American Public Education - Earnings Call - Q3 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the American Public Education Third Quarter twenty nineteen 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. Would now like to hand the conference over to your speaker today, Chris Simenoski, Vice President, Investor Relations.

Thank you. Please go ahead.

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, expected revenues, expenses and earnings, and plans with respect to recent, current and future partnerships, investments and initiatives, including efforts to rebuild the nursing platform as well as information technology replacements and upgrades. 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 other events occur in the future. This evening it's my pleasure to introduce Angela Selden, our President and CEO, and Rick Sunderland, our Executive Vice President and CFO.

At this time I'd now like to turn the call over to Angela Selden. Angie?

Speaker 2

Thank you, Chris, and good evening, everyone. It's a pleasure to speak with all of you. This evening, I will comment at a high level on both the recent quarter and my first impressions after fifty days about the strengths and opportunities at APEI. The skills gap and the high cost of higher education are creating a national crisis. Workers can no longer afford to learn the skills that employers need.

According to a Wiley Education Services annual survey, 64% of the six hundred hour leaders surveyed said there is a skills gap in their company. Pair that with a $1,400,000,000,000 outstanding student loan debt, and these two forces are colliding to create unmatched opportunity for those positioned to provide today's workers with access to high quality, flexible, and career relevant degree programs and workforce training that is either affordable or debt free. It is important for our key stakeholders to understand that my priority is to grow APEI's core business with an emphasis on addressing this national need for affordability to upscale America's workforce. While the third quarter results met or slightly exceeded the company's outlook, the performance does not reflect the strong foundation and the market potential for APEI. As we move forward, our primary focus will be to grow the core business through increased learner and course enrollments across all brands and to accelerate our reach to provide affordable, accessible, relevant, and high quality postsecondary education and training to new learner markets.

In the 2019, net course registrations by new and total learners at APUS declined 5% year over year. The decline was primarily driven by an 11.9% decline in net course registrations by new learners utilizing Military Tuition Assistance or TA. The decline in net course registrations by new learners utilizing TA was largely impacted by the temporary exhaustion of Navy TA program funds. As previously noted, the U. S.

Navy announced that TA benefits available to sailors were expected to be exhausted by the May and effective May 2839, the Navy ceased approving TA program funds until the start of the new government fiscal year on 10/01/2019. APUS anticipated that this development would result in a loss of 4,300 net course registrations during the third quarter. However, actual results were better than that anticipated loss by approximately six thirty net course registrations. Net course registrations by new learners utilizing Federal Student Aid, or FSA, were also slightly better than expected. That said, APUS did experience a 7.7% decline in net course registrations by new learners utilizing FSA compared to the prior year period.

The declines were partially offset by a 9.6% increase in net course registrations by new learners utilizing Veterans Benefits or VA and a 5.4% increase in net course registrations by new learners utilizing cash or other sources. I believe APUS remains one of the best kept secrets in higher education. One of the key reasons I joined APEI is to accelerate the positive impact that APUS can have on delivering higher education with low debt or no debt to working adult learners. As of May 2019, approximately seventy two percent of the 90,000 APUS alumni graduated with no APUS incurred student loan debt, demonstrating leadership in our national mission to provide affordable, accessible, and relevant higher education to adult learners of all kinds. In pursuit of that mission, APUS recently announced an increase in tuition grants for active duty soldiers who pursue undergraduate and master's level courses.

The APUS book grant was also extended to now include active duty military learners at the master's level. Previously, active duty learners pursuing master's level courses at APUS paid for their textbooks and either financed or paid out of pocket any differences between the Department of Defense TA benefit and the higher per credit hour cost of the graduate tuition. We believe the new tuition grants and the extension of the book grant may increase the number of active duty military learners at APUS with no out of pocket cost, especially at the master's level. The extension of grants to benefit more military students continues to fulfill our commitment to service members and reflects our intention to expand our presence within our core military community. Ushering in a new period of sustained enrollment growth at APUS must be supported first by leveraging APUS capability in our core military and military affiliated markets.

As APUS was founded on the principle of assisting military learners who face barriers to degree completion, going forward we will work to assist new learner populations with similar characteristics where APUS can have meaningful impact on their success. Historically, the message of affordability in advertising at APUS has been subtle. I believe, especially given this national conversation about rising tuition and student loan debt in higher education, there are opportunities to create large scale awareness and attract college ready students with a primary message of affordability and value. At my direction and with the support of APEI's Board of Directors, we recently began a detailed review of our operations and current market opportunities for the APEI businesses. With my prior experience in large scale business transformation, these efforts may help discover and prioritize important growth areas and lead to streamlined processes, improved capabilities and better tools.

The recent modest tuition increase at APUS, the first since 2015, is intended to support new investments in academic learning and student operations. We recently completed an evaluation of our information technology ecosystem, which resulted in a plan to upgrade and replace our learning management system in 2020 to modernize the APUS campus for students and faculty. Also, we intend to improve the operational effectiveness of each department and many of the major functions within the university, beginning with the replacement of the CRM systems for both APUS and Hondros, which is already underway. We believe this technology transformation program, which is anticipated to cost between 6,000,000 and $8,000,000 in 2020, will enable APUS to better accommodate new flexible learning modalities such as credential seekers, dual degrees and custom programs for partnerships to serve new market segments, improve the operational effectiveness of our enterprise, and enhance the learning experience for students and faculty. In addition to having met many enthusiastic employees at APUS during my first fifty days at APEI, I have spent time with the management team at the Hondros College of Nursing, visiting campus locations, speaking with students, and reviewing Hondros enrollment growth recovery plan.

As part of their comprehensive plan, Hondros, or HCN, has taken steps to build a strong pipeline of practical nursing, or PN, students which serves as the primary feeder to Hondros Associate Degree in Nursing, or ADN, program. Although student enrollment in Hondros PN program declined 9% year over year in the 2019, the enrollment decline has lessened, representing a dramatic improvement compared to the more precipitous declines of the last several quarters. Overall, HCN's new and total enrollment increased by 5313% sequentially or compared to the 2019. In addition, HCN or Hondros team reported improved student retention compared to last year. Success with the deployment of the new Salesforce CRM software and continued progress with its new Indianapolis campus that is scheduled for opening in 2020 pending regulatory approval.

In short, we are pleased with the positive momentum building at Hondros. In summary, it is an important priority for me to strengthen all aspects of the APEI core business, in part by unleashing the potential that currently exists within the organization. The initiatives we discuss today are really just the beginning of our growth story. Yesterday was Veterans Day and it was a clear reminder about what attracted me to fulfilling our mission to bring affordable, accessible, relevant, high quality educational experiences to learners who are driven to succeed. Frankly, I believe APEI is one of the best platforms available today that can continue to have a positive impact on providing workers access to affordable upskilling and have a voice in the national conversation around low debt and no debt in higher education as learners pursue their dreams of improving the lives of their families and of themselves.

It is the highest honor for me to lead APEI through this important part of its history. And now I will turn the call over to our CFO, Rick Sunderland.

Speaker 3

Thank you, Angie, and good evening. Going on to Page three. American Public Education's consolidated revenue for the three months ended September 3039, decreased $5,100,000 or 7% to $67,900,000 compared to $73,000,000 in the prior year period. APEI segment revenue decreased $2,600,000 or 4.1% to $61,200,000 due primarily to the temporary exhaustion of Navy TA program funds during the period. HCN segment revenue decreased $2,400,000 or 26.8% to $6,700,000 due to a decline in student enrollment.

Total costs and expenses increased 7.1% to $70,800,000 for the three months ended September 3039. The results for the quarter reflect the following on a pretax basis: $2,800,000 in employee compensation costs for post employment benefits that will be payable to the APUS President upon retirement a $1,600,000 increase in advertising costs as compared to the prior year period A $1,500,000 non cash impairment of goodwill and $800,000 in information technology costs related to the evaluation of replacements or upgrades of our technology and learning management systems, which by the way was approximately $400,000 lower than we anticipated. Consolidated bad debt expense for the 2019 was $1,000,000 or 1.5 percent of revenue compared to $1,300,000 or 1.7% of revenue in the prior year period. APEI's consolidated net loss was $1,600,000 or $0.10 per diluted share for the three months ended September 3039. However, adjusted net income for the 2019 was $1,800,000 or $0.11 per diluted share.

Adjusted net income, a non GAAP measure, excludes the $2,800,000 in employee compensation costs in our APEI segment and the 1,500,000 impairment of goodwill in our HCN segment as well as the applicable tax effect of the adjustments. Our core business continues to generate strong operating cash flow. Cash flow from operations increased 25% to $31,900,000 compared to $25,600,000 in the prior year. Accounts receivable decreased by $6,100,000 compared to December 3138, driven primarily by improved payment processing at the Department of Defense. Total cash and cash equivalents as of September 3039 was approximately $210,100,000 compared to $212,100,000 as of December 3138.

Cash and cash equivalents was reduced by $27,300,000 used to repurchase our common stock. During the nine months ended September 3039, the company repurchased approximately 966,000 shares of its common stock. Capital expenditures for the nine months ended September 3039 decreased to $4,200,000 compared to $5,300,000 in the prior year period. Going on to Page four, fourth quarter twenty nineteen outlook. Our outlook for the 2019 is as follows.

In the 2019, we expect consolidated revenue to decline between minus 7% and minus 3% year over year. The temporary exhaustion of Navy TA program funds is expected to negatively impact October 2019 revenue by approximately $400,000 but we do not expect a significant impact in November. However, we are unable to predict whether and to what extent the Navy will continue to impose limitations on TA program approvals as a result of limited funding. The company expects diluted earnings per share to be between $0.35 and $0.40 in the 2019. The consolidated outlook for earnings per share includes the impact of any share repurchases that may occur during the 2019.

In the fourth quarter, we anticipate spending an additional $1,000,000 on our information technology upgrades and replacements and spending between approximately $6,000,000 and $8,000,000 in 2020, focusing on specific information technology projects, including replacements of our learning management and customer relationship management systems. The $1,000,000 for the three months ended December 3139 is included in APEI's outlook for the fourth quarter. At APUS, total net course registrations are expected to be in the range of minus 2% to plus 2% year over year and net course registrations by new students are expected to be in the range of minus 1% to plus 3% year over year. At Hondros, total enrollment decreased by 24% year over year, while new student enrollment decreased 20% compared to the 2018. Effective 01/01/2020, APUS will increase tuition by approximately 5% for undergraduate and master's courses to support new investments in academic learning and student operations.

As Angie mentioned earlier, APUS has also increased tuition and fee grants to our active duty military students at both the undergraduate and graduate levels and extended the book grant program to now include active duty military learners at the master's level. APUS estimates that the tuition grant will apply to approximately 60% of its total net course registrations made on or after 01/01/2020. We believe the new tuition grants and the extension of the book grant will increase the number of active duty military learners at APUS that may pursue an undergraduate or graduate degree with no out of pocket cost. We believe this will further strengthen our leadership position within military and military affiliated communities. Now we would like to take questions from the audience.

Operator, please open the line for questions.

Speaker 0

Thank you. Our first question comes from Greg Pendy from Sidoti.

Speaker 4

Line is open.

Speaker 0

Hi, for taking

Speaker 4

my question. Can you just kind of give us a little color on how we should think about the cadence quarterly in 2020 of the technology spend? Is it going to be front half loaded or back half loaded or just kind of distributed throughout the year? Thanks.

Speaker 3

Yes. Hey, Greg. I think we'll be equally distributed across the year, really ramping up these activities in the fourth quarter to get a running start on January 1. And so you'll see the spend likely relatively equally distributed across the four quarters of the year.

Speaker 4

Okay. That's helpful. And then can you just kind of give us a little bit of color on the marketing spend? I think it was targeting Hondros and kind of how that played out and how you're thinking about that going forward?

Speaker 3

Right. So there was an increased spend. We reported $1,600,000 year over year increase. That was 1,300,000.0 at APIS and the balance at Hondros. So Hondros was spending into the fourth quarter.

Of course, APUS was spending into the fourth quarter also. And we did see the benefits. You can see the sequential increase in enrollments at Hondros, I believe, was up new students were up 53. Total enrollment was up 13%. At APUS, you can see from our guidance, at least midpoint to the top end, we're basically at zero or slightly positive.

And so we're seeing those benefits. Of course, the fourth quarter also saw the resumption of the Navy. And I think as we previously reported on the second quarter call, were talking about the potential impact of the Navy. Navy was up year over year through that May time period. And so we're seeing strength in the TA and including the Navy.

And we expect that to continue in the fourth quarter.

Speaker 4

That's helpful. Thanks a lot.

Speaker 3

Thanks, Greg.

Speaker 0

There are no further questions at this time. I turn the call back over to Chris Simunowski.

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.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.