American Public Education - Earnings Call - Q1 2019

Transcript

Speaker 0

Good afternoon, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the APEI Reports First Quarter twenty nineteen Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

And with that, I would now like to turn the call over to Chris Simenoski, Vice President of Investor Relations. Please go ahead.

Speaker 1

Great. Thank you, Julie. Good evening, and welcome to American Public Education's discussion of financial and operating results for the 2019. Materials that accompany today's conference call are available in the Events and Presentations 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 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, 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 filed with the SEC and the quarterly report on Form 10 Q filed with the SEC earlier today, as well as factors described in 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. And now I'll turn the call over to Doctor. Boston.

Speaker 2

Thank you, Chris. Good afternoon, everyone. I will begin our call today by discussing our recent operating results for the 2019. Our CFO, Rick Sunderland, will then discuss APEI's financial results and our outlook for the 2019. In the 2019, APUS reported a year over year increase in both new and total net course registrations of 81% respectively.

This exciting result represents the first year over year quarterly increase in net course registrations by new students at APUS since the 2012. The increase was driven by a 25.7% year over year increase in net course registrations by new students utilizing Military Tuition Assistance or TA as well as by a 3.1% increase in net course registrations by new students utilizing cash or other sources. We believe these increases are a reflection of our focus on most likely to persist communities where student quality and advertising costs are more compatible with APUS' low tuition model. That said, the increase in net course registrations at APUS was partially offset by a 9.3% decline in net course registrations by new students utilizing Federal Student Aid or FSA and a 6.8% decline in net course registrations by new students utilizing Veterans Benefits or VA. While net course registrations by students utilizing FSA continued to decline, the first course pass and completion rate, a measure of student persistence and quality, for APUS undergraduate students utilizing FSA remains at historically high levels.

For the three months ended March 3139, total enrollment at Hondros College of Nursing or HCN declined 15% year over year and new student enrollment decreased 32% compared to the prior year period. We believe some of the changes we have made to our admissions and academic achievement requirements have negatively affected student enrollment at HCN. However, we believe these changes are ultimately beneficial to students and will result in a better educational experience and improved testing pass rates in the future. Furthermore, we remain committed to serving the higher education needs of nurses and healthcare professionals more broadly as we see continued strong demand for education in these professions. We believe our continued focus on academic quality, attracting students with greater college readiness, and on recent upgrades to our enrollment management processes has produced outstanding results, including, but not limited to, significantly better student persistence, improved conversion rates and a more stable student population at APUS.

The improvement in our quality mix of students is reflected in part by APUS's fiscal year twenty sixteen draft cohort default rate, which improved to 18.5% compared to the fiscal year twenty fifteen official cohort default rate of 23.8%. The quality of APUS is also reflected by referral rates and student satisfaction. Thus far in 2019, 50% of new students responding to our new student surveys indicated that they were referred by others and 95% of respondents to our 2018 alumni survey indicated that they would recommend APUS to a friend or colleague. In short, we believe APUS offers a better student experience at an affordable price and exhibits improved student persistence than just a few years ago. Although building a durable higher education institution requires time and patience, the initiatives to stabilize APUS enrollment and enroll students whose educational objectives align with completion give us confidence in the future of our overall enterprise.

As a result, I am pleased to announce that the APEI Board of Directors has authorized a $35,000,000 stock repurchase program that effectively returns a portion of our excess cash to shareholders. Now I will turn the call over to our CFO, Rick Sunderland. Rick?

Speaker 3

Thank you, Wally. American Public Education's first quarter twenty nineteen consolidated revenue decreased by 2% to $73,400,000 compared to $75,000,000 in the prior year period. The revenue decrease was due to a $1,600,000 or 16.7% revenue decrease in our Hondros segment. Revenue in our API segment was $65,700,000 in each of the three month periods ended March 3139 and 2018. While APUS total net course registrations increased approximately 1% period over period, revenue per net course registration was lower compared to the prior year period.

Cost and expense were $72,100,000 for the three months ended March 3139, compared to $68,800,000 in the prior year. Cost and expenses in the current year period include a $5,900,000 pretax noncash impairment of goodwill in our Hondros segment. Consolidated instructional costs and services expenses decreased approximately $1,800,000 to $27,900,000 and as a percentage of revenue decreased compared to 39.6% in the prior year period. The decrease in instructional costs and services expenses was primarily driven by a decrease in employee compensation costs and instructional materials costs in both our APEI and Hondros segments. In the prior year period, employee compensation costs include approximately $800,000 of pretax expenses from the voluntary reduction in force program in our APEI segment.

The decrease in instructional costs and services expenses as a percentage of revenue was a result of instructional costs and services expenses decreasing at a rate greater than consolidated revenue. Selling and promotional expenses decreased approximately $600,000 to $15,000,000 and as a percentage of revenue decreased to 20.5% of revenue compared to 20.8% in the prior year period. The decrease in selling promotional expenses was primarily driven by a decrease in employee compensation costs in our API segment, partially offset by an increase in advertising costs in our API segment. In the prior year period, employee compensation costs include approximately $500,000 of pretax expenses from the Voluntary Reduction in Force program in our APEI segment. The decrease in selling and promotional expenses as a percentage of revenue was a result of selling and promotional expenses decreasing at a rate greater than consolidated revenue.

General and administrative expenses increased approximately $200,000 to $19,100,000 and as a percentage of revenue increased to 26% from 25.2% in the prior year period. The increase in general and administrative expenses was primarily the result of an increase in professional fees in our API segment, partially offset by a decrease in employee compensation costs in our API segment. During the quarter, we incurred approximately $1,300,000 in pretax professional fees related to the evaluation of an acquisition. In the prior year period, employee compensation costs include approximately $400,000 of pretax expenses from the Voluntary Reduction in Force program in our APEI segment. The increase in general and administrative expenses as a percentage of revenue was a result of general and administrative expenses increasing during a period when consolidated revenue decreased.

Consolidated bad debt expense for the quarter was 1,000,000 or 1.4% of revenue compared to $1,100,000 or 1.5% of revenue in the prior year period. The company recorded a pretax non cash charge of $5,900,000 to reduce the carrying value of its goodwill in our Hondros segment. Depreciation and amortization expenses decreased approximately $400,000 to $4,100,000 and as a percentage of revenue decreased to 5.5% of revenue from 6% in the prior year period. Due to the loss in our Hondros segment, our effective tax rate during the 2019 was a benefit at approximately 6.6% compared to expense of 28.9% in the prior year period. API segment income from operations before interest income and income taxes driven by improved performance at APUS increased approximately 47% to $7,500,000 or 11.4% of revenue compared to $5,100,000 or 7.8% of revenue in the 2018.

Hondros segment loss from operations before interest income and income taxes was $6,100,000 during the three months ended March 3139, compared to income of $1,000,000 in the same period of 2018. The decline is primarily a result of the $5,900,000 goodwill impairment charge and a decrease in revenue due to lower enrollments during the three months ended March 3139. Consolidated net income for the quarter was $1,000,000 or $06 per diluted share compared to net income of $4,600,000 or $0.28 per diluted share in the prior year period. Adjusted net income for the 2019 was $5,300,000 or $0.32 per diluted share. Adjusted net income for the 2019 excludes the pretax non cash expense of $5,900,000 associated with the reduction in the carrying value of goodwill for the company's Hondros segment as well as the applicable tax effect of the adjustment.

For additional information regarding adjusted net income, a non GAAP measure, please refer to GAAP to adjusted net income reconciliation in the financial tables of our first quarter twenty nineteen press release. Total cash and cash equivalents at March 3139 were approximately $215,900,000 compared to $212,100,000 as of December 3138. Capital expenditures approximately $1,600,000 for the three months ended March 3139 compared to $1,700,000 in the prior year period. Finally, as Wally mentioned, the API Board of Directors has authorized a $35,000,000 stock repurchase program. Going on to the second quarter twenty nineteen outlook.

Our outlook for the 2019 is as follows. At APUS, the change in total net course registrations is expected to be between a 3% decrease and a 2% increase year over year. And the change in net course registrations by new students is expected to be between a 4% decrease and a 1% increase year over year. At Hondros, for the spring quarter, which is the three months ending June 3039, total student enrollment declined by 24 year over year and new student enrollment decreased by 35% year over year. As Wally noted, enrollments at Hondros were adversely impacted by changes in admissions processes and course retake policies among other factors.

Hondros is taking action by further modifying certain admissions requirements and focusing on growth initiatives, which we believe will mitigate the impact of these reductions in enrollments. In the 2019, we expect consolidated revenue to decline between 62% year over year. Net income for the 2019 is expected to be in the range of $0.25 to $0.3 per fully diluted share. The change in operating margin indicated by our second quarter guidance is influenced in part by enrollment declines at Hondros that have a significant impact on that unit's operating margin. We anticipate a year over year decline in Hondros segment operating income of approximately $1,700,000 in the 2019 compared to the 2018.

Although our path to overall enrollment growth may not be a straight line, I am pleased by the continued and sustained improvement in many of our quality metrics as well as by the impact of our cost management at APUS. API segment operating income increased from $5,100,000 in the 2018 to $7,500,000 in the 2019, an increase of approximately 47% driven by improved performance at APUS. The year over year operating margin improvement in our API segment was primarily driven by good expense management overall and is particularly evidenced by lower compensation costs from the voluntary reduction in force during the 2018, lower textbook and course materials costs and lower bad debt expense. Along with our continued focus on quality and affordability, we believe the continued improvements we are making to our enrollment management processes along with adjustments to our marketing strategy, which emphasizes outreach to military, corporations and other most likely to persist communities is what ultimately builds the durable and respected higher education institutions that our students and other key stakeholders expect. Now we would like to take questions from the audience.

Operator, please open the line for questions.

Speaker 0

Thank you. Peter Appert from Piper Jaffray. Please go ahead. Your line is open.

Speaker 4

Hi, guys. This is Kevin Estock in for Peter Appert. Just want to say great start numbers this quarter in APUS. I guess I was wondering, so in 2Q, you guided towards slightly lower number, so there's a little bit of a deceleration. I guess I was wondering if you could point to any reasons why and maybe what the long term start growth we should expect going forward?

Speaker 3

You want me to answer? Okay. Thank you. This is Rick. So the first quarter enrollment numbers were driven primarily by the military.

We were up close to 26% in military start new student registrations. We're not seeing that level of strength in the second quarter, but we're still seeing strength in the military. We're expecting it will be up year over year. As it relates to the guidance, in the military, they can only register one month in advance. So it's a little more challenging as we sit here on May 7 giving guidance when we have a couple of months in the quarter where we don't have actual registrations, which is different than what we had when we gave our year end numbers and our first quarter guidance given the timing of the 10 ks versus the timing of the 10 Q.

So good strength in the military in the first quarter. That appears to be enduring, but not necessarily at the level that we saw in the first quarter. And we feel good about where we're our trend line in the military.

Speaker 4

Sure. Great. Okay. Thanks. That makes sense.

And my second question is just about Hondros. And know you explained why the starts were weak. I guess I'm just wondering, have you guys looked what kind of maybe growth opportunities you guys were looking at, like maybe additional campuses and new states or new programs?

Speaker 2

Sure. Fair question. We have stated that our intention after we finish our first year of accreditation under ABHES is to organically add facilities. ABHES has a rule that you can only add one facility a year organically. And we have received approval from the State of Indiana to add a campus.

And at the same time, we have to receive approval from our accrediting body before that approval is final as well as the Department of Education. So it's our intention in June to notify ABHES that we're going to add a campus. And then we go through the process back to Indiana again to get inspections and a lease and that sort of thing. But our plan would be to open that campus by 2020. And then at the same time, assuming that's going as well as our Toledo campus did, we would probably submit again in June because it's based on our anniversary date with AvHES for another campus at a location yet to be identified or approved for that matter.

So one a year is the current rule and regulation for AvHES and that works within our existing operating infrastructure.

Speaker 4

Okay, great. Thank you very much.

Speaker 0

Greg Pendy with Sidoti. Please go ahead. Your line is open.

Speaker 5

Hey, guys. Thanks for taking my questions. Just the first one, just given the tax benefit in the quarter, is there anything we should be thinking big picture on the quarterly cadence on how taxes might fall with the next three quarters?

Speaker 3

Yes, Greg. I think that was a discrete event. I think you're going to see it return to a more normalized level. Of course, overall provision for the year is going to be impacted by that amount that occurred in the first quarter. So I think you can model in something close to normal levels going forward, understanding that the year to date is obviously affected by the first quarter discrete event.

Speaker 5

Okay. And then can you just kind of talk about the revenue per student? Is there anything kind of that sticks out on the year over year kind of decline?

Speaker 3

Yeah, sure. For APUS,

Speaker 2

the year over year decline primarily results to one undergrad course that we had in our general studies program. That was a two credit hour course. That course was revamped and is now a three credit hour course, but not effective until the April 1. So it'll take time to phase in because some people signed up for the old course in advance of April when the new course was available. But by the end of the year that switch should be made.

Rick, anything else to add?

Speaker 3

Well, yes. So I would add. So that's the primary driver. The other driver is tuition for our military students is 8% lower than tuition for nonmilitary. So as you read the Qs going back in the K and most recent Q, you'll see the change in mix between military and nonmilitary.

It has an effect on revenue per student. But Wally's right, the main driver there is the introduction of the two credit course, which happened in April, followed by the replacement with a three credit course, which happened in April. And then the lag given the fact that our students can register up to five months in advance.

Speaker 5

Great. Okay. That's helpful. Thanks a lot.

Speaker 2

Sure. Thank you.

Speaker 0

We have no further questions at this time. I will turn the call back over to you, Chris.

Speaker 1

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

Speaker 0

This concludes today's conference call. Thank you again for your participation and you may now disconnect.