American Public Education - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the APEI Reports Second Quarter twenty twenty Results Conference Call. At this time all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. If you require any further assistance please press 0.

I would now like to hand the conference over to your first speaker for today Chris Simoniewski. Thank you. 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 2020. Materials that accompany today's conference call are available in the events and presentation 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, plan, should, will, and would. These forward looking statements include without limitation, statements regarding expected growth, registrations, enrollments, revenues, expenses, earnings, and plans with respect to recent, current, and future initiatives, including marketing initiatives, efforts to grow Hondros College of Nursing, and information technology replacements and upgrades. Furthermore, these forward looking statements include without limitation, statements regarding investments and partnerships and the future impacts of and the company's response to the COVID nineteen pandemic and the economy. 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 related to the COVID-nineteen pandemic and the risk factors described in the Risk Factors section and elsewhere in the company's most recent annual report on Form 10 ks and quarterly report on Form 10 Q filed with the SEC as well as the company's other SEC filings. The company undertakes no obligation to update publicly any forward looking statements for any reasons 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 Angela Selden, our CEO, and Rick Sunderland, our Executive Vice President and CFO. Now at this time, I'd like to turn the call over to Angela Selden. Angie?

Speaker 2

Thank you, Chris. Good evening, everyone. I'd like to begin our call today first by expressing my gratitude to the faculty and staff of American Public University System, APUS, Hondros College of Nursing, HCN, and American Public Education Inc, APEI. Our heritage of serving those who serve has never been more crucial in these unprecedented times. During our second quarter, our faculty and staff have selflessly mobilized to continue to safely serve our students.

APUS students continue to benefit from our fully online operating model while to a modified learning environment with virtual coursework supplemented by on brown labs and clinicals. Please know that the health and well-being of our students, faculty, and staff remain a top priority. We are pleased to report that enrollment momentum continues, reflecting the ongoing transformation that has been taking place at APEI. APUS delivered double digit increases in registrations from both new and returning students. At Hondros, both new and total enrollment increased meaningfully.

Overall, we are pleased that our second quarter financial results are ahead of expectations. Today, we will also share news on our ongoing enterprise transformation, including new leadership, new board members, as well as positive progress on our technology modernization initiatives. We are incredibly grateful that a growing number of adult learners are seeking affordable, safe, and uninterrupted access to high quality, higher education experiences. Our institutions were built on the belief that quality education should be accessible to all, not reserved for the few. Our heritage and our beliefs have shaped today's APEI mission to help adult learners of all backgrounds fulfill their purpose and obtain the skills they need to maximize their higher education return on investment, a term we call HEROI.

Since our founding by a retired Marine Corps officer, APUS has strived to create a more efficient and effective student value proposition online at a cost far less than many traditional on ground institutions. We have been pioneers in making online learning affordable and have continued to improve the student experience since our founding. We do this by focusing on core education and separating coursework from other expensive non core aspects of traditional higher education such as dorms, dining halls, and stadiums. This unbundling enables APUS to provide well designed, long established, quality online programs without passing bundled costs on to learners. Furthermore, it has ensured our students receive the same successful academic experiences today as they had before the pandemic.

We continue to invest in enhancing the student experience as evidenced by our ongoing technology modernization program at APUS. Our online learning platform enables a high degree of collaboration and engagement with quality academic content. Our academic teams bring decades of know how in applying learning theory, instructional design, and communities of inquiry with faculty to student, student to student, and student to content interactions. All wrapped in effective technologies, adaptive learning, and tested principles. And our active outreach program aimed at educating learners about the affordability and the potential value of an APUS experience.

Our proven track record and the success of more than 98,000 APUS alumni speak for themselves. APUS has been committed to affordability since its inception. Our undergraduate tuition has only increased $35 per credit hour since 02/2001. Second, no cost course materials have been a hallmark of our offerings to undergraduate, doctoral, and military tuition grant eligible students. The APUS book grant has provided students over $142,000,000 in book grant savings since 02/2001.

Number three, we have helped reduce the time to completion for a majority of our graduates by providing learners with approximately 3,500,000 transfer credits since 02/2001. Number four, undergraduate degrees are 60% lower than average four year public in state tuition and fees, not including any incremental savings students may enjoy from the recognition of transfer credits. Number five, as of December 3139, seventy two percent of our alumni have graduated with no APUS incurred student loan debt. And finally, forty eight percent of APUS students were referred by other APUS students or alum, which we believe underscores that our students recognize the importance of our value proposition of access to affordable, inclusive, high quality, flexible education experiences. Highgrove College of Nursing is intensely focused on its students first approach as it continues the training and education of nearly 2,000 frontline health care personnel so that they can serve those in need.

The demand for nurses is outpacing supply, making the work of Hondros all that more important to the health care community. Now with hospitalizations in Ohio recently reaching the highest level since the pandemic began, Hondros is serving an even more critical role in the fight against COVID nineteen as a campus based pre licensure nursing educator, conferring degrees which prepare students to become licensed practical or registered nurses. Even though Hondros itself incurred expenses to move all operations online in the second quarter due to the COVID nineteen pandemic, Hondros distributed 100%, and let me underscore this to be sure that there is no confusion, Hondros distributed not just the 50% required to be distributed, but the full 100% of the $3,120,000 received in CARES Act emergency relief aid. 100% went directly to 1,687 eligible nursing students in need who were studying who were not studying online at Hondros prior to the COVID nineteen pandemic. Already, 123 of these nursing student recipients are working on the job, having since graduated with nursing degrees with RN or LPN eligibility.

We took this step because it was the right thing to do, to help our nursing students through a time of need. According to Hondros student Shirley Arrington, now an LPN, the aid came at a time of true necessity because I was able to buy the things I needed to take my online courses. She added, I am so grateful. As we shared in a prior earnings call, Hondros offers an institutional affordability grant to serve underserved communities by matching funds to reduce enrollment costs. Additionally, Hondros has over 45 employer partnerships providing tiered pricing to maximize employer tuition reimbursement.

In the 2020, new and total net course registrations at APUS increased year over year by 3018% respectively. We believe that the increase in net course registrations was driven not only by increased interest in online education, but also by our implementation of the Freedom Grant, which extended our textbook and tuition grants to military students at the master's level and by our positive message of affordability resonating with the many communities we serve. Net course registrations by students at APUS increased year over year in each primary funding category, including federal student aid or FSA, which increased 1.8% year over year. This first year over year increase since the 2000 Net course registrations by new students utilizing cash and other sources increased 42.5% year over year, albeit as compared with a smaller number. We believe increased interest in online education, particularly among those in military communities, and our message of affordability helped drive year over year increases.

Net course registrations by new students utilizing tuition assistance or TA and veterans benefits or VA increased forty two point three percent and twelve point three percent respectively compared to the prior year period. We experienced a year over year increase in net course registrations by new students from each branch of the military, including the Navy, which was adversely impacted last year by limitations on TA course approval. We believe the increase in registrations among active duty military at ATUS was driven in part by the launch of the AMU Freedom Grant and our focused effort to continue serving this community with honor. Active duty military students are experiencing many of the same disruptions as nonmilitary learners, and we think that has contributed to our results so far this year. Uncertainty regarding higher education options in the fall continues to make online education an attractive option.

We believe the overall number of active duty service members utilizing the tuition assistance program remains steady with growing percentage of them seeking online options and an increasing number of them are selecting AMU as a trusted higher education brand. This further illustrates the durability of the franchise we have created over the years. We plan to continue building on our nearly three decades of service to military, military affiliated, and veteran communities, and pursuing our goal of increasing the number of military learners with minimal or no out of pocket cost for their higher education. Our academic operations and technology teams have worked tirelessly over many years to improve the student experience and learning outcome. I am pleased to report on our continued progress.

The undergraduate persistence rate at APUS as measured by the first course pass and completion rate of students utilizing FSA improved in May 2020 to its highest level since 02/2009, a tremendous milestone that is particularly noteworthy given the severity of the current recession and the fact that we are only just beginning to implement our strategy for nonmilitary communities. I'm also pleased to welcome new senior management team members. The APOS Board of Trustees recently appointed Doctor. Wade Dyke as the university's president. Doctor.

Dyke was a former president of Kaplan University and more recently served as the CEO of Great Hearts Academy. We look forward to his starting in his official role in two days. Steve Summers, also formerly of Kaplan and formerly of Rosetta Stone, is our new SVP of Strategy and Corporate Development. And Amy Manning has joined as SVP of Human Resources, most recently serving as Vice President of HR at Cisco Systems. We are also delighted to welcome two recently appointed APEI Board members, Bernetta Blevins, a business adviser who has served in a number of executive leadership capacities, including CFO, COO, and chief of staff for education and educational technology companies, and Daniel Pianco, who brings more than two decades of investment experience and is a trusted education expert frequently featured by national media outlets.

All of these new management and board members represent fresh leadership and additional bench strength that will be tremendously helpful in accelerating our enterprise transformation and scaling our adult learning platform. I'm committed to ensuring that we have the best team in place to achieve our goals and further strengthen our core enterprise. To that end, I am pleased that our technology modernization project at APUS remains on track with our goal of completing our migration to a new learning management system or LMS by early twenty twenty one. As of the August start, we have successfully transitioned approximately 42% of our unique courses to the new LMS with no unscheduled downtime. We have begun to expand the functionality and integration of our new CRM system, Salesforce, with other systems.

And before the end of this year, we intend to accelerate our initiative aimed at moving most of our infrastructure to the cloud, which we believe will further improve our student experience. Our systems and processes continue to scale well with the increased enrollment at APUS. Our team continues to operate successfully under difficult conditions while addressing increased demand for online learning and nursing programs. Our learning platform at APUS is robust with the capacity to serve thousands of additional students. Under conditions of fully remote working and high student demand, our critical service functions continue to operate successfully.

Our leadership team has evaluated the eventual phase in reopening of our administrative offices with the health and safety of our workers as our primary consideration. We currently anticipate the full opening of our offices in Charlestown, West Virginia starting in early twenty twenty one. As discussed at the beginning of this call, I would like to, in particular, applaud the efforts of Hondros hard working mission driven employees who earlier this year under emergency conditions and in support of nursing students created virtual courses, lectures, clinicals while keeping campuses open for advising, labs, and other hands on portions of the curriculum. Hondros has since fully reopened at six campuses using small in person classes and screening, social distancing, and masking requirements while continuing to offer virtual courses. Of note, for the reporting year ended 06/30/2020, Hondros program satisfied its primary accrediting body's threshold requirements, ABHES, for retention rates, placement rates, and mandatory licensure and credentialing examination pass rates.

For the three months ending 09/30/2020, new student enrollments at Hondros increased 88%, and total student enrollment increased 38% compared to the prior year period. As I mentioned earlier, we believe the increase is the result of Hondros student first approach and the flexibility and quality of its nursing program, as well as a result of the increases in the demand for nurses in the battle to save lives during the pandemic. As we have illustrated today, we believe in creating shared value. This is reflected in everything we do, including environmental sustainability. We remain committed to linking business strategy and social responsibility.

With examples such as APUS's online learning platform and solar arrays powering the lead platinum buildings in Charlestown, allowing us to fulfill our mission with a relatively small impact on the environment. And while our nation's path to post COVID nineteen conditions and economic recovery remains uncertain, APUS and Hondros are grateful to be the institutions of choice for many learners, including nurses, first responders, veterans, and active duty military. Now more than ever, at APEI, we remain committed to providing learners of all backgrounds access to obtain the skills they need to achieve their purpose while maximizing their higher education return on investment. Now I will turn the call over to our CFO, Rick Sunderland.

Speaker 3

Thank you, Angie. Good evening, everyone. American Public Education's consolidated revenue for the three months ended 06/30/2020 increased 16.4% to $82,100,000 compared to $70,600,000 in the prior year period. API segment revenue increased 15.9% to $73,500,000 as a result of higher net course registrations, primarily for military students utilizing TA, which is at a lower revenue per net course registration than other funding sources. HCN segment revenue increased by 20.5% to $8,600,000 as a result of higher student enrollment.

We believe the increase in enrollment at Hondros was due in part to the continued impact of initiatives implemented in 2019 as well as changes in the competitive landscape due to COVID-nineteen and increased demand for nursing education. In the second quarter, cost and expenses increased year over year by 12.6% to $73,100,000 as compared to the prior year period. The increase in cost and expenses was primarily due to an increase in employee compensation costs, advertising and marketing support costs and professional fees in our APEI segment as well as an increase in instructional materials costs in our HCN segment, which was partially offset by a decrease in commencement and travel costs in our APEI segment. Consolidated instructional costs and services expenses increased approximately $2,000,000 to $30,700,000 and as a percentage of revenue decreased to 37.4% compared to 40.7% in the prior year period. The increase in instructional costs and services expenses was primarily due to an increase in employee compensation costs in our API segment and an increase in employee compensation and instructional materials costs in our HCN segment, partially offset by a decrease in commencement and travel costs in our API segment.

Selling and promotional expenses increased approximately $3,000,000 to $17,100,000 and as a percentage of revenue increased to 20.8% of revenue compared to 20% in the prior year period. The increase in selling and promotional expenses was primarily due to an increase in advertising costs in our APEI and HCN segments and an increase in employee compensation costs and marketing support costs in our API segment, partially offset by a decrease in travel costs in our APEI segment. For the quarter ended June 30, advertising costs increased $1,900,000 in our API segment and $200,000 in our HCN segment and marketing support costs increased $500,000 in our API segment as compared to the prior year period. General and administrative expenses increased approximately $3,600,000 to $21,700,000 and as a percentage of revenue increased to 26.5% from 25.7 in the prior year period. The increase in general and administrative expenses was primarily a result of an increase in employee compensation costs and professional fees in our API segment, partially offset by decreases in employee compensation costs in our HCM segment and bad debt expense in our API segment.

For the quarter ended June 30, general and administrative expenses includes the following on a pretax basis: $1,300,000 in professional fees related to growth opportunities and $1,000,000 in costs related to our technology modernization project. Consolidated bad debt expense was $1,000,000 or 1.2% of revenue in the 2020 compared to $900,000 or 1.3% of revenue in the prior year period. Depreciation and amortization expenses decreased approximately $500,000 to $3,400,000 and as a percentage of revenue decreased to 4.1% of revenue from 5.6% in the prior year period. Operating income for the 2020 increased by $3,300,000 or 59.2 percent to $9,000,000 compared to operating income of $5,700,000 in the prior year period. Consolidated net income for the quarter was $6,700,000 or $0.45 per diluted share compared to net income of $4,900,000 or $0.30 per diluted share in the prior year period.

Total cash and cash equivalents as of 06/30/2020 were approximately $216,000,000 compared to $202,700,000 as of December 3139. Cash flow from operations for the six months ended 06/30/2020 increased 33.8% to $31,700,000 compared to $23,700,000 in the prior year period. Capital expenditures for the six months ended 06/30/2020 were approximately $2,900,000 compared to $3,000,000 in the prior year period. Going on to Page eight, third quarter twenty twenty outlook. Our outlook for the 2020 is as follows.

At APUS, net course registrations by new students are expected to increase between 1014% year over year. And total net course registrations are expected to increase between 812% year over year. At Hondros, new student enrollment increased by 88% year over year, while total student enrollment increased 38% compared to the 2019. In the 2020, we expect consolidated revenue to increase between 1014% year over year with year over year increases in both our APEI and HCN segments. The company expects diluted earnings per share to be between $05 and $0.10 in the 2020.

The consolidated outlook for the third quarter earnings per share includes items, which we generally view as important investments in our future growth, such as investments in our technology modernization project and increased marketing to elevate our affordability message. APEI's financial strength was achieved through the fulfillment of our mission, which places a relentless focus on student outcomes and student satisfaction and forms the core of our long term approach. We are honored to be the educator of choice for so many adult learners. Although the pandemic has created a great deal of uncertainty in our daily lives and in our economy, we remain optimistic about the future, our students' future, our institutions' future, and that of the communities we serve. Now we would like to take questions from the audience.

Operator, please open the line for questions.

Speaker 2

Your first question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Speaker 4

Thank you so much and congratulations on the momentum that you guys have going forward. I'm just curious, compared to the guidance that you gave us three months ago, from your perspective, what were the biggest areas of surprise?

Speaker 2

Thank you for that feedback. Really appreciate it. Yes, Hi. It's Angie Seldon here. Would say that We're very pleased with a few areas that are a result of this platform platform and this investment in momentum that we've been building over the past three quarters.

We're very pleased that we've seen year over year increases in graduate programs and certificates in our military affiliated segment. We've seen year over year increases in our undergraduate degrees and certificates for our nonmilitary, and certainly significant momentum across all different segments of our military. So we're just very pleased with the momentum that we're seeing across all of those segments.

Speaker 4

Okay. Great. That's helpful. Given that you've seen this big increase in demand, I'm just curious, from your perspective, can you handle this demand? What do you have to do to make sure that you can serve these students?

Speaker 2

Great question. If you recall, in the first earnings call I had the privilege of participating in, we discussed our growth strategy, which was first and foremost focused on organic growth, focused on APUS and focused on Hondros. And in that organic growth strategy, we identified operational areas where we needed to invest both in talent and in technology in order to be able to grow the business. And we had the good fortune of of making the decisions to make those investments in advance of the pandemic such that we then, as a result, were able to handle the increased demand without without a hitch. So we're very we're very grateful that we had begun the growth initiative in the fall of last year to lay the foundation for the operational capabilities necessary to support the increased volume, due to the pandemic and and some of the other investments we've made.

Speaker 4

Okay. Great. If I could sneak in one more, this one's on Hondros. First of all, in terms of the numbers that you reported, can you remind me, the the Indianapolis campus, is it already in the same store number? Or I'm just curious what if it's not, what kind of your same store enrollment growth would have been?

Speaker 2

Rick, can you answer that question?

Speaker 3

Yeah, sure, Jeff. It's not in the same store. It opened April 1, so it's not in the prior number. The Indiana Board limits the initial enrollment for a new campus. And so the enrollment this year will be limited to, I believe, a total of 30 students.

So it's inconsequential to the large growth that we're seeing at Hondros. That said, in the future, the expectation is it will grow well beyond that and certainly contribute to the enrollment momentum we're seeing at Hondros.

Speaker 4

And is there any limit on opening up new campuses in that state?

Speaker 3

In Indiana or Ohio?

Speaker 4

Well, I know you're already in Ohio. I mean, there may be more room for more, but I was more curious about Indiana.

Speaker 3

I'm not aware of any limitations. We're authorized in that state. That's a market by market evaluation, Jeff, and we're going to obviously look to the most compelling markets as we think about opening additional campuses.

Speaker 4

Okay. Fantastic. I'll get back in the queue. Thanks so much.

Speaker 2

Thank you. Your

Speaker 0

next question comes from the line of Austin Madlow.

Speaker 5

Sure. I have one on Hondros as well. You know, given what we're seeing in health care now and and knowing of all the macro trends that make nursing, so in demand to meet country's needs, can you talk about how the nursing offering might evolve and potentially expand over time? Like, I believe, you you have RN to BSN in Ohio. Could that go more nationally, or are there other degree tracks that you might experiment with over time?

Speaker 2

I'll start. And then, Rick, if you have other comments to add, that would be great. So thank you for your question. Today at Hondros, we offer two programs. We offer the PN program, which allows eligibility for a student to sit to the NCLEX exam and and become an LPN.

And we offer an ADN program, which allows the students to sit, to become an RN. When, several years ago when Hondros was acquired, the other, post licensure programs that were offered at Hondros were migrated to APUS. And APUS today offers some of those post licensure degree programs. As you imagine, we are continuously evaluating the opportunities in the state of Ohio specifically as it relates to post licensure degree programs. And, and at the board level, we we discuss periodically, which of those may be of interest for us to offer in the future.

But at the present time, what we are committed to in Ohio and in Indiana is the PN and ADN program offerings.

Speaker 3

Yeah. Would just add that when you think about Hondros and APUS together, we offer everything from an LPN, which is at Hondros, all the way through MSN, Master of Science in Nursing at APUS. So we do have a fairly broad nursing offering when you consider it across the two institutions.

Speaker 5

Got it. And would you be able to elaborate a bit more on the changes in nursing competition you mentioned in your HCN segment commentary?

Speaker 3

You want me to answer that, Angie?

Speaker 2

Sure. Yeah. Go for it.

Speaker 3

Yeah. I mean, quite simply, rather than choosing to go online and offer a blended virtual as well as on ground offering, some schools, perhaps many, just closed, thereby limiting the choices that prospective students have. So it's a very much a localized market. In certain markets, the competition was reduced due to closure.

Speaker 5

Got it. Got it. And my last question, you mentioned inorganic growth opportunities in the press release. Can you elaborate a bit on those? Is that in reference to the enterprise transformation or is that something else?

Speaker 2

Well, I'll start by reinforcing what our APEI mission really is about, which is to provide learners of all backgrounds access to the skills they need to achieve their purpose, and maximize their higher education return on investment. When we began the growth initiative in q three of last year, our focus was really on organic growth and making sure that we had the people, the processes, and the tools in place to unlock organic growth at APUS and at Hondros. We additionally said we would be looking opportunistically for ways to continue to reinforce that mission of creating a platform, offering ways for learners to obtain new skills, but all underpinned by the notion of maximizing their higher ed return on investment or AGROI. So we're very committed to making sure that the any any additional learning experiences that we offer, our our students or our learners in the future really, follow that principle. And so we're we're evaluating now, ways in which we can expand how we serve those students, beyond ATUS and Hondros.

Speaker 5

Great. Appreciate the color.

Speaker 0

And we do have a question from the line of Jeff Silber from BMO Capital Markets.

Speaker 4

Thanks for letting me back in. Know, given we've got a big election coming up over the next few months, I'll ask the question that a lot of folks are asking. If we see a change in administration, do you think there might be any impact on your business? And I'm specifically focusing on the inclusion in the ninetyten role as potential inclusion of military and veterans funding. Thanks.

Speaker 2

I think I'll start at the high level, and then, Rick, I'll turn it over to you for the 9010. The the thing that we're very pleased with, Jeff, is that our value proposition to students doesn't really fall into one or the other political side. The fact that we can offer students an incredible value proposition of affordability, high quality, and seventy two percent of our students graduate with zero student debt It's something that both both sides of the aisle will embrace. And so we believe that that's a message that perhaps has not been made widely known in the past about APEI and in particular APUS. And we're, as I mentioned on previous earnings calls, we're higher education's best kept secret.

And so we really believe that that value proposition will persevere in the face of whatever political winds come at us. I think I'd like to turn over the question on 9010 to Rick.

Speaker 3

Right, Jeff. So obviously the conversation is not only about including TA and VA, but also about will it shift to 80. We pay very careful attention to that. At ninetyten, if you look at the payer sources, I think you could surmise achievement of that. At $85.15 it's probably closer.

And I would point out the experience of this quarter where, albeit off a smaller number, cash and other was one of our fastest growing funding sources. So we have an eye on that and we follow details as it comes up periodically in Congress and in the Senate.

Speaker 2

One of the things I'll also add is that our marketing initiatives, recently in 2020 are really focused, as we've discussed on past earnings calls, on microsegments. And one of the microsegments that we're focused on is something that will assist with creating some more distance on that $85.15, potential threshold.

Speaker 4

Okay. Great. Looking forward to hearing more progress on that. Thanks so much.

Speaker 1

So at this time there are no further questions. I would like to conclude the call for today and I wish to thank you for your continued interest in American Public Education.

Speaker 4

Have a great evening everyone.

Speaker 0

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect at this time.