Postscript on Purdue University Global Post

Author

Phil Hill
January 07, 2020

After my Sunday post “Purdue University Global Loses $43 million in First Full Year Since Kaplan Transfer“, a spokesperson from Purdue University contacted me and provided commentary on several points made in the post. I welcome this clarification, especially as it helps explain the $90 million line item on non operating revenue and whether that is relevant to long-term Purdue Global financial viability. In short, that revenue is relevant, and therefore it is best to interpret the loss last year as $43 million and not $133 million.

I am going to share Purdue’s response in full and then provide my thoughts below.

Purdue University Response

In this section, quotes from my original post are in blue italics, and Purdue’s commentary is in quotation below each quote.

“Strictly speaking, the $43 million number is most relevant for this year, but this amount obscures the effect of one-time or short-term payments from Kaplan that were part of the initial agreement. In other words, the operating losses matter from a long-term viability perspective.”

This is false. Payments from Kaplan have no impact on the profit and loss and even if they did, they occurred last fiscal year not this one.

Additionally, “operating losses” are constrained by some accounting rules and they are only one part of Purdue Global’s financial picture. Due to accounting rules, virtually every university in the country reports an “operating loss” and so the reported number is an insufficient and misleading measure of “long-term viability.”

However, you do raise an important question regarding what was in the $43 million number? That included a deliberate one-time, $28.5 million marketing investment as we launched a new university brand. It also included $9 million in accrued but unpaid KHE fee that won’t need to be paid until the cash flow is positive. Only $5.5 million was a loss from operations.

“What is not entirely clear is the breakdown of $90 million in Non-Operating Revenues. Purdue University Global is a public institution, but it does not receive state funding. I believe this revenue includes $30 million in transfers from Kaplan’s parent company, Graham Holdings, that was defined as part of the initial 2017 agreement.”

This is false. The $90m is tuition and fee revenue from Pell grants plus a small amount of investment income and gift revenue. It’s only classified as non-operating due to accounting rules. It’s clearly revenue from student enrollments, not transfers from Kaplan.

“The Purdue – Kaplan deal was never popular among Purdue University faculty and last spring there was an interesting debate in a local paper between three faculty members …”

This is an overgeneralization, especially following our work on campus to dispel myths and to explain the opportunity. There will always be some vocal critics, but the University Senate is in a much different place than it was a few years ago in regard to Purdue Global. Over the last year, the Senate declined to take up a resolution critical of Purdue Global. A special ad hoc committee established by University Senate to study a variety of issues related to Purdue Global has effectively disbanded after concluding that any concerns had been addressed. In addition, faculty from at least four Purdue West Lafayette colleges are now engaged with Purdue Global to offer new educational offerings through the new online university.

“I am not sure the difference between the following numbers (around 29k) and the IPEDS numbers reported by Purdue (see above, around 36k), but nevertheless the following updated numbers indicate a new steady state of enrollment.”

IPEDS has some unique requirements for Purdue Global since it’s on a quarter system. The chart you chose is ours and was correct at the time and an easier way to look at the data. The most up-to-date, year-over year comparison looks even better with enrollment growth from 2018 to 2019.

Updated Purdue Global enrollment numbers for calendar year 2018 and 2019, showing an increase of 5%.

source: Purdue University updates using October 2018 and October 2019 census dates

“… but for now it is not apparent that Purdue Global will be financially viable.”

Purdue Global had $45 million cash on hand at the end of FY19. The deficit in FY19 was primarily driven by one-time strategic start-up investments, particularly brand marketing and the development of some new programs that align with Purdue’s strengths and competitive advantages. For FY20, we have every expectation that Purdue Global will generate an operating surplus.

My Commentary

This response from Purdue is quite helpful in filling in gaps in the public record. Given the importance of Purdue Global, it is important that other schools (and even for-profit companies) understand what is happening with this high-profile initiative, and to understand it accurately.

In particular, the most important clarification is that the “$90m is tuition and fee revenue from Pell grants plus a small amount of investment income and gift revenue”. Additionally, it is useful to see details on the “deliberate one-time, $28.5 million marketing investment” and “$9 million in accrued but unpaid KHE fee that won’t need to be paid until the cash flow is positive”.

In my opinion, the majority of the $90 million non operating revenue is relevant to operations, meaning that the $43 million loss (and not $133 million) is applicable. I disagree, however, with the statement that “only $5.5 million was a loss from operations”.

The $28.5 million marketing investment does NOT imply that Purdue Global spent only that amount on marketing and will not need to in the future. What it means is that based on internal budgeting Purdue Global spent $28.5 million more than what they believe is a steady state marketing level, and that they believe they can go back down to steady state marketing in FY2020. For perspective see this Purdue Exponent article.

According to the May 2 SEC filing, Kaplan will assist PUG in areas including admissions support, technology support, marketing services and international and domestic student recruitment. The filing does not cite expected costs of those services, but according to a fact-finding team from the Higher Learning Commission, Purdue representatives estimated the cost of KHE’s “back office services” to be about $200 million in addition to an estimated $100 million to be spent on marketing. The Higher Learning Commission’s report was published earlier this year.

If accurate, this information indicates that Purdue Global likely spent more than $130 million on marketing in FY2019.

As the chart above and my original post showed, Purdue Global seems to have slowed down or even reversed the enrollment declines of Kaplan University (good for them), but the additional marketing spend was clearly a key part of this change. The total marketing spend, even the amount above steady state, is very relevant to operations.

Furthermore, the accrued but unpaid KHE fee of $9 million is also relevant. The liability has not gone away, it is part of annual operations, and (assuming PG becomes cash flow positive) due to Kaplan Higher Education in the future.

Purdue’s claim about me overgeneralizing that the “deal was never popular among Purdue University faculty” is a fair point, but in the same way I challenge their brushing off of faculty complaints as “myths” and “some vocal critics”. It would be interesting to survey the Purdue faculty on this question to get a better sense of support, but that is not in the cards (at least as public information).

All in all, this is a valuable update from Purdue University. Looking forward, the final statement Purdue provided is the one to watch – “For FY20, we have every expectation that Purdue Global will generate an operating surplus”.