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OFFON

GRAND CANYON EDUCATION, INC.

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

08/05/2021 | 04:23pm EDT

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 June 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, 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, 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:

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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 has

been retained in 2021 as the semester is scheduled to begin 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. There

are currently no plans to have a late move-in date for the Fall 2021 semester

   and the number of students currently scheduled to live on campus is at
   capacity;



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


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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. 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 2021 semesters
were completed without interruption and each university partner has started its
Summer 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.



No 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 six months ended June 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           Six Months Ended
                                                         June 30,                    June 30,
                                                     2021          2020          2021         2020
Costs and expenses
Technology and academic services                       16.7 %        14.6 %        15.0 %       13.1 %
Counseling services and support                        30.2          31.0  
       27.9         28.9
Marketing and communication                            22.6          22.1          21.3         20.6
General and administrative                              4.5           5.1           4.3          4.7





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


Service revenue. Our service revenue for the three months ended June 30, 2021
was $201.5 million, an increase of $15.7 million, or 8.5%, as compared to
service revenue of $185.8 million for the three months ended June 30, 2020. The
increase year over year in service revenue was primarily due to year over year
increases in university partner enrollments of 3.5% and in revenue per student.
Partner enrollments totaled 101,808 at June 30, 2021 as compared to 98,326 at
June 30, 2020. University partner enrollments at our off-campus classroom and
laboratory sites were 4,210, an increase of 13.2% over enrollments at June 30,
2020, which includes 176 GCU students at June 30, 2021. Enrollments at GCU grew
to 97,774 at June 30, 2021, an increase of 3.3% over enrollments at June 30,
2020. GCU enrollment declines between March 31 and June 30 of each year as
ground enrollment at GCU at June 30 of each year only includes traditional-aged
students taking Summer school classes, which is a small percentage of GCU's
traditional-aged student body. The Spring semester for GCU's traditional-aged
student body ends near the end of April each year. GCU also had a decline in the
year over year growth rate of its online students between March 31, 2021 to June
30, 2021 (see - Impact of COVID-19 above). The increase in revenue per student
is primarily due to the service revenue impact of the increased room, board, fee
and other ancillary revenues at GCU in the second 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. These
increases were partially offset by a one-day shift in timing for the Spring
campus semester resulting in one day moving into the first quarter of 2021 from
the second quarter of 2021. 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 twelve 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 as compared to 23 at June 30, 2020.

Technology and academic services. Our technology and academic services expenses
for the three months ended June 30, 2021 were $33.7 million, an increase of $6.5
million, or 24.0%, as compared to technology and academic services expenses of
$27.2 million for the three months ended June 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 $4.6 million,
$1.4 million and $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 2.1% to 16.7% for the three months ended
June 30, 2021, from 14.6% for the three months ended June 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 Spring and Summer 2021 semester ancillary revenues at GCU. GCE has
31 off-campus classroom and laboratory sites open as of June 30, 2021 as
compared to the

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23 sites that were open as of June 30, 2020. Additionally, in the second quarter
of 2021 we incurred costs for a number of locations that we anticipate will open
in the next 15 months.

Counseling services and support. Our counseling services and support expenses
for the three months ended June 30, 2021 were $60.9 million, an increase of $3.3
million, or 5.8%, as compared to counseling services and support expenses of
$57.6 million for the three months ended June 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 $1.8 million and $1.7 million, respectively,
partially offset by a slight decrease in occupancy and depreciation expenses 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 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 second 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 decreased 0.8% to 30.2% for the three months ended June 30, 2021, from
31.0% for the three months ended June 30, 2020 primarily due to our ability to
leverage our counseling services and support expense across an increasing
revenue base and the increased Spring and Summer 2021 semester ancillary
revenues at GCU.

Marketing and communication. Our marketing and communication expenses for the
three months ended June 30, 2021 were $45.4 million, an increase of $4.3
million, or 10.6%, as compared to marketing and communication expenses of $41.1
million for the three months ended June 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 $3.9 million, increased other communications
expenses of $0.3 million and increased employee compensation, including
share-based compensation, and related expenses of $0.1 million. Our marketing
and communication expenses as a percentage of net revenue increased by 0.5% to
22.6% for the three months ended June 30, 2021, from 22.1% for the three months
ended June 30, 2020, primarily due to the increase in the number of new
off-campus classroom and laboratory sites opened since June 30, 2020 and sites
planned to open in the next 15 months, partially offset by our ability to
leverage our marketing and communication expenses across an increasing revenue
base and the increased Spring and Summer 2021 semester ancillary revenues at
GCU.

General and administrative. Our general and administrative expenses for the
three months ended June 30, 2021 were $9.1 million, a decrease of $0.4 million,
or 4.4%, as compared to general and administrative expenses of $9.5 million for
the three months ended June 30, 2020. This decrease was primarily attributable
to a decrease in employee compensation, including share-based compensation, and
related expenses of $0.4 million and a decrease in other general and
administrative expenses of $0.3 million, partially offset by an in increase in
professional fees of $0.3 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. Our general and administrative expenses as a percentage
of net revenue decreased by 0.6% to 4.5% for the three months ended June 30,
2021, from 5.1% for the three months ended June 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 and the increased Spring and Summer 2021 semester
ancillary revenues at GCU.

Amortization of intangible assets. Amortization of intangible assets for the
three months ended June 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 June 30, 2021 was $14.8 million, an increase of $0.1 million,
as compared to $14.7 million for the three months ended June 30, 2020. The
Secured Note bears interest at 6% annually, and GCU makes monthly interest
payments.

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Interest expense. Interest expense was $0.8 million for the three months ended
June 30, 2021, a decrease of $0.3 million, as compared to interest expense of
$1.1 million for the three months ended June 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 42 basis points from the second quarter of 2020 to the second
quarter of 2021.

Investment interest and other. Investment interest and other for the
three months ended June 30, 2021 was $0.2 million, a decrease of $0.2 million,
as compared to $0.4 million in the three months ended June 30, 2020. This
decrease was primarily attributable to a decline in interest income on excess
cash due to lower interest rates.

Income tax expense. Income tax expense for the three months ended June 30, 2021
was $15.0 million, a decrease of $0.3 million, or 2.0%, as compared to income
tax expense of $15.3 million for the three months ended June 30, 2020. This
decrease was the result of a decrease in our effective tax rate between periods
partially offset by higher taxable income. The lower effective tax rate was
primarily due to favorable adjustments as a result of the completion of several
state audits. Our effective tax rate was 23.3% during the second quarter of 2021
compared to 24.6% during the second quarter of 2020.



Net income. Our net income for the three months ended June 30, 2021 was $49.5
million, an increase of $2.5 million, or 5.2%, as compared to $47.0 million for
the three months ended June 30, 2020, due to the factors discussed above.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Service revenue. Our service revenue for the six months ended June 30, 2021 was
$438.4 million, an increase of $31.0 million, or 7.6%, as compared to service
revenue of $407.4 million for the six months ended June 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 101,808 at June 30, 2021 as compared to 98,326 at June 30,
2020. University partner enrollments at our off-campus classroom and laboratory
sites were 4,210, an increase of 13.2% over enrollments at June 30, 2020, which
includes 176 GCU students at June 30, 2021. Enrollments at GCU grew to 97,774 at
June 30, 2021, an increase of 3.3% over enrollments at June 30, 2020. GCU
enrollment declines between March 31 and June 30 of each year as ground
enrollment at GCU at June 30 of each year only includes traditional-aged
students taking Summer school classes, which is a small percentage of GCU's
traditional-aged student body and professional studies students. The Spring
semester for GCU's traditional-aged student body ends near the end of April each
year. GCU also had a decline in the year over year growth rate of its online
students between March 31, 2021 to June 30, 2021 (see - Impact of COVID-19
above). The increase in revenue per student is primarily due to the service
revenue impact of the increased room, board, fee and other ancillary revenues at
GCU in the six months ended June 30, 2021 as compared to the six months ended
June 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 twelve 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 as
compared to 23 at June 30, 2020. 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 six months ended June 30, 2021 were $65.7 million, an increase of $12.3
million, or 23.0%, as compared to technology and academic services expenses of
$53.4 million for the six months ended June 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 $8.9 million,
$2.8 million and $0.6 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

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off-campus classroom and laboratory sites year over year. Our technology and
academic services expenses as a percentage of net revenue increased 1.9% to
15.0% for the six months ended June 30, 2021, from 13.1% for the six months
ended June 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 and Summer semester ancillary
revenues at GCU. GCE has 31 off-campus classroom and laboratory sites open as of
June 30, 2021 as compared to the 23 sites that were open as of June 30, 2020.
Additionally, in the second quarter of 2021 we incurred costs for a number of
locations that we anticipate will open in the next 15 months.

Counseling services and support. Our counseling services and support expenses
for the six months ended June 30, 2021 were $122.2 million, an increase of $4.4
million, or 3.7%, as compared to counseling services and support expenses of
$117.8 million for the six months ended June 30, 2020. This increase was
primarily attributable to increases in employee compensation and related
expenses including share-based compensation of $4.5 million, partially offset by
a decrease in other counseling services and support 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 decrease in other counseling services and support expenses is
primarily the result of decreased 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 quarter of 2021. Our counseling services and support expenses as
a percentage of net revenue decreased 1.0% to 27.9% for the six months ended
June 30, 2021, from 28.9% for the six months ended June 30, 2020 primarily due
to our ability to leverage our counseling services and support expense across an
increasing revenue base and the increased Spring and Summer 2021 semester
ancillary revenues at GCU.

Marketing and communication. Our marketing and communication expenses for the
six months ended June 30, 2021 were $93.2 million, an increase of $9.4 million,
or 11.2%, as compared to marketing and communication expenses of $83.8 million
for the six months ended June 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 $8.6 million, increased employee compensation,
including share-based compensation, and related expenses of $0.3 million and
increased other communications expenses of $0.5 million. Our marketing and
communication expenses as a percentage of net revenue increased by 0.7% to 21.3%
for the six months ended June 30, 2021, from 20.6% for the six months ended June
30, 2020, primarily due to the increase in the number of new off-campus
classroom and laboratory sites opened since June 30, 2020 and sites planned for
opening in the next 15 months partially offset by increased Spring and Summer
2021 semester ancillary revenues at GCU.

General and administrative. Our general and administrative expenses for the
six months ended June 30, 2021 were $18.7 million, a decrease of $0.4 million,
or 2.1%, as compared to general and administrative expenses of $19.1 million for
the six months ended June 30, 2020. This decrease was primarily attributable to
a decrease in employee compensation, including share-based compensation, and
related expenses and a decrease in other general and administrative expenses of
$0.6 million and $0.6 million, respectively, partially offset by an increase in
professional fees of $0.8 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. Our general and administrative expenses as a percentage
of net revenue decreased by 0.4% to 4.3% for the six months ended June 30, 2021,
from 4.7% for the six months ended June 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 and the increased Spring and Summer 2021 semester
ancillary revenues at GCU.

Amortization of intangible assets. Amortization of intangible assets for the
six months ended June 30, 2021 and 2020 were $4.2 million for both periods. As a
result of the acquisition of our wholly owned subsidiary, Orbis Education,
certain identifiable intangible assets were created (primarily customer
relationships) that will be amortized over their expected lives.

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Interest income on Secured Note. Interest income on the Secured Note for the
six months ended June 30, 2021 was $29.3 million, a decrease of $0.1 million, as
compared to $29.4 million for the six months ended June 30, 2020. The Secured
Note bears interest at 6% annually, and GCU makes monthly interest payments. The
decrease from the prior year was primarily due to 2020 being a Leap Year with
one additional day of interest.

Interest expense. Interest expense was $1.6 million for the six months ended
June 30, 2021, a decrease of $1.0 million, as compared to interest expense of
$2.6 million for the six months ended June 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 99 basis points from the first half of 2020 to the first half 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 six months
ended June 30, 2021 was $0.4 million, a decrease of $0.2 million, as compared to
$0.6 million in the six months ended June 30, 2020. This decrease was primarily
attributable to a decline in interest income on excess cash due to lower
interest rates.

Income tax expense. Income tax expense for the six months ended June 30, 2021
was $35.0 million, a decrease of $3.1 million, or 8.2%, as compared to income
tax expense of $38.1 million for the six months ended June 30, 2020. This
decrease was the result of a decrease in our effective tax rate between periods.
Our effective tax rate was 21.5% during the six months ended June 30, 2021
compared to 24.4% during the six months ended June 30, 2020. In the first half
of 2021, the effective tax rate was impacted by an increase in excess tax
benefits, which increased to $4.4 million in the six months ended June 30, 2021
as compared to $0.6 million in the same period in 2020 due to a higher stock
price and higher stock option exercises in the first half 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 six months ended June 30, 2021 was $127.6
million, an increase of $9.2 million, or 7.8%, as compared to $118.4 million for
the six months ended June 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.

Liquidity and Capital Resources

Liquidity. Our unrestricted cash and cash equivalents and investments were $113.9 million at June 30, 2021. Our credit facility had an available line of credit of $115.0 million as of June 30, 2021.


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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 June 30, 2021, the
Company had loaned an additional $289,815 to GCU, net of repayments, including
$190.0 million in June 2021. The $190.0 million borrowed in June 2021 was repaid
in July 2021.

GCU has engaged a firm to assist it in refinancing the Secured Note. If GCU is
successful in refinancing all or part of the Secured Note it would eliminate or
reduce the interest income earned by us. It is currently our intention that the
proceeds received on a refinancing would be used to repurchase our common stock,
paydown our existing debt, or for other general corporate purposes. We can
provide no assurance that GCU will be successful in refinancing the Secured
Note.

GCU generally pays for the service fees and its interest due on the Secured Note
for the month in arrears. However, GCU paid its June 2021 estimated service fee
and interest due on the Secured Note at the end of June 2021, thereby reducing
the Secured Note, net and interest receivable on the Secured Note on our
consolidated balance sheet as of June 30, 2021. GCU also paid the June 2020
estimated service fee and interest due on the Secured Note receivable at the end
of June 2020 so the impact on cash flows for the change in accounts receivable
and interest receivable from university partners during the six months ended
June 30, 2021 in comparison to the six months ended June 30, 2020 was not
material. We believe that GCU's cash flows from operations are currently
sufficient to fund all of its capital expenditures without additional loans from
us although it is possible that GCU will continue to borrow from us for short
term cash flow needs.

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.

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

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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 will be completed by September 9, 2021.

We repurchased 981,431 shares of common stock in the three months ended June 30,
2021, including the shares delivered during the quarter as part of the two ASR
transactions discussed above. At June 30, 2021, there remains $96.6 million
available under our share repurchase authorization (which authorization was
increased to $1,066.6 million in July 2021).



Cash Flows

Operating Activities. Net cash provided by operating activities for the six
months ended June 30, 2021 was $210.3 million as compared to $221.1 million for
the six months ended June 30, 2020. The decrease in cash generated from
operating activities between the six months ended June 30, 2020 and the
six months ended June 30, 2021 was primarily due to changes between years in the
working capital balances, primarily income taxes. 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. Our income taxes payable balance increased $32.2 million between
December 31, 2019 and June 30, 2020 as compared to a decrease of $5.4 million
between December 31, 2020 and June 30, 2021 primarily due to the Treasury
Department extending the due date in 2020 of certain estimated tax payments due
to COVID-19 from April 15, 2020 to July 15, 2020. This was partially offset by
an increase in net income between periods.

Investing Activities. Net cash used in investing activities was $240.1 million
and $80.6 million for the six months ended June 30, 2021 and 2020, respectively.
The net cash used in investing activities in the six months ended June 30, 2021
consisted of capital expenditures of $15.8 million and purchases of investments,
net of proceeds from the sale of investments of $34.1 million. Funding to GCU
during the first six months of 2021 totaled $190.0 million, which was repaid in
July 2021. During the six months ended June 30, 2020, we paid $12.2 million for
capital expenditures and received proceeds from investments of $6.8 million.
Funding to GCU during the first six months of 2020 totaled $75.0 million, which
was repaid in July 2020. During the six-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 since June 30, 2020. We plan to open a number of additional sites in the
next 15 months.

Financing Activities. Net cash used in financing activities was $146.6 million
and $90.5 million for the six months ended June 30, 2021 and 2020, respectively.
During the six months ended June 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, $151.7 million was used to purchase treasury stock in
accordance with the Company's share repurchase program, and $10.0 million was
paid to Morgan Stanley under our ASR agreement for shares that will be settled
no later than September 9, 2021. Principal payments on notes payable and capital
leases totaled $16.6 million, partially offset by

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proceeds from the exercise of stock options of $2.7 million and borrowings on
our line of credit of $35.0 million. During the six months ended June 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 $69.0 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 $16.6
million, partially offset by proceeds from the exercise of stock options of $0.1
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.

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Financials (USD)
Sales 2021 904 M - -
Net income 2021 262 M - -
Net Debt 2021 - - -
P/E ratio 2021 15,4x
Yield 2021 -
Capitalization 4 119 M 4 119 M -
Capi. / Sales 2021 4,55x
Capi. / Sales 2022 4,24x
Nbr of Employees 4 138
Free-Float 83,4%
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Technical analysis trends GRAND CANYON EDUCATION, INC.
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Number of Analysts 4
Last Close Price 92,07 $
Average target price 111,25 $
Spread / Average Target 20,8%
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Managers and Directors
Brian E. Mueller Chairman, President & Chief Executive Officer
Daniel E. Bachus Chief Financial Officer
Dilek Marsh Chief Technology Officer
Kathy J. Claypatch Chief Information Officer
William Stan Meyer Chief Operating Officer