PART I – FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201%20Financial%20Statements) For the three months ended March 31, 2019, the company reported service revenue of $197.3 million and net income of $73.2 million, reflecting a significant business model change from the prior year's university-related revenue of $275.7 million, with total assets increasing to $1.62 billion due to the Orbis Education acquisition [Nature of Business](index=9&type=section&id=1.%20Nature%20of%20Business) Grand Canyon Education (GCE) transitioned from owning a university to an education services company, expanding partnerships through the acquisition of Orbis Education Services - On July 1, 2018, GCE sold Grand Canyon University and transitioned into an educational services company providing support services to post-secondary institutions[20](index=20&type=chunk) - On January 22, 2019, GCE acquired Orbis Education Services for **$361.2 million** (net of cash acquired), expanding its services to 17 additional university partners focused on healthcare education[21](index=21&type=chunk) - Following the Transaction and Acquisition, GCE provides services to 18 university partners and no longer owns or operates an institution of higher education[22](index=22&type=chunk) [The Transaction](index=9&type=section&id=2.%20The%20Transaction) GCE sold Grand Canyon University assets to a non-profit entity, receiving an $870.1 million Secured Note and entering a long-term master services agreement for 60% of GCU's tuition and fee revenue - As consideration for the sale of university assets, GCE received a Secured Note from GCU with an initial principal of **$870.1 million**, a **6.0%** annual interest rate, and a maturity date of June 30, 2025[23](index=23&type=chunk) - GCE entered into a master services agreement to provide comprehensive support services to GCU in exchange for **60%** of GCU's tuition and fee revenue[23](index=23&type=chunk) [Acquisition](index=11&type=section&id=3.%20Acquisition) GCE acquired Orbis Education for approximately $361.2 million, resulting in significant intangible assets and goodwill, and contributing $17.5 million in revenue and $0.4 million in net income in Q1 2019 - GCE acquired Orbis Education on January 22, 2019, for **$361.2 million**, financed through a new credit agreement (**$191.0 million**) and operating cash (**$171.0 million**)[27](index=27&type=chunk) Orbis Education Purchase Price Allocation (in thousands) | Item | Amount | | :--- | :--- | | Total net asset or liability purchased and assumed | $217,690 | | Purchase price | $365,977 | | **Goodwill** | **$148,287** | | Intangible assets (primarily university partner relationships) | $210,280 | - From the acquisition date to March 31, 2019, Orbis Education contributed **$17,481 thousand** in revenue and **$380 thousand** in net income to GCE's consolidated results[32](index=32&type=chunk) [Summary of Significant Accounting Policies](index=13&type=section&id=4.%20Summary%20of%20Significant%20Accounting%20Policies) The company's accounting policies reflect its new business model, including recognizing service revenue over time, capitalizing content development costs, and adopting the new lease accounting standard - Service revenue commenced on July 1, 2018, and is generated from long-term (**7-15 years**) agreements with university partners, recognized over time as services are provided in exchange for a percentage of tuition and fee revenue[48](index=48&type=chunk)[49](index=49&type=chunk) - The company capitalizes costs to develop and create digital course content for university partners, amortizing these costs on a straight-line basis over the estimated course life, generally **four years**[53](index=53&type=chunk)[54](index=54&type=chunk) - On January 1, 2019, the company adopted the new lease standard (ASU 2016-02), which resulted in recognizing right-of-use (ROU) assets and lease liabilities on the balance sheet, with the Orbis acquisition adding **$13.1 million** in ROU assets and lease liabilities[68](index=68&type=chunk) [Notes Payable and Other Noncurrent Liabilities](index=26&type=section&id=11.%20Notes%20Payable%20and%20Other%20Noncurrent%20Liabilities) GCE entered into a new $325 million credit facility to finance the Orbis acquisition, resulting in total notes payable of $248.4 million as of March 31, 2019, with the company in compliance with all debt covenants - On January 22, 2019, GCE entered into a new **$325 million** credit facility, including a **$243.75 million** term loan and an **$81.25 million** revolver, to fund the Orbis acquisition and repay existing debt[85](index=85&type=chunk) Notes Payable as of March 31, 2019 (in thousands) | Description | Amount | | :--- | :--- | | Note payable (Term Loan) | $242,166 | | Revolving line of credit | $6,250 | | **Total** | **$248,416** | | Less: Current portion | $48,422 | | **Long-term portion** | **$199,994** | [Share-Based Compensation](index=28&type=section&id=13.%20Share-Based%20Compensation) In Q1 2019, GCE granted 149,000 shares of restricted common stock and recorded $2.6 million in share-based compensation expense under its 2017 Equity Incentive Plan - In Q1 2019, the company granted **149,000 shares** of restricted stock and recorded total share-based compensation expense of **$2.6 million**[93](index=93&type=chunk)[96](index=96&type=chunk) Restricted Stock Activity (Q1 2019) | (In thousands of shares) | Total Shares | | :--- | :--- | | Outstanding as of December 31, 2018 | 460 | | Granted | 149 | | Vested | (171) | | Forfeited, canceled or expired | (11) | | **Outstanding as of March 31, 2019** | **427** | [Treasury Stock](index=29&type=section&id=14.%20Treasury%20Stock) The company repurchased 108,000 shares for $10.0 million in Q1 2019 under its $175 million share repurchase program, with $78.1 million remaining available as of March 31, 2019 - During Q1 2019, the company repurchased **108,000 shares** for **$10.0 million** under its authorized plan[97](index=97&type=chunk) - As of March 31, 2019, **$78.1 million** was available for future repurchases under the current authorization, which expires on December 31, 2019[97](index=97&type=chunk) Consolidated Income Statement Highlights (Q1 2019 vs Q1 2018) | (In thousands, except per share data) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | **Service revenue** | **$197,287** | $— | | University related revenue | $— | $275,681 | | **Net revenue** | **$197,287** | **$275,681** | | Operating income | $72,431 | $90,092 | | **Net income** | **$73,243** | **$73,681** | | Diluted income per share | $1.52 | $1.52 | Consolidated Balance Sheet Highlights | (In thousands) | March 31, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $88,467 | $120,346 | | Secured Note receivable | $929,998 | $900,093 | | Goodwill | $151,228 | $2,941 | | **Total assets** | **$1,619,473** | **$1,324,017** | | Total liabilities | $346,600 | $110,420 | | **Total stockholders' equity** | **$1,272,873** | **$1,213,597** | Consolidated Cash Flow Highlights (Q1 2019 vs Q1 2018) | (In thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $76,337 | $119,008 | | Net cash used in investing activities | ($340,852) | ($38,525) | | Net cash provided by (used in) financing activities | $171,269 | ($12,829) | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=Item%202%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the Q1 2019 results to the successful transition to an education services provider and the acquisition of Orbis Education, driving service revenue growth and increased operating expenses to support expanded partnerships, while maintaining strong liquidity - The company transitioned from operating a university to a service provider model on July 1, 2018, and acquired Orbis Education on January 22, 2019, making direct year-over-year comparisons of reported revenue and expenses difficult[107](index=107&type=chunk)[108](index=108&type=chunk) - End-of-period enrollment across all university partners grew **11.3% year-over-year** to **101,679**, including a **7.6% increase at GCU** and the addition of **3,384 students** from Orbis-serviced programs[109](index=109&type=chunk) - On a comparable basis, service revenue grew **19.3% YoY**, driven by the Orbis acquisition and a **7.6% increase in GCU enrollments**, with Orbis partner agreements generating higher revenue per student[114](index=114&type=chunk) - The effective tax rate for Q1 2019 was **13.5%**, down from **18.8% in Q1 2018**, primarily due to a one-time favorable state tax settlement of **$5.9 million**[127](index=127&type=chunk) [Results of Operations](index=34&type=section&id=Results%20of%20Operations) In Q1 2019, service revenue was $197.3 million, with comparable growth of 19.3%, while operating expenses, particularly technology, academic, and marketing, increased significantly due to the Orbis acquisition, and interest expense rose due to new debt Operating Expense Changes (Q1 2019 vs Q1 2018) | Expense Category | Q1 2019 (in millions) | Q1 2018 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Technology and academic services | $19.0 | $10.7 | +78.0% | | Counseling services and support | $53.1 | $50.7 | +4.6% | | Marketing and communication | $35.5 | $28.5 | +24.3% | | General and administrative | $11.5 | $7.4 | +54.9% | - Interest income of **$13.7 million** was generated from the Secured Note received from GCU[124](index=124&type=chunk) - Interest expense increased by **$2.3 million** to **$2.6 million**, primarily due to a **$190.1 million increase** in outstanding debt to finance the Orbis acquisition[125](index=125&type=chunk) [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with $102.7 million in unrestricted cash, having financed the Orbis acquisition through a combination of operating cash and a new $325 million credit facility, and expects to fund future capital expenditures from operations - Financed the **$361.2 million Orbis acquisition** with **$190.1 million** from an increased credit facility and **$171.1 million** of operating cash on hand[131](index=131&type=chunk) - Entered into an amended credit agreement for a **$325.0 million facility**, comprising a **$243.8 million term loan** and an **$81.3 million revolving credit facility**[132](index=132&type=chunk) Contractual Obligations (as of March 31, 2019, in millions) | Obligation | Total | Less than 1 Year | 2-3 Years | 4-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long term notes payable | $248.4 | $48.4 | $96.8 | $103.2 | $0.0 | | Lease liabilities | $13.3 | $1.5 | $4.4 | $3.7 | $3.7 | | Purchase obligations | $11.0 | $7.3 | $3.5 | $0.2 | $0.0 | | **Total** | **$272.7** | **$57.2** | **$104.7** | **$107.1** | **$3.7** | [Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk on variable-rate debt, which is managed using an interest rate corridor instrument, and inflation is not considered to have a material impact - The company manages interest rate risk on its variable-rate debt using an interest rate corridor instrument with a notional amount of **$58.3 million**[145](index=145&type=chunk) - The interest rate corridor hedges risk by setting the company's rate at **1.5%** when the 30-Day LIBOR is between **1.5% and 3.0%**, and if LIBOR exceeds **3.0%**, the company pays the actual rate less **1.5%**[145](index=145&type=chunk) [Controls and Procedures](index=32&type=section&id=Item%204%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[149](index=149&type=chunk) - No material changes to the internal control over financial reporting occurred during the first quarter of 2019[150](index=150&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=33&type=section&id=Item%201%20Legal%20Proceedings) The company reported no legal proceedings during the period - None[151](index=151&type=chunk) [Risk Factors](index=33&type=section&id=Item%201A%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[152](index=152&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=33&type=section&id=Item%202%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 107,527 shares for approximately $10.0 million in Q1 2019 under its $175.0 million share repurchase program, with $78.1 million remaining available Share Repurchases in Q1 2019 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Purchased as Part of Program | Maximum Dollar Value Remaining | | :--- | :--- | :--- | :--- | :--- | | Jan 2019 | 82,500 | $93.03 | 82,500 | $80,400,000 | | Feb 2019 | 25,027 | $92.90 | 25,027 | $78,100,000 | | Mar 2019 | — | $— | — | $78,100,000 | | **Total** | **107,527** | **$93.00** | **107,527** | **$78,100,000** | - As of March 31, 2019, **$78.1 million** remains available under the share repurchase authorization, which expires December 31, 2019[154](index=154&type=chunk)

Financial Data and Key Metrics Changes - Enrollment increased by 7.8% to 97,400 students in Q4 2018 compared to the previous year [6] - Service revenues were $177.5 million in Q4 2018, up 9% from $162.9 million in Q4 2017 on a comparable basis [27][28] - Adjusted operating income for Q4 2018 was $80.5 million with an operating margin of 45.3%, compared to $69.7 million and 42.8% in Q4 2017 [29] - Effective tax rate decreased to 19.5% in Q4 2018 from 25.5% in Q4 2017 due to the Tax Cuts and Jobs Act [39] Business Line Data and Key Metrics Changes - Technology and academic services revenue grew from $10.7 million in Q4 2017 to $11.1 million in Q4 2018, a 3.3% increase [30] - Counseling services and support expenses increased from $50.2 million in Q4 2017 to $52 million in Q4 2018, a 3.5% increase [33] - Marketing and communication expenses as a percentage of comparable revenue decreased by 80 basis points from Q4 2017 to Q4 2018 [35] Market Data and Key Metrics Changes - GCU's traditional ground campus produced a record 7,000 new students in fall 2018, with expectations of approximately 8,000 new students for fall 2019 [16] - Orbis is expected to expand by adding seven new locations in 2019, focusing on high-quality outcomes with a 90% graduation rate [21] Company Strategy and Development Direction - The company aims to implement six core growth strategies to enhance academic services and improve outcome metrics for students [15] - GCE will continue to seek additional university partners that offer geographic and programmatic differentiation [24] - The focus remains on maintaining high graduation rates and low student loan default rates while expanding the online campus by 6% to 7% [18] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about enrollment growth due to the non-profit status of GCU, which has positively impacted student recruitment [74] - The company is being cautious in setting new targets for online business growth, maintaining a conservative estimate of 6% to 7% [74] - Management highlighted the importance of finding optimal partners for future growth rather than rushing into agreements that may lead to cannibalization [96] Other Important Information - The company repurchased 52,784 shares of common stock in Q4 2018 at a cost of approximately $5.5 million [43] - Total unrestricted cash and short-term investments were $120.3 million as of December 31, 2018 [44] - GCE's CapEx for 2019 is estimated to range between $20 million and $25 million, primarily for software development [45] Q&A Session Summary Question: What is the target growth rate for the online business? - Management maintains a target growth rate of 6% to 7% for the online business, citing strong enrollment growth in Q4 2018 [74] Question: Will the new Orbis locations require additional university partners? - The new locations in 2019 will not require additional university partners as they will be opened with existing partners [76] Question: What is the EPS impact of the Orbis acquisition? - The guidance includes the higher interest expense associated with the acquisition, and the effective tax rate does not assume the tax deduction associated with the amortization of the intangible asset [85] Question: What drove the decision to walk away from certain university partnerships? - The decision was based on a lack of differentiation and potential cannibalization between similar programs offered by both institutions [96]

[PART I](index=3&type=section&id=PART%20I) [Special Note Regarding Forward-Looking Statements](index=3&type=section&id=Special%20Note%20Regarding%20Forward-Looking%20Statements) This section highlights that the Annual Report contains forward-looking statements, which are not guarantees of future performance and are subject to various risks and uncertainties - Forward-looking statements are identified by words like 'may,' 'should,' 'expects,' 'anticipates,' and similar expressions, and are based on information available at the time they are made[11](index=11&type=chunk) - Key risk factors include the Company's ability to operate successfully as a third-party service provider, GCU's operational success, termination of key customer agreements, management of strategic initiatives (e.g., Orbis Education acquisition), compliance with extensive regulatory frameworks (Title IV, state laws, accreditation), and potential damage to reputation from negative publicity[12](index=12&type=chunk)[13](index=13&type=chunk)[15](index=15&type=chunk) - The Company assumes no obligation to update forward-looking statements unless required by applicable securities laws[15](index=15&type=chunk) [Item 1. Business](index=5&type=section&id=Item%201.%20Business) This section details Grand Canyon Education, Inc.'s (GCE) transformation from operating Grand Canyon University (GCU) to becoming an educational services provider - Effective July 1, 2018, GCE transitioned from owning and operating Grand Canyon University to becoming an educational services company, providing support services to post-secondary institutions, with GCU as its initial sole client[17](index=17&type=chunk)[18](index=18&type=chunk) - The Company completed the acquisition of Orbis Education Services, LLC on January 22, 2019, expanding its client base to **17 additional universities**, primarily in healthcare education programs[29](index=29&type=chunk) Key Financial Data (2017 vs. 2018) | Metric | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | Change (%) | | :----------------------- | :---------------------- | :---------------------- | :--------- | | Net Revenue | $845.5 million | $974.1 million | -13.2% | | Operating Income | $258.1 million | $282.8 million | -8.7% | | Comparable Net Revenue | $640.5 million | $584.5 million | +9.6% | | GCU End-of-Period Enrollment | 97,369 | 90,297 | +7.8% | [Overview](index=5&type=section&id=Overview) This subsection provides a brief history of GCE's transition from operating Grand Canyon University to becoming an educational services provider - Prior to July 1, 2018, Grand Canyon Education, Inc. (GCE) operated Grand Canyon University (the University)[17](index=17&type=chunk) - On July 1, 2018, GCE sold the University to Grand Canyon University (GCU), an independent Arizona non-profit corporation, and GCE became an educational services company[17](index=17&type=chunk) - During the second half of 2018, GCE provided technology, academic, counseling, marketing, and back-office services to GCU, its sole services client for that year[18](index=18&type=chunk) [The Transaction](index=5&type=section&id=The%20Transaction) This subsection details the sale of Grand Canyon University to an independent non-profit and the subsequent Master Services Agreement - On July 1, 2018, GCE transferred the University campus and related assets to GCU for a purchase price of **$870.1 million**, paid via a senior secured note (Secured Note) with a **6.0% annual interest rate** and a maturity date of June 30, 2025[20](index=20&type=chunk) - In connection with the sale, GCE and GCU entered into a **15-year Master Services Agreement**, under which GCE provides various support services to GCU in return for **60% of GCU's tuition and fee revenue**[20](index=20&type=chunk)[22](index=22&type=chunk) - The Master Services Agreement includes early termination fees (100% of trailing 12-month fees after 7 years or Secured Note payment) and non-renewal fees (50% of trailing 12-month fees after 15 years)[22](index=22&type=chunk) [Our Business](index=7&type=section&id=Our%20Business) This subsection describes GCE's operations before and after the transaction, including its new role as an educational services provider and the acquisition of Orbis Education [Pre-Transaction Operations](index=7&type=section&id=Pre-Transaction%20Operations) This subsection describes Grand Canyon University's operations and accreditation status prior to the transaction - Prior to the Transaction, GCU (operated by GCE) was a regionally accredited university offering over **240 graduate and undergraduate degree programs** across nine colleges, both online and on-ground[26](index=26&type=chunk) - GCU's campus in Phoenix, Arizona, spanned over **275 acres** and included extensive facilities such as classroom buildings, residence halls, a library, recreation center, arena, and athletic stadiums[27](index=27&type=chunk) - GCU was reaccredited in 2017 by The Higher Learning Commission (HLC) for a maximum term of **ten years**[26](index=26&type=chunk) [Operations as an Educational Services Provider](index=8&type=section&id=Operations%20as%20an%20Educational%20Services%20Provider) This subsection details GCE's new role as a full-service educational services provider and its expansion through the Orbis Education acquisition - Beginning July 1, 2018, GCE became a full-service educational services provider, leveraging over **$200 million invested in systems** to automate and scale processes for core academic functions, technology, marketing, and back-office support[28](index=28&type=chunk) - While GCE had no prior experience as a third-party service provider, it retained all assets and employees involved in delivering these services internally for the University, positioning it to serve additional university customers[28](index=28&type=chunk) - On January 22, 2019, GCE acquired Orbis Education Services, LLC, an educational services company supporting healthcare education programs for **17 universities** across the U.S., expanding GCE's client base beyond GCU[29](index=29&type=chunk) [Suite of Services](index=8&type=section&id=Suite%20of%20Services) This subsection outlines the comprehensive range of services GCE provides to educational institutions, including technical, academic, counseling, marketing, and back-office support [Technical and Academic Services](index=8&type=section&id=Technical%20and%20Academic%20Services) This subsection details GCE's offerings in online course delivery, student records management, curriculum development, and faculty support - GCE provides technical and academic services including online course delivery (via its proprietary LoudCloud system), student records management, assessment, CRM, and other administrative systems[31](index=31&type=chunk)[32](index=32&type=chunk) - Academic services encompass curriculum and new program development, faculty training and recruitment, class scheduling, and technical support with state regulatory compliance[31](index=31&type=chunk)[36](index=36&type=chunk) - The Company operates **two data centers** with redundant data backup and provides **18/7 technical support** for students and faculty[36](index=36&type=chunk) [Counseling Services and Support](index=10&type=section&id=Counseling%20Services%20and%20Support) This subsection describes GCE's team-based counseling, admissions, financial aid processing, and proactive student support services - GCE offers team-based counseling and support, including admissions services that provide transparent information on program requirements, finance options, and degree completion times[35](index=35&type=chunk)[36](index=36&type=chunk) - Financial aid processing services include awarding, certifying, originating, and disbursing Title IV Program funds, managing refunds, and providing financial counseling[41](index=41&type=chunk) - Students receive an assigned advisor for proactive support throughout their matriculation, with online access to administrative services like financial aid applications, tuition payments, and transcript orders[41](index=41&type=chunk) [Marketing and Communication](index=12&type=section&id=Marketing%20and%20Communication) This subsection covers GCE's marketing strategies, including digital lead acquisition, media planning, video production, and data analytics - Marketing services include lead acquisition through various digital channels (SEO, SEM, social media), digital communication strategies, and brand identity development[38](index=38&type=chunk)[42](index=42&type=chunk) - GCE provides full-service media planning and strategies for traditional and digital platforms, along with in-house video production for diverse marketing content[42](index=42&type=chunk)[50](index=50&type=chunk) - A team of data analysis professionals applies prescriptive analytics, including predictive modeling, data mining, and visualization, to inform business decisions[50](index=50&type=chunk) [Back Office Services](index=14&type=section&id=Back%20Office%20Services) This subsection outlines GCE's administrative support functions such as finance, human resources, audit, and procurement - Back office services include finance and accounting (payroll, AP, GL, student accounting, financial reports, budgeting, taxes)[45](index=45&type=chunk)[50](index=50&type=chunk) - Human resources services cover performance management, personnel policies, recruitment, onboarding, and benefit plan design[50](index=50&type=chunk) - Audit services involve developing and executing an annual internal audit plan, while procurement services manage purchasing and vendor relationships[50](index=50&type=chunk) [Employees](index=14&type=section&id=Employees) This subsection provides information on GCE's employee count and labor relations as of December 31, 2018 - As of December 31, 2018, GCE employed approximately **2,800 professional and administrative personnel** and about **700 part-time employees**, mostly student workers[46](index=46&type=chunk) - None of the employees are part of any collective bargaining agreements, and relations with employees are considered good[46](index=46&type=chunk) [Community Involvement and the Public Good](index=14&type=section&id=Community%20Involvement%20and%20the%20Public%20Good) This subsection highlights GCE's initiatives in revitalizing West Phoenix, job creation, and supporting educational community programs - GCE, in partnership with GCU, is executing a five-point plan to revitalize its West Phoenix neighborhood, focusing on increasing home values (**221 projects completed with Habitat for Humanity**) and improving safety (crime decreased substantially through a **$1.6 million partnership with Phoenix Police**)[47](index=47&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk) - The Company has significantly increased job creation, employing approximately **3,500 persons** as of December 31, 2018, **three times more** than ten years prior[50](index=50&type=chunk) - GCE supports community initiatives through student tuition organization contributions (**$3.7 million in 2018**), the 'Donate to Elevate' program, GCU's 'Students Inspiring Students' tutoring program, and K-12 educational development sponsorships[54](index=54&type=chunk)[55](index=55&type=chunk)[56](index=56&type=chunk)[57](index=57&type=chunk) [Seasonality](index=16&type=section&id=Seasonality) This subsection explains how GCE's net revenue and operating results fluctuate due to seasonal variations in GCU's enrollment - Net revenue and operating results fluctuate due to seasonal variations in GCU's enrollment, with lower operating margins typically in the second and third fiscal quarters due to fewer traditional ground students attending courses during summer months[60](index=60&type=chunk) [Competition](index=16&type=section&id=Competition) This subsection describes the highly fragmented and competitive educational services market and key competitive factors - The educational services market is highly fragmented and competitive, with major players like 2U, Pearson Online Learning Services, and Wiley Education Services[61](index=61&type=chunk)[63](index=63&type=chunk) - Competitive factors include reputation, quality of client base, marketing effectiveness, robustness of technology solutions, breadth of service offerings, student support, program cost, and time to degree[63](index=63&type=chunk) - The market has evolved from full-service, revenue-sharing models to alternative unbundled fee-for-service models, and providers also offer massive open online courses[62](index=62&type=chunk) [Proprietary Rights](index=18&type=section&id=Proprietary%20Rights) This subsection details how GCE protects its intellectual property, including technology, courseware, and business know-how - GCE protects its intellectual property, including technology, courseware, and business know-how, through copyrights, trademarks, service marks, trade secrets, domain names, and agreements[63](index=63&type=chunk) - While intellectual property rights are important, the loss of any individual right or group of related rights is not expected to have a material adverse effect on the overall business[63](index=63&type=chunk) [Available Information](index=19&type=section&id=Available%20Information) This subsection specifies where GCE's public filings and reports can be accessed, including its website and the SEC's website - GCE makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other SEC filings available free of charge on its website (www.gce.com) and through the SEC's website (www.sec.gov)[65](index=65&type=chunk) [REGULATION](index=19&type=section&id=REGULATION) This subsection provides an overview of the extensive regulatory environment governing higher education and GCE's role as a service provider [Overview](index=19&type=section&id=Overview) This subsection outlines the extensive regulation of higher education by state, accrediting, and federal bodies, and GCE's indirect and direct compliance obligations - Institutions of higher education are extensively regulated by state agencies, accrediting commissions, and the federal government (U.S. Department of Education, ED) under the Higher Education Act (HEA)[68](index=68&type=chunk) - As a service provider to institutions participating in Title IV programs, GCE is indirectly subject to ED regulations and directly regulated as a 'third-party servicer,' requiring compliance audits and contractual obligations to adhere to Title IV provisions[70](index=70&type=chunk)[72](index=72&type=chunk)[77](index=77&type=chunk) - GCE is also subject to data security and privacy regulations due to its role as a third-party service provider[73](index=73&type=chunk) [State Post-Secondary Education Regulation](index=21&type=section&id=State%20Post-Secondary%20Education%20Regulation) This subsection discusses state authorization requirements for GCE's clients and the implications of non-compliance or SARA participation - GCE's clients must maintain authorization from relevant state agencies to offer education, with non-compliance potentially leading to loss of Title IV eligibility or operational restrictions[76](index=76&type=chunk)[79](index=79&type=chunk) - The State Authorization Reciprocity Agreement (SARA) establishes national standards for interstate distance education, with Arizona (where GCU is located) being a W-SARA member[80](index=80&type=chunk) - Failure to comply with state licensing or authorization requirements in non-SARA states could prohibit GCE from recruiting or offering services to students in those states, significantly affecting its business[81](index=81&type=chunk) [State Professional Licensure](index=23&type=section&id=State%20Professional%20Licensure) This subsection addresses varying state requirements for professional licensure in fields like education and healthcare, which GCE's clients must meet - Many states have specific requirements for professional licensure in fields like education and healthcare, which vary by state and field[83](index=83&type=chunk) - Factors influencing licensure include institutional/program approval, meeting state requirements, accreditation status, and recognition of degrees by other states[85](index=85&type=chunk) - GCE must be mindful of these requirements to ensure client institutions maintain their licensure, although GCE is not directly regulated by these bodies[87](index=87&type=chunk) [Accreditation](index=25&type=section&id=Accreditation) This subsection explains the importance of accreditation for educational quality, Title IV eligibility, and GCE's need to adapt services to diverse client standards - Accreditation is a non-governmental process evaluating educational quality, crucial for institutions to be eligible for Title IV aid and for credit transfers, graduate school applications, and employer recognition[88](index=88&type=chunk)[89](index=89&type=chunk) - GCU, GCE's principal client, is regionally accredited by the HLC through **2027** and holds various programmatic accreditations[89](index=89&type=chunk) - GCE will need to tailor its services to meet the differing accreditation standards of future clients in various regions[90](index=90&type=chunk) [Regulation of Federal Student Financial Aid Programs](index=25&type=section&id=Regulation%20of%20Federal%20Student%20Financial%20Aid%20Programs) This subsection details the complex federal regulations governing Title IV programs, GCU's provisional status, and key compliance areas for institutions - Institutions must comply with HEA and ED regulations to participate in Title IV programs, which are subject to periodic reauthorization and amendments by Congress, potentially impacting funding and eligibility[91](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk) - GCU's participation in Title IV programs is currently **provisional and month-to-month**, pending ED's review and approval of the Transaction, with no assurance of recertification or absence of restrictions[98](index=98&type=chunk) - Key regulatory areas include administrative capability, financial responsibility (composite score), timely return of Title IV funds for withdrawn students, student loan cohort default rates, and the incentive compensation rule (with a 'bundled services' exception that GCE follows)[99](index=99&type=chunk)[102](index=102&type=chunk)[107](index=107&type=chunk)[108](index=108&type=chunk)[111](index=111&type=chunk)[112](index=112&type=chunk) [Regulatory Standards that May Restrict Institutional Expansion or Other Changes](index=36&type=section&id=Regulatory%20Standards%20that%20May%20Restrict%20Institutional%20Expansion%20or%20Other%20Changes) This subsection highlights regulatory hurdles for institutional expansion, requiring approvals from state, accrediting, and federal agencies, potentially impeding growth - Expansion efforts, such as adding new teaching locations or educational programs, require review and approval by state post-secondary agencies, accrediting commissions, and ED[127](index=127&type=chunk) - GCU, due to its provisional Title IV certification, is currently required to obtain ED approval for new programs, which could impede its ability to introduce new offerings and slow growth[128](index=128&type=chunk) - Failure to obtain timely approvals could impair GCE's expansion plans and potentially lead to repayment liabilities for Title IV funds[128](index=128&type=chunk) [Item 1A. Risk Factors](index=37&type=section&id=Item%201A.%20Risk%20Factors) This section outlines significant risks and uncertainties that could materially and adversely affect GCE's business, financial condition, cash flow, or results of operations - The Company's business model has fundamentally changed from an owner-operator to a third-party service provider, requiring adaptation and posing risks related to its new role and relationship with GCU[132](index=132&type=chunk) - Extensive regulation of the higher education industry, including Title IV programs, accreditation, and state authorizations, presents significant compliance risks, with potential for financial penalties, operational restrictions, or loss of financial aid funding for clients[140](index=140&type=chunk) - A large percentage of GCE's revenue is attributable to its contractual relationship with GCU, making the Company highly dependent on GCU's performance and continued participation in Title IV programs[171](index=171&type=chunk) [Risks Related to the Transaction](index=37&type=section&id=Risks%20Related%20to%20the%20Transaction) This subsection details risks associated with GCE's transition to a third-party service provider, its dependence on GCU, and the provisional Title IV status - GCE's failure to adapt its business operations to succeed as a third-party service provider could materially adversely impact its operations, as it has limited prior experience in this role[132](index=132&type=chunk) - GCU's independent board of trustees has fiduciary duties that may diverge from GCE's interests, and the CEO's dual role as GCE's CEO and GCU's President could affect his time and attention[132](index=132&type=chunk)[134](index=134&type=chunk) - GCE's ability to realize the value of the acquired assets depends on GCU's performance and its capacity to make payments on the **$870.1 million Secured Note**[135](index=135&type=chunk) - GCU's provisional, month-to-month participation in Title IV programs, pending ED's approval of the change in control, poses a risk of non-recertification or significant limitations, which would materially affect GCE[136](index=136&type=chunk) [Risks Related to the Extensive Regulation of Our Industry](index=40&type=section&id=Risks%20Related%20to%20the%20Extensive%20Regulation%20of%20Our%20Industry) This subsection outlines compliance risks from extensive regulations, including Title IV, accreditation, and state authorizations, potentially leading to penalties or funding loss - Non-compliance with extensive regulatory requirements (state authorization, accreditation, Title IV) by GCE or its clients could lead to financial penalties, operational restrictions, or loss of financial aid funding[140](index=140&type=chunk) - ED's rulemaking, including the Borrower Defense to Repayment regulations, and the uncertainty surrounding their effectiveness, could increase operating costs and alter GCE's business model[141](index=141&type=chunk) - Risks include potential loss of Title IV eligibility due to high student loan default rates (exceeding **30% for three years** or **40% for one year**), failure to meet ED's financial responsibility standards (composite score below **1.5**), and sanctions for substantial misrepresentation in marketing or recruitment[147](index=147&type=chunk)[148](index=148&type=chunk)[150](index=150&type=chunk) - As a third-party servicer, GCE is directly subject to ED requirements, including compliance audits and joint and several liability with client institutions for Title IV violations[165](index=165&type=chunk)[167](index=167&type=chunk) [Risks Related to Our Business](index=51&type=section&id=Risks%20Related%20to%20Our%20Business) This subsection covers risks related to GCE's dependence on GCU, acquisition integration, market competition, and the ability to attract and retain key personnel - A significant percentage of GCE's revenue is tied to GCU, and any decline in GCU's enrollment or termination/non-renewal of the Master Services Agreement could materially impact GCE's financial performance[171](index=171&type=chunk) - The acquisition of Orbis Education, GCE's first, carries integration risks, and future acquisitions may also pose challenges such as debt, dilution, and operational assimilation difficulties[172](index=172&type=chunk)[173](index=173&type=chunk)[174](index=174&type=chunk) - Success depends on effective marketing and advertising to recruit and retain students, keeping pace with changing market needs and technology, and managing competition from other education service companies[175](index=175&type=chunk)[177](index=177&type=chunk)[179](index=179&type=chunk) - The Company's success is also dependent on its ability to recruit and retain key personnel and protect its proprietary rights and intellectual property[185](index=185&type=chunk)[186](index=186&type=chunk) [Risks Related to Our Business Technology Infrastructure](index=57&type=section&id=Risks%20Related%20to%20Our%20Business%20Technology%20Infrastructure) This subsection addresses risks concerning data security, privacy regulations, cyber-attacks, system disruptions, and the reliability of information systems - GCE's collection and use of personal information subjects it to data security and privacy regulations (e.g., FERPA, Red Flags Rule), with violations or breaches potentially harming its reputation and operations[188](index=188&type=chunk)[190](index=190&type=chunk)[191](index=191&type=chunk) - Computer networks and phone systems are vulnerable to unauthorized access, cyber-attacks, and system disruptions, which could impair online course availability, damage reputation, and lead to student loss[189](index=189&type=chunk)[193](index=193&type=chunk) - Failure of information systems to properly store, process, and report data could reduce management effectiveness, interfere with regulatory compliance, and increase operating expenses[194](index=194&type=chunk) [Risks Related to Owning our Common Stock](index=59&type=section&id=Risks%20Related%20to%20Owning%20our%20Common%20Stock) This subsection discusses risks associated with anti-takeover provisions, stock price volatility, dividend policy, and internal control effectiveness - Anti-takeover provisions in GCE's charter documents, Delaware General Corporation Law, and education agency regulations could make it difficult for a third party to acquire the company, potentially discouraging takeovers[195](index=195&type=chunk) - The trading price of GCE's common stock could decline if securities analysts cease coverage or downgrade their evaluations[196](index=196&type=chunk) - GCE does not anticipate paying cash dividends in the foreseeable future, meaning capital appreciation will be the sole source of gains for stockholders[198](index=198&type=chunk) - Failure to maintain proper and effective internal controls could impair the ability to produce accurate financial statements, leading to stock price decline and potential sanctions[197](index=197&type=chunk) [Item 1B. Unresolved Staff Comments](index=61&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) This section states that there are no unresolved staff comments from the SEC - There are no unresolved staff comments[199](index=199&type=chunk) [Item 2. Properties](index=61&type=section&id=Item%202.%20Properties) This section describes GCE's property holdings and leasing arrangements following the July 1, 2018 transaction, highlighting its retained administrative building and leased office locations - Prior to July 1, 2018, GCE owned and operated the **275-acre GCU ground campus** in Phoenix, Arizona, including numerous academic, residential, and athletic facilities[200](index=200&type=chunk) - After the transaction, GCE retained a **325,000 square foot administrative building** and a parking garage near GCU's campus, accommodating approximately **2,700 employees**[201](index=201&type=chunk) - The retained office building, constructed in 2016, was designed for maximum energy efficiency, using only **0.41 watts per square foot** for lighting (half of typical efficient buildings) and a rooftop rainwater collection system[201](index=201&type=chunk)[202](index=202&type=chunk) - GCE also leases four office locations in California and plans to add more space in Arizona and the southwest U.S. for growth, applying similar energy efficiency principles to leased facilities[203](index=203&type=chunk) [Item 3. Legal Proceedings](index=63&type=section&id=Item%203.%20Legal%20Proceedings) This section states that GCE is subject to ordinary litigation incidental to its business but does not expect these matters to have a material adverse effect - GCE is subject to ordinary and routine litigation incidental to its business[204](index=204&type=chunk) - Management does not expect the ultimate costs to resolve these matters to have a material adverse effect on the Company's financial position, results of operations, or cash flows[204](index=204&type=chunk) [Item 4. Mine Safety Disclosures](index=63&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that there are no mine safety disclosures to report - There are no mine safety disclosures[205](index=205&type=chunk) [PART II](index=64&type=section&id=PART%20II) [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=64&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) This section provides information on GCE's common stock trading, shareholder details, dividend policy, equity compensation plans, and share repurchase activities - GCE's common stock trades on the Nasdaq Global Market under the symbol 'LOPE', with holders entitled to **one vote per share**[208](index=208&type=chunk) - As of December 31, 2018, there were approximately **121 registered holders** of common stock, with a substantially greater number of beneficial holders[209](index=209&type=chunk) - The Company does not anticipate paying cash dividends in the foreseeable future, intending to retain earnings for business development and growth, and is restricted by its existing credit facility[210](index=210&type=chunk)[198](index=198&type=chunk) Share Repurchases (Q4 2018) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--------------------------- | :--------------------- | :--------------------------- | | October 1 – October 31, 2018 | — | $— | | November 1 – November 30, 2018 | 12,300 | $117.24 | | December 1 – December 31, 2018 | 40,484 | $99.51 | | **Total** | **52,784** | **$103.64** | - The Board of Directors authorized repurchases of up to **$175.0 million** of common stock, with **$88.1 million** remaining available as of December 31, 2018[213](index=213&type=chunk)[215](index=215&type=chunk) Cumulative Total Return (2013-2018) | Index/Company | 12/13 | 12/14 | 12/15 | 12/16 | 12/17 | 12/18 | | :------------------------- | :----- | :----- | :----- | :----- | :----- | :----- | | Grand Canyon Education, Inc. | 100.00 | 107.02 | 92.02 | 134.06 | 205.34 | 220.50 | | S&P 500 | 100.00 | 113.69 | 115.26 | 129.05 | 157.22 | 150.33 | | 2018 Peer Group | 100.00 | 95.49 | 63.68 | 68.60 | 87.82 | 96.90 | [Item 6. Selected Consolidated Financial and Other Data](index=66&type=section&id=Item%206.%20Selected%20Consolidated%20Financial%20and%20Other%20Data) This section presents a five-year summary of selected consolidated financial and other data, including income statement, balance sheet, and operational metrics Selected Consolidated Income Statement Data (2014-2018, in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Service revenue | $333,002 | $— | $— | $— | $— | | University related revenue | $512,499 | $974,134 | $873,344 | $778,200 | $691,055 | | Net revenue | $845,501 | $974,134 | $873,344 | $778,200 | $691,055 | | Total costs and expenses | $587,352 | $691,380 | $636,141 | $567,839 | $510,240 | | Operating income | $258,149 | $282,754 | $237,203 | $210,361 | $180,815 | | Net income | $229,011 | $203,319 | $148,514 | $131,411 | $111,466 | | Diluted EPS | $4.73 | $4.22 | $3.15 | $2.78 | $2.37 | | Period end enrollment | 97,369 | 90,297 | 81,908 | 74,506 | 67,806 | Selected Consolidated Balance Sheet Data (2014-2018, in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :-------------------------------------- | :------------ | :------------ | :------------ | :------------ | :------------ | | Cash and cash equivalents, and investments | $120,346 | $242,745 | $108,572 | $106,400 | $166,022 | | Restricted cash, cash equivalents and investments | $61,667 | $94,534 | $84,931 | $75,384 | $67,840 | | Secured Note receivable | $900,093 | $— | $— | $— | $— | | Total assets | $1,324,017 | $1,303,573 | $1,092,493 | $891,982 | $749,564 | | Notes payable (including short-term) | $59,905 | $66,616 | $98,252 | $79,877 | $86,493 | | Total stockholders' equity | $1,213,597 | $985,951 | $773,686 | $610,251 | $476,232 | Adjusted EBITDA Reconciliation (2014-2018, in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :-------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Net income | $229,011 | $203,319 | $148,514 | $131,411 | $111,466 | | Plus: interest expense | 1,536 | 2,169 | 1,328 | 1,248 | 1,801 | | Less: interest income on Secured Note | (26,947) | — | — | — | — | | Plus: income tax expense | 57,989 | 80,209 | 87,610 | 77,596 | 68,232 | | Plus: depreciation and amortization (GCE assets) | 15,571 | 15,612 | 12,510 | 11,479 | 11,502 | | Plus: contributions in lieu of state income taxes | 3,718 | 2,025 | 4,000 | 2,750 | 2,750 | | Plus: loss on Transaction | 18,370 | 562 | 1,136 | 1,702 | 159 | | Plus: university related expenses | 173,330 | 324,140 | 294,188 | 253,263 | 221,065 | | Less: 40% of university related revenue | (205,000) | (389,654) | (349,338) | (311,280) | (276,422) | | Plus: share-based compensation | 9,914 | 9,683 | 9,659 | 8,960 | 8,190 | | **Adjusted EBITDA** | **$274,052**| **$245,122**| **$209,358**| **$177,235**| **$148,059**| [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=72&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on GCE's financial condition and results of operations, focusing on the impact of the business transformation, key trends, critical accounting policies, and a detailed comparison of financial performance for 2018, 2017, and 2016 - GCE's business model shifted from owning and operating a university to providing educational services, with GCU as its primary client, impacting revenue recognition and expense presentation[234](index=234&type=chunk)[237](index=237&type=chunk) - The acquisition of Orbis Education Services, LLC in January 2019 for **$365.8 million in cash** marked GCE's first acquisition and expanded its client base to **17 additional universities**[240](index=240&type=chunk) Net Revenue and Operating Income (2017 vs. 2018) | Metric | 2018 ($M) | 2017 ($M) | YoY Change (%) | | :--------------------- | :-------- | :-------- | :------------- | | Net Revenue | 845.5 | 974.1 | -13.2% | | Operating Income | 258.1 | 282.8 | -8.7% | | Adjusted Net Revenue | 640.5 | 584.5 | +9.6% | | Adjusted Operating Income | 248.6 | 219.8 | +13.1% | | Adjusted Operating Margin | 38.8% | 37.6% | +1.2 pp | - GCE's liquidity is supported by cash flow from operations, cash and equivalents, and a new **$325.0 million credit facility** (term loan and revolving credit) secured in January 2019 to finance the Orbis acquisition[281](index=281&type=chunk)[283](index=283&type=chunk) [Executive Overview](index=72&type=section&id=Executive%20Overview) This subsection provides a high-level summary of GCE's business transformation from university operator to educational services provider - Prior to July 1, 2018, GCE operated Grand Canyon University; after this date, it became an educational services company providing support services to post-secondary institutions[234](index=234&type=chunk) - During the second half of 2018, GCE's sole client was GCU, to which it provided technology, academic, counseling, marketing, communication, and back-office services[235](index=235&type=chunk) [The Transaction](index=72&type=section&id=The%20Transaction) This subsection briefly reiterates the consummation of the transaction with GCU on July 1, 2018, and its impact on GCE's operations - The Transaction with GCU was consummated on July 1, 2018, changing GCE's operations from owning a university to being an education services provider[236](index=236&type=chunk) [Key Trends, Developments and Challenges](index=72&type=section&id=Key%20Trends%2C%20Developments%20and%20Challenges) This subsection discusses the significant changes in GCE's operational structure, strategic acquisitions, and financial highlights for the fiscal year 2018 [Change in the Structure of Our Operations](index=72&type=section&id=Change%20in%20the%20Structure%20of%20Our%20Operations) This subsection details GCE's transition from an owner-operator to a third-party service provider, highlighting its new relationship with GCU and dual CEO role - GCE transitioned from an owner-operator of a regulated institution to a third-party service provider, offering bundled services to university clients, leveraging its internal experience and technological investments[237](index=237&type=chunk) - GCU is now an independent non-profit entity with its own board of trustees, and GCE's relationship is as a third-party service provider, with potential for diverging interests[241](index=241&type=chunk) - Mr. Brian E. Mueller holds dual roles as GCE's CEO and GCU's President, with a structure in place to prevent his participation in operational matters between the two entities[241](index=241&type=chunk) [Acquisition of Orbis Education Services, LLC](index=74&type=section&id=Acquisition%20of%20Orbis%20Education%20Services%2C%20LLC) This subsection describes GCE's first acquisition of Orbis Education Services, LLC, expanding its client base and healthcare education programs - On January 22, 2019, GCE acquired Orbis Education Services, LLC for **$365.8 million in cash**, marking its first acquisition and expanding its client base beyond GCU to **17 universities** supporting healthcare education programs[240](index=240&type=chunk) - The acquisition was financed through an amended credit agreement with a consortium of banks[240](index=240&type=chunk) [Fiscal Year 2018 Highlights](index=74&type=section&id=Fiscal%20Year%202018%20Highlights) This subsection summarizes GCE's key financial and operational performance metrics for 2018, reflecting the impact of the business transformation 2018 Financial Highlights | Metric | 2018 ($M) | 2017 ($M) | YoY Change (%) | | :--------------------- | :-------- | :-------- | :------------- | | Net Revenue | 845.5 | 974.1 | -13.2% | | Operating Income | 258.1 | 282.8 | -8.7% | | Adjusted Net Revenue | 640.5 | 584.5 | +9.6% | | Adjusted Operating Income | 248.6 | 219.8 | +13.1% | | Adjusted Operating Margin | 38.8% | 37.6% | +1.2 pp | | GCU Enrollment | 97,369 | 90,297 | +7.8% | - The decrease in net revenue and operating income was driven by the transition from owning a university to being an education services provider, receiving **60% of GCU's tuition and fee revenue** as service revenue[241](index=241&type=chunk) - The increase in comparable revenue was primarily due to GCU's enrollment growth and increased ancillary revenue, partially offset by institutional scholarships[241](index=241&type=chunk) [Transition to Being a Service Provider](index=76&type=section&id=Transition%20to%20Being%20a%20Service%20Provider) This subsection reaffirms GCE's successful transition to an education services provider, evidenced by GCU's growth and the Orbis Education acquisition - GCE successfully transitioned from an owner-operator to a service provider, evidenced by GCU's continued growth and the acquisition of Orbis Education[243](index=243&type=chunk) - The Company now operates as an education services provider for **18 different non-profit institutions** of higher education[243](index=243&type=chunk) [Critical Accounting Policies and Estimates](index=76&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This subsection outlines GCE's key accounting policies, particularly changes in revenue recognition post-transaction, and other significant estimates - Revenue recognition policies changed significantly post-July 1, 2018: GCE now recognizes service revenue from GCU (**60% of tuition and fees**) ratably over the service period as a single performance obligation[245](index=245&type=chunk)[246](index=246&type=chunk) - Prior to the transaction, university-related revenue (tuition, fees, ancillary) was recognized pro-rata over instruction periods or at the point of service[247](index=247&type=chunk)[248](index=248&type=chunk) - Other critical accounting policies include evaluating long-lived assets for impairment, recognizing current and deferred income taxes, and establishing valuation allowances for deferred tax assets[249](index=249&type=chunk)[250](index=250&type=chunk) [Results of Operations](index=78&type=section&id=Results%20of%20Operations) This subsection provides a detailed analysis of GCE's financial performance, including revenue, expenses, and net income, with comparisons across fiscal years [Overview of Expense Reclassification](index=78&type=section&id=Overview%20of%20Expense%20Reclassification) This subsection explains the reclassification of operating expenses in 2018 to align with GCE's new service provider model and enhance comparability - Operating expenses were reclassified in 2018 to conform to the new service provider presentation, providing transparency for ongoing service costs versus non-recurring university expenses transferred to GCU[251](index=251&type=chunk) - To enhance comparability, 'as adjusted Non-GAAP net revenue' is calculated as **60% of university-related revenues** for periods prior to July 1, 2018[251](index=251&type=chunk) Operating Expenses as % of Adjusted Non-GAAP Revenue | Expense Category | 2018 | 2017 | 2016 | | :--------------------------- | :---- | :---- | :---- | | Technology and academic services | 6.8 % | 7.2 % | 7.5 % | | Counseling services and support | 32.0 %| 32.3 %| 33.4 %| | Marketing and communication | 18.3 %| 18.7 %| 18.8 %| | General and administrative | 4.7 % | 4.6 % | 5.4 % | [Year Ended December 31, 2018 Compared to Year Ended December 31, 2017](index=79&type=section&id=Year%20Ended%20December%2031%2C%202018%20Compared%20to%20Year%20Ended%20December%2031%2C%202017) This subsection provides a detailed year-over-year financial comparison, highlighting the impact of the transaction on revenue, expenses, and net income Revenue Comparison (2018 vs. 2017, in millions) | Revenue Type | 2018 ($M) | 2017 ($M) | YoY Change ($M) | YoY Change (%) | | :----------------------- | :-------- | :-------- | :-------------- | :------------- | | Service revenue | 333.0 | — | +333.0 | N/A | | University related revenue | 512.5 | 974.1 | -461.6 | -47.4% | | **Net Revenue** | **845.5** | **974.1** | **-128.6** | **-13.2%** | | Adjusted Net Revenue | 640.5 | 584.5 | +56.0 | +9.6% | - Technology and academic services expenses increased by **4.2% to $43.6 million**, primarily due to higher employee compensation and related expenses to support GCU's enrollment growth[254](index=254&type=chunk) - Counseling services and support expenses rose by **8.5% to $204.7 million**, driven by increased headcount, salary adjustments, and benefit costs[255](index=255&type=chunk) - Marketing and communication expenses increased by **7.6% to $117.4 million**, mainly due to higher advertising costs[257](index=257&type=chunk) - General and administrative expenses grew by **10.4% to $30.0 million**, influenced by increased employee compensation and a rise in contributions in lieu of state income taxes from **$2.0 million to $3.7 million**[258](index=258&type=chunk) - University related expenses decreased by **46.5% to $173.3 million**, reflecting costs transferred to GCU, partially offset by share-based compensation for transferred employees[259](index=259&type=chunk) - A loss on Transaction of **$18.4 million** was recorded, including third-party costs, asset impairment, and cash transferred to fund a deferred compensation plan for former GCE employees now at GCU[260](index=260&type=chunk) - Interest income on the Secured Note was **$26.9 million**, while interest expense decreased by **$0.7 million to $1.5 million** due to increased capitalized interest and lower debt balances[261](index=261&type=chunk)[262](index=262&type=chunk) - Income tax expense decreased by **27.7% to $58.0 million**, with the effective tax rate falling to **20.2% from 28.3%**, primarily due to the Tax Cuts and Jobs Act and increased state income tax credits from tuition organization contributions[264](index=264&type=chunk) - Net income increased by **$25.7 million to $229.0 million**[265](index=265&type=chunk) [Year Ended December 31, 2017 Compared to Year Ended December 31, 2016](index=83&type=section&id=Year%20Ended%20December%2031%2C%202017%20Compared%20to%20Year%20Ended%20December%2031%2C%202016) This subsection presents a detailed financial comparison between 2017 and 2016, focusing on revenue growth, expense trends, and tax impacts Revenue Comparison (2017 vs. 2016, in millions) | Revenue Type | 2017 ($M) | 2016 ($M) | YoY Change ($M) | YoY Change (%) | | :----------------------- | :-------- | :-------- | :-------------- | :------------- | | University related revenue | 974.1 | 873.3 | +100.8 | +11.5% | | End-of-period enrollment | 90,297 | 81,908 | +8,389 | +10.2% | - Technology and academic services expenses increased by **7.0% to $41.8 million**, driven by higher employee compensation and technology licensing costs[267](index=267&type=chunk) - Counseling services and support expenses rose by **7.7% to $188.6 million**, primarily due to increased headcount and employee-related costs[268](index=268&type=chunk)[270](index=270&type=chunk) - Marketing and communication expenses increased by **10.7% to $109.1 million**, mainly due to higher advertising spend[271](index=271&type=chunk) - General and administrative expenses decreased by **3.3% to $27.2 million**, largely due to lower contributions to private school tuition organizations (**$2.0 million in 2017 vs. $4.0 million in 2016**)[272](index=272&type=chunk) - University related expenses increased by **10.2% to $324.1 million**, including lease termination costs of **$3.5 million in 2016**[273](index=273&type=chunk) - Interest expense increased by **$0.9 million to $2.2 million** due to lower capitalized interest, while investment interest and other increased by **$2.7 million to $2.9 million** due to higher average investment balances[274](index=274&type=chunk)[275](index=275&type=chunk) - Income tax expense decreased by **$7.4 million to $80.2 million**, with the effective tax rate falling to **28.3% from 37.1%**, primarily due to the adoption of the share-based compensation standard (**$16.5 million benefit**) and a **$10.7 million benefit** from revaluing deferred tax assets/liabilities due to the Tax Cuts and Jobs Act[276](index=276&type=chunk)[278](index=278&type=chunk) - Net income increased by **$54.8 million to $203.3 million**[279](index=279&type=chunk) [Seasonality](index=87&type=section&id=Seasonality) This subsection explains the seasonal fluctuations in GCE's net revenue and operating results driven by GCU's enrollment patterns - GCE's net revenue and operating results fluctuate seasonally due to changes in GCU's enrollment, with traditional ground students not attending courses during summer months (May-August), leading to lower operating margins in Q2 and Q3[280](index=280&type=chunk) - Sequential quarterly enrollment increases in the fall and first calendar quarter contribute to higher net revenue and operating income in Q1 and Q4[280](index=280&type=chunk) [Liquidity, Capital Resources, and Financial Position](index=87&type=section&id=Liquidity%2C%20Capital%20Resources%2C%20and%20Financial%20Position) This subsection assesses GCE's financial health, including cash position, debt, share repurchase program, cash flows, and contractual obligations [Liquidity](index=87&type=section&id=Liquidity) This subsection details GCE's cash and investment balances, the Secured Note from GCU, and the financing for the Orbis Education acquisition - As of December 31, 2018, GCE had **$120.3 million** in unrestricted cash, cash equivalents, and investments, and **$61.7 million** in restricted cash and cash equivalents related to its credit agreement[281](index=281&type=chunk) - GCE received a **$870.1 million Secured Note** from GCU on July 1, 2018, bearing **6.0% annual interest** and maturing June 30, 2025, with GCE providing an additional **$30 million** for GCU's capital expenditures in H2 2018, increasing the note balance to **$900.1 million**[282](index=282&type=chunk) - On January 22, 2019, GCE acquired Orbis Education for **$365.8 million**, financed by a new **$325.0 million credit facility** (term loan and revolving credit) and cash on hand, repaying its previous **$60.0 million term loan**[283](index=283&type=chunk)[284](index=284&type=chunk) - GCE anticipates adequate liquidity for ongoing operations, capital expenditures, and working capital for at least the next **24 months**[285](index=285&type=chunk) [Share Repurchase Program](index=89&type=section&id=Share%20Repurchase%20Program) This subsection outlines the Board-authorized share repurchase program, including amounts authorized and shares repurchased - The Board authorized repurchases of up to **$175.0 million** of common stock, with an expiration date of December 31, 2019[286](index=286&type=chunk) - Since approval, GCE has purchased **3.6 million shares** for **$86.9 million**, with **$88.1 million** remaining under authorization as of December 31, 2018[288](index=288&type=chunk) [Cash Flows](index=89&type=section&id=Cash%20Flows) This subsection analyzes GCE's cash flows from operating, investing, and financing activities, highlighting the impact of the transaction Net Cash Flows (2016-2018, in millions) | Activity | 2018 ($M) | 2017 ($M) | 2016 ($M) | | :----------------- | :-------- | :-------- | :-------- | | Operating Activities | 199.1 | 304.9 | 237.8 | | Investing Activities | (238.2) | (152.1) | (216.0) | | Financing Activities | (26.8) | (35.7) | 10.7 | - Net cash from operating activities decreased significantly in 2018 due to the Transaction's impact on liabilities, increased accounts receivable from GCU, and lower non-cash charges[289](index=289&type=chunk) - Net cash used in investing activities in 2018 was primarily for the Transaction (**$131.6 million transferred to GCU**), short-term investments, and capital expenditures (**$94.5 million**), including **$30.0 million funding to GCU** for campus projects[290](index=290&type=chunk) - Net cash used in financing activities in 2018 included **$24.8 million** for common share repurchases (including tax withholdings) and **$6.7 million** in principal debt payments, partially offset by **$4.6 million** from stock option exercises[293](index=293&type=chunk) [Contractual Obligations](index=91&type=section&id=Contractual%20Obligations) This subsection presents a table summarizing GCE's contractual obligations, including notes payable and purchase obligations Contractual Obligations as of December 31, 2018 (in millions) | Obligation Type | Total | Less than 1 Year | 2-3 Years | 4-5 Years | More than 5 Years | | :----------------------- | :---- | :--------------- | :-------- | :-------- | :---------------- | | Long term notes payable | $59.9 | $36.5 | $23.4 | $— | $— | | Purchase obligations | $11.6 | $7.5 | $3.9 | $0.2 | $— | | **Total** | **$71.5** | **$44.0** | **$27.3** | **$0.2** | **$—** | [Off-Balance Sheet Arrangements](index=91&type=section&id=Off-Balance%20Sheet%20Arrangements) This subsection states that GCE has no material off-balance sheet arrangements - GCE does not have any off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on its financial condition or results of operations[295](index=295&type=chunk) [Non-GAAP Discussion](index=91&type=section&id=Non-GAAP%20Discussion) This subsection explains the use of Adjusted EBITDA as a supplemental non-GAAP measure of operating performance - Adjusted EBITDA is used as a supplemental non-GAAP measure of operating performance and for compensation decisions, but it is not a substitute for GAAP measures like net income or operating income[296](index=296&type=chunk) - Adjusted EBITDA excludes items not considered reflective of core operating performance, such as interest expense, income tax expense, depreciation, amortization, transaction costs, and certain contributions[226](index=226&type=chunk)[229](index=229&type=chunk) [Recent Accounting Pronouncements](index=92&type=section&id=Recent%20Accounting%20Pronouncements) This subsection refers to the notes to consolidated financial statements for details on recently adopted accounting standards - This section refers to Note 3 – Summary of Significant Accounting Policies for details on recent accounting pronouncements[297](index=297&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures about Market Risk](index=92&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discusses GCE's exposure to inflation, market risk, and interest rate risk, and how it manages these risks - Inflation has not had a material impact on GCE's results of operations for 2016-2018, but future inflation could adversely affect financial condition[298](index=298&type=chunk) - GCE manages 30-day LIBOR interest exposure from variable rate debt using an interest rate corridor, hedging **$60.0 million** with thresholds for interest payments[299](index=299&type=chunk) - Excess cash is invested in short-term certificates of deposit, money market instruments, municipal bond portfolios, or municipal mutual funds, with a policy requiring minimum BBB ratings[300](index=300&type=chunk)[301](index=301&type=chunk) - A **10% increase or decrease** in interest rates would not have a material impact on GCE's future earnings, fair values, or cash flows as of December 31, 2018[301](index=301&type=chunk) [Item 8. Consolidated Financial Statements and Supplementary Data](index=93&type=section&id=Item%208.%20Consolidated%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements of Grand Canyon Education, Inc. and its subsidiaries for the years ended December 31, 2018, 2017, and 2016, along with accompanying notes that provide detailed accounting policies, transaction specifics, and other financial disclosures - KPMG LLP issued an unqualified opinion on GCE's consolidated financial statements and the effectiveness of its internal control over financial reporting as of December 31, 2018[304](index=304&type=chunk)[305](index=305&type=chunk) - The financial statements reflect the significant business transformation on July 1, 2018, from a university operator to an education services provider, impacting revenue streams and asset/liability composition[324](index=324&type=chunk)[327](index=327&type=chunk) - Key accounting policies include revenue recognition (changed post-transaction), valuation of long-lived assets, income taxes, and share-based compensation, with details on recent accounting pronouncements adopted[362](index=362&type=chunk)[367](index=367&type=chunk)[348](index=348&type=chunk)[357](index=357&type=chunk)[351](index=351&type=chunk)[387](index=387&type=chunk)[389](index=389&type=chunk)[390](index=390&type=chunk)[391](index=391&type=chunk) [Report of Independent Registered Public Accounting Firm](index=94&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) This subsection provides KPMG LLP's unqualified opinion on GCE's consolidated financial statements and internal control over financial reporting - KPMG LLP provided an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2018, and on the effectiveness of internal control over financial reporting as of December 31, 2018[304](index=304&type=chunk)[305](index=305&type=chunk) [Consolidated Balance Sheets](index=95&type=section&id=Consolidated%20Balance%20Sheets) This subsection presents GCE's consolidated balance sheets, detailing assets, liabilities, and stockholders' equity as of December 31, 2018 and 2017 Consolidated Balance Sheets (as of December 31, in thousands) | Asset/Liability Category | 2018 | 2017 | | :----------------------------- | :------------ | :------------ | | Cash and cash equivalents | $120,346 | $153,474 | | Restricted cash and cash equivalents | $61,667 | $94,534 | | Investments | $69,002 | $89,271 | | Accounts receivable, net | $46,830 | $10,908 | | Secured Note receivable | $900,093 | $— | | Property and equipment, net | $111,039 | $922,284 | | Total assets | $1,324,017 | $1,303,573 | | Total current liabilities | $80,518 | $238,135 | | Notes payable, less current portion | $23,437 | $59,925 | | Total liabilities | $110,420 | $317,622 | | Total stockholders' equity | $1,213,597 | $985,951 | [Consolidated Income Statements](index=96&type=section&id=Consolidated%20Income%20Statements) This subsection presents GCE's consolidated income statements, detailing revenues, expenses, and net income for the years ended December 31, 2018, 2017, and 2016 Consolidated Income Statements (Year Ended December 31, in thousands) | Metric | 2018 | 2017 | 2016 | | :------------------------- | :---------- | :---------- | :---------- | | Service revenue | $333,002 | $— | $— | | University related revenue | $512,499 | $974,134 | $873,344 | | Net revenue | $845,501 | $974,134 | $873,344 | | Total costs and expenses | $587,352 | $691,380 | $636,141 | | Operating income | $258,149 | $282,754 | $237,203 | | Interest income on Secured Note | $26,947 | $— | $— | | Income before income taxes | $287,000 | $283,528 | $236,124 | | Income tax expense | $57,989 | $80,209 | $87,610 | | Net income | $229,011 | $203,319 | $148,514 | | Diluted income per share | $4.73 | $4.22 | $3.15 | [Consolidated Statements of Comprehensive Income](index=97&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This subsection presents GCE's consolidated statements of comprehensive income, including net income and other comprehensive income items Consolidated Statements of Comprehensive Income (Year Ended December 31, in thousands) | Metric | 2018 | 2017 | 2016 | | :----------------------------------------- | :---------- | :---------- | :---------- | | Net income | $229,011 | $203,319 | $148,514 | | Unrealized gains (losses) on hedging derivatives, net of taxes | 118 | 11 | (151) | | Unrealized gains (losses) on available for sale securities, net of taxes | 309 | 175 | (270) | | **Comprehensive income** | **$229,438**| **$203,505**| **$148,093**| [Consolidated Statements of Stockholders' Equity](index=98&type=section&id=Consolidated%20Statements%20of%20Stockholders%20Equity) This subsection presents GCE's consolidated statements of stockholders' equity, detailing changes in equity for the years ended December 31, 2018, 2017, and 2016 Consolidated Statements of Stockholders' Equity (Year Ended December 31, in thousands) | Metric | 2018 | 2017 | 2016 | | :------------------------- | :------------ | :------------ | :------------ | | Balance at beginning of period | $985,951 | $773,686 | $610,251 | | Net income | 229,011 | 203,319 | 148,514 | | Common stock purchased for treasury | (9,606) | (1,510) | (15,367) | | Share-based compensation | 4,356 | 2,898 | 7,581 | | Exercise of stock options | 4,632 | 7,372 | 13,207 | | Balance at end of period | $1,213,597 | $985,951 | $773,686 | [Consolidated Statements of Cash Flows](index=100&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This subsection presents GCE's consolidated statements of cash flows, detailing cash generated and used in operating, investing, and financing activities Consolidated Statements of Cash Flows (Year Ended December 31, in thousands) | Activity | 2018 | 2017 | 2016 | | :--------------------------- | :---------- | :---------- | :---------- | | Net cash provided by operating activities | $199,085 | $304,898 | $237,761 | | Net cash used in investing activities | $(238,235) | $(152,064) | $(216,001) | | Net cash (used in) provided by financing activities | $(26,845) | $(35,733) | $10,727 | | Net (decrease) increase in cash and cash equivalents and restricted cash | $(65,995) | $117,101 | $32,487 | | Cash and cash equivalents and restricted cash, end of period | $182,013 | $248,008 | $130,907 | [Notes to Consolidated Financial Statements](index=101&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This subsection provides detailed disclosures and explanations supporting the consolidated financial statements, including accounting policies and transaction specifics [1. Nature of Business](index=101&type=section&id=1.%20Nature%20of%20Business) This subsection describes GCE's business as an education services company and its significant business model change on July 1, 2018 - Grand Canyon Education, Inc. (GCE) is a publicly traded education services company providing support services to the post-secondary education sector, including technology, academic, counseling, marketing, and back-office services[324](index=324&type=chunk) - GCE's business model changed significantly on July 1, 2018, following a transaction where it ceased operating Grand Canyon Universi