half of 2022 increasing the total number of these sites to 32 at June 30, 2022 and we anticipate opening four more this Fall and six to eight more in 2023 which should re-accelerate the ABSN student enrollment growth. Enrollments at GCU declined to 92,233 at June 30, 2022, a decrease of 5.7% over enrollments at June 30, 2021 primarily due to the decrease in GCU online enrollments between years. Enrollments for GCU ground students were 7,309 at June 30, 2022 up from 6,202 at June 30, 2021 primarily due to a 24.0% increase in traditional ground students taking summer school courses between years. GCU enrollment declines between March 31 and June 30 of each year as ground enrollment at GCU at June 30 of each year only includes traditional-aged students taking summer school classes, which is a small percentage of GCU’s traditional-aged student body. The Spring semester for GCU’s traditional-aged student body ends near the end of April each year.
Technology and academic services . Our technology and academic services expenses for the three months ended June 30, 2022 were $38.2 million, an increase of $4.5 million, or 13.4%, as compared to technology and academic services expenses of $33.7 million for the three months ended June 30, 2021. This increase was primarily due to increases in employee compensation and related expenses, including share-based compensation and benefit expenses and in other technology and academic costs of $4.2 million and $0.3 million, respectively. These increases were primarily due to increased headcount to support our 27 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs and the increased number of off-campus classroom and laboratory sites year over year. Our technology and academic services expenses as a percentage of revenue increased 2.4% to 19.1% for the three months ended June 30, 2022, from 16.7% for the three months ended June 30, 2021. This increase was primarily due to partnership agreements with university partners that have off-campus classroom and laboratory sites requiring a higher level of technology and academic services than our agreement with GCU. We anticipate that technology and academic services expenses as a percentage of revenue will continue to increase in the future as we open more off-campus classroom and laboratory sites.
Counseling services and support . Our counseling services and support expenses for the three months ended June 30, 2022 were $66.0 million, an increase of $5.1 million, or 8.4%, as compared to counseling services and support expenses of $60.9 million for the three months ended June 30, 2021. This increase was primarily attributable to increases in other counseling services and support expenses, employee compensation and related expenses including share-based compensation and benefit expenses, and occupancy and depreciation expenses of $2.4 million, $2.4 million, and $0.3 million, respectively. The increase in other counseling services and support expenses is primarily the result of increased travel costs for our 27 university partners as compared to the COVID-19 impacted second quarter of 2021, during which significantly lower travel costs were incurred. The increases in employee compensation and related expenses were primarily due to increased headcount to support our university partners, and their planned increases in enrollment, tenure-based salary adjustments, an increase in benefit costs and the increased number of off-campus classroom and laboratory sites open year over year. Our counseling services and support expenses as a percentage of revenue increased 2.9% to 33.1% for the three months ended June 30, 2022, from 30.2% for the three months ended June 30, 2021 primarily due to the significant increase year over year in travel and benefit costs and the increased headcount. We anticipate that counseling services and support expense as a percentage of revenue will continue to be higher in 2022 than in 2021 as travel expenses return to pre-COVID-19 levels and we grow our employee base and their compensation to meet our university partners’ growth expectations and retain our employees.
Marketing and communication . Our marketing and communication expenses for the three months ended June 30, 2022 were $49.7 million, an increase of $4.3 million, or 9.4%, as compared to marketing and communication expenses of $45.4 million for the three months ended June 30, 2021. This increase was primarily attributable to the increased cost to market our university partners’ programs and to the marketing of new university partners and new locations which resulted in increased advertising of $3.4 million and increased employee compensation, including share-based compensation and benefit expenses of $0.9 million. Our marketing and communication expenses as a percentage of revenue increased by 2.3% to 24.9% for the three months ended June 30, 2022, from 22.6% for the three months ended June 30, 2021, primarily due to the increase in the number of new university partners and their growth expectations and increased off-campus classroom and laboratory sites opened and sites planned to open in the next 12 months.
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General and administrative . Our general and administrative expenses for the three months ended June 30, 2022 were $9.9 million, an increase of $0.8 million, or 8.5%, as compared to general and administrative expenses of $9.1 million for the three months ended June 30, 2021. This increase was primarily attributable to an increase in other general and administrative expenses, professional fees, and employee compensation, including share-based compensation and benefit expenses of $0.4 million, $0.2 million and $0.2 million, respectively. Our increase in other general and administrative expenses is primarily related to an increase in travel costs and charitable contributions between years. The increased professional fees is primarily increased legal and audit fees between years. The increase in employee compensation and related expenses is primarily related to tenure adjustments and higher benefit costs between years. Our general and administrative expenses as a percentage of revenue increased by 0.4% to 4.9% for the three months ended June 30, 2022, from 4.5% for the three months ended June 30, 2021.
Amortization of intangible assets . Amortization of intangible assets for the three months ended June 30, 2022 and 2021 were $2.1 million for both periods. As a result of the acquisition of our wholly owned subsidiary, Orbis Education, certain identifiable intangible assets were created (primarily customer relationships) that will be amortized over their expected lives.
Interest income on Secured Note . Interest income on the Secured Note for the three months ended June 30, 2021 was $14.8 million. GCE recognized interest income on the Secured Note including borrowings made for capital expenditures, at an interest rate of 6%. GCU repaid all amounts owed on the Secured Note in the fourth quarter of 2021. As the Secured Note receivable was paid off in 2021 there was no interest income earned on the Secured Note in the second quarter of 2022 and there will be none in future periods.
Interest expense . Interest expense was $0.8 million for the three months ended June 30, 2021. The credit facility was repaid and terminated in early November 2021.
Investment interest and other . Investment interest and other for the three months ended June 30, 2022 was $0.3 million, as compared to investment interest and other for the three months ended June 30, 2021 was $0.2 million.
Income tax expense . Income tax expense for the three months ended June 30, 2022 was $8.6 million, a decrease of $6.4 million, or 42.7%, as compared to income tax expense of $15.0 million for the three months ended June 30, 2021. This decrease was the result of a decrease in our taxable income partially offset by an increase in our effective tax rate between periods. Our effective tax rate was 25.2% during the second quarter of 2022 compared to 23.3% during the second quarter of 2021. In the second quarter of 2022, the effective tax rate was unfavorably impacted by an increase in the state income tax rate.
Net income . Our net income for the three months ended June 30, 2022 was $25.6 million, a decrease of $23.9 million, or 48.3%, as compared to $49.5 million for the three months ended June 30, 2021, due to the factors discussed above.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Service revenue . Our service revenue for the six months ended June 30, 2022 was $443.9 million, an increase of $5.5 million, or 1.2%, as compared to service revenue of $438.4 million for the six months ended June 30, 2021. The increase year over year in service revenue was primarily due to increases in GCU traditional campus enrollments, university partners enrollments in ABSN programs and revenue per student year over year partially offset by a decrease in online enrollments at GCU of 7.5% (see - Impact of COVID-19 above) and to a lesser extent, students in a university partner’s OTA program of 34% (see - Impact of COVID-19 above). Additionally, GCU’s traditional campus Summer semester moved back six days compared to the six months ended June 30, 2021, which reduced service revenues earned in the six months ended June 30, 2022 by $0.5 million. The increase in revenue per student between years is primarily due to the service revenue impact of the increased room, board and other ancillary revenues at GCU in the first half of 2022 as compared to the prior year period (see - Impact of COVID-19 above) and the increase in students at off-campus classroom and laboratory sites. Service revenue per student for ABSN students at off-campus classroom and laboratory sites generates a significantly higher revenue per student than we earn under our agreement with GCU, as these agreements generally provide us with a higher revenue share percentage, the partners have higher tuition rates than GCU
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and the majority of their students take more credits on average per semester. Partner enrollments totaled 96,029 at June 30, 2022 as compared to 101,808 at June 30, 2021. University partner enrollments at our off-campus classroom and laboratory sites were 4,120, a decrease of 2.1% over enrollments at June 30, 2021, which includes 324 GCU students at June 30, 2022. This growth rate has slowed over the past year primarily due to the 34.0% decline in OTA students. Year over year ABSN students grew 1.2% at June 30, 2022. As is discussed above in Impact of COVID-19, none of our ABSN partners have stopped admitting new students due to clinical faculty challenges that began during the pandemic, however some locations that were scheduled to open in 2021 and 2022 have been pushed back and some existing partners have reduced incoming cohort sizes which has slowed the growth. In addition, in a joint decision between us and one of our university partners, two ABSN off-campus classroom and laboratory sites were closed at the beginning of this year to allow the university partner to focus its resources closer to its home location. Excluding the prior year enrollments from locations that have been closed in the past twelve months, ABSN students grew by 6.6% year over year. We did open three new off-campus classroom and laboratory sites in the first half of 2022 increasing the total number of these sites to 32 at June 30, 2022 and anticipate opening four more this Fall and six to eight more in 2023 which should re-accelerate the ABSN student enrollment growth. Enrollments at GCU declined to 92,233 at June 30, 2022, a decrease of 5.7% over enrollments at June 30, 2021 primarily due to the decrease in GCU online enrollments between years. Enrollments for GCU ground students were 7,309 at June 30, 2022 up from 6,202 at June 30, 2021 primarily due to a 24.0% increase in traditional ground students taking summer school courses between years. GCU enrollment declines between March 31 and June 30 of each year as ground enrollment at GCU at June 30 of each year only includes traditional-aged students taking summer school classes, which is a small percentage of GCU’s traditional-aged student body. The Spring semester for GCU’s traditional-aged student body ends near the end of April each year.
Technology and academic services . Our technology and academic services expenses for the six months ended June 30, 2022 were $74.5 million, an increase of $8.8 million, or 13.3%, as compared to technology and academic services expenses of $65.7 million for the six months ended June 30, 2021. This increase was primarily due to increases in employee compensation and related expenses, including share-based compensation and benefit expenses, in other technology and academic costs and in occupancy and depreciation including lease expenses of $7.0 million, $1.6 million and $0.2 million, respectively. These increases were primarily due to increased headcount to support our 27 university partners, and their increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs and the increased number of off-campus classroom and laboratory sites year over year. Our technology and academic services expenses as a percentage of revenue increased 1.8% to 16.8% for the six months ended June 30, 2022, from 15.0% for the six months ended June 30, 2021. This increase was primarily due to partnership agreements with university partners that have off-campus classroom and laboratory sites requiring a higher level of technology and academic services than our agreement with GCU partially offset by the increased Spring and Summer 2022 semester ground traditional campus revenues at GCU. We anticipate that technology and academic services expenses as a percentage of revenue will continue to increase in the future as we open more off-campus classroom and laboratory sites.
Counseling services and support . Our counseling services and support expenses for the six months ended June 30, 2022 were $133.5 million, an increase of $11.3 million, or 9.3%, as compared to counseling services and support expenses of $122.2 million for the six months ended June 30, 2021. This increase was primarily attributable to increases in other counseling services and support expenses, employee compensation and related expenses including share-based compensation and benefit expenses, and occupancy and depreciation expenses of $7.1 million, $3.7 million and $0.5 million, respectively. The increase in other counseling services and support expenses is primarily the result of increased travel costs for our 27 university partners as compared to the COVID-19 impacted first half of 2021, during which significantly lower travel costs were incurred. The increases in employee compensation and related expenses were primarily due to increased headcount to support our university partners, and their planned increased enrollment growth, tenure-based salary adjustments, an increase in benefit costs and the increased number of off-campus classroom and laboratory sites open year over year. Our counseling services and support expenses as a percentage of revenue increased 2.2% to 30.1% for the six months ended June 30, 2022, from 27.9% for the six months ended June 30, 2021 primarily due to significant increase year over year in travel and benefit costs and the increased headcount, partially offset by our ability to leverage our counseling services and support expense across an increasing revenue base primarily due to the increased Spring and Summer 2022 semester ground traditional campus revenues at GCU. We anticipate that counseling services and support expense as a percentage of revenue will continue to be higher in 2022 than in 2021 as travel expenses return to pre-COVID-19 levels and we grow our employee base and their compensation to meet our university partners’ growth expectations and retain our employees.
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Marketing and communication . Our marketing and communication expenses for the six months ended June 30, 2022 were $100.6 million, an increase of $7.4 million, or 8.0%, as compared to marketing and communication expenses of $93.2 million for the six months ended June 30, 2021. This increase was primarily attributable to the increased cost to market our university partners’ programs and to the marketing of new university partners and new locations which resulted in increased advertising, employee compensation, including share-based compensation and benefit expenses, and other communications expenses of $5.7 million, $1.6 million and $0.1 million, respectively. Our marketing and communication expenses as a percentage of revenue increased by 1.4% to 22.7% for the six months ended June 30, 2022, from 21.3% for the six months ended June 30, 2021, primarily due to the increase in the number of new university partners and their growth expectations and increased off-campus classroom and laboratory sites opened and sites planned to open in the next 12 months.
General and administrative . Our general and administrative expenses for the six months ended June 30, 2022 were $19.7 million, an increase of $1.0 million, or 5.8%, as compared to general and administrative expenses of $18.7 million for the six months ended June 30, 2021. This increase was primarily attributable to an increase in professional fees, other general and administrative expenses, and employee compensation, including share-based compensation, and related benefit expenses of $0.5 million, $0.4 million, and $0.1 million, respectively. The increase in professional fees is primarily due to increased legal and audit fees between years. Our increase in other general and administrative expenses is primarily related to an increase in travel costs and charitable contributions between years. The increase in employee compensation and related expenses is primarily related to higher benefit costs and tenure adjustments. Our general and administrative expenses as a percentage of revenue increased by 0.1% to 4.4% for the six months ended June 30, 2022, from 4.3% for the six months ended June 30, 2021.
Amortization of intangible assets . Amortization of intangible assets for the six months ended June 30, 2022 and 2021 were $4.2 million for both periods. As a result of the acquisition of our wholly owned subsidiary, Orbis Education, certain identifiable intangible assets were created (primarily customer relationships) that will be amortized over their expected lives.
Interest income on Secured Note . Interest income on the Secured Note for the six months ended June 30, 2021 was $29.3 million. GCE recognized interest income on the Secured Note including borrowings made for capital expenditures, at an interest rate of 6%. GCU repaid all amounts owed on the Secured Note in the fourth quarter of 2021. As the Secured Note receivable was paid off in 2021 there was no interest income earned on the Secured Note in the six months ended June 30, 2022 and there will be none in future periods.
Interest expense . Interest expense was $1.6 million for the six months ended June 30, 2021. The credit facility was repaid and terminated in early November 2021.
Investment interest and other . Investment interest and other for the six months ended June 30, 2022 was $0.5 million, as compared to investment interest and other for the six months ended June 30, 2021 was $0.4 million.
Income tax expense . Income tax expense for the six months ended June 30, 2022 was $28.2 million, a decrease of $6.8 million, or 19.4%, as compared to income tax expense of $35.0 million for the six months ended June 30, 2021. This decrease was the result of a decrease in our taxable income partially offset by an increase in our effective tax rate between periods. Our effective tax rate was 25.2% during the six months ended June 30, 2022 compared to 21.5% during the six months ended June 30, 2021. In the first half of 2021, the effective tax rate was significantly impacted by excess tax benefits of $4.4 million as a result of exercises of the remaining stock options held by employees prior to their expiration. Excess tax benefits totaled only $0.1 million in the first half of 2022. In the first half of 2022, the effective tax rate was also unfavorably impacted by an increase in the state income tax rate.
Net income . Our net income for the six months ended June 30, 2022 was $83.6 million, a decrease of $44.0 million, or 34.4%, as compared to $127.6 million for the six months ended June 30, 2021, due to the factors discussed above.
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Seasonality
Our net revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in our university partners’ enrollment. Our partners’ enrollment varies as a result of new enrollments, graduations, and student attrition. Revenues in the summer months (May through August) are lower primarily due to the majority of GCU’s traditional ground university students not attending courses during the summer months, which affects our results for our second and third fiscal quarters. Since a significant amount of our costs are fixed, the lower revenue resulting from the decreased summer enrollment has historically contributed to lower operating margins during those periods. Partially offsetting this summer effect has been the sequential quarterly increase in enrollments that has occurred as a result of the traditional fall school start. This increase in enrollments also has occurred in the first quarter, corresponding to calendar year matriculation. Thus, we experience higher net revenue in the fourth quarter due to its overlap with the semester encompassing the traditional fall school start and in the first quarter due to its overlap with the first semester of the calendar year. A portion of our expenses do not vary proportionately with these fluctuations in service revenue, resulting in higher operating income in the first and fourth quarters relative to other quarters. We expect quarterly fluctuation in operating results to continue as a result of these seasonal patterns.
Liquidity and Capital Resources
As of June 30,
As of December 31,
(In thousands)
2022
2021
Cash, cash equivalents and investments
$
203,268
$
600,941
Overview
Our liquidity position, as measured by cash and cash equivalents and investments decreased by $397.7 million between December 31, 2021 and June 30, 2022, which was largely attributable to share repurchases during the six months ended June 30, 2022 of $528.0 million, partially offset by cash provided by operating activities of $146.1 million. Our unrestricted cash and cash equivalents and investments were $203.3 million at June 30, 2022 and $600.9 million at December 31, 2021.
Based on our current level of operations and anticipated growth, we believe that our cash flow from operations and other sources of liquidity, including cash and cash equivalents, will provide adequate funds for ongoing operations, planned capital expenditures, and working capital requirements for at least the next 24 months.
Cash Flows from Operating Activities
Six Months Ended June 30,
(In thousands)
2022
2021
Net cash provided by operating activities
$
146,089
$
210,329
The decrease in cash generated from operating activities between the six months ended June 30, 2022 and the six months ended June 30, 2021 was primarily due to a decrease in net income and changes in working capital balances, primarily accounts payable and income tax receivable. We define working capital as the assets and liabilities, other than cash, generated through the Company’s primary operating activities. Changes in these balances are included in the changes in assets and liabilities presented in the consolidated statement of cash flows.
Cash Flows from Investing Activities
Six Months Ended June 30,
(In thousands)
2022
2021
Net cash used in investing activities
$
(79,617)
$
(240,085)
Investing activities consumed $79.6 million of cash in the six months ended June 30, 2022 compared to $240.1 million in the six months ended June 30, 2021.
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In the first six months of 2022 cash used in investing activities consisted of the purchase of available-for-sale securities, net of proceeds from the sale of investments of $64.4 million with the excess cash flows generated from the recent repayment of the Secured Note by GCU in the fourth quarter of 2021. In 2021 purchases of investments, net of proceeds from the sale of investments totaled $34.1 million.
In the first six months of 2022 and 2021 cash used in investing activities also included the purchases of capital expenditures totaling $15.1 million and $15.8 million, respectively. Capital expenditures for both periods primarily consisted of leasehold improvements and equipment for new off-campus classroom and laboratory sites, as well as purchases of computer equipment, internal use software projects and furniture and equipment to support our increasing employee headcount. The Company incurs upfront expenses and capital expenditures prior to an off-campus classroom and laboratory site being opened. The Company intends to continue to spend approximately $30.0 million to $35.0 million per year for capital expenditures.
Funding to GCU during the first six months of 2021 totaled $190.0 million, which was repaid in July 2021.
Cash Flows from Financing Activities
Six Months Ended June 30,
(In thousands)
2022
2021
Net cash used in financing activities
$
(528,012)
$
(146,565)
Financing activities consumed $528.0 million of cash in the six months ended June 30, 2022 compared to $146.6 million in the six months ended June 30, 2021.
During the six months ended June 30, 2022 and 2021, $523.4 million and $151.7 million, respectively was used to purchase treasury stock in accordance with GCE’s share repurchase program, and in 2021 $10.0 million was paid to Morgan Stanley under our accelerated share repurchase (“ASR”) agreement for shares that would be settled no later than September 9, 2021. In 2022 and 2021, $4.6 million and $6.0 million, respectively, of cash was utilized to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards. The Company intends to continue using a significant portion of its cash flows from operations to repurchase its shares.
In 2021, principal payments on notes payable and capital leases totaled $16.6 million, partially offset by proceeds from the exercise of stock options of $2.7 million and borrowings on our line of credit of $35.0 million.
Share Repurchase Program
Our Board of Directors has authorized under its existing stock repurchase program, an aggregate authorization for share repurchases since the initiation of the program of $1,645.0 million. The current expiration date on the repurchase authorization by our Board of Directors is December 31, 2022. Repurchases occur at the Company’s discretion and the Company may modify, suspend or discontinue the repurchase authorization at any time.
Under our share repurchase authorization, we may purchase shares in the open market or in privately negotiated transactions, pursuant to the applicable SEC rules. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant.
We repurchased 5,894,337 shares of common stock in the six months ended June 30, 2022. At June 30, 2022, there remains $72.0 million available under our share repurchase authorization .
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.