What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-10-27 · 71 added, 201 removed, 101 unchanged (73% of the section changed)

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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;

Important factors that could cause our actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements, 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, 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;

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(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

solutions, infrastructure and operational processes to provide services to these institutions on a large scale.

GCE has developed significant technological 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 four 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 January 2019, GCE began providing education services to numerous university partners across the United States, through our wholly owned subsidiary, Orbis Education.

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 September 30, 2022, GCE provides education services to 27 university partners across the United States.

As of March 31, 2023, 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.

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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 nine 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

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, primarily in the first four months of 2022 as compared to 2021 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.

In the third quarter of 2022, we have seen an online new student increase over the prior year.

As the year over year comparables returned to historical levels in the third quarter of 2022 and schools, hospitals and businesses are generally reopened, our online enrollment growth rate has begun to re-accelerate;

● 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 22.7% between September 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 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 2022 Form 10-K for the fiscal year ended December 31, 2022.

During the nine months ended September 30, 2022, there were no significant changes in our critical accounting policies.

During the three months ended March 31, 2023, 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.

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

Amortization of intangible assets has been excluded from the table below:

Three Months Ended

Nine Months Ended

September 30,

Costs and expenses

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General and administrative

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Service revenue .

Our service revenue for the three months ended September 30, 2022 was $208.7 million, an increase of $1.9 million, or 0.9%, as compared to service revenue of $206.8 million for the three months ended September 30, 2021.

The increase year over year in service revenue was primarily due to an increase in GCU traditional campus enrollments of 8.0% and increases in revenue per student year over year, partially offset by a decrease in online enrollments at GCU of 4.7% (see - Impact of COVID-19 above) and to a lesser extent, students in a university partner’s OTA program of 22.7% (see - Impact of COVID-19 above).

Additionally, GCU’s traditional campus Fall semester moved forward one day compared to the third quarter of 2021, which increased service revenues earned in the third quarter by $1.5 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 third quarter of 2022 as compared to the prior year period although the impact of this growth is not as significant in the 3 rd quarter of each year as it is in the 1 st and 4 th quarters as the Fall semester does not begin until the first week in September.

In addition, 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 116,202 at September 30, 2022 as compared to 118,832 at September 30, 2021.

University partner enrollments at our off-campus classroom and laboratory sites were 5,695, an increase of 0.8% over enrollments at September 30, 2021, which includes 421 GCU students at September 30, 2022.

This growth rate has slowed over the past year primarily due to the 22.7% decline in OTA students as the university partner stopped admitting new students for most of 2021 due to clinical placement backlog.

Year over year ABSN students increased 2.7% at September 30, 2022.

None of our ABSN partners have stopped admitting new students due to the 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

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 7.5% year over year.

We did open six new off-campus classroom and laboratory sites in the nine months ended September 30, 2022 increasing the total number of these sites to 35 at September 30, 2022 and we anticipate opening six to eight more in 2023 which should re-accelerate the ABSN student enrollment growth.

Enrollments at GCU declined to 110,928 at September 30, 2022, a decrease of 2.2% over enrollments at September 30, 2021 primarily due to the decrease in GCU online enrollments between years.

Enrollments for GCU ground students were 25,350 at September 30, 2022 up from 23,628 at September 30, 2021 primarily due to a 8.0% increase in traditional ground students between years.

Our service revenue for the three months ended March 31, 2023 was $250.1 million, an increase of $6.0 million, or 2.5%, as compared to service revenue of $244.1 million for the three months ended March 31, 2022.

The increase year over year in service revenue was primarily due to an increase in GCU traditional campus enrollments of 6.6% and an increase in revenue per student year over year, partially offset by a decrease in students in a university partner’s Occupational Therapy Assistants (“OTA”) program of 19.9%.

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 quarter of 2023 as compared to the prior year period .

In addition, s ervice revenue per student for Accelerated Bachelor of Science in Nursing (“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.

The increase in revenue per student in the three months ended March 31, 2023 was negatively impacted by the timing of the Spring semester for the ground traditional campus.

The Spring semester started two days later in 2023 and extended four more days into April, which had the effect of shifting $4.5 million in service revenue from the first quarter of 2023 to the second quarter of 2023.

Partner enrollments totaled 112,588 at March 31, 2023 as compared to 110,217 at March 31, 2022.

University partner enrollments at our off-campus classroom and laboratory sites were 4,315, a decrease of 4.0% over enrollments at March 31, 2022, which includes 360 and 283 GCU students at March 31, 2023 and 2022, respectively.

This growth rate has slowed over the past year primarily due to the 19.9% decline in OTA students as the university partner stopped admitting new students for most of 2021 due to clinical placement backlog and although that partner is now admitting students, the number of

admitted students remains below previous levels.

Year over year ABSN students decreased 2.9% at March 31, 2023.

None of our ABSN partners stopped admitting new students due to the clinical faculty challenges that began during the pandemic, however some locations that were scheduled to open were delayed and some existing partners have experienced reduced incoming cohort sizes which has slowed the growth.

We believe the growth in the number of OTA and ABSN students is also being negatively impacted by the strong job market as these students have historically been individuals with already completed bachelor’s degrees choosing to re-career into one of these health professions.

To address this challenge, we have been working with a number of our university partners to adjust their programs to allow students with the required education experience but without a complete bachelor’s degree to enter their programs.

We did open six new off-campus classroom and laboratory sites in the year ended December 31, 2022 and one site in the three months ended March 31, 2023 increasing the total number of these sites to 36 at March 31, 2023 and we anticipate opening three to four more in 2023 which we hope, along with the program change discussed earlier, will re-accelerate the ABSN student enrollment growth.

Enrollments at GCU increased to 108,633 at March 31, 2023, an increase of 2.5% over enrollments at March 31, 2022.

Enrollments for GCU ground students were 22,568 at March 31, 2023 up from 21,281 at March 31, 2022 primarily due to a 6.6% increase in traditional ground students between years.

GCU online enrollments were 86,065 at March 31, 2023, up from 84,722 at March 31, 2022.

Technology and academic services .

Our technology and academic services expenses for the three months ended September 30, 2022 were $37.6 million, an increase of $2.0 million, or 5.8%, as compared to technology and academic services expenses of $35.6 million for the three months ended September 30, 2021.

This increase was primarily due to increases in employee compensation and related expenses, including share-based compensation and benefit expenses, in occupancy and depreciation and in other technology and academic costs of $1.2 million, $0.4 million and $0.4 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 0.8% to 18.0% for the three months ended September 30, 2022, from 17.2% for the three months ended September 30, 2021.

Our technology and academic services expenses for the three months ended March 31, 2023 were $37.5 million, an increase of $1.2 million, or 3.3%, as compared to technology and academic services expenses of $36.3 million for the three months ended March 31, 2022.

This increase was primarily due to increases in occupancy and depreciation and in employee compensation and related expenses, including share-based compensation of $0.9 million and $0.6 million, respectively, partially offset by a decrease in other technology and academic costs of $0.2 million.

These increases were primarily due to the costs associated with the increased number of off-campus classroom and laboratory sites and the increased headcount to support our 27 university partners, and their increased enrollment growth, tenure-based salary adjustments 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 0.1% to 15.0% for the three months ended March 31, 2023, from 14.9% for the three months ended March 31, 2022.

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.

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Counseling services and support .

Our counseling services and support expenses for the three months ended September 30, 2022 were $67.2 million, an increase of $5.0 million, or 8.1%, as compared to counseling services and support expenses of $62.2 million for the three months ended September 30, 2021.

This increase was primarily attributable to increases in employee compensation and related expenses including share-based compensation and benefit expenses, in other counseling services and support expenses and in occupancy and depreciation of $3.5 million, $1.4 million, and $0.1 million, respectively.

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.

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 third quarter of 2021, during which significantly lower travel costs were incurred.

Our counseling services and support expenses as a percentage of revenue increased 2.1% to 32.2% for the three months ended September 30, 2022, from 30.1% for the three months ended September 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 September 30, 2022 were $50.7 million, an increase of $3.6 million, or 7.5%, as compared to marketing and communication expenses of $47.1 million for the three months ended September 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 $3.0 million and increased employee compensation, including share-based compensation and benefit expenses of $0.8 million, partially offset by a decrease in other marketing and communication expenses of $0.2 million.

Our marketing and communication expenses as a percentage of revenue increased by 1.5% to 24.3% for the three months ended September 30, 2022, from 22.8% for the three months ended September 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 three months ended September 30, 2022 were $15.6 million, an increase of $1.1 million, or 7.8%, as compared to general and administrative expenses of $14.5 million for the three months ended September 30, 2021.

This increase was primarily attributable to an increase in other general and administrative expenses, in employee compensation, including share-based compensation and benefit expenses and in professional fees of $0.6 million, $0.5 million and $0.1 million, respectively, partially offset by a decrease in occupancy and depreciation of $0.1 million.

Our increase in other general and administrative expenses is primarily related to increases in travel costs and other charitable contributions between years.

The increase in employee compensation and related expenses is primarily related to tenure adjustments and higher benefit costs between years.

The increased professional fees is primarily increased legal and audit fees between years.

Our general and administrative expenses as a percentage of revenue increased by 0.5% to 7.5% for the three months ended September 30, 2022, from 7.0% for the three months ended September 30, 2021 primarily due to the increase in other expenses.

Amortization of intangible assets .

Amortization of intangible assets for the three months ended September 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 September 30, 2021 was $15.0 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 third quarter of 2022 and there will be none in future periods.

Interest expense .

Interest expense was $0.7 million for the three months ended September 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 September 30, 2022 was $0.7 million, as compared to investment interest and other for the three months ended September 30, 2021 of $0.2 million.

Interest rates have increased in 2022 resulting in increased investment interest income.

Income tax expense .

Income tax expense for the three months ended September 30, 2022 was $6.2 million, a decrease of $6.0 million, or 48.6%, as compared to income tax expense of $12.2 million for the three months ended September 30, 2021.

This decrease was the result of a decrease in our taxable income and a decrease in our effective tax rate between periods.

Our effective tax rate was 17.2% during the third quarter of 2022 compared to 20.3% during the third quarter of 2021.

In the third quarter of 2022 and 2021, the effective tax rate was favorably impacted by the contributions in lieu of state income taxes of $5.0 million in July 2022 and 2021.

The impact of the contributions in the third quarter of 2022 had a greater impact on the effective tax rate than it did in the third quarter of 2021 due to lower income before taxes.

Our net income for the three months ended September 30, 2022 was $30.0 million, a decrease of $17.7 million, or 37.0%, as compared to $47.7 million for the three months ended September 30, 2021, due to the factors discussed above.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Service revenue .

Our service revenue for the nine months ended September 30, 2022 was $652.6 million, an increase of $7.4 million, or 1.1%, as compared to service revenue of $645.2 million for the nine months ended September 30, 2021.

The increase year over year in service revenue was primarily due to increases in GCU traditional campus enrollments and revenue per student year over year partially offset by a decrease in online enrollments at GCU of 4.7% (see - Impact of COVID-19 above) and to a lesser extent, students in a university partner’s OTA program of 22.7% (see - Impact of COVID-19 above).

Additionally, GCU’s traditional campus Fall semester moved up one day compared to the nine months ended September 30, 2021, which increased service revenues earned in the nine months ended September 30, 2022 by $1.5 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 nine months of

2022 as compared to the prior year period (see - Impact of COVID-19 above) and the increase in revenue per student 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 116,202 at September 30, 2022 as compared to 118,832 at September 30, 2021.

Year over year ABSN students increased 2.7% at September 30, 2022.

Excluding the prior year enrollments from locations that have been closed in the past twelve months, ABSN students grew by 7.5% year over year.

Enrollments at GCU declined to 110,928 at September 30, 2022, a decrease of 2.2% over enrollments at September 30, 2021 primarily due to the decrease in GCU online enrollments between years.

Enrollments for GCU ground students were 25,350 at September 30, 2022 up from 23,628 at September 30, 2021 primarily due to a 8.0% increase in traditional ground students between years.

Technology and academic services .

Our technology and academic services expenses for the nine months ended September 30, 2022 were $112.1 million, an increase of $10.8 million, or 10.7%, as compared to technology and academic services expenses of $101.3 million for the nine months ended September 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 $8.3 million, $2.0 million and $0.6 million, respectively.

Our technology and academic services expenses as a percentage of revenue increased 1.5% to 17.2% for the nine months ended September 30, 2022, from 15.7% for the nine months ended September 30, 2021.

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 nine months ended September 30, 2022 were $200.8 million, an increase of $16.4 million, or 8.9%, as compared to counseling services and support expenses of $184.4 million for the nine months ended September 30, 2021.

This increase was primarily attributable to increases in other counseling services and support expenses, in employee compensation and related expenses including share-based compensation and benefit expenses, and occupancy and depreciation expenses of $8.5 million, $7.3 million and $0.6 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 nine months ended September 30, 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 30.8% for the nine months ended September 30, 2022, from 28.6% for the nine months ended September 30, 2021 primarily due to significant increase year over year in travel and benefit costs and the increased headcount, partially offset by the increased 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.

Our counseling services and support expenses for the three months ended March 31, 2023 were $73.3 million, an increase of $5.8 million, or 8.6%, as compared to counseling services and support expenses of $67.5 million for the three months ended March 31, 2022.

This increase was primarily attributable to increases in employee compensation and related expenses including share-based compensation and in other counseling services and support expenses of $4.8 million and $1.3 million, respectively, partially offset by a decrease in occupancy and depreciation of $0.2 million.

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 and the increased number of off-campus classroom and laboratory sites open year over year.

The increase in other counseling services and support expenses is primarily the result of increased travel costs for our 27 university partners.

Our counseling services and support expenses as a percentage of revenue increased 1.6% to 29.3% for the three months ended March 31, 2023, from 27.7% for the three months ended March 31, 2022 primarily due to the significant increase year over year in headcount and travel costs.

We anticipate that counseling services and support expense as a percentage of revenue will continue to be higher in 2023 than in 2022 as travel expenses continue to increase 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 nine months ended September 30, 2022 were $151.2 million, an increase of $10.9 million, or 7.8%, as compared to marketing and communication expenses of $140.3 million for the nine months ended September 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 and in employee compensation, including share-based compensation and benefit expenses of $8.7 million and $2.3 million, respectively, partially offset by a decrease in other communication expenses of $0.1 million.

Our marketing and communication expenses as a percentage of revenue increased by 1.5% to 23.2% for the nine months ended September 30, 2022, from 21.7% for the nine months ended September 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.

Our marketing and communication expenses for the three months ended March 31, 2023 were $52.9 million, an increase of $2.0 million, or 4.0%, as compared to marketing and communication expenses of $50.9 million for the three months ended March 31, 2022.

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 $2.0 million and increased employee compensation, including share-based compensation of $0.3 million, partially offset by a decrease in other marketing and communication expenses of $0.3 million.

Our marketing and communication expenses as a percentage of revenue increased by 0.3% to 21.1% for

the three months ended March 31, 2023, from 20.8% for the three months ended March 31, 2022, primarily due to the number of 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 nine months ended September 30, 2022 were $35.3 million, an increase of $2.2 million, or 6.7%, as compared to general and administrative expenses of $33.1 million for the nine months ended September 30, 2021.

This increase was primarily attributable to an increase in other general and administrative expenses, in employee compensation, including share-based compensation, and related benefit expenses, and in professional fees of $1.1 million, $0.6 million, and $0.6 million, respectively, partially offset by a decrease in occupancy and depreciation of $0.1 million.

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.

The increase in professional fees is primarily due to increased legal and audit fees between years.

Our general and administrative expenses as a percentage of revenue increased by 0.3% to 5.4% for the nine months ended September 30, 2022, from 5.1% for the nine months ended September 30, 2021primarily due to the increase in other expenses.

Our general and administrative expenses for the three months ended March 31, 2023 were $9.8 million, a decrease of $0.1 million, or 1.1%, as compared to general and administrative expenses of $9.9 million for the three months ended March 31, 2022.

Our general and administrative expenses as a percentage of revenue decreased by 0.2% to 3.9% for the three months ended March 31, 2023, from 4.1% for the three months ended March 31, 2022 primarily due to our ability to leverage our other general and administrative expenses across an increasing revenue base.

Amortization of intangible assets .

Amortization of intangible assets for the nine months ended September 30, 2022 and 2021 were $6.3 million for both periods.

Amortization of intangible assets for the three months ended March 31, 2023 and 2022 were $2.1 million for both periods.

Interest income on Secured Note .

Interest income on the Secured Note for the nine months ended September 30, 2021 was $44.4 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 nine months ended September 30, 2022, and there will be none in future periods.

Interest expense .

Interest expense was $2.3 million for the nine months ended September 30, 2021.

The credit facility was repaid and terminated in early November 2021.

Investment interest and other .

Investment interest and other for the nine months ended September 30, 2022 was $1.3 million, as compared to investment interest and other for the nine months ended September 30, 2021 of $0.6 million.

Interest rates have increased during the nine months ended September 30, 2022 resulting in increased investment interest income.

Investment interest and other for the three months ended March 31, 2023 was $2.2 million, as compared to investment interest and other for the three months ended March 31, 2022 of $0.2 million due to higher investment balances and higher returns on those balances.

Income tax expense .

Income tax expense for the nine months ended September 30, 2022 was $34.5 million, a decrease of $12.7 million, or 27.0%, as compared to income tax expense of $47.2 million for the nine months ended September 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 23.3% during the nine months ended September 30, 2022 compared to 21.2% during the nine months ended September 30, 2021.

In the nine months ended September 30, 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 nine months ended September 30, 2022.

The effective tax rate was favorably impacted by the contributions in lieu of

state income taxes of $5.0 million in July 2022 and 2021.

The impact of the contribution in 2022 had a greater impact on the effective tax rate than it did in 2021 due to lower income before taxes.

Our net income for the nine months ended September 30, 2022 was $113.6 million, a decrease of $61.6 million, or 35.1%, as compared to $175.2 million for the nine months ended September 30, 2021, due to the factors discussed above.

Income tax expense for the three months ended March 31, 2023 was $17.0 million, a decrease of $2.6 million, or 13.0%, as compared to income tax expense of $19.6 million for the three months ended March 31, 2022.

This decrease was the result of a decrease in our effective tax rate between periods and a slight decrease in our taxable income.

Our effective tax rate was 22.3% during the first quarter of 2023 compared to 25.2% during the first quarter of 2022.

In the first quarter of 2023, the effective tax rate was impacted by excess tax benefits of $0.9 million as compared to only $0.1 million in the first quarter of 2022.

In the first quarter of 2023 the effective tax rate was favorably impacted by state income tax refunds, while in the first quarter of 2022 the effective tax rate was unfavorably impacted by state audits.

Our net income for the three months ended March 31, 2023 was $59.6 million, an increase of $1.5 million, or 2.6%, as compared to $58.1 million for the three months ended March 31, 2022, due to the factors discussed above.

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.

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Liquidity and Capital Resources

As of September 30,

As of March 31,

As of December 31,

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Cash, cash equivalents and investments

Our liquidity position, as measured by cash and cash equivalents and investments decreased by $492.7 million between December 31, 2021 and September 30, 2022, which was largely attributable to share repurchases in accordance with our share repurchase program and capital expenditures during the nine months ended September 30, 2022 of $571.6 million and $26.3 million, respectively, partially offset by cash provided by operating activities of $110.5 million.

Our unrestricted cash and cash equivalents and investments were $108.3 million at September 30, 2022 and $600.9 million at December 31, 2021.

Our liquidity position, as measured by cash and cash equivalents and investments increased by $12.8 million between December 31, 2022 and March 31, 2023, which was largely attributable to cash flows from operations exceeding share repurchases and capital expenditures during the three months ended March 31, 2023.

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

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

Net cash provided by operating activities

The decrease in cash generated from operating activities between the nine months ended September 30, 2022 and the nine months ended September 30, 2021 was primarily due to a decrease in net income and changes in working capital balances, primarily accounts payable and accrued liabilities.

The decrease in cash generated from operating activities between the three months ended March 31, 2022 and the three months ended March 31, 2023 was primarily due to changes in working capital balances, primarily accounts receivable, accounts payable and accrued liabilities.

Accounts payable and accrued liabilities decreased by $12.1 million due to the timing of the payrolls and check runs each quarter.

This decrease was offset by an increase in account receivable of $6.8 million due to timing of payments from our university partners resulting in lower accounts receivable balances.

We define working capital as the assets and liabilities, other than cash, generated through the Company’s primary operating activities.

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Cash Flows from Investing Activities

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

Net cash used in investing activities

Investing activities consumed $95.3 million of cash in the nine months ended September 30, 2022 compared to $11.3 million in the nine months ended September 30, 2021.

In the first nine 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 $68.7 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 proceeds from investments, net of purchases of investments totaled $10.5 million.

In the first nine months of 2022 and 2021 cash used in investing activities also included the purchases of capital expenditures totaling $26.3 million and $21.4 million, respectively.

Investing activities consumed $37.1 million of cash in the three months ended March 31, 2023 compared to $69.7 million in the three months ended March 31, 2022.

In the first three months of 2023 and 2022 cash used in investing activities consisted of the purchase of available-for-sale securities, net of proceeds from the sale of investments of $28.3 million and $62.8 million, respectively.

In the first three months of 2023 and 2022 cash used in investing activities also included capital expenditures totaling $8.6 million and $6.8 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.

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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 nine months of 2021 totaled $190.0 million, which was repaid in July 2021.

Cash Flows from Financing Activities

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

Net cash used in financing activities

Financing activities consumed $576.2 million of cash in the nine months ended September 30, 2022 compared to $382.4 million in the nine months ended September 30, 2021.

During the nine months ended September 30, 2022 and 2021, $571.6 million and $354.2 million, respectively was used to purchase treasury stock in accordance with GCE’s share repurchase program.

Financing activities consumed $41.2 million of cash in the three months ended March 31, 2023 compared to $399.6 million in the three months ended March 31, 2022.

During the three months ended March 31, 2023 and 2022, $34.9 million and $394.9 million, respectively was used to purchase treasury stock in accordance with GCE’s share repurchase program.

In 2023 and 2022, $6.3 million and $4.6 million, respectively, of cash was utilized to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards.

A significant amount of the share repurchases in 2021 and 2022 were from the proceeds received on the repayment of the Secured Note.

The Company intends to continue using a significant portion of its cash flows from operations to repurchase its shares but share repurchases in future years will be less than in 2021 and 2022.

In 2021, principal payments on notes payable and capital leases totaled $24.9 million, partially offset by proceeds from the exercise of stock options of $2.7 million.

A significant amount of the share repurchases in 2022 were from the proceeds received on the repayment of the Secured Note.

The Company intends to continue using a significant portion of its cash flows from operations to repurchase its shares but share repurchases in future years will be less than in 2022.

Share Repurchase Program

On October 26, 2022, our Board of Directors increased the authorized under its existing stock repurchase program by $200.0 million, reflecting an aggregate authorization for share repurchases since the initiation of the program of $1,845.0 million.

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 $1,845.0 million.

The current expiration date on the repurchase authorization by our Board of Directors is December 31, 2023.

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The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant.

We repurchased 6,475,758 shares of common stock in the nine months ended September 30, 2022.

At September 30, 2022, there remains $23.9 million available under our share repurchase authorization (which authorization was increased to $223.9 million in October 2022) .

We repurchased 309,978 shares of common stock in the three months ended March 31, 2023.

At March 31, 2023, there remains $160.9 million available under our share repurchase authorization .

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis