American Public Education Inc (APEI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 American Public Education, Inc. earnings conference call. My name is Akia, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Chris Symanoskie. Please proceed, sir.

Thank you, operator. Good morning, everyone, and welcome. Before we begin, please note that an electronic copy of the PowerPoint presentation that accompanies this conference call is available in the webcast section of our investor relations website and is included as an exhibit to our current report on Form 8-K filed earlier today. Also please note that statements made in this conference call regarding American Public Education or its subsidiaries that are not historical facts are 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, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitation, statements about the second quarter and full year 2008 outlook and statements regarding expected growth.

Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors including the various risks described in the risk factor section and elsewhere in the Company's annual report on Form 10-K filed with the SEC.

The Company undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Today our speakers are Wally Boston, CEO of American Public Education, and Harry Wilkins, Executive Vice President and CFO. Now at this time, I'd like to turn control of the call over to Wally Boston. Mr. Boston?

Thanks, Chris. Good morning, everyone. I'm pleased to report another quarter of strong financial and operational performance of American Public Education. During the first quarter of this year, our revenues increased 65% to $23.2 million. This growth was driven by a continued strong registration growth, improving student retention and increases in the number of returning disenrolled students. Our operation margins increased to 23.5% in the first quarter compared to 19.1% in the same quarter of last year. We were able to increase margins despite staffing increases, new public company expenses and the need to expand facilities to accommodate our current and future staffing needs.

In this quarter, our net income increased to $3.4 million, a year-over-year increase of 122%. Our reported earnings of $0.18 per diluted share is $0.04 above the high end of our previously issued earnings guidance range. The earnings upside is mostly attributable to higher-than-expected revenues. These solid results give us the confidence to raise our full year guidance. Today we announced that we are increasing our full year 2008 earnings outlook to between $0.67 and $0.72 per diluted share.

We are also excited to announce that we have signed a Memorandum of Understanding or MOU with the Navy, effectively completing the process for full acceptance since the Navy College Partnership Distance Learning Program or NCPDLP. The MOU is simply in agreement that details the requirements of participation in the program.

Our membership in the Navy's program will give us broader access to Navy bases and great visibility on Navy websites. That opportunity is important to us as the Navy is the second largest branch of the military, but ranks fourth as percent totally to U.S. military enrollment. This development is likely to help us expand our success with Navy students and allow us increase our market share with the military overall.

In the near future, we expect to be listed as a member institution on the Navy's education websites and printed materials for service members and in communications to educational service officers. We've been told by the Navy that all these events will happen after each of the new schools accepted into the program sign their MOUs. This process is nearing completion.

We have also launched efforts to deepen our relationship with DSOs on Navy bases and we have created a custom landing page with our approved programs that will lengthen the Navy program's websites. With the completion of another quarter of record results behind us and our continued success at expanding in both the civilian and military markets, we have greater visibility and confidence in our expected performance in 2008. Our CFO, Harry Wilkins is here today to tell us more about our recent performance and expectations for the remainder of the year. Harry?

Thanks, Wally. I'm going to speak to the slides that are in the PowerPoint presentation. I'm going to start with the fourth slide, which go over our first quarter financial results. This quarter's record number of registrations represents the ninth consecutive quarter we've had year-over-year growth and that's because that's how many quarter we published. It's actually been more than that, but we can't talk to the things we haven't published yet.

Net course registrations for the first quarter 2008 increased 59% over the comparable period in the previous year, up to 33,100 net course registrations for the period. That was driven by stronger than anticipated growth from returning students. We actually have a retention increased about 4% over the comparable period last year. We have more returning students taking more courses.

In addition to that, we had a 34% increase in the number of new course registrations -- course registrations from new students. That ended up increasing our total enrollment to our university to over 33,000 students, which is about a 70% increase over the same time last year.

The -- that increase in registrations, as we go into the financials, led to increase in revenues. We had a 65% increase in our top-line growth revenues. We're up to $23.2 million. That was a little more than we had anticipated. But it was good. The -- at the same time, our -- we kept our expenses in line, so our margin growth went from 19% in the previous comparable period to over 23%, nearly 24% for this first quarter.

That all works out to a net income of about $3.4 million, up 122% over the comparable quarter in the last year and our EPS of about $0.18, which is about $0.04 higher than we had given in the upper range of our guidance. That $0.04 mostly relates, as Wally said, to additional revenue. About $0.03 of that is just due to revenue increases of about $0.01. It's, really, it's a timing difference of expenses and we'll speak to that as we go through this. So it was a very good quarter.

I'll move onto the next slide where we talk about operating margins. That's the fifth slide. And we have a comparable here of quarter to quarter for the prior year breakdown of our margins. We were able to increase our margins 4%, about the same margins we had in the fourth quarter of last year.

So the margin decline that we had really anticipated as we became a public company, had public company costs, that margin -- that margin's gone. It didn't really happen, mostly because of the revenue increase. Our actual expenses, the money that we spent was about what we anticipated. The revenue increase of about $1.1 million is what really led to the operating improvements.

The savings that we had -- we had to spend a little bit more money on instructional costs and services than we anticipated just because of the increase in number of registrations. That was offset by less than anticipated public company costs.

We did have a filing, an S-1 filing in -- during the quarter and we capitalized some costs that we may have had to expense, legal costs, accounting costs that we have been -- if we hadn't had that public offering. But still, the public company expenses that we had anticipated, about $0.5 million per quarter, we haven't quite incurred that yet. It remains to be seen. We're still anticipating about $500,000 a quarter going forward that we really have -- we've been about $100,000 less than that so far.

And our effective tax rate did change. Our effective tax rate for this quarter was a little over 40%. We had previously guided that we would have about a 42% effective tax rate for this year. I think now we're looking at probably about a 41% effective tax rate, just because we're growing a lot outside of West Virginia and Maryland and Virginia into some states were the tax rates just are a little different. So it's mostly state -- the change in effect of state tax rates that's driving that. But it's still about a 41% is what I think we will incur for the year.

That's all I wanted to talk about margin improvement. Let's move into the outlook for the second quarter. That's the sixth slide. As we look at the second quarter, we're anticipating net course registrations overall to be approximately 32,000. Net course registrations. That would be about a 53% growth over the same period of the prior year. And net course registrations from new students to be about 7,600, which would be about a 38% increase for that -- we're about two months into the quarter, so we feel pretty confident in that.

The total revenue we're anticipating to be in the range of $23.8 million to $24.5 million, which represents a 47% to 51% increase over the previous year. And net income will be about $2.6 million to $2.9 million, which will be about a 30% to 45% increase. Diluted EPS to be between $0.14 and $0.15. As you'll note, that would imply that we have some increased expenses in the second quarter. We do have. Our graduation in the second quarter is the only quarter where we have those expenses.

That's about $250,000 that we don't we have in any other quarter. And we have expanded our facilities quite largely. We have opened a new building which we're leasing in Charles Town in the second quarter at about 10,000 squared feet. We have doubled our lease space in Manassas. The new facilities costs are going to add about $100,000 per month of rent expense in the second quarter that we haven't had previously.

And then again we are going to role out our marketing for our masters in education programs and our marketing more toward the Navy, the two areas where we haven't spent a lot of money marketing before. So if you add that all up, that's -- it gets to our second quarter outlook, which is a little -- fairly comparable to what I think the analysts have guided people toward. But not to give them any credit. But I think that's no surprise to anybody. I think it's pretty much what we had predicted previously.

So let's look at the full year 2008 outlook. We are increasing our outlook for the year for registrations from -- we had previously said we think we'll do about 137,000 course registrations. We think we'll now do about 139,000 registrations. We are leaving our net course registrations from new students at about 33,500. That's what we had anticipated previously. That's a 36% increase for the year. And we still feel that's about what we will do.

We are increasing our outlook for revenue by about -- from $100 million to $103 million was our previous guidance. We're increasing that to $102 million to $104 million. And we are expecting to have some margin improvement which results in net income being increased from $11.9 million to $12.5 million is what we had said previously. We are now saying it's going to be about $12.8 million to $13.6 million. And that results in diluted EPS range, as Wally previously mentioned, that the new guidance is to $0.67 to $0.72 a share.

We still think depreciation and amortization expenses that we had given guidance on previously will come in between $4.1 million and $4.3 million. We do have -- we are continuing to build out our facilities and continuing to improve our IT infrastructure, especially to support our financial aid growth, which has been very strong. So our capital expenses -- we're upping that outlook to about $200,000 more than we had previously said we were going to spend. So that kind of gives you a guideline for this year.

I did want to point out that in the first quarter, one of the areas that we got question on a lot in our road show was can we take what we were doing in the military and grow in the civilian marketplace? We're seeing that we have been able to do that.

Our financial aid registrations have grown 167% over the same period last year. We were processing about 300 registrations a month in the first quarter of '07 for financial aid students. We're now doing about 1,400 a month, over a 1,000 more in the first quarter of this year. So that continues to grow and we continue to have to improve our systems.

As you know, especially with new students, that's a very complicated process trying to, at a distance, get all the financial aid paperwork as financial aid students and we continue to make system improvements to help improve that. And we still have a way to go. But we really think during the third quarter we're going to have a new system in place which will greatly enhance our ability to push more people through the process effectively.

You can't screw up with financial aid processing. It's very regulated. We intend to be very effective at how we manage it. We can be more efficient and we expect to achieve some operating efficiencies in that, which should really help in the third and fourth quarter. So with that summary, I will turn things back to Wally.

Great. Thanks a lot, Harry. At a time when tax revenues to support higher education are decreasing, federal and state governments are looking for ways to curb the rising cost of higher ed. These issues probably are going to become more prominent during a time of recession and during an election year, where citizens are looking to elected officials for action on the matter. Unfortunately, the political solution to these problems will likely be complicated.

However, APEI is at the forefront of providing affordable higher education programs at a distance. We have answer that challenges of affordability. Our success can be seen in our most recent results with Title IV registrations, as Harry said, up 166% in the quarter to approximately 4,000 registrations. We view this as a great sign that we are growing in the civilian market and fulfilling our mission of affordability. Recent developments in the military market are a great indication of our continued expansion in that market.

We completed the process to be part of the Navy's College Program Distance Learning Partnership. We also signed an MOU with the Marine Corps' Chemical Biological Incident Response Force, further strengthening our presence in the military. Our plans to launch new programs over the next two years are on track. Our faculty has been working on designing new PhD programs.

The process has been proceeding as planned. We anticipate submitting them to our accrediting bodies this fall. Investors can expect the public launch of doctoral programs in late 2009. The addition of these degrees will be a great complement to our existing programs. Given the fact that 25% of our graduates return to us for a second degree and that our students have been asking us for doctoral programs, we see tremendous opportunities to provide current and potential students affordable PhD programs at a distance.

More recently, our associate degree in general studies, which has 19 concentrations, is being restructured into several associates degrees and certificates. The structure change to move concentrations to degrees has been submitted to the higher learning commission for approval. We hope to begin enrolling students in these programs by the end of 2008. The new associates degrees are designed to be eligible for Title IV. Currently our associate degree in general studies is not eligible because of our for-profit status.

All three of our new master degree programs in education are approved by the Higher Learning Commission. We are now offering the masters of education in supervision and administration and the masters of education in teaching with a concentration in instructional leadership for May starts. We plan to launch our masters of education in guidance and counseling and several additional concentrations in teaching by September.

We have not aggressively marketed these degrees as we want approval for certification for professional licensure before we initiate larger advertising campaigns. We are currently preparing for our launch. Investors may begin to see meaningful enrollments in early 2009.

In closing, we plan to stay affordable, develop new programs and provide high quality education to increasing numbers of students, both military and civilian. We believe that we have the strategy, the mission, substantial resources, the right business model and talented people to make this happen. Now I would like to answer any questions you may have. Operator, please open the lines for questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Trace Urdan of Signal Hill. Please proceed.

Hey, good morning. It looked like, as the selling and promotional costs came in much lower than the 12% that you all had guided for the year, I'm wondering if you're still thinking in terms of that 12% and the costs are maybe just more backend loaded or how you're thinking about the spending in that line now.

I think the cost -- I think we do have some back-loaded costs in there, Trace. But we actually spent about what we had anticipated in terms of dollars, but we got a lot more revenue in -- related to that. So that -- the change in percentage was more that our revenue increased than it was that we didn't do the spend that we anticipated. So I still think 12% is probably about the most we will spend in marketing and I think we will get there.

We did delay some of the marketing for our graduate programs in education because we really didn't launch them until the second quarter and we didn't want to get ahead of ourselves in advertising that. And also, the Navy took a little bit longer to get the MOU established and some of the advertising we were going to do in the Navy and we had planned in the first quarter we're going to do now in the second quarter.

So I think that we will increase our selling as we go forward. I don't think it will get more than 12% of revenue. But how much it will -- I think we'll spend what we need to spend to make our top-line growth come in.

Okay. Thanks. That actually leads pretty well into the next question I had, which was that it sounds as though you have something anticipated in your budget or your guidance for increased share in the Navy. I wonder if that's the case. And the fact that, as you said, things were delayed a little bit. Does that change your outlook for what you might be able to do with the Navy this year?

I -- Trace, this is Wally. I don't -- I think a lag of three or four months isn't really that big of a deal. We try not to get so granular to look at absolutes by any branch of the service. But from a big picture perspective, the Navy is the second largest branch in terms of manpower, and our enrollment in the Navy is actually below our enrollment in the Marine Corps, which is the smallest.

So we think that now that we'll get a lot of exposure on their website. Once the -- all the new participants have signed their MOUs, they'll put us all up at the same time. We're already gaining access to bases as DSOs hear about who's been admitted into the program and who signed the MOU. We'll build these enrollments and I think we're confident that achieving this, along with our new education degrees, we'll hit the numbers that we've given guidance on for the year.

Okay. Wally, one of your competitors that runs ground and online-based schools, had suggested that the Department of Defense was moving towards -- I gather there maybe are slightly different requirements of ground-based schools and online schools and that there was some suggestion that maybe standards for online schools would be raised, presumably not impacting you, but maybe some of the lower quality folks that operate in the online spheres. Any of that ring true? I wonder if you elaborate on that a bit.

Sure, it does. You have a pretty good source. The online schools have to go through a process called MIVER and I can't tell you what the acronym stands for, but essentially their programs are reviewed and that's how they get qualified to teach the programs on the base.

Well for about two-and-a-half, three years now there has been a process to include -- work on policies and procedures to include distance learning school in the MIVER process. As you might imagine, some of the land-based schools have said, if we have to go through this process, why shouldn't the distance learning schools?

American Public University system actually had one of our employees, Jim Herhusky, on the MIVER committee to review all that. So we've been an active participant. We're pretty proud of our programs, particularly since we achieved regional accreditation. We think our programs stand out there as being high quality programs. And we're fully prepared that, with the new proposed MIVER process, that we'll not only conform, but as you implied, that some folks running lesser quality programs by distance probably won't get approved.

That's great. Okay. I'll let someone else ask a question. Thank you.

Sure. Operator?

And your next question is from the line of Mark Marostica of Piper Jaffray. Please proceed.

Thank you. Nice job on the quarter. My question -- first question relates to the trending we've been noticing in average revenue per student. What seems to be showing an improving growth rate as you look at that metric sequentially, either on a trailing 12 month basis or just the raw metric itself. Could you give us a sense why that's starting to show improvement and if that's sustainable?

Yes. I -- the revenue per student is going to be better as we get more Title IV students in the mix because they're taking more courses than the traditional -- the Title IV students have to take at least six courses a year to qualify for Title IV. Our traditional military students still average about two courses a year. So the revenue per student will increase as our mix changes. Last year, we were about seven -- for the first quarter, about 7% of our registrations were Title IV students. This year it's about 12% of our students, on a much bigger base, too. So I think that's the trend that will continue.

And on that point, what courses and programs are you seeing these students who tap into Title IV take?

I mean, it runs across the board. We actually have had a very large increase in our liberal arts courses since we were eligible for Title IV funds. Our -- history was one of our fastest growing programs last year. So we're finding that there's not a lot of online liberal arts degrees available to these students and the combination of our affordability and the different program offerings we have seems to be very popular with civilians.

But I mean, it really does run the gamut. They like our IT programs, which we launched last year, and a lot of liberal arts courses. And then a lot of them are the civilians, are in defense-related industries or in fire and safety and our First Responder market. And they like our traditional military courses.

And --

I echo with Harry that the fire safety and criminal justice coming from law enforcement and emergency management folks are pretty popular with the FSA students.

And then, there is one point that may not be obvious. And that's -- we offer courses in both eight and 16-week lengths. And it does seem like the eight-week courses are becoming much more popular and we're offering more of them.

So there is a bit of a mix change and a little bit of revenue compression, which could be impacting the revenue per student numbers on any one quarter. As we go to more -- obviously, we recognize the revenue faster in eight-week courses than we do on the 16-week courses. So some of that revenue compression may be impacting your number also.

Got it. And presumably, these civilian students are taking more masters programs, I believe?

Yes, that's true, but it -- our growth in the military is still very strong and most of them are undergraduates. But yes, I mean, I -- we're finding that the civilians also like our undergraduate programs. We haven't seen -- there's no question the civilians are taking more graduate programs than the military students. About 35% to 40% of our civilian students are in our graduate programs. That is true, but they still are taking a lot of undergraduate courses also.

Great. And then one last question and I'll turn it over, relative to the guidance. For fiscal '08, we notice, of course, that you increased your total net course registration guidance up a couple thousands students, yet you held firm your new course registration guidance of 33,500. Is that because of the returning student phenomenon that you're seeing increase or what's driving that nuance?

That's exactly right. We're -- we really have tried to put in some academic improvements that we thought would enhance our retention and it's coming to fruition. Our retention is up about 4% -- between 4% and 6% a month over the same period last year and that is driving the new increase in registration outlook that we've got.

Great.

We're getting a lot from registrations from returning students and students who have formerly been disenrolled who are coming back now that we have the region accreditation. Students who may have dropped out in the past now want to come back and complete their degree since we're a regionally accredited program.

Great. Thank you.

And your next question comes from the line of Jeff Silber of BMO Capital Markets. Please proceed.

Thanks so much. Just a follow-up on the comments regarding the returning students in retention. Are you doing anything differently? Are you specifically marketing towards those students a little bit harder than you have in the past?

We identified a few years back that the initial course was probably the key place to work with our undergraduate students, so we sort of have an intro to college course that prepares them for the rigors of an online education -- time management, the fact that if you're in an eight-week course and you miss your assignment in week one, next week you've got to make up a fourth of the course in assignments in one week. And so planning is pretty important.

But we've also, as we've gotten more into learning outcomes and assessments, we've put testing in there, both writing and reading as well as math, that allows us to triage the students so that we don't have a student who goes in there thinking that, well I had trig in high school and I'm ready to take calculus in college.

When one high school's trig program may be different than another high school's trig program. So we do the assessments, the triages. If the results are such that we think the student's chance for failure are pretty high if they don't go into a remedial course in math, we make that recommendation. And so we've seen a kickup in -- as we improve that first course, which we call RQ-295, we're getting many more students coming back than we did in the days prior to doing assessments.

Okay. Actually, that's very helpful. Thanks so much. Going back to your guidance for the current quarter on your new student net course registration, not to nitpick here a little bit here, but it looks like you're looking for growth to accelerate in the second quarter relative to the growth you had in the first quarter. I'm not sure if my numbers are exactly right. If that's the case, is there any specific reason for that?

No, I think we grew 59% over the corresponding period in the first quarter and we're projecting to grow 53%.

I'm actually looking at the new student numbers, I'm sorry.

New student numbers. Yes, there is a reason for that. And the reason is that we are improving our Title IV processing. We -- last year we put systems in place that could get about 500 registrations through the process every month. We've improved that this year. We have about 1,400 registrations we're getting through the process for financial aid students every month now, but we still need to improve that and we really have not been getting the students through the process quickly enough.

There were some students who should have gotten in March who we didn't get through the process in time and they're coming in April and May. And what you're seeing, I think, is that these process improvements we're making are going to allow more and more students to register. It's not a question that the students aren't out there. It's the question of we literally haven't been able to get them through the process quickly enough.

Okay. That's helpful as well. And speaking of Title IV, with the potential increase in Title IV loan limits, do you think that will have any potential benefit to you? I know you're one of the lower price course -- excuse me, lower priced schools out there, but I'm just wondering what your thoughts are on that.

I don't think it will really help us that much. It won't -- it certainly won't hurt us. But it will help other schools more than it will help us. Because right now the minimum loan requirements are enough to fund our program. Now it may make a difference if somebody needs to -- wants to go to school full-time and has to quit their job and needs to borrow more money for living expenses and things like that.

Obviously, our students will be able to that and as we move into a civilian marketplace where we have more full-time students maybe and maybe even some traditional college-age students, that might make a bigger difference to them. They may need more money for living expenses even beyond what they would currently get now with us. So it certainly can't hurt us at all. It probably won't help us as much as it will help other schools.

Okay. Great. Thanks so much.

Thanks, Jeff.

Your next question is from the line of Bob Craig of Stifel Nicolaus. Please proceed.

Good morning, guys.

Good morning.

The first question is how do you think about what's ultimately necessary in terms of new registration growth in order to achieve your growth targets, which I believe is within roughly 40% registration and revenue growth?

Well, I think the continued guidance that we gave in new student numbers for the year, I think, was 33,500. I think that will more than help us meet our numbers guidance that we've given for 2008. One of the benefits we're picking up here is this uptick in retention.

We'd have to go through a measured process. We -- looking at our mission, Bob, we really value our accreditation and the quality that we put forth. We're constantly recycling, evaluating outcomes assessments and reevaluating the programs and ways we can improve them. So we -- we're always sensitive to how fast we grow.

On our road show, we made the comment that, in the second quarter of last year, when we were growing at about 90% of new students, we just backed off the Internet advertising because we felt that that was too high. And so, we're really comfortable giving you the guidance in the net new student registrations for the year. And when we do our math and our projections and look at what our returning rates are, we think we can hit the guidance we gave you for the year at that number.

But it is, with us, Bob, that is a key measure because, again, we don't have any price increase built in.

Right.

So when you look at our 65% revenue growth in the first quarter, that's all volume increase. So it's -- we try to do it through a combination of improving retention and new students. And certainly our projected growth of 36% for new students in '08 will get us to where we want to be. We do have one additional benefit, though. We have a pretty long tail for our students. Those students take six or seven years to graduate. They're going part-time.

And if you go back -- so the students who are graduating this year were enrolled six or seven years ago. So we don't have a lot of graduates in the pipeline just because we didn't have that many students enrolling in the program six years ago. So we may have to bump that up, that number up in future years. We may have to bump new student growth up a little bit more as we have more people graduating. But right now, 36% new student growth certainly gets us to where we want to be.

Okay. That's helpful. A couple of times here you've mentioned the retention improvement. Do you care to say what that's gone from and to? I think at one point you mentioned you wanted to wait four quarters as a public company before outlining that a little bit in more detail. Is that still the case?

We do. We're very -- and we don't give that number out and it's very inconsistent with the way schools measure. There is no standard measurement for retention. Everybody identifies a student -- there's no standard definition of what a student is. Is a student somebody who takes one course?

Is a student somebody who's been there for at least one quarter? Some people measure it, who have completed one semester successfully. So since there's no standardized measurement, we're a little hesitant and nobody else publishes that number that I'm aware of either, so we're a little hesitant to put a number out there.

But I think we will once we get a better handle on it. We're going through process improvements. We're in a very dynamic environment. We're growing 65% this year on top of 70% growth last year. And we want to make sure we have good numbers to put out that we're comfortable with and we can improve on before we share them with the world.

Okay. Do you guys plan on building up your outreach staff? Is that still at 13 people?

No, we've increased the outreach staff and we have plans with the Navy. Some of that's already happened and we also have plans to do that in our criminal justice area and some other areas.

Okay. And last question. Any changes in thinking on uses for cash and cash flow, thinking about share repurchase and/or acquisitions?

I would say that eventually we'll have to do one or the other. We'll have to figure out some way to maximize the value of that cash for our shareholders. Right now it's not enough money for us to worry too much about it. We're about $32 million or so and that number continues to increase, obviously.

But yes, at some point, we certainly will consider acquisitions. And at some point, we probably would consider distributing that cash to our shareholders if we don't have a better use for it. But right now it's not something we lose a lot of sleep worrying about.

Great. I appreciate the color. Thanks, guys.

Sure.

Your next question is a question from the line of Brandon Dobell of William Blair. Please proceed.

Thanks. Maybe, Harry, I wonder if you could reconcile something for me. Are we -- are we safe to assume that the delta between the new registrations in the quarter of 7,500 and your previous guidance of 7,800, which I think was just kind of end of January timeframe, that the delta there was just a systems issue? You couldn't get people processed quickly enough? Or was there any kind of a -- either a deterioration in the visibility that your pad system provides you on kind of a two, three-month basis?

No. No. I mean, I think it was a couple of things. First of all, we had a lot more returning students registrations than we had anticipated. And we scheduled classes five months in advance and those returning students took a lot of those classes. But yes, we are continuing to make process improvements.

We -- it's taking a little bit longer to get those students registered and that's why -- that timing difference is the reason why we have 38% new student guidance for the second quarter and 36% for the year. Yes, some of those students who didn't get in the first quarter, we're going to make sure they get in the second quarter.

Right. Okay. And as you think about lead flow or the success of the dollars you're spending, looking back in the first quarter or here early in the second quarter, are you guys still satisfied with kind of the flow of leads, the quality of leads, those kind of things?

Yes, I think we are. I mean, as anyone who knows about Web 2.0 and Internet marketing, you're always trying new and different things, so we constantly will try new key words and throw some of them out and then the ones that work, we'll spend -- we'll put more money behind them.

And we're doing a lot more branding on Internet keywords this year under American Public University because of our goal to increase the civilian side of the population. And that requires some tinkering there. So we're actually -- we're happy. Do 100% of our words hit? No, but nobody else's do either. So we're satisfied with the flow that's coming from the work that we're doing.

We've done some things, too. We're experimenting with some things. We've opened up Europe. We had closed off international leads to our website in the past because we weren't very -- we hadn't found them to be quality leads. We've opened that back up because there seems to be more international interest in our forces. We have actually assigned one admissions persons to handle international lead flow. That's pretty much what they do.

So we're getting a little more things like that as our affordable tuition -- as we don't increase tuition, as the dollar becomes more declining in value compared to international marketplace. So suddenly our recently accredited U.S. education online is -- it seems to be a little bit more popular internationally. So those are some things that are changing that we're doing. But other than that, we're pretty much happy with the progress we're making. Everything seems to be going as expected or a little bit better than we thought.

Okay. And then a final question [with it], within the originally launched education programs, are you guys happy with the progress you're making -- you've made there so far with the type of student's you're getting, sources of those students, those kinds of things?

Brandon, we're happy. We've had a very low profile launch on the first two degrees that we launched for a couple reasons, one of which is that we really wanted to leverage our marketing spend once all the degrees were out there. We're doing something that's a little different than a lot of schools, which is the goal's to offer licensed programs here.

Right.

And a lot of people sort of leave the students on their own to work out the licensure issues. So we're going through the process with the State of West Virginia who has the reciprocity for the other states. And once we're confident that we are going to be able to get all the paperwork done with the approvals there, we'll put through a big marketing blitz. And I think as we said either in my script or in the announcement, we think we'll begin all the degrees in September.

Okay. And then final question may be for you, Harry. Any takeaways from the new systems efforts that are going on in terms of how we should think about bad debts, collection periods, that kind of stuff?

No, I -- one of the things that nobody's asked about that is -- could impact us a little bit is the whole financing thing with federal student loans. We use Sallie Mae and we have lenders that we deal with. If we decided to go to direct lending, which is something everybody should be considering, I think, that could conceivably have a little bit of a delay.

I think it takes a little bit longer to get the money through direct lending than it does for Sallie Mae right now. When I came on board as Chief Financial Officer, we had 58 days of revenue in receivables. We're down to 22 days right now. So we really speeded up the cash collection process. That might slow a little bit if we went to direct lending.

Other than that, I don't really see any problem. We certainly -- bad debt has not been a problem with us. We make sure we know how we're going to collect the money before students get into classes. So we don't let them into class unless we're pretty sure we can collect it. So historically, that expense has been very minimal here. I expect that to continue.

What I -- one of my concerns with direct lending is managing default risk. I think that there's more risk of defaults on federal student loans if the government is trying to collect the -- traditional lending institutions and the guaranty agencies are trying to collect it. So those are the kind of concerns I have. They're more two or three years out there on short-term.

Okay. Great. Thanks, guys.

Sure.

Your next question comes from the line of Cliff Greenberg of Baron Capital. Please proceed.

Hi, guys. Congratulations. Just a couple of things further. On -- the plans to market the education degrees is still going to be done on a local basis or is it a more national effort in the fall? And secondly, you mentioned that you're trying to get your associates degrees qualified for Title IV. Please explain what we do in associates degrees now and if we do get them or as we get them qualified for Title IV, what we -- what that could mean or could that be a big piece of the business? Thank you.

Sure, Cliff. On the education degrees, we've said that we continue to plan to, with our relationship marketing where we have program managers whose focus is on the education degrees and they'll focus on basically some door-to-door introductions in the states of West Virginia, Maryland and Virginia. At the same time, we'll back that up with brochures and local advertising. And then, as we generate students, we'll begin to increase our Internet marketing spend. It's worked for us in the past when we've launched programs. And that's the way we'll do it.

When would you think is -- when would we go to the Internet? By the end of this year maybe or is that next year sometime?

Well it all depends on flow, but one of the things you also want to do when you start a program is make sure you have enough qualified teachers to handle the enrollment, so it's going to be a slow and gradual process rather than a big spend $2 million and bring in a lot of people and then wonder about how the heck you're going to teach them. So I think we will ramp it up gradually and we'll leave it to Carol Gilbert, our very capable marketing Vice President, figure that out with her team.

On the associates degrees, our associates degrees have been eligible for military tuition assistance and we did not know -- we actually had created an associates degree in general studies with 20-some concentrations, figuring that that worked out really nicely for moving up into a bachelors degree. But unbeknownst to us, since we functioned without Title IV for many years, if you are a for profit institution, a degree in general studies is not eligible for Title IV, simply because it, theoretically, doesn't lead to a job.

So you have to have associates degrees with the actual degree itself in a format that leads to a job. So we -- our academic faculty went through and restructured the degrees. We've put that application forth to the higher learning commission and we expect to hear over the next couple of months from them. I think they'll be fine with it mainly because we're really not changing the programs. We're just restructuring into multiple degrees instead of multiple concentrations. And they understand that, as a for profit, we have this issue with Title IV access for our students.

I can't really tell you what the outcome of that will be other than my -- our assumption has been that it'll make the associates degrees attractive to federal student aid students who have not found them attractive because we blocked them from registering for those associates degrees because they were not Title IV eligible.

If we weren't going to change our student population and still have a bunch of military folks, I would tell you that probably that enrollment is not going to change. But certainly we anticipate that there will probably be some folks from the public sector once we take the block off, that will find these attractive.

And do you offer discounted degree -- online degrees in associates versus competitors like you do in some of the higher degrees?

I would say that our associates degrees don't compare in cost to some of the online nonprofits like Rio Salado. They're there because there are students, at least in the military, who get promotion points for associates degrees. And so that's really why we've had them historically. And we don't have an intention to discount them.

Our degrees do compare at the associates level pretty favorably. Last time I checked I think they're $10 or $15 per course less than [Axi] is. So if you look at some of the online for profit associates degrees, I think we're competitive. But this is more for convenience for our students. We're not promoting this as a big source of revenue. So if that happens, it will be a pleasant surprise.

Thank you.

Your next question is from the line of Corey Greendale of First Analysis. Please proceed.

Hi. Good morning. Harry, as long you've brought it up, on the direct lending, are you currently tied in to do that if you need to or are you going through the process to be tied in for direct lending?

We are already approved for direct lending.

Okay.

It would just be an internal situation where we'd have to work out the changes in processing with our third party loan servicer that we use. It would take about 45 to 60 days. There's no reason you can't do both, which is something we're also anticipating.

A little more complicated, but you can actually participate with Sallie Mae and also do direct lending. There's no restriction on that. And so, we're already approved for it. It's just a question, do we really want to change the processes to do direct lending? It actually will be a little easier for us in the long run, once we get these processes in place.

The reason we haven't done it previously is that, traditionally, Sallie Mae and the financial institutions actually gave the students a better deal. They didn't have as much -- have to pay as much in origination fees that they do in direct lending. That part of is changing as we speak and it's hard, at this point, to gauge exactly where it's going to be six months from now.

But we would be remiss if we weren't planning on making sure we had access to direct lending if we needed it. I still have personal concerns about the government. There's not enough money for the federal government to fund all those loans. They'd have to raise the money.

Plus I really -- Sallie Mae and there are guaranty agencies offer a lot of -- historically, have offered a lot of benefits to our students in terms of ability to consolidate loans and just dealing with them. And I don't know whether we'd get the same quality of service for our students from the federal government. So we -- we're still debating internally, but we're moving toward getting direct lending in place if we need it.

Okay. Great. Then I had a couple questions about the Title IV market. First would be, it sounds like you're getting pretty broad interest among your spectrum of programs. Is the interest coming primarily from people in public service professions, as you expected? Or are you seeing even interest outside those areas?

Well, we don't really market to the broad market. You don't see our ads on TV. We say our mission is educating those who serve and we -- the substantial number of these are coming from the public service sector -- government employees, fire and emergency management, law enforcement. That said, we do have people who find us. -- that's the great thing about the Internet -- who are teachers and -- who aren't looking for an education degree, by the way, but are looking for that history degree with a concentration in the Civil War and, which is one of our areas of expertise.

So -- but we're not paying to advertise broadly. As I said on our road show, the University of Phoenix spends in two weeks what we spend in a year in marketing. So we look at focusing on our niches and focusing on our core market. And at the same time, we do get some folks who come in and find us that aren't in either of those categories and we're glad to find them.

And we're getting better at identifying key words that people use. There's a lot of key words that we have experimented with that we would have never thought about really putting advertising dollars into that are turning out to be pretty good lead generators for.

So yes, it is an increasingly larger spectrum of students that are finding us. And we're finding that affordability is becoming a bigger and bigger issue with people with education. They need the education, but they can't afford it another method. So I think that people are finding us and that affordability will continue to drive our growth.

Okay. In serving the Title IV market, can you give us a sense how many admissions reps you have doing that and what you're hiring plans are for that?

Well I mean, we have the same admissions reps doing military students that are doing Title IV students. We do have a -- what we have added and I think is a key to increasing our ability to get people through the system, is a financial aid help desk. We have a number of people and actually we're hiring several more people to do that. We launched that in February and we're starting to see the benefit. The way Title IV works, it takes about 30 days to get through the process, so that launching it in February really doesn't benefit us until about April.

And we're finding that that is increasing our conversion rates of Title IV students. And expect to continue to make improvements to increase the conversion rates of Title IV students. We traditionally get about -- between 70% and 75% of our military student leads convert to students. The Title IV has been more like 28% to 35% of people who express interest converting. So we're hoping to improve those conversion rates on Title IV with these process changes. But yes, we do have a financial aid help desk now. I think we had six or seven people we started with. We've hired another one this month. So we continue to grow that.

Okay. That's helpful. And just one other question on the numbers. Wally, I think you said that, over time, sales and promotion probably gets toward 12% of revenue. If you hit the revenue guidance for next quarter, do you think that sales and promotion would be around 12% or is it more of a slower trend toward that level?

That's a great question, I think, given that it's the second day of May, it's tough to answer at this point. We're trying to spend our budget and at the same time, we don't believe in pushing dollars towards campaigns that would be wasted or not timely, so --

And we really don't want to get into the position of starting to give guidance on individual expense line items at this point. So let's just say that we think our marketing will not exceed 12%. It was 9% for this quarter. I don't think it will be less than that for next quarter.

Great. Thanks very much.

Your next question comes from the line of James Maher of Think. (inaudible), please proceed.

Thank you. Good morning. A couple of my questions have already been addressed. But maybe you could elaborate, if you would, on the Navy program and when you think you might start to see some incremental benefit from the MOU. And also if you could address, historically, you've had a very strong referral rate because you've had such good experience with the other services. Do you think that this is going to be a similar thing with the Navy or will it take a little bit longer for this to start to ramp up and be effective?

Well, I would tell you that you don't do any of this overnight. We have had a historical relationship -- we actually have a decent number of Navy students. It's just that the number of students compared to their size is not proportionate compared to what we get from the other branches.

The importance of being in this program, when they opened it in 2002, they closed it and admission was only open to schools that were regionally accredited at the time and we were not. Once we gained our regional accreditation, we inquired and were told that it wasn't open. So we waited until they created a process to open it and let other schools in. We weren't the only one admitted.

We, by being on that website, that's a big deal for us and for anyone else who's on the website because it's one of the first places that a student will look for if they want a distance learning program. The other thing that it does is, as ESOs get familiar with the fact that we're now in that process, our outreach representatives can begin visiting the bases and seeing that our brochures are stocked in the education office.

And similarity with other branches, if we get a decent number of students, usually we're able to get office hours where perspective students can come and visit with our outreach reps. So it will take some time. We're not forecasting that we're going to double our enrollment with those guys overnight, but I do think that we will see the enrollment in the Navy reach about the same percentage that we have with the other branches over time.

That's great. Thank you.

And your next question comes from the line of [Corey Amon] of Rice Voelker. Please proceed.

Hey, good morning. You may have provided this, but of the 33,000 total enrollment, how much of that was military versus non-military at March 30, March 31st?

We have not given that information. We do that annually.

Okay.

And I think that will be our continual trend to do that.

Okay. So of the guidance for net course registrations from new students of approximately 33,500, you're not willing to discuss or comment on what proportion of that might be from the military?

I don't know the answer off the top of my head anyway because we weren't really prepared to answer the question. We -- obviously, we budgeted increasing civilian percentages, recorded a substantial increase in the first quarter of this year with our FSA registrations, which are predominantly civilians. But it's not an answer that I could get to you since we said we'd give annually.

Okay. Yes, no problem.

It's going to improve. It's going to continue to improve.

Yes. We're up 12%. 12% of the first quarter registrations were for Title IV students, which are mostly civilian.

Okay. The -- just so I'm clear. You said 4,000 registrations were from Title IV in the first quarter. I missed whether that was 4,000 of the new student registrations or the overall registrations.

Total.

Okay. Okay. Great. Those are my only questions. Thanks.

Thank you.

Your next question is from the line of Jeff Silber of BMO Capital Markets. Please proceed.

Sorry. Just a quick numbers question. Did you disclose graduations in the quarter and are you willing to do that?

Yes, we do that annually. We don't do it each quarter.

Okay. Great. Thanks so much.

Sure.

There are no further questions at this time. I would now like to turn the call back over to Mr. Chris Symanoskie for closing remarks.

All right. Thank you, operator. That does conclude our conference call for today. We thank you all for your time and your interest in American Public Education. Have a great day today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.