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Purdue Global FY20 Financials Show Online School Getting Closer to Break Even

In January I looked at Purdue University’s annual report and shared that Purdue Global (PG) still lost money in its second full year of operations after converting from the for-profit Kaplan University.

Last year I reported that Purdue Global lost $43 million, which a Purdue spokesperson attributed to “a deliberate one-time, $28.5 million marketing investment” and that for “FY20, we have every expectation that Purdue Global will generate an operating surplus.”

We finally have the Purdue University Financial Report for the period ending June 30, 2020, and it appears that despite improvements in enrollment and retention at Purdue Global, the school did not generate an operating surplus. While the numbers were better than last year’s, Purdue Global lost $21 million in its second full year of operations.

Unlike FY19, I did not at the time have the Purdue Global internal budget numbers to better explain this loss. Thanks to an anonymous source, I now have a copy of Purdue Global’s FY20 key metrics and financial summary (July 2019 – June 2020), and the numbers show the school dropping in revenue and inquiries but improving enrollments and reducing marketing spend. While the data is 11 months old, we can now better understand Purdue Global’s operations.

Purdue Global Metrics and Financials Sheet

The view comparing fiscal years 2017 through 2020 is the most useful view, and this combines a view of key operating metrics as well as unit financial performance.

Purdue Global financials and operating metrics for FY 2017 through 2020, showing a post-fee loss of roughly $2 million in the most recent year

Revenue Down but Operating Income Up

It is interesting for FY20 that overall revenues actually decreased ($392 to $388 million) yet operating income increased ($43 to $2 million loss), noting the reduction of expenses from $403 to $372 million. The primary changes from FY19 to FY20:

  • Bad Debt dropped from $21 to $9 million;

  • Marketing Expenses dropped from $130 to $117 million;

  • Admission Expenses dropped from $58 to $49 million;

  • KHE Student Support expenses dropped from $39 to $34 million; and

  • KHE Administrative expenses dropped from $62 to $58 million.

What is not clear is why Admissions Expenses and Student Support expenses dropped so significantly. I get why Marketing Expenses dropped, as FY19 required huge spending to establish the Purdue Global brand, but the other two don’t make sense given increasing enrollments – especially at these levels (15% and 12% drops). I wonder if we are seeing some cross-over, with Purdue University providing services in these areas, leading to PG getting some of these expenses off of the books.

What About the $21 million Loss?

Before looking at some of the new data, let’s first understand how to resolve the $21 million “decrease in net position” with the operating financials. In the financials above, it is important to recognize that Kaplan Higher Education (KHE) gets paid as an OPM vendor first for the services provided (presumably with overhead included but without profit) and then gets paid a fee on top of the services income. Do not be fooled into thinking that KHE only gets paid the fee. As you can see from Graham Holdings annual report, KHE makes more than $300 million per year in operating revenue, and the vast majority of that is from Purdue Global – also meaning that the vast majority of the expenses shown above are for services provided by KHE.

Based on an email interview, a Purdue University spokesperson clarified the $21 million number as follows:

As stated publicly in the August Purdue Global Trustees meeting, the recurring operating income pre-fee was +$10 million, pre-Kaplan fee.

The post-fee operating income/change in net position is -$21m . That comes from: +$10m recurring operating income, Less $3.5m of 1x charges (mostly facility closures), Less $27m of Kaplan fees (= to about 7% of revenue). Per the terms of the agreement, Kaplan is paid last so the $27m fee means a sizeable amount of the calculated fee will be foregone by Kaplan.

Result: -$21m change in net position.

Note that the $7.4 million pre-fee operating income is less than the $10 million described, with the difference coming from non-recurring expenses.

Also note that the agreement for the fee is for Purdue Global to pay KHE 12.5% of revenue as the calculated fee, as long as the school has met certain financial metrics. There are date offsets and other calculations such as available cash on hand that make it difficult to fully resolve the Purdue University annual report financials with the internal Purdue Global operating financials, but the key is that as part of the agreement, KHE foregoes (does not get paid, now or in the future) the difference between the 12.5% calculated fees (which would have been roughly $48.5 million) and what the calculations allow (the $27 million, or 7% of revenue).

For FY20, Purdue Global had positive pre-fee operating income after expenses for the first time, but they are still losing money once the fee is added in.

Enrollment Metrics

The enrollments are a little easier to follow. There are two key metrics: Enrollments, which captures all students enrolled in courses at PG within the year, and ME Census which captures enrollment at a point in time in mid October, similar to the Fall Enrollment metrics from IPEDS. As described by the Purdue spokesperson:

As a university with multiple start opportunities a year, the census numbers fluctuate month to month and season to season. In order to normalize comparisons, we release a snapshot every year in mid. October, just like we do with the rest of Purdue.

Both metrics showed an increase from FY19 to FY20. Despite a lower number of inquiries, Purdue Global had materially higher enrollment and has clearly reversed the long-term enrollment decline from Kaplan University. I suspect this comes from two factors: leveraging the Purdue brand to improve conversion rates and several of the free or low-cost options for Purdue staff and Indiana residents.

FY21 Expectations

Since we are already 11 months into FY21, I asked about expectations for the current year and got this response:

The FY21 numbers will be better than FY20. Enrollment has continued to grow and PG will post an operating profit both pre and post-fee.

The mid October 2020 census count for Purdue Global is approximately 13% higher than mid October 2019. PG clearly is benefitting from improved conversion rates and from the pandemic-driven increase in primarily online institutions that we’re seeing across the board in the US.

Accordingly, the Purdue spokesperson stated that “PG will post an operating profit both pre and post-fee.”

Put it all together, and Purdue Global has reversed its long-term enrollment decline and improved its financial performance, but as of FY20 overall revenue was down and the school was still losing money. FY21 will likely see a revenue increase and potentially positive post-fee operating income, but we’ll find that out in the fall.

Update: I fixed a math error to show that student support expenses dropped by 12%, not 13%, from FY19 to FY20.