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OFFON

GRAND CANYON EDUCATION, INC.

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GRAND CANYON EDUCATION, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/03/2021 | 08:04am EST

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, economic, or business 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;

the extent to which obligations under our credit agreement, including the need

? to comply with restrictive and financial covenants and to pay principal and

interest payments, limits our ability to conduct our operations or seek new

business opportunities;

? our ability to manage future growth effectively;

? 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 "2020 Form 10-K") filed with the Securities
and Exchange Commission ("SEC") for the fiscal year ended December 31, 2020, 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.

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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
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. In the healthcare field, GCE,
together with Orbis Education, works 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. As of September 30, 2021, GCE provides education services
to 27 university partners across the United States.

We plan to continue to add additional university partners and will roll out
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. Therefore, we
refer to all university partners as "GCE partners" or "our partners" and no
longer differentiate between partners of GCE and partners of Orbis Education; we
will, however, continue to 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.



GCE has a long-term master services agreement with GCU (the "Master Services
Agreement") pursuant to which 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
and hotel. 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. Beginning in March
2020, GCU's programs for its professional studies students and its traditional
ground university students were immediately converted to an online learning
environment and residential students were strongly encouraged to move off
campus. Summer 2020 semester classes were moved to an online environment as well
and most students were given the choice of attending the Fall 2020 semester in
person or completely online. Given GCE's historical experience delivering online
education services and the fact that all of GCU's students and faculty use the
university's online learning management system for at least some of the
coursework, the transition was seamless and thus, the university did not incur a
significant decrease in tuition revenue or significant increase in costs
associated with this transition in March 2020. The following impacts from the
COVID-19 pandemic,

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however, did serve to reduce GCU's non-tuition revenue during 2020 and have or
will reduce GCU's revenue during 2021 and, consequently, the service revenues we
earned under the Master Services Agreement:

Traditional ground university students who elected to move off campus near the

? end of the Spring 2020 semester received partial refunds for dormitory and meal

payments, which reduced GCU's revenue and thus the service revenues earned by

   GCE in the last nine days of March 2020 and the month of April 2020;



Ancillary businesses operated by GCU such as its hotel and merchandise shops

were closed in late March 2020. Most of these businesses re-opened with scaled

? back operations in mid-September 2020, which reduced and will continue to

reduce GCU's revenues and thus the service revenues earned by GCE until these

   businesses are fully reopened;




   Limited residential students remained on campus during the Summer 2020

semester, which reduced GCU's dormitory and ancillary revenues and thus the

? service revenues earned by GCE in 2020. The number of residential students that

remained on campus during the Summer 2021 semester, however, was higher than in

   the Summer of 2019;




   GCU's doctoral students are required to attend two residencies on the

university's campus and at its hotel in Phoenix, Arizona as part of their

dissertation. On an annual basis approximately 3,000 learners attend the

week-long residencies, most of whom have historically attended in the Summer.

Most of the residencies which were scheduled for the last week of March 2020

through the end of July 2020 were cancelled, and the residencies scheduled for

? August 2020 through December 2020 were held at another location with lower than

normal attendance. This reduced GCU's revenues including at its hotel, and thus

reduced service revenues earned by GCE until residencies returned to normal

attendance. In the first quarter of 2021, doctoral residencies returned to the

university's campus and its hotel, although at lower than normal attendance

   rates; attendance at doctoral residencies in the second quarter of 2021
   returned to 2019 levels;



GCU shifted its start date for the Fall 2020 semester for its traditional

ground students from August 24, 2020 to September 8, 2020, which had the effect

? of shifting tuition revenue for all GCU traditional students and certain

ancillary revenue for residential students, from the third quarter of 2020 to

the fourth quarter of 2020. This later start date for the Fall semester was

   retained in 2021 as the semester began on September 7, 2021;



GCU shifted its move-in date for its residential students in the Fall 2020

semester to the week of September 21, 2020, which reduced housing revenue and

certain ancillary revenue for residential students by three weeks. In addition,

? approximately 4,900 of GCU's traditional campus students elected to attend the

Fall 2020 semester entirely in the online modality. Residential enrollment for

the Fall 2020 semester was approximately 11,500 whereas residential bed

capacity is approximately 14,500. This reduction in residential students caused

a reduction in GCU's revenue and thus the service revenues earned by GCE;

The first week of the Spring 2021 semester was completed in an online modality

for GCU's traditional students 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. These changes had the effect of

reducing GCU's dormitory and ancillary revenues in the Spring of 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


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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. We anticipate that some or

all of these trends will continue through the rest of 2021 and thus the year

over year online growth rate might continue to decline. 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;



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 has long-term services agreements with numerous other university
partners across the United States. The majority of these other university
partners' students are studying in the Accelerated Bachelor of Science in
Nursing program which is offered in a 12-16 month format in three or four
academic semesters. The Spring, Summer and Fall 2020 and Spring and Summer 2021
semesters were completed without interruption and each university partner has
started its Fall 2021 semester. Some students who were scheduled to start their
programs in the Summer 2020 semester delayed their start until the Fall 2020
semester, which resulted in lower enrollments and revenues in the Summer 2020
semester than was planned. In a number of locations, the demand to start in the
Fall 2020 semester was greater than initially planned but a number of our
university or healthcare partners chose not to increase the Fall 2020 cohort
size to compensate for the Summer 2020 start shortfall due to concerns about
clinical availability. The Fall 2020 enrollment was only slightly lower than our
original expectations as the Summer 2020 new start shortfall was offset by
higher retention rates and slightly higher than expected Fall 2020 new starts.
Beginning with the Summer 2021 semester and continuing into the Fall 2021
semester, we have 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.



No other changes are currently anticipated with our other university partners
related to the Fall 2021 semester 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
prior to the end of the Fall 2021 semester, or take some other action that
adversely impacted program enrollment, such an event would reduce the service
revenues earned by GCE.



The COVID-19 outbreak also presents operational challenges to GCE as a large
percentage of our workforce is currently working 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 2020 Form 10-K for the
fiscal year ended December 31, 2020. During the nine months ended September 30,
2021, there were no significant changes in our critical accounting policies.

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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          Nine Months Ended
                                                      September 30,               September 30,
                                                    2021          2020          2021         2020
Costs and expenses
Technology and academic services                      17.2 %        15.5 %        15.7 %       13.9 %
Counseling services and support                       30.1          29.3   
      28.6         29.1
Marketing and communication                           22.8          21.3          21.7         20.8
General and administrative                             7.0           7.1           5.1          5.5





Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020


Service revenue. Our service revenue for the three months ended September 30,
2021 was $206.8 million, an increase of $8.4 million, or 4.2%, as compared to
service revenue of $198.4 million for the three months ended September 30, 2020.
The increase year over year in service revenue was primarily due to year over
year increases in university partner enrollments and in revenue per student.
Partner enrollments totaled 118,832 at September 30, 2021 as compared to 117,772
at September 30, 2020. University partner enrollments at our off-campus
classroom and laboratory sites were 5,652, an increase of 12.1% over enrollments
at September 30, 2020, which includes 286 GCU students at September 30, 2021.
Enrollments at GCU grew to 113,466 at September 30, 2021, an increase of 0.6%
over enrollments at September 30, 2020. Enrollments for GCU ground traditional
students were 23,628 at September 30, 2021 up from 22,363 at September 30, 2020
primarily due to a 9.5% increase in traditional ground students between years.
GCU's ground traditional students residing on campus in GCU's residence halls
increased from 11,441 in the Fall of 2020 to 15,570 in the Fall of 2021, an
increase of 36.1%, representing approximately 65.9% of GCU's ground traditional
students. GCU had a decline in its working adult students (online and
professional studies) between September 30, 2020 and September 30, 2021 (see -
Impact of COVID-19 above). 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 2021 as compared to the
prior year period (see - Impact of COVID-19 above) and the growth in the
enrollment for students at off-campus classroom and laboratory sites. Service
revenue per student for 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 are studying in the Accelerated Bachelor of Science in Nursing
program and take more credits on average per semester. The ten new off-campus
classroom and laboratory sites opened in the past 15 months, partially offset by
the non-renewal of the contract with a university partner with two sites in the
first quarter of 2021 increased the total number of these sites to 31.

Technology and academic services. Our technology and academic services expenses
for the three months ended September 30, 2021 were $35.6 million, an increase of
$4.8 million, or 15.7%, as compared to technology and academic services expenses
of $30.8 million for the three months ended September 30, 2020. This increase
was primarily due to increases in employee compensation and related expenses
including share-based compensation and in occupancy and depreciation including
lease expenses of $4.6 million and $0.4 million, respectively, partially offset
by a slight decrease in technology and academic supply costs of $0.2 million.
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 net revenue increased 1.7% to 17.2% for the
three months ended September 30, 2021, from 15.5% for the three months ended
September 30, 2020. 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 Summer and Fall 2021 semester
ancillary revenues at GCU. GCE has 31 off-campus classroom and laboratory sites
open as of

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September 30, 2021. Additionally, in the third quarter of 2021 we incurred costs for a number of locations that we anticipate will open in the next 12 months.


Counseling services and support. Our counseling services and support expenses
for the three months ended September 30, 2021 were $62.2 million, an increase of
$4.0 million, or 6.9%, as compared to counseling services and support expenses
of $58.2 million for the three months ended September 30, 2020. This increase
was primarily attributable to increases in employee compensation and related
expenses including share-based compensation and increases in other counseling
services and support expenses of $2.7 million and $1.4 million, respectively,
partially offset by a slight decrease in occupancy and depreciation expenses of
$0.1 million. The increases in employee compensation and related expenses were
primarily due to increased headcount to support our 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 open year over year. The increase in other counseling services and support
expenses is primarily the result of increased travel costs to service our 27
university partners as compared to the COVID-19 impacted third quarter of 2020,
during which all non-essential travel ceased. Occupancy and depreciation costs
declined slightly as a large percentage of our workforce continues to work
remotely. Our counseling services and support expenses as a percentage of net
revenue increased 0.8% to 30.1% for the three months ended September 30, 2021,
from 29.3% for the three months ended September 30, 2020 primarily due to an
increase in benefit costs and the return to historical levels for travel costs,
partially offset by our ability to leverage our counseling services and support
expense across an increasing revenue base primarily due to the increased Summer
and Fall 2021 semester ancillary revenues at GCU.

Marketing and communication. Our marketing and communication expenses for the
three months ended September 30, 2021 were $47.1 million, an increase of $4.9
million, or 11.5%, as compared to marketing and communication expenses of $42.2
million for the three months ended September 30, 2020. 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 $4.3 million, increased other
communications expenses of $0.3 million, increased employee compensation,
including share-based compensation, and related expenses of $0.2 million and
increased occupancy and depreciation costs of $0.1 million. Our marketing and
communication expenses as a percentage of net revenue increased by 1.5% to 22.8%
for the three months ended September 30, 2021, from 21.3% for the three months
ended September 30, 2020, primarily due to the increase in the number of new
off-campus classroom and laboratory sites opened in the past 15 months 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, 2021 were $14.4 million, an increase of $0.4
million, or 3.0%, as compared to general and administrative expenses of $14.0
million for the three months ended September 30, 2020. This increase was
primarily attributable to an increase in professional fees of $1.0 million and
an increase in occupancy and depreciation expense of $0.1 million, partially
offset by decreases in other general and administrative expenses of $0.4 million
and in employee compensation, including share-based compensation, and related
expenses of $0.2 million. The increase in professional fees is primarily due to
increased legal and audit fees between years. The decrease in employee
compensation and related expenses is primarily related to lower headcount at our
office in Indiana as we have transitioned a number of back office functions to
Arizona. Our decrease in other general and administrative expenses is primarily
related to reduced travel costs. Our general and administrative expenses as
a percentage of net revenue decreased by 0.1% to 7.0% for the three months ended
September 30, 2021, from 7.1% for the three months ended September 30, 2020 due
to the cost savings realized by consolidating certain back office functions and
reduced travel costs, our ability to leverage our other general and
administrative expenses across an increasing revenue base primarily due to the
increased Summer and Fall 2021 semester ancillary revenues at GCU.

Amortization of intangible assets. Amortization of intangible assets for the
three months ended September 30, 2021 and 2020 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 from GCU in the initial principal amount of $870.1 million (the "Secured Note") for the three months ended September 30, 2021 was $15.0 million, an increase of


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$0.1 million, as compared to $14.9 million for the three months ended September
30, 2020. The Secured Note bears interest at 6% annually, and GCU makes monthly
interest payments.

Interest expense. Interest expense was $0.7 million for the three months ended
September 30, 2021, a decrease of $0.2 million, as compared to interest expense
of $0.9 million for the three months ended September 30, 2020. The decrease in
interest expense was primarily due to a decline in the average credit facility
outstanding balance between periods due to paydowns of the credit facility
during the past twelve months and a slight decline in the average interest rate
between periods.

Investment interest and other. Investment interest and other for the three months ended September 30, 2021 and 2020 was $0.2 million for both periods.

Income tax expense. Income tax expense for the three months ended September 30,
2021 was $12.2 million, a decrease of $0.9 million, or 7.4%, as compared to
income tax expense of $13.1 million for the three months ended September 30,
2020. This decrease was the result of a decrease in our taxable income partially
offset by a slight increase in our effective tax rate between periods. Our
effective tax rate was 20.3% during the third quarter of 2021 compared to 20.2%
during the third quarter of 2020.



Net income. Our net income for the three months ended September 30, 2021 was
$47.7 million, a decrease of $4.3 million, or 8.4%, as compared to $52.0 million
for the three months ended September 30, 2020, due to the factors discussed
above.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020


Service revenue. Our service revenue for the nine months ended September 30,
2021 was $645.2 million, an increase of $39.4 million, or 6.5%, as compared to
service revenue of $605.8 million for the nine months ended September 30, 2020.
The increase year over year in service revenue was primarily due to year over
year increases in university partner enrollments and in revenue per student.
Partner enrollments totaled 118,832 at September 30, 2021 as compared to 117,772
at September 30, 2020. University partner enrollments at our off-campus
classroom and laboratory sites were 5,652, an increase of 12.1% over enrollments
at September 30, 2020, which includes 286 GCU students at September 30, 2021.
Enrollments at GCU grew to 113,466 at September 30, 2021, an increase of 0.6%
over enrollments at September 30, 2020. Enrollments for GCU ground traditional
students were 23,628 at September 30, 2021 up from 22,363 at September 30, 2020
primarily due to a 9.5% increase in traditional ground students between years.
GCU's ground traditional students residing on campus in GCU's residence halls
increased from 11,441 in the Fall of 2020 to 15,570 in the Fall of 2021, an
increase of 36.1%, representing approximately 65.9% of GCU's ground traditional
students. GCU had a decline in its working adult students (online and
professional studies) between September 30, 2020 to September 30, 2021 (see -
Impact of COVID-19 above). 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 nine months ended September 30, 2021 as
compared to the nine months ended September 30, 2020 (see - Impact of COVID-19
above) and the growth in the enrollment for students at off-campus classroom and
laboratory sites. Service revenue per student for 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 are studying in the Accelerated Bachelor
of Science in Nursing program and take more credits on average per semester. The
ten new off-campus classroom and laboratory sites opened in the past 15 months,
partially offset by the non-renewal of the contract with a university partner
with two sites in the first quarter of 2021 increased the total number of these
sites to 31. In addition, we generated slightly more revenues in 2020 as
compared to the same period in 2021 due to 2020 being a Leap Year and thus
providing an extra day of revenue in 2020 as compared to 2021.

Technology and academic services. Our technology and academic services expenses
for the nine months ended September 30, 2021 were $101.3 million, an increase of
$17.1 million, or 20.3%, as compared to technology and academic services
expenses of $84.2 million for the nine months ended September 30, 2020. This
increase was primarily due to increases in employee compensation and related
expenses including share-based compensation, in occupancy and depreciation
including lease expenses, and in technology and academic supply costs of $13.4
million, $3.2 million and

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$0.5 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 net revenue
increased 1.8% to 15.7% for the nine months ended September 30, 2021, from 13.9%
for the nine months ended September 30, 2020. 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 increased Spring,
Summer and Fall semester ancillary revenues at GCU. GCE has 31 off-campus
classroom and laboratory sites open as of September 30, 2021. Additionally, in
the third quarter of 2021 we incurred costs for a number of locations that we
anticipate will open in the next twelve months.

Counseling services and support. Our counseling services and support expenses
for the nine months ended September 30, 2021 were $184.4 million, an increase of
$8.4 million, or 4.7%, as compared to counseling services and support expenses
of $176.0 million for the nine months ended September 30, 2020. This increase
was primarily attributable to increases in employee compensation and related
expenses including share-based compensation and increase in other counseling
services and support expenses of $7.1 million and $1.3 million, respectively.
The increases in employee compensation and related expenses were primarily due
to increased headcount to support our 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 open year
over year. The increase in other counseling services and support expenses is
primarily the result of increased travel costs to service our 27 university
partners. All non-essential travel ceased when the COVID-19 national emergency
was announced in mid-March 2020. Travel costs remained low through the rest of
2020 and the first quarter of 2021 but returned to historical levels in the
second and third quarters of 2021. Our counseling services and support expenses
as a percentage of net revenue decreased 0.5% to 28.6% for the nine months ended
September 30, 2021, from 29.1% for the nine months ended September 30, 2020
primarily due to our ability to leverage our counseling services and support
expense across an increasing revenue base primarily due to the increased Spring,
Summer and Fall 2021 semester ancillary revenues at GCU.

Marketing and communication. Our marketing and communication expenses for the
nine months ended September 30, 2021 were $140.3 million, an increase of $14.3
million, or 11.3%, as compared to marketing and communication expenses of $126.0
million for the nine months ended September 30, 2020. 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 $12.9 million, increased employee
compensation, including share-based compensation, and related expenses of $0.7
million and increased other communications expenses of $0.7 million. Our
marketing and communication expenses as a percentage of net revenue increased by
0.9% to 21.7% for the nine months ended September 30, 2021, from 20.8% for the
nine months ended September 30, 2020, primarily due to the increase in the
number of new off-campus classroom and laboratory sites opened in the past 15
months and sites planned for opening in the next twelve months.

General and administrative. Our general and administrative expenses for the
nine months ended September 30, 2021 and 2020 were $33.1 million for both
periods. The decreases in employee compensation, including share-based
compensation, and related expenses and in other general and administrative
expenses of $0.9 million and $0.9 million, respectively, were offset by an
increase in professional fees of $1.8 million. The decrease in employee
compensation and related expenses is primarily related to lower headcount at our
office in Indiana as we have transitioned a number of back office functions to
Arizona. Our decrease in other general and administrative expenses is primarily
related to reduced travel costs. 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 net revenue decreased by 0.4% to 5.1%
for the nine months ended September 30, 2021, from 5.5% for the nine months
ended September 30, 2020 due to the cost savings realized by consolidating
certain back office functions, reduced travel costs, our ability to leverage our
other general and administrative expenses across an increasing revenue base
primarily due to the increased Spring, Summer and Fall 2021 semester ancillary
revenues at GCU.

Amortization of intangible assets. Amortization of intangible assets for the nine months ended September 30, 2021 and 2020 were $6.3 million for both periods. As a result of the acquisition of our wholly owned subsidiary, Orbis


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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
nine months ended September 30, 2021 was $44.4 million, an increase of $0.1
million, as compared to $44.3 million for the nine months ended September 30,
2020. The Secured Note bears interest at 6% annually, and GCU makes monthly
interest payments.

Interest expense. Interest expense was $2.3 million for the nine months ended
September 30, 2021, a decrease of $1.2 million, as compared to interest expense
of $3.5 million for the nine months ended September 30, 2020. The decrease in
interest expense was primarily due to a decline in the average credit facility
outstanding balance between periods due to paydowns of the credit facility
during the past twelve months and an average interest rate reduction of
approximately 68 basis points from the first nine months of 2020 to the first
nine months of 2021 partially offset by 2020 being a Leap Year with one
additional day of interest.

Investment interest and other. Investment interest and other for the nine months
ended September 30, 2021 was $0.6 million, a decrease of $0.2 million, as
compared to $0.8 million in the nine months ended September 30, 2020. This
decrease was primarily attributable to a decline in interest income on excess
cash due to lower interest rates and a lower average investment balance.

Income tax expense. Income tax expense for the nine months ended September 30,
2021 was $47.2 million, a decrease of $4.1 million, or 8.0%, as compared to
income tax expense of $51.3 million for the nine months ended September 30,
2020. This decrease was the result of a decrease in our effective tax rate
between periods. Our effective tax rate was 21.2% during the nine months ended
September 30, 2021 compared to 23.1% during the nine months ended September 30,
2020. In the nine months ended September 30, 2021, the effective tax rate was
impacted by an increase in excess tax benefits, which increased to $4.4 million
in the nine months ended September 30, 2021 as compared to $0.7 million in the
same period in 2020 due to a higher stock price and higher stock option
exercises in the first nine months of 2021. The inclusion of excess tax benefits
and deficiencies as a component of our income tax expense will increase
volatility within our provision for income taxes as the amount of excess tax
benefits or deficiencies from share-based compensation awards are dependent on
our stock price at the date the restricted awards vest, our stock price on the
date an option is exercised, and the quantity of options exercised. Our
restricted stock vests in March each year so the favorable benefit will
primarily impact the first quarter each year. Also, the lower effective tax rate
was impacted due to favorable adjustments as a result of the completion of
several state audits.



Net income. Our net income for the nine months ended September 30, 2021 was $175.2 million, an increase of $4.8 million, or 2.8%, as compared to $170.4 million for the nine months ended September 30, 2020, due to the factors discussed above.

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.

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Liquidity and Capital Resources

Liquidity. Our unrestricted cash and cash equivalents and investments were $61.0 million at September 30, 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 and our revolving line of credit, will provide adequate funds
for ongoing operations, planned capital expenditures, and working capital
requirements for at least the next 24 months.

Arrangements with GCU


In conjunction with the Asset Purchase Agreement with GCU, we received a Secured
Note as consideration for the transferred assets (the "Transferred Assets"). The
Secured Note contains customary commercial credit terms, including affirmative
and negative covenants applicable to GCU, and provides that the Secured
Note bears interest at an annual rate of 6.0%, has a maturity date of June 30,
2025, and is secured by all of the assets of GCU. The Secured Note provides for
GCU to make interest only payments during the term, with all principal and
accrued and unpaid interest due at maturity, and also provides that we may loan
additional amounts to GCU to fund approved capital expenditures. GCU has been
funding its capital expenditures using its own funds except that, in both June
2021 and 2020 GCU requested additional loan amounts that approximated its
previous capital expenditures during those fiscal years. In both instances GCU
repaid the amounts borrowed in the following month. As of September 30, 2021,
the Company had loaned an additional $99,815 to GCU, net of repayments.

On October 28, 2021, the Company received formal notice from GCU of GCU's entry
into a refinancing transaction (the "Refinancing") the proceeds of which will be
used to repay $500.0 million of the outstanding balance of the Secured Note on
October 29, 2021. In connection with the Refinancing and related partial
repayment of the Secured Note, the Company entered into a Modification of Credit
Agreement with GCU (the "Modification"). The Modification provides that, in
exchange for the partial repayment, (i) the Company will release its first
priority lien on GCU's assets, (ii) GCU will grant a first priority lien to a
financial institution as master trustee under a master trust indenture (the
"Master Trust Indenture"), and (iii) the Company will receive an obligation from
the master trust evidencing the remaining balance of the Secured Note due to the
Company (the "Trust Obligation"). The Trust Obligation continues to bear
interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is
secured on an equal and proportional basis with all other obligations issued
under the Master Trust Indenture by all of the assets of GCU.

Termination of GCE Credit Agreement


The Company is a party to that certain Amended and Restated Credit Agreement,
dated as of January 22, 2019, among the Company, Orbis Education Services, LLC,
a wholly owned subsidiary of the Company, as guarantor, Bank of America, N.A. as
administrative agent, swing line lender and letter of credit issuers, and the
other lenders names therein (as amended, the "GCE Credit Agreement"). Upon its
receipt of the proceeds from the Refinancing in partial payment of the Secured
Note, the Company repaid all amounts due under the outstanding term loan and
revolving credit facilities of, and terminated, the GCE Credit Agreement and
plans to use the balance of such proceeds for general corporate purposes,
including repurchases of shares under the Company's share repurchase program.

Share Repurchase Program


In January 2021 and July 2021, our Board of Directors increased the
authorization under its existing stock repurchase program by $100.0 million and
$970.0 million, respectively, reflecting an aggregate authorization for share
repurchases since the initiation of the program of $1,470.0 million. The current
expiration date on the repurchase authorization by our Board of Directors is
December 31, 2021. Repurchases occur at the Company's discretion and the Company
may modify, suspend or discontinue the repurchase authorization at any time.

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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.

On March 10, 2021, the Company entered into an accelerated share repurchase
("ASR") agreement with Morgan Stanley & Co. LLC ("Morgan Stanley") to repurchase
up to $35.0 million of its outstanding shares of common stock as part of the
Company's share repurchase program. Under the ASR agreement, the Company
received initial delivery of approximately 275,889 shares of common stock,
representing approximately 80% of the number of shares of common stock initially
underlying the ASR agreement based on the closing price of the common stock of
$101.49, on March 9, 2021. The total number of shares that the Company
repurchased under the ASR program was based on the volume-weighted average price
of the common stock during the term of the ASR agreement, less a discount, and
was subject to potential adjustments pursuant to the terms and conditions of the
ASR agreement. The final settlement of the share repurchases under the ASR
agreement was completed on May 4, 2021 with additional delivery of 45,914 shares
of common stock. The ASR agreement resulted in a total of 321,803 shares
repurchased at an average cost of $108.76.

On May 14, 2021, the Company entered into an ASR agreement with Morgan Stanley
to repurchase up to $50.0 million of its outstanding shares of common stock as
part of the Company's share repurchase program. Under the ASR agreement, the
Company received initial delivery on May 17, 2021 of approximately 418,279
shares of common stock, representing approximately 80% of the number of shares
of common stock initially underlying the ASR agreement based on the closing
price of the common stock of $95.63, on May 14, 2021. The total number of shares
that the Company will repurchase under the ASR program will be based on the
volume-weighted average price of the common stock during the term of the ASR
agreement, less a discount, and subject to potential adjustments pursuant to the
terms and conditions of the ASR agreement. The final settlement of the share
repurchases under the ASR agreement was completed on August 13, 2021 with
additional delivery of 139,270 shares of common stock. The ASR agreement
resulted in a total of 557,549 shares repurchased at an average cost of $89.68.

We repurchased 2,324,316 shares of common stock in the three months ended September 30, 2021, including the shares delivered during the quarter as part of the ASR transactions discussed above. At September 30, 2021, there remains $864.1 million available under our share repurchase authorization.

Cash Flows


Operating Activities. Net cash provided by operating activities for the nine
months ended September 30, 2021 was $208.9 million as compared to $180.1 million
for the nine months ended September 30, 2020. The increase in cash generated
from operating activities between the nine months ended September 30, 2020 and
the nine months ended September 30, 2021 was primarily due to changes between
years in the working capital balances, primarily accounts payable and accounts
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.

Investing Activities. Net cash used in investing activities was $11.3 million
and $13.7 million for the nine months ended September 30, 2021 and 2020,
respectively. The net cash used in investing activities in the nine months ended
September 30, 2021 consisted of capital expenditures of $21.4 million and
proceeds from investments, net of purchases of investments of $10.5 million.
Funding to GCU during the first nine months of 2021 totaled $190.0 million,
which was repaid in July 2021. During the nine months ended September 30, 2020,
we paid $22.2 million for capital expenditures and received proceeds from
investments of $8.7 million. Funding to GCU during the first nine months of 2020
totaled $75.0 million, which was repaid in July 2020. During the nine-month
period for 2021 and 2020, capital expenditures primarily consisted of leasehold
improvements and equipment for new university partner locations, as well as
purchases of computer equipment, other internal use software projects and
furniture and equipment to support our increasing employee headcount. The
increase in capital expenditures between periods is primarily due to the
increase in the number of sites opened or those that will be opened during the
next 15 months. We invest approximately $1.5 million in leasehold improvements
and equipment for each off-campus classroom and laboratory site. We have opened
ten off-campus classroom and laboratory sites in the past 15 months. We plan to
open a number of additional sites in the next 15 months.

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Table of Contents


Financing Activities. Net cash used in financing activities was $382.4 million
and $122.0 million for the nine months ended September 30, 2021 and 2020,
respectively. During the nine months ended September 30, 2021, $6.0 million was
used to purchase common shares withheld in lieu of income taxes resulting from
the vesting of restricted share awards, $354.2 million was used to purchase
treasury stock in accordance with the Company's share repurchase program.
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.
During the nine months ended September 30, 2020, $5.0 million was used to
purchase common shares withheld in lieu of income taxes resulting from the
vesting of restricted share awards and $92.3 million was used to purchase
treasury stock in accordance with the Company's share repurchase program.
Principal payments on notes payable and capital leases totaled $24.9 million,
partially offset by proceeds from the exercise of stock options of $0.2 million.

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.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2021 899 M - -
Net income 2021 261 M - -
Net Debt 2021 - - -
P/E ratio 2021 13,8x
Yield 2021 -
Capitalization 3 260 M 3 260 M -
Capi. / Sales 2021 3,62x
Capi. / Sales 2022 3,45x
Nbr of Employees 4 138
Free-Float 77,9%
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Average target price 105,00 $
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Managers and Directors
Brian E. Mueller Chairman, President & Chief Executive Officer
Daniel E. Bachus Chief Financial Officer
Dilek Marsh Senior Vice President
Kathy J. Claypatch Chief Technology Officer
William Stan Meyer Chief Operating Officer