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Purdue University Global Loses $43 million in First Full Year Since Kaplan Transfer
Phil Hill
January 05, 2020
Update 7 Jan 2019: Purdue responded to this post and answered some questions raised below. See follow-up post “Postscript on Purdue University Global Post“. I have adjusted the text below on the new information on non operating revenues.
One of the biggest stories in postsecondary online education in the past few years was the partnership between Purdue University and Kaplan University, where KU was transferred to Purdue and rebranded as Purdue University Global under a 30-year contract. The high-profile move, announced in March 2017 and finalized in April 2018, converted the 30k+ university from a for-profit into a public nonprofit under the Purdue brand while turning Kaplan Higher Education into a single-client Online Program Management (OPM) vendor.
Last year it was reported that Purdue Global was losing money, almost $16 million in the partial year (Purdue’s fiscal year starts on July 1st), and now we have more recent data.
Financial Report
Based on the latest Purdue University Financial Report provided to the Board of Trustees in October 2019 and approved in December, Purdue University Global had $133 million in operating losses and $43 million in net position losses in its first full year of operation. 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.
The financial report describes its separation of Operating Revenues and Non Operating Revenues as follows (p. 15):
Revenues are classified for financial reporting as either operating or nonoperating. Operating revenues are generated by providing goods and services to our students and other important constituents of the University and include tuition and fees, grants and contracts, and sales and services. Tuition and fees and housing revenue assessed to students are reported gross, with the related scholarship allowance presented separately. Nonoperating revenues are those received by the University without providing a corresponding good or service and include our state appropriations, investment income, and private gifts.
The July 1, 2018 through June 30, 2019 statement of activities (p. 77) shows the revenue and losses. The key numbers are in the Loss before Other Revenues line.
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. But I have to admit that I’m not sure here, and I can find no public reporting to better explain the numbers.
Falling Enrollment
It should not be surprising that Purdue University Global is losing money, as Kaplan University was already losing enrollments like most of the for-profit sector. Looking at IPEDS data from Fall 2012 through 2018, I have combined all of Kaplan University and Purdue University Global campuses into one institution and showed on the same chart as other large online enrollment institutions. The data show a persistent drop in enrollment since 2014, although the losses may be slowing.
Administration Statements
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 and the Purdue CFO, Bill Sullivan (there is a good summary by Derek Newton in Forbes). In Sullivan’s response to the faculty members’ initial letter, he described the initial losses and expectations moving forward.
While it is true that, in its first year of operation, Purdue Global invested more in startup costs than it offset by revenues, this was a deliberate strategic choice and was, importantly, prefunded by Kaplan Higher Education through the assets it brought to Purdue at acquisition. It is important to note that Purdue Global had more than $66 million in cash at the end of 2018 – a far cry from “bleeding the system dry.”
Another important consideration is that under the acquisition’s terms, Purdue is guaranteed payments of $10 million a year for the first five years. These funds could be reinvested at Purdue Global or they could even be shifted to other areas of Purdue, potentially including the regional campuses. Again, that is a far cry from “bleeding the system dry.”
But perhaps most important is the fact that Purdue has the first claim on any revenue Purdue Global takes in. Recall that Purdue owns and runs the university while Kaplan is reimbursed for its expenses in providing various back office support services as marketing, human resources, admissions and information technology. In the waterfall of cash flow, the last to get paid will always be Kaplan and the first will always be Purdue. That is, as money comes in, Purdue’s side of the operating costs and its $10 million priority payment are paid first.
This is an important point because I expect elevated startup costs to continue into 2019 and more modestly in 2020.
There are signs, also from Board of Trustees report from October, that the enrollment has stabilized since Fall 2018. It is worth noting that Indiana offers a 45% tuition discount to state residents in undergraduate programs at Purdue Global, and that Purdue employees can attend for free. 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.
Kaplan Higher Education as OPM
Due to the Purdue deal, Kaplan Higher Education changed from a for-profit set of institutions into an OPM provider. In their most recent earnings release, the Kaplan Higher Education division of Graham Holdings showed $238 million in revenue in the first nine months of 2019 from Purdue University Global (I believe Purdue represents the vast majority of this division’s activities), based on p. 28.
Extrapolating this number for a full 12 months, Kaplan HE as an OPM is likely making close to $315 million in revenue from the Purdue agreement, out of Purdue Global’s roughly $437 million in operating expenses. While Kaplan’s case is unique, that is still a large OPM operation, especially from just one client.
Note that the fiscal years of Purdue and Graham do not align, so use these numbers as a rough estimate.
Termination Clause
There is one other item worth mentioning here, in that the original Transition and Operations Support Agreement (TOSA) between Purdue and Kaplan had a clause for either side to terminate the contract based on financial losses. I am not suggesting that either side is considering this option based on the current losses, but it is worth remembering this option. From p. 26 of the TOSA:
Either Party shall have the right to terminate this Agreement in the event that New University generates $25 million or more in annual Cash Operating Losses for three (3) consecutive Fiscal Years, or incurs, during any period of the Initial Term, aggregate Cash Operating Losses greater than $75 million (taking into account gains during such period) (either circumstance being called a “Triggering Loss
”).
Where (p. 2 of Exhibit A):
“Cash Operating Losses”, for any Fiscal Year, means the amount by which: (a) the sum of: (1) the Academic Costs plus the Support Costs incurred in such Fiscal Year, plus (2) $10 million for each of the first 60 months following the Effective Date, exceeds (b) the total Revenue earned by New University in such Fiscal Year.
I believe the “Cash Operating Losses” for any year refers primarily to $43 million. Essentially $43 million plus the annual $10 million priority payment, or $53 million for this year. Clearly this exceeds the clause (i) above for the first year.
More to Come
Enrollment at Purdue Global appears to be improving, but at what cost? There are some real one-time revenue items obscuring the true financial state of Purdue Global, and the enrollment stabilization includes free or reduced tuition offers. I’d like to see details on the $90 million in nonoperating revenues as well as some breakdown of expenses, but for now it is not apparent that Purdue Global will be financially viable.
As it turns out, however, there is a lot more to the Purdue – Kaplan story beyond Purdue Global, as I’ll share in an upcoming post.
The post Purdue University Global Loses $43 million in First Full Year Since Kaplan Transfer appeared first on Phil Hill & Associates.