American Public Education - Earnings Call - Q2 2019

Transcript

Speaker 0

Good afternoon. My name is and I'll be your conference operator today. At this time, I would like to welcome everyone to the American Public Education Second Quarter twenty nineteen Earnings 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.

Thank you. I would now like to turn the call over to Chris Simonevsky, Vice President of Investor Relations.

Speaker 1

Thank you, operator. 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 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 registration and enrollments, Navy Tuition Assistance Funds, expected revenues, expected earnings and plans with respect to recent, current and future initiatives, including information technology replacements and upgrades, and 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 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 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 Officer. Now I'll turn the call over to Doctor. Boston.

Speaker 2

Thanks, Chris. Good evening, everyone. As we begin today, I'd like to comment on the quarter at a high level. While the quarter met expectations, we are by no means satisfied with the results and remain focused on aggressively pursuing our improvement initiatives. Today, you'll hear about the challenges we faced, but even more about how we're addressing each in a way that we believe will pave the way for improvement and sustained success.

We remain focused on strengthening the core business at APUS and repairing the business at Hondros, while maximizing the inherent value on our existing assets. We will continue to be results focused both in the near and long term. I will also discuss possible future investment in our information technology infrastructure and the second quarter's operating results at a high level before our CFO, Rick Sunderland, will walk you through APEI's recent financial results and our outlook for the 2019. With that, let's proceed with our discussion of Hondros. Hondros College of Nursing or HCN is facing two primary operational challenges.

One, achieving satisfactory enrollment in new and returning students and two, meeting the applicable standards of our regulatory and accrediting bodies. To overcome these challenges, we have opened additional pathways to degree attainment as well as work to identify the appropriate balance of academic achievement requirements, admissions requirements and attracting appropriate students. One new pathway to degree attainment is our new Direct Entry Associate's Degree in Nursing or ADN option, which will launch this fall. HEN's Direct Entry ADN option provides an additional way for successful college ready students to enroll, complete a degree, and enter the nursing profession in as few as fifteen months when attending full time. Acceptance in the program requires a prospective student to take an entrance exam, transfer at least 32 semester credits, and possess a 2.5 GPA or higher from prior college experience.

We believe the program is ideal for students with no prior nursing experience, but with some college experience, or a non nursing degree who are seeking opportunity to change careers and begin a nursing program. We think this new option will help HCN reach its enrollment goals of achieving sequential increases in new student enrollment, strengthen total student enrollment, and improve retention rates and first time NCLEX pass rates by attracting working adults from non nursing professions who have already demonstrated successful academic performance. Since appointing Harry Wilkins as interim CEO at HCN in May, I am pleased with his team's progress in performing a thorough analysis of the college and its operations. They are already making important changes to improve the financial and operating performance of the institution. These changes include, but are not limited to, upgrading HCN's enrollment management processes with new Salesforce and Enrollment Rx software, fine tuning the staffing model by adjusting customer service staff hours to include evenings and weekends, optimizing marketing with enhanced geo targeting and new referral based marketing campaigns, and enhancing financial services by launching new scholarships and payment plans for improved recruitment and retention, as well as to lower bad debt expense.

In addition, the team performed a comprehensive course by course analysis, made changes to optimize teaching and better align curriculum with NCLEX exam content, and created a more personalized academic experience, especially for at risk students. HCN continues to prepare for the opening of a new campus location. We signed a lease and are building out a new campus location in Indianapolis, Indiana. The economics of opening a new campus are attractive given the relatively low capital investment required. Properly located and managed, the new campus can reach cash flow breakeven within eighteen to twenty four months.

Our discussion of new campus locations merits some discussion given the work that Harry and the team are doing at HCN to improve the health of the institution. While we believe there is great opportunity for new campus locations beginning with Indianapolis, we will monitor our existing programs and locations before carefully considering the timing of future investments. I'm optimistic about a timely turnaround at HCN because of the quick and smart action of the current team at HCN as well as because of continuing strong demand for nursing education. In the 2019, APUS escalated plans to evaluate possible replacements or upgrades to its information technology and learning management systems. The initiative is expected to lead to an information technology transformation program intended to increase the enterprise's agility and enhance the university experience for students.

In addition, if we proceed, the goals of the longer term effort would include enabling our systems to better accommodate flexible learning modalities modalities such as dual degrees, competency based education and custom programs for partnerships. The initial evaluation phase of this initiative will determine the final scope, duration and estimated cost of the project. Moving on to operational results for the 2019. APUS reported a year over year decrease in new and total net course registrations of 21%, respectively. The decreases were driven by a year over year decline of 9.7 in net course registrations by new students utilizing Federal Student Aid or FSA, a decline of 8.4% in net course registrations by new students utilizing Veterans Benefits or VA, and a decline of 5.7% in net course registrations by new students utilizing cash and other sources.

These declines were partially offset by a 5.7% increase in net course registrations by new students utilizing DoD Tuition Assistance or TA. As of May 2019, the Navy reported that its Tuition Assistance Program funds had been exhausted for the balance of its fiscal year ending September 3039. The Navy is the only branch of service to have suspended its TA program funds, and we expect the funds to be reinstated at the start of the next fiscal year. Although some Navy students may be Pell eligible, we anticipate that this event will have a negative impact on our third quarter results and to a lesser extent our fourth quarter results. For context, Navy TA registrations at APUS represented approximately 6.5% of total registrations for the three months ended September 3038.

I'm pleased to report that according to data provided by the Department of Defense, AMU maintained its number one position in the TA market, having provided approximately 17% of all TA courses in FY 2018, the year the latest data is available for a leadership position comparable to the prior year. At HCN for the three months ended June 3039, total student enrollment declined by 24% year over year and new student enrollment decreased by approximately 35% year over year. As mentioned earlier, I believe the team at HCN has an effective plan in place to improve the overall health and reputation of our nursing platform. As a result of their confidence in the plan, we have decided to increase HCN's advertising spend in the third quarter in support of our goal to achieve a sequential increase in new student enrollment and a strengthening of total student enrollment in the 2019. A strong fall start would position HCN for improved operational performance in 2020.

In conclusion, at APUS, we have built a respected higher education enterprise based on our core belief that higher education should be flexible and affordable. Approximately 70 of our APUS alums graduate with no student loan debt incurred at APUS. Few Title IV institutions can say this. In 02/2002, we celebrated the success of 107 graduates. And in May 2019, I presided over the graduation of over 11,000 students, bringing the total number of AMU and APU alums to more than 90,000.

We achieved this success during a time of rapid transformation in higher ed as well as during a period of unprecedented regulatory change and economic volatility. We recognize that strengthening the core business at APUS and repairing the business at HCN is a mere step, but a critically important step towards maximizing the inherent value in our enterprise and building a higher education institution that serves the needs of working professionals as job skills and nature of work itself rapidly evolve. Now I will turn the call over to our CFO, Rick Sunderland. Rick?

Speaker 3

Thank you, Wally. Going on to page three in the PowerPoint. American Public Education's consolidated revenue for the three months ended June 3039, decreased 3.1% to $70,600,000 compared to $72,800,000 in the prior year period. The revenue decrease was primarily due to a $2,000,000 or 21.6% revenue decrease at Hondros. For the quarter, APUS revenue declined $200,000 or 0.4%.

Total cost of expenses were $64,900,000 for the three months ended June 3039, compared to $64,800,000 in the prior year, an increase of 100000.0%. Consolidated instructional costs and services expenses decreased approximately $300,000 to $28,700,000 and as a percentage of revenue increased to 40.7% compared to 39.8% 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 HCN segments. Selling and promotional expenses increased approximately $800,000 to $14,100,000 and as a percentage of revenue increased to 20% of revenue compared to 18.2% in the prior year period. The increase in selling and promotional expenses was primarily driven by an increase in advertising costs in our API segment.

General and administrative expenses increased approximately $500,000 to $18,100,000 and as a percentage of revenue increased to 25.7% from 24.2% in the prior year period. The increase in general and administrative expenses was primarily related to increased information technology costs in our API segment and employee separation costs in our HCN segment, partially offset by a decrease in professional fees in our API segment. Consolidated bad debt expense was $900,000 in both quarterly periods. And as a percent of revenue, 1.3% of revenue in 2019 compared to 1.2% of revenue in 2018. Depreciation and amortization expenses decreased approximately $400,000 to $3,900,000 and as a percentage of revenue decreased to 5.6% of revenue from 6% in the prior year period.

The $2,400,000 or 29% decline in consolidated income from operations before interest income and income taxes was driven by a decrease in income from operations before interest income and income taxes at Hondros. For the quarter, the loss from operations before interest income and income taxes at Hondros was $900,000 compared to income from operations before interest income and income taxes of $900,000 in the prior year period, a year over year decrease of $1,800,000 In our API segment, income from operations before interest income and income taxes decreased dollars or 8.1%, primarily due to higher advertising and information technology costs in the current year period. API segment operating income margin declined to 10.4% in the current year period compared to 11.3% in the prior year. Driven by the operating loss at Hondros, consolidated operating income margin declined to 8% in the current year period compared to 11.1% in the prior year. Consolidated net income for the quarter was $4,900,000 or $0.30 per diluted share compared to net income of $6,500,000 or $0.39 per diluted share in the prior year period.

Cash flow from operations increased 21.2% to $23,700,000 compared to $19,600,000 in the prior year. Accounts receivable decreased by $7,600,000 compared to December 3138, driven by improved payment processing in both TA and VA. Total cash and cash equivalents as of June 3039 were approximately $220,800,000 compared to $212,100,000 as of December 3138. During the quarter, the company repurchased 127,467 shares of its common stock for $9,600,000 under the previously authorized $35,000,000 stock repurchase plan. At June 3039, dollars 25,700,000.0 remains under our share repurchase authorization.

Capital expenditures for the quarter were approximately $3,000,000 compared to $3,600,000 in the prior year period. Going on to Page four, third quarter twenty nineteen outlook. Our outlook for the 2019 is as follows. In the 2019, we expect consolidated revenue to decline between 117% year over year. The company expects diluted earnings per share between a loss of $02 and income of $03 per diluted share in the 2019.

The EPS range indicated by our third quarter guidance is impacted in part by the enrollment decline at Hondros that had a significant impact on that unit's operating income. We anticipate a year over year decline in HCN segment operating income of approximately $2,400,000 in the 2019 compared to the 2018, driven in part by the higher advertising spend mentioned by Wally. In addition, the following will impact operating income and operating income margin in our API segment in the 2019. Number one, APUS estimates that the temporary suspension of Navy TA program funds will result in a loss of approximately 4,300 net course registrations in the quarter. The revenue impact of this disruption in Navy TA funding is expected to be approximately $2,900,000 Number two, we anticipate the evaluation of technology upgrades and possible replacements will cost $1,200,000 pretax.

And number three, APUS plans to increase its advertising spend by approximately an additional $1,800,000 pretax as compared to the prior year period. At APUS, total net course registrations are expected to decline between 105% year over year, and net course registrations by new students are expected to decline between 1712% year over year, both impacted, of course, by the reduction in Navy TA registrations. Excluding the anticipated loss of net course registrations resulting from the disruption in Navy TA funding, new and total net course registrations would have been approximately six percentage points higher for new and five percentage points higher for total than third quarter guidance year over year. At Hondros, both new and total student enrollment will decrease by 29 year over year in the 2019. As Wally noted earlier, enrollments at Hondros were adversely impacted by changes in admissions processes, academic achievement policies, and market perceptions.

However, as noted, Hondros has launched several initiatives to improve the overall performance of the institution and importantly has set a goal to achieve a sequential increase in new student enrollment and a strengthening of total student enrollment in the 2019. Now we would like to take questions from the audience. Operator, please open the line for questions.

Speaker 0

And our first question comes from Corey Greendale with First Analysis.

Speaker 4

Hey, good afternoon. Corey. Hey, Corey. Corey. So first, hey, how are doing?

First question is, easy, and apologies if this is repetition, but I just missed the number, Wally, that you provided for the change in new student registrations from FSA. If you could just repeat that one.

Speaker 2

Are you talking about guidance or for the second quarter?

Speaker 4

For the second quarter.

Speaker 3

Yes, second quarter, Corey, new was down 5.7%.

Speaker 4

7.7%. Thank you.

Speaker 3

Oh, I'm sorry. It's 9.7%, Corey.

Speaker 4

9.7%. Got Thank it. Two So questions maybe first on, Hondros. The in in terms of there's some language in the the queue, and you somewhat alluded to it about market perceptions and, something about perceptions on the ground there. Was just hoping you could elaborate on that, like what that is and what you're doing to improve that.

Speaker 2

Sure. We basically been we flatlined at a NCLEX pass rate for first time test takers for our ADN program, our RN program, at a number that was below the level that the state of Ohio wanted us to be at, which is 95% of the national average. The board and I were not happy with that. So we wanted to look at we asked our academic team to look at ways in which we can improve the rate. And so a number of things that they put in place were practices followed by other schools, including administering an additional admissions test upfront, a test called the ACCUPLACER, which is not uncommon, but we were using the HESI and instead we added the ACCUPLACER, as well as putting in different standards for minimum passing grades on lab courses.

And so when those changes went in and the last one went in starting in the first quarter in January, it was very negative reaction across the board with prospective students. And some of that was caused by returning students who weren't happy with the changed passing requirements for the lab courses, which are very helpful towards passing the NCLEX exam. And so that was our first quarter decline, which we obviously reported on and we began looking at ways in which we can improve it. And when some of those ways, which by the way, changes in test results and passing standards and other requirements may have to get approved by the Ohio Board. And typically, so if you're going to make a change, you've got to notify them a quarter in advance of when you're going to make a change so you can't make these changes overnight.

And so when our team's recommended solution didn't work starting in the second quarter in April, I decided in May to make a leadership change and we brought Harry Wilkins back. And so Harry's been working with the team, many of whom he knew from his previous three years as the CEO, and, you know, put a number of changes in place including evaluating the entire curriculum where some of the speed bumps were in in courses for for students that was causing some of the negative reaction and and basically spending a lot more time with students at the campus locations, listening to them and trying to alleviate some of those perceptions that were out in the community. It's not cured yet, but I believe that he and his team with this deliberate measured pace of analyzing and then visiting all of the campuses, including making a campus director change at one campus, think are progressing. And it's sad that this occurred, particularly when the impetus for the changes was to get a higher pass rate. By the way, the pass rates are improving, but at the same time, it's impacted enrollment much more negatively than we wanted.

So we're working to build a balance between what the right curriculum is, what the right evaluations are and how to make sure that our students succeed.

Speaker 4

Very helpful. Thank you. And just sort of in light of those, it sounds like there are steps in place should lead to improvement. Obviously, in terms of enrollment, it hasn't happened yet. So, as you think about geographic expansion, I guess, are you committed to Indianapolis?

And, are you seeing enough in the data to suggest it is bottoming that it makes sense to start expanding geographically before you have more confidence that the model stabilizes? Or just can you just kinda leverage your thinking?

Speaker 2

No. It's a great question. In fact, we don't have a specific start date, but we did have a date. Our application had been with the state of Indiana for quite a while, think about or eighteen to twenty four months, and there was a lag because you may recall the previous administration changed out ACIC made all schools move over from ACICS to another creditor. And while we were in that process, we couldn't

So we'd already put our application in place. We had the delay. The state understood that. Once we got a new creditor in place, we had six months roughly to make a go, no go decision on it. We like the location.

We like the state. We like all the demographics. So we signed a lease, and part of the state's process is you actually have to have your campus built out before they'll give you your license and authorization to open up a class. So we'll you know, our our goal is to have that campus build out done by November. At the same time, our current plans don't have us starting and opening up a term until the second quarter of next year.

And if we're not feeling good about how we're progressing elsewhere, Corey, we could always delay that. We could push it back. But we did have to sign our lease in order to keep the authorization from expiring.

Speaker 4

Yep, understood. I have some additional questions, so I'll go back in queue and ask if no one else has them. Thank you.

Speaker 2

Okay.

Speaker 0

And we have another question from Corey Greendale with First Analysis.

Speaker 4

All right. Well, appreciate you. So I'll just keep going then. Sure. So the next question I had was on the APHIS segment and understand the effects of the Navy, and I know this kind of thing has come up, this general sort of thing has come up before.

If you back out the impact of the Navy, it sounds like the new course registration trend is still a little bit more negative than it was in Q2. So what else are you seeing that is softer in Q3 versus Q2?

Speaker 2

Well, one thing we're seeing, we made a choice this year to really focus on putting our marketing dollars, given the increased competition everywhere with online, where we could achieve a student enrollment for $2,000 or less. And so that meant that we were spending more money on our military segment than our civilian segment. And so one of the things that did to us was it lowered our average number of registrations per student overall because the military students take fewer registrations per year than the civilian students. So that number in terms of net registrations through June 30 is approximately 2,000. Right, Rick?

Speaker 4

Mhmm.

Speaker 2

And so we're we're seeing that, Corey. I I I can't quite fine tune it for what it'll be in the third quarter because we don't exactly project our our our registrations by payer source. We look at them in the aggregate, but we're we're just don't fine tune them that much. But if you know that it was 2,000 down on the net simply due to the ratio difference, TA was up for the first six months, but by virtue of TA being up, it's a lower number of net registrations per student on average. It's been that way historically.

FSA students have to be at least half time. TA students are allowed to take one course only. And because of that differential, it was 2,000 down in the first and it's going to be a similar negative number down just simply because of the mix in the third quarter.

Speaker 4

Very helpful. Thank you. And is the decision to increase selling promotional expense for APUS, does that mean that you're willing to accept a higher cost per student registration, or does it mean you're focusing kind of on different areas?

Speaker 2

No. It does mean we're willing to accept something slightly higher. Part of the issue is that when you have monthly starts where you're bringing in students every month, we have this temporary suspension of TA funding by the Navy, if we don't bring in students to replace them, then we're not going to have returning students in subsequent quarters. So it's just prudent to spend that extra money. You know, we looked at the ROIs and the pluses and minuses and where to spend it.

So, you know, we're more than likely in that incremental spend gonna be spending more than the $2,000, but it's because we wanna bring in new students to, you know, try and replace the new students lost by the Navy.

Speaker 4

Got it. I'll just do one more and then we can follow-up offline. In terms of the potential scope of the technology transformation plan, it sounds like it at least could relate to the LMS. What could the scope be? Could it hit your ERP system, your CRM, or what pieces of technology are you looking at?

Speaker 2

Yes. I would say just from a big picture perspective, we're looking at the LMS. We're looking at the SIS, which our SIS pad is homegrown, and we're also looking at the CRM. So those three systems are pretty large, pretty transformative, and very few people engage in a project. But we think it's about time when you look at we're probably the largest user of Sakai.

That's our existing LMS out there. It's open source, it served us well, but there's a number of advances, particularly as it relates to accommodating some of the alternative modalities of instruction like CBE that the newer LMSs can handle quite capably. And then CRM is really dependent on what we do with the SIS.

Speaker 4

Okay. Great. Very helpful. Thank you. And

Speaker 0

our next question comes from Greg Pendy with Sidoti.

Speaker 4

Hey guys, thanks for taking my question. Can you just help us understand I guess just on Hondros just with the requirement now to take the I guess the ACCUPLACER exam, how many nursing schools, I guess, in the area probably don't require that? I'm assuming that, you know, in a competitive environment some students may just choose another nursing school. How common is that requirement?

Speaker 2

So actually the ACCUPLACER requirement that we put in place in January was a pretest requirement and not something that was normally done by the for profit schools. And so when we did that, we had students who were just test averse because it's a three or four hour exam that didn't want to do it and they went elsewhere where people were not administering it. We've changed that. We actually changed that requirement. And we're still administering it as a baseline, but we built it into the first term courses.

So that way we can have the baseline so we can diagnose how well the students are performing and learning, but not making it a pre admission requirement. So that's working, but it's still going to take a while to get the word out in the community that we're no longer requiring that as a pre test.

Speaker 4

Got it. That's helpful. Thanks. And

Speaker 0

there are no further questions at this time. I'll turn the conference back over to Chris Sumonowski.

Speaker 1

Thank you, operator. That will conclude our call for today. We wish to thank you for listening and for your continued interest in American Public Education. Good evening.