American Public Education - Earnings Call - Q1 2018

Transcript

Speaker 0

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the American Public Education First Quarter twenty eighteen Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

At this time, I would like to turn the conference over to Mr. Chris Simenoski, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, operator. Good evening, and welcome to American Public Education's discussion of financial and operating results for the 2018. Presentation materials for today's conference call are available via the webcast section of our website and are included as an exhibit to our current report on Form eight ks furnished with the SEC earlier today. Please note that statements made in this conference call and in the accompanying presentation materials regarding American Public Education or its subsidiaries that are not historical facts may be forward looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry. These forward looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements.

Forward looking statements can be identified by words such as anticipate, believe, seek, could, estimate, expect, intend, may, should, will and would. These forward looking statements include, without limitation, statements regarding expected growth, amount and nature of anticipated charges, expected registrations and enrollments, expected revenues, expected earnings and plans with respect to recent, current and future initiatives, investments and partnerships. Actual results could differ materially from those expressed or implied by these forward looking statements as a result of various factors, including the risk factors described in the Risk Factors section and elsewhere in the company's most recent annual report on Form 10 ks and subsequent quarterly report on Form 10 Q filed with the SEC and the company's other SEC filings. The company undertakes no obligation to update publicly any forward looking statements for any reason unless required by law, even if new information becomes available or other events occur in the future. This evening, it's my pleasure to introduce Doctor.

Wallace Boston, our President and CEO and Rick Sunderland, our Executive Vice President and Chief Financial Officer. Now I'll turn the call over to Doctor. Boston. Thanks,

Speaker 2

Chris. Starting off with Slide two, recent results and highlights. I'll begin our call today by discussing our recent operating results and reviewing the progress we have made with respect to our strategic goals. Our CFO, Rick Sunderland, will then report on our first quarter financial results and provide additional perspective on the company's outlook for the 2018. In the 2018, net course registrations by new students at APUS declined 11%, total net course registrations declined 4% compared to the prior year period.

However, net course registrations by returning students only declined by 3% year over year. We believe that the difference in the rate of decline of registrations by new students and that of returning students relates at least in part to continued improvements in student persistence and our quality mix of students. The continued increase in student persistence suggests that the course and retention initiatives we have launched over the last few years appear to be improving student success and the overall quality of our offerings. The overall decline in net course registrations by new students at APUS was largely driven by a 24 year over year decline in net course registrations by new students utilizing Federal Student Aid as well as by a 13% year over year decline in new students utilizing cash and other sources and 9% year over year decline in net course registrations by new students utilizing Military Tuition Assistance or TA. The decline in overall net course registrations by new students at APUS was partially offset by an 8% year over year increase in new students utilizing veterans benefits.

We believe that net course registrations by students using TA were adversely impacted by the short lived government shutdown, in particular for net course registrations during the month of March. I am pleased that we are currently experiencing a strengthening of net course registrations by students utilizing TA in the 2018, although enrollment for this period is still ongoing. I'm also pleased by the start of our second cohort of doctoral students who began their studies in strategic intelligence and global security this past weekend. This start follows on the heels of the recent announcement that APUS was recognized by the National Security Agency, NSA, and the Department of Homeland Security, DHS, as a National Center of Academic Excellence in Cyber Defense Education. With this designation, APUS joins an elite group of regionally accredited institutions that have also received the distinction.

We believe third party recognition, especially specialty accreditations and our new doctoral programs further enhance the academic reputation of APUS. We are working diligently to improve the student onboarding process at APUS, including by implementing processes that foster even greater customer engagement and by expanding student service hours. In our outreach to prospective students, we plan to broaden our message of affordability among prospective students in targeted geographies and through an increased number of digital channels. For the three months ended March 3138, or winter term 2018, total enrollment at Hondros School of Nursing, or HCN, increased approximately 11% year over year, driven by a 19% year over year increase in new student enrollment. Although the status of HCN's accreditor, the Accrediting Council of Independent Colleges and Schools as a recognized accrediting agency, was recently restored by the Department of Education, HCN continues to seek additional accreditation and has an in process application for accreditation by the Accrediting Bureau of Health Education Schools, or ABHES, a national accrediting agency that is also recognized by the Department of Education.

ABHES indicated that it will take action on HCN's application at its late May twenty eighteen meeting. We remain excited about HCN's long term prospects as well as the opportunity for nursing and health care education more broadly as we believe nursing schools turn away thousands of qualified applicants each year from undergraduate nursing programs. Over the last decade, nursing schools have annually rejected around 30,000 applicants who met admissions requirements according to the American Association of Colleges of Nursing. This supports our decision to keep access to nursing and health care education as a focus of our long term strategic plan. APEI's second quarter outlook reflects our belief that overall net course registrations at APUS may be approximately flat year over year.

In future quarters, APUS expects continued volatility in net course registrations. However, the second quarter outlook for net course registrations, combined with the benefits of improved completion rates at APUS and revenue growth at HCN are expected to result in a year over year increase in API's consolidated revenue compared to the 2017. In summary, we plan to maintain our focus on enrollment stabilization and student persistence at APUS while building on HCN's recent successes. We anticipate launching several new degree programs at APUS in 2018, and we plan to open a new HCN campus in late twenty nineteen subject to regulatory approvals. At the same time, we intend to increase our emphasis on workforce development and competency based learning as well as expand our strategic relationships to strengthen our long term competitive position and fulfill our institutional mission.

At this time, I will turn the call over to our CFO, Rick Sunderland. Rick? Thank you, Wally. American Public Education's first quarter twenty eighteen consolidated financial results include a 1% decline in revenue to $75,000,000 compared to $75,700,000 in the prior year period. The decrease during the period is attributable to a 3.6% decrease in revenue in our API segment, partially offset by a 23% increase in revenue in our Hondros segment when compared to the prior year.

Speaker 3

In the first quarter, our API segment revenue decreased to $65,700,000 compared to $68,100,000 in the prior year period. The decline in API segment revenue is primarily attributable to a decrease in net course registrations. Hondros segment revenue increased to $9,300,000 in the first quarter compared to $7,600,000 in the same period of 2017. The increase in Hondros segment revenue was primarily due to increased enrollments. On a consolidated basis, costs and expenses increased 2.1% to $68,800,000 compared to $67,400,000 in the prior year period.

The increase in costs and expenses was primarily due to increased employee compensation costs in both our API segment and our Hondros segment, including costs related to the Voluntary Reduction in Force program or VRIF implemented during the three months ended March 3138, and additional stock based compensation related to certain employees reaching retirement eligibility in our API segment. For the first quarter, consolidated instructional costs and services expense or ICS as a percentage of revenue increased to 39.6% compared to 38.3% in the prior year period. Our ICS expenses for the three months ended March 3138 were $29,700,000 representing an increase of 2.5% from 29,000,000 for the three months ended March 3137. The increase in ICS was primarily due to an increase in employee compensation costs in our API segment and Hondros segment, including costs related to the VRIF in our API segment, partially offset by decreases in instructional materials expense in our API segment. Selling and promotional expense or S and P as a percentage of revenue increased to 20.8% of revenue compared to 20.4% in the prior year period.

Year over year, S and P costs increased 0.9% to $15,600,000 compared to $15,400,000 in the prior year. The increase in S and P was primarily a result of an increase in employee compensation costs related to the VRIF in our API segment, partially offset by decreases in advertising costs and marketing support materials expense in our API segment. General and administrative expense, or G and A, as a percentage of revenue increased to 25.2 from 23.4% in the prior year period. Our

Speaker 0

G

Speaker 3

and A expenses increased 6.4% to $18,900,000 compared to $17,800,000 in the prior year period. The increase in G and A was primarily related to increases in employee compensation costs related to the VRIF and additional stock based compensation costs for retirement eligible employees in our API segment, partially offset by decreases in bad debt expense in our API segment. Bad debt expense for the three months ended March 3138 was 1,100,000 or 1.5% of revenue compared to $1,400,000 or 1.9% of revenue in the prior year period. The decrease in bad debt expense was primarily due to changes in student mix, prior changes in admissions and verification processes and changes in other processes. Depreciation and amortization was $4,500,000 for the three months ended March 3138, compared to $4,700,000 in the prior year period.

Our effective tax rate during the 2018 was approximately 29%. In the 2018, we reported income from operations before interest income and income taxes of $6,200,000 compared to $8,300,000 in the prior year period. In the 2018, we reported net income of $4,600,000 or $0.28 per diluted share compared to net income of $4,500,000 or $0.28 per diluted share in the prior year period. Adjusted net income, a non GAAP measure for the 2018 was $5,900,000 or $0.35 per diluted share. Adjusted net income for the 2018 excludes approximately $1,700,000 in pretax expenses associated with the VRIF as well as the applicable tax effect of the adjustment.

The workforce reduction was substantially completed on 04/01/2018, and was not contemplated in our first quarter outlook. For additional information regarding adjusted net income, a non GAAP measure, please refer to GAAP to adjusted net income reconciliation in the financial tables in the earnings release we issued earlier today. Total cash and cash equivalents as of March 3138, were approximately $186,200,000 compared to $179,200,000 as of December 3137. Capital expenditures were approximately $1,400,000 for the three months ended March 3138, compared to $1,700,000 in the prior year period. For the three months ended March 3138, the company made no estimated tax payments compared to $6,100,000 in aggregate estimated tax payments during the three months ended March 3137.

The company expects to make estimated tax payments in the aggregate amount of $5,500,000 during the 2018 related to tax extensions and first quarter estimates. In connection with the voluntary reduction in force, the company expects to pay $1,700,000 in employee severance costs during the 2018. Effective January 1, we adopted FASB Accounting Standards Codification or ASC six zero six revenue from contracts with customers using the modified retrospective approach. Adjustments to our financial statements resulting from the adoption of ASC six zero six were not material and are described more fully in our quarterly report on Form 10 Q filed earlier today with the SEC. Going on to Slide four, second quarter outlook.

Our outlook for the 2018 is as follows: APUS net course registrations by new students are expected to decrease between 83% year over year. The change in total net course registrations is expected to be approximately flat year over year. For its spring term, which is the three months ending June 3038, new student enrollment at Hondros increased 5% and total student enrollment increased 17% year over year. For the 2018, we expect consolidated revenue to increase between 02% year over year. Net income for the 2018 is expected to be in the range of $0.29 to $0.34 per fully diluted share.

In closing, we are encouraged by the stabilization of total net course registrations at APUS. Furthermore, I am pleased by our emphasis on cost control as we take appropriate steps to stabilize APUS net and total student registrations while maintaining our focus on quality and affordability. Hondros continues to show growth and margin improvement. Its plans to expand strategic relationships and the opening of a new campus location in late twenty nineteen should help fulfill its mission and address the critical nursing shortage in Ohio. We believe these efforts, combined with existing and future workforce focused initiatives, will enable us to reach our long term goals.

Now we would like to take questions from the audience. Operator, please open the line for questions.

Speaker 0

Thank you, sir. And our first question comes from Peter Appert with Piper Jaffray. Your line is open. Please go ahead.

Speaker 4

Thank you. Good afternoon. So Wally, you mentioned TA hurt by the government shutdown, seeing some strengthening recently. Can you talk about the trend in that business, the base access issue, if that's been resolved? And whether you think the TA business gets back to positive territory over the course of the year?

Speaker 2

I think we're optimistic, of another government shutdown, that TA business will get back to normal. We I think the bigger impact for the first quarter was the few days shutdown. But at the same time, there have been some systems glitches with the Air Force, and the base access issue has not yet been resolved. We are hoping to positively hear resolution sometime in the near future, but we just can't predict that.

Speaker 3

Okay.

Speaker 4

The negative two to positive two in 2Q registrations, I think the way the arithmetic works is that would require some pretty dramatic improvement in persistence. Is there something that's informing that forecast that would give you confidence that the numbers could move that meaningfully?

Speaker 2

Well, April is done, and we are very close to finalizing May registrations. And so we look at our we do monthly starts. So it's simply taking one month that's actual, one month that's close and forecasting what June is going to look like. But essentially, we have continued to improve our first course completion rates for FSA students. That was our bellwether indicator for whether or not the students who are coming through the pipeline were legitimate students, were students who had intentions to complete, at least from an academic perspective complete a course and hopefully move forward in their programs.

That continues to increase and that's really the big driver here.

Speaker 4

Right. Got it. Okay. And then for Rick, the you mentioned another $1,700,000 in severance costs in 2Q. Is that the end of the severance costs?

Number one. And then number two, can you give us any estimate in terms of the annualized cost savings you expect from this?

Speaker 3

Right. So let me be clear. When I made the reference to the second quarter, I was making reference to the cash that we're going to be paying that. The VRIF was completed substantially completed on April 1. And so the cost associated with that is recognized in the first quarter.

In terms of the expected savings, that's in the 10 Q and I'm looking for the number. I believe it was 1.7 Chris, you have the number?

Speaker 1

1.7 to 2.4.

Speaker 3

2.4 range. Yes. And I can find that in the 10 Q and tell you that number.

Speaker 4

Got it. Okay. Good enough. Thank you.

Speaker 3

Then I have the number. The savings would be no, I don't have it. So sorry, go ahead.

Speaker 4

Okay. I'll find it. The for Hondros, the additional campus you would open, that would be in Ohio would be the expectation?

Speaker 2

Actually, that's not our expectation. We haven't announced where it is, but we have researched and actually in one case applied, formally applied. So we are not allowed to get approval for it until we've moved over to our new accrediting body and taken off of provisional status with the Department of Education. So once we get that status and can formalize it, we'll make our announcement.

Speaker 3

So the savings is on Page 21. It's 1,700,000.0 to 2,100,000.0 for this year, and the annualized is 2,100,000.0 to $2,800,000 so

Speaker 4

Great. Thank you. And then Wally, continuing on Hondros, you've had some really good momentum in that business, obviously. How aggressively do you want to pursue expansion once you have the capability with the creditors to step up the pace of campus openings?

Speaker 2

Well, I think aggressive is probably a tough word to pursue. I mean, as much as it's been a nice turnaround in our investment, The nursing business is highly regulated. You have both the NCLEX pass rate that you're monitored on and regulated state by state as well as your placement rate that you're regulated on in most of the states as well as your accrediting body. So pushing for aggressive campus additions while you have to make sure that you're admitting the right quality student who can both pass the NCLEX and then be placed generally within sixty to ninety days after passing the NCLEX. While I would like to say that we'll do that, we need to maintain our quality.

So if I were saying an aggressive year would probably be organically adding two locations.

Speaker 4

Okay. And then lastly, Wally, any new or incremental thoughts in terms of priorities for the allocation of your balances, which continue to expand?

Speaker 2

We continue to look for opportunities for that, Peter.

Speaker 4

And I assume that's mainly in the M and A arena?

Speaker 2

Yes.

Speaker 4

And anything you'd call out in terms of areas of focus or areas of particular interest?

Speaker 2

I think we've stated our interest in health care. And at the same time, we're much more interested in nursing than we are in some of the other ancillary areas of health care that have tough times with gainful employment. The final gainful employment regulations haven't been issued, so we'll take a look at that and see if that might change our perspective. But at least at this point in time, it's health care with a nursing emphasis. And I think we scale so nicely in APUS.

There's no real reason to try to find another online provider.

Speaker 4

Great. Thanks, Wally.

Speaker 0

Thank you. Our next question comes from Alex Paris with Barrington Research. Your line is open. Go ahead please. Good afternoon.

This is Chris Howe sitting in

Speaker 2

for Alex Paris. I had a question surrounding FSA And I didn't hear you mention it, but what was the returning student numbers for FSA? And kind of reflecting back on the last call, do you expect the trend to continue to slow? And at what point would you say you would get close to breakeven? Well, so we said that our new FSA students were down 23.6% in the first quarter.

The returning FSA students were only down 6% in the first quarter. I think the difference between that new and returning number shows that the change in our mix has paid off because even though the new FSA numbers are still declining in double digits, we've got a single digit decline in returning FSA students. I don't believe we gave you specific time for transitioning for FSA students specifically. But as you can see with our guidance for the second quarter overall, the impact to returning students from FSA is quite diminished. And we do believe that over time, it will balance itself out.

Speaker 0

Our next question comes from Jeff Silber with BMO Capital Markets.

Speaker 5

Hey, good afternoon. It's Henry Chan calling in for Jeff. Hey, Henry. Hey, guys. A question on the VA payer growth.

Just curious what's driving that growth? And is that eventually, it could look like

Speaker 4

it could at least offset some of the weakness in TA?

Speaker 2

Well, we hope the weakness in TA is not permanent. But TA, we continue to have a great brand with AMU, a great reputation. Reputation is pretty important in the military market, meeting the needs of our students, being military friendly in terms of recognizing their training for academic credit, having degrees that match up for both their career in the military and their career post military. And while we love our VA students, they actually generally don't persist with us to a degree unless they left their active duty lives close to a degree because Congress has deemed that if you're attending 100% online institution, you only get 50% of the housing allowance. So I'm grateful that the number is up 23% for the quarter.

But at the same time, we always know that we have a quicker drop off in the lifetime number of courses for a VA student versus a TA student because of that housing allowance anomaly.

Speaker 5

Got it. Okay. That makes sense. And on the Hondros side for the expansion of the new campus, what are the key, I guess, milestones that you have to pass? I know you mentioned the accreditation has to be finalized.

And then are sort of the next steps beyond that?

Speaker 2

So well, first of all, we you have to go to the state that you're applying for a new campus in. Our last one that we added, Toledo, was in Ohio where we already are. I stated that we're looking at two other states and we have a formal application in it. One of them and our approval is subject to approval of both the U. S.

Department of Education and our accrediting body. And until either the issue with our ACICS accrediting body is lifted and lifted by the Department of Education. And while they said that they reinstated them, they haven't lifted they have not lifted the provisional participation agreements that every ACICS school had. Until that's lifted, you can't add degrees, you can't add campuses. And until we get a new accrediting agency, we can't lift the PPIF either.

So once that is lifted, we will be able to make our application first with the accrediting body. The last entity you get your approval from is the U. S. Department of Education.

Speaker 5

Okay. Got it. Okay. And in terms of the actual campus itself, will this be like a Greenfield campus that is newly constructed?

Speaker 2

We typically lease space from owners of office parks.

Speaker 3

Okay.

Speaker 2

So but it will be a brand new campus, I mean, for us, but it may be in a building that is not brand new, but has a special purpose location or floors for our nursing school.

Speaker 5

Got it. Okay. And any idea on what the size of this new campus might be?

Speaker 2

Let's see. I think we with our Toledo location, it's approximately 20,000 square feet. So I'd assume it'd be similar size.

Speaker 5

Similar size. Okay. Got it. Okay, great. Thanks so much.

Speaker 2

Thank you.

Speaker 0

Thank you. And at this time, I'm showing no further questions. I would like to turn the call back over to Mr. Symenosky for closing remarks.

Speaker 1

Thank you. That will conclude our call for today. We wish to thank you for listening and for your interest in American Public Education. Have a great evening.

Speaker 0

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful

Speaker 5

day.