Grand Canyon Education Inc.’s (LOPE) second-quarter 2014 earnings of 49 cents a share beat the Zacks Consensus Estimate of 45 cents by 8.9% as well as the company’s expectation of 44 cents by 11.4%. Earnings climbed 16.7% year over year on higher- than-expected enrollment, solid revenue growth and strong operating margins.
Despite the strong quarterly results, share prices slipped almost 3.5%, as the company’s guidance failed to satisfy investors’ appetite. Grand Canyon Education has been surpassing the Zacks Consensus Estimate on both counts over the past two quarters and investors’ expected the company’s guidance to be much higher than the guided range for 2014.
Revenues and Enrollments in Detail
Quarterly revenues of $158.6 million beat the Zacks Consensus Estimate of $156 million by 1.7% as well as the company’s expectation of $155.5 million by 2%. Revenues increased 12.1% from the year-ago levels due to a solid increase in total enrollment.
Total enrollment rose 12.7% from the prior-year quarter to 57,707 students, as both ground enrollment and online enrollment increased in double digits. Total enrollment exceeded the company’s expectation of 56,500 students. Ground enrollment rose 38.7% year over year whereas online enrollment increased 10.8% in the quarter. New enrollment grew in high single digits.
Grand Canyon Education has been consistently witnessing strong enrollment growth on the back of its low tuition cost, full time faculty, small class size and efficient service oriented counseling teams. The company’s career-oriented programs have a steady demand among students.
Grand Canyon Education reported a 15.2% year-over-year increase in graduate degree enrollment to 24,438. Undergraduate enrollment increased 10.9% year over year to 33,269.
However, another education company Strayer Education, Inc. (STRA), which reported in the same week, continued to witness declining total enrollment levels, due to continued unemployment, overall economic downturn and a subsequent decline in student demand.
Costs and Margins
Operating margin increased 160 basis points (bps) to 23.9% due to disciplined cost management and lower bad debt expenses. Operating margin exceeded the company’s expectation of 22.7%
Instructional cost of services of $67.6 million in the second quarter of 2014 increased 9.4% year over year due to an increased number of faculty members to support higher enrollment at the university. As a percentage of revenue, instructional cost of services increased 100 basis points year over year to 42.6%. As a percentage of revenue, bad debt expense of 2.1% declined 110 basis points, owing to an improvement in student quality and process.
The company has updated its guidance in order to incorporate the differences between the start and end date of the spring semester.
For third quarter 2014, management projects net revenue to be $169.0 million, higher than prior expectation of $167.7 million; operating margin of 24.7%, earnings per share of 53 cents, higher than prior expectation of 52 cents; and student count of 67,000.
For fourth quarter 2014, the company expects net revenue of $181.6 million; operating margin of 27.8%, earnings per share of 63 cents and student count of 66,700.
For full-year 2014, the company expects net revenue of $676.6 million compared to $672.2 million expected earlier; operating margin of 25.7% compared to 25.4% guided earlier and earnings per share of $2.21 compared to the prior expectation of $2.15 per share.
Grand Canyon Education has plans to introduce programs on information technology, computer science and worship art in the fall of 2014. The company intends to introduce degree programs in electrical, biomedical and mechanical in 2015.
Grand Canyon Education currently carries a Zacks Rank #3 (Hold).
DeVry Education Group Inc. (DV) is a better-ranked stock in the education industry with a Zacks Rank #1 (Strong Buy). Another higher-ranked company is Capella Education Company (CPLA), carrying a Zacks Rank #2 (Buy).