American Public Education Inc (APEI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2008 American Public Education Inc. Earnings Conference Call. My name is Lakeisha, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Chris Symanoskie, Director of Investor Relations. Please proceed.

Great. Thank you, Operator. Good evening, everyone, and welcome to American Public Education's Second Quarter 2008 Earnings Release Conference Call and Webcast. 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 upon 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 third 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 factors 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. I am pleased to report yet another quarter of strong financial and operational performance. During the second quarter of 2008, our revenues increased 55% to $25 million. This growth was driven primarily by strong growth in registrations from new and returning students.

Our operating margins increased to 23% in the second quarter, compared to 20% in the same quarter of last year. We were able to increase margins, while making investments in new programs and expanding our corporate facilities to meet our administrative needs.

This quarter, our net income increased to $3.9 million, a year-over-year increase of 93%. Our reported earnings of $0.21 per diluted share is $0.06 above the high end of our previously issued earnings guidance. The earnings upside is mostly attributable to higher than expected revenues, lower than expected expenses and a lower than expected effective tax rate. These solid results give us the confidence to raise our full year guidance. Today we announced that we are again increasing our full year 2008 earnings outlook to between $0.76 and $0.80 per diluted share.

Last quarter we gained membership in the Navy's Distance Learning Partnership, a program that will give us broader access to Navy bases and greater visibility on Navy websites. I am pleased to report that the Navy's main distance learning website has been updated with a new list of partner schools at the URL listed on our slide.

In addition, we are moving full steam ahead with our efforts to develop a stronger relationship with the Navy and its key influencers. Our team of outreach representatives has initiated a regular visitation schedule to Navy installations and has been invited to attend numerous Navy education fairs.

We expect it to take some time before we see a material impact on enrollment from this program, however, the Navy has been very receptive to our activities and programs, giving us a high degree of confidence in future prospects.

Recently, Congress passed and the President signed into law, a new GI Bill that effectively increases the amount of funds available to veterans for higher education. The new funds will be roughly equivalent to the highest tuition of state schools in the state where the service member is attending school. The increased funds will be a positive for us.

However, one of the most exciting aspects of the new bill is the feature of transferability to spouses and children. It is important to note that the new GI Bill does not go into effect until July of 2009, which will give us time to examine the nuances of the new plan and coordinate our marketing efforts around those changes.

While we soft launched our three new Master of Education degrees earlier in the year, we are beginning to market them in earnest in the third quarter after receiving approval from the State of West Virginia to offer four additional education programs for licensure. One, a Master's of Education in Teaching with a concentration in elementary education.

Two, a Master's of Education in Teaching with a concentration in Social Studies. Three, a post-baccalaureate certificate. And, four, a Master in Guidance and Counseling. We will start teaching classes in these programs in September and October of this year.

With this addition, we now offer a total of six programs in the field of education. We have nearly 200 students enrolled in our new MED programs, but we expect to see a more meaningful impact on registrations later in 2009, as we build awareness of our programs among teachers, now that we've achieved approval for licensure.

Another highlight of the quarter is related to program level accreditation. Our emergency and disaster management program recently obtained accreditation from the Foundation of Higher Education. The Foundation of Higher Education, FoHE, works through the FEMA's higher education initiative in collaboration with practitioners and academics from around the world to establish emergency and disaster management educational standards, which are centered on emergency management best practices.

APOS's program is the first 100% online university to achieve this accreditation and is now recognized by peers as being among the top higher education, emergency management institutions in the U.S. These types of developments continually strengthen our ability to serve students and make us more attractive to potential students.

In closing, our results this quarter are straightforward. We delivered a strong quarter and continue to be focused on expanding within our target audiences, military professionals and civilians in the public service sectors. We continue to make investments in new initiatives that are consistent with our mission of affordability and serving market segments with unique needs.

Such initiatives include PhD programs currently in development, additional education degree concentrations and future initiatives that would further support our long-term growth. The completion of another successful quarter illustrates our ability to grow and invest for the future, while becoming more efficient and without sacrificing quality, high student satisfaction and positive learning outcomes.

Now I will turn the call over to our CFO, Harry Wilkins, to provide you with some more detail on the quarter's results and to discuss our expectations for the remainder of the year. Harry?

Thanks, Wally. This quarter's results represent the tenth consecutive quarter of record year-over-year growth in net course registrations. Actually, there's been more than that, but that's been since Wally's been in charge. He's doing a good job. So I can direct you to slide four, but you can see that our growth was very strong for the quarter. And that was really driven mostly by growth in net course registrations from new students, which came in at 60% increase over the corresponding three month period for 2007.

This is a tremendous registration growth rate for what is seasonally a low quarter for us, historically, as it is for many post-secondary education companies. So we were obviously very pleased with that and we continue to grow in the military, particularly. Even a little bit more than we had anticipated. So that gives us a year-over-year growth rate of 57%. And you can see that led to a strong revenue growth and net income growth, which actually was 93%. So we're very pleased with that.

The 57% increase in registrations year-over-year has led to a 55% increase in revenue. One of the reasons why revenue growth is trailing registration growth a little bit is because we have a lot of lab courses, actually science labs, which are available on CD-ROM for our students. It's a very innovative approach to online labs, but as our civilian population has grown, we've seen a lot of growth in the humanities and science courses.

And those labs are only worth one credit and we charge $250 for those courses. So to the extent the labs are growing, actually they've grown about 100% year-over-year, and that's caused our average revenue per course to come down slightly. But obviously we're very pleased with the 55% revenue growth.

The bottom line again, that we reported for the second quarter, had net income of $3.9 million or $0.21 per diluted share, an increase of more than 90% over prior comparable period. Net income that we gave guidance to was $0.14 to $0.15, so we beat that by $0.06.

Now, as we'll explain in the next couple of slides, that $0.06 that we beat our expectations by was $0.02 attributable to a tax -- less than we expected tax effect tax rate. We will talk to you about that in a minute. It was also $0.02 per share due to the fact that we actually delayed spending money on promoting our education programs.

We had originally thought we were going to really promote those programs in the second quarter. We didn't get all the approvals we needed from West Virginia until a little bit later than what we thought, so we're going to roll out those programs now in the third and fourth quarter. And that $0.02 of savings we had in the second quarter, we will spend in Q3 and Q4.

So of that $0.06 that we beat our own expectations by, about $0.02 was due to a one-time tax change that we'll talk about -- about $0.02 was due to a delay in selling and promotions. So the over performance of about $0.02 was really related to the new students that we had that exceeded our expectations.

If you look at slide five, we'll talk about margin improvement. And you can see that we really enjoyed some significant margin improvement in both G&A and instructional costs and services year-over-year. Our selling and promotion was nearly 11% of revenue, but that was less than we had anticipated. And again, that's because we delayed marketing our education programs until they had been approved. And we're just starting to do that now and we will continue to do that for the rest of the year.

So we're pleased. We anticipated some margin improvement. It's a little bit more than we thought. The other thing that's happening in our G&A expenses is that we originally anticipated the cost of being a public company would be about $1.5 million to $2 million more than last year, and it probably will turn out to be that way. But it isn't as evenly weighted throughout the year as we anticipated. It's a little bit more back-end weighted.

The Sarbanes-Oxley compliance costs will be a little bit more in the fourth quarter of this year than it was in the second quarter. We had modeled that $2 million of public company expense would kind of evenly flow throughout the year, and we're finding that it's a lot more seasonal than we anticipated. So we had some savings in the second quarter from that. So -- I mean, I think the margin improvement speaks for itself. It was a really good quarter.

Now let's get to that tax situation we talked about. We talk about that on slide six. What happened with our tax rate is that in 2007, we have to file that 10-K within 60 days -- or I guess we will next year anyway. We have to file them in March and we haven't finished our state tax return.

So we're now filing in 48 states that we report corporate income taxes. That's a lot more than we have in the past, and we don't complete those returns until after we have to release our 10-K. So we have to estimate what our state taxes will be. And because we're not sure until we actually file the returns, we are conservative in our estimates and it turned out that we had about a $400,000 over accrual in 2007 for our estimated taxes.

When we actually completed the returns, in the second quarter of this year, we have to book that adjustment because we know what it is. It's no longer an estimate, it's an actual adjustment. And the result of that was that our taxes for 2007 were about $400,000 less than we anticipated.

When we book that adjustment to tax expenses in the second quarter, it gives us an effective 34% rate. Normally our rates should be 41%. That's what we model, that's what it should be. But because of this one-time tax savings related to the last year, its just saved us about $0.02 of our own earnings of tax expense. So we try to show the pro forma impact of that on slide six.

Slide six on the left-hand column shows what we actually reported as net income and diluted EPS. And on the right-hand side it shows you what you should ordinarily expect if we had our normal tax rate outside of this one-time adjustment.

So let's look ahead now. We had a great quarter. We kind of explained the differences from our expectations for the second quarter. Let's talk about the third quarter and the full year. If you go to slide seven, I think you'll see that we've increased our guidance -- well, I guess we didn't give guidance for the third quarter yet, so this is our third quarter guidance.

We've increased our guidance for the full year. But for the third quarter, we're giving guidance of net course registrations of 36,250, which would represent about a 43% growth in enrollment, and the net course registrations for the new students to approximate 9,100, which would equate to about a 37% growth rate year-over-year. And again, remember we're comping against pretty good quarters from last year. We had a record enrollment last year also.

That would drive revenue growth of anywhere between $25.5 million to $26.2 million, which gets us in a range of about 45% to 49% growth, and would equate to net income of $3.1 million to $3.4 million or 40% to 53% growth. If you do the math on our estimated shares outstanding, that gives you an EPS range of about $0.17 to $0.18 for the third quarter.

Now if you look at the full year, which goes to slide eight, and we're increasing our guidance. On slide eight we show what our prior guidance was from the last earnings call of 139,000 registrations.

We're increasing that net course registration guidance to 141,000 for the year, and for new students from 33,500 to 34,500, which causes us to increase our revenue from a range of $102 million to $104 million to a new range of $103 million to $105.5 million. And net income, we're increasing from 2.8 -- or $12.8 million to $13.6 million, up to $14.5 million to $15.1 million. And that gives us a new EPS range of $0.76 to $0.80 per share for the whole year.

We also are continuing to experience a lot of growth. We have to -- [grow the] back office too. So we're continuing to expand our facilities. Our growth rate is getting to the point now where we can actually get ahead of it a little bit. And we've expanded our facilities at both of our locations, Manassas and Charles Town, a little bit before we anticipated, but we've been able to get some buildings.

We now are in nine buildings that we've leased and four that we own, which is 13 buildings now. And that's caused our CapEx to be a little bit higher than we anticipated. But because we're spending this money this year, I really think it's going to save us from having to expand the facilities next year. I think by the end of this year, we'll have all the facilities in place at Manassas and Charles Town that we will need for 2009.

So I guess in closing, our strategy, as you know, includes entering new and underserved segments to propel our future growth, new markets like the education programs in the Navy. We continue to increase our market share in our historical markets of the military and we hope to continue to expand our presence in the civilian marketplace.

Now Wally and I will be happy to answer any questions we have from the audience. And I'd ask the Operator, if you're there, to please at this time open the lines up for questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Mark Marostica, Piper Jaffray. Please proceed.

Thank you, nice job on the quarter. My first question relates to -- I know a metric that you track pretty closely, and that is the student satisfaction quotient. And in particular, I was wondering if you could comment on perhaps areas where you outperformed your expectation and any areas where you underperformed what you thought you should have done for the quarter?

Thanks, Mark. We did do a presentation that we filed the transcript with I guess, during the past quarter that had some statistics from our student satisfaction quotient. I don't remember all of those off the top, but in many cases we were in the 95th percentile as far as satisfaction goes.

We're pleased with all the results. I would say that we didn't have a single question that was below the 85th percentile of the 20 metrics that we track and there was only one in the 85th to 90th and then almost all of them were in the 95th to 100. So from my perspective, there are none that I'm dissatisfied with. We have a great focus since all of our full-time employees are paid an incentive bonus based on that outcome.

We do measure it each quarter. Our comp committee approved the bonus for the second quarter, which is the numbers you see and they were very glad. It was like the eighth consecutive quarter where we had improving results in that index. So there's no particular ones that stand out. They're all, quite frankly, pretty damn good and the one that's below 90% is in 85% to 90%. So I'm not that upset about it.

Okay. Great. And then with regards to your registration growth that you achieved in the quarter, could you give us a sense of what the growth was in the Title IV area versus the military?

Yes. I can tell you that in the second quarter, our financial services students grew 87.5% over the corresponding three-month period in the prior year, and that so far for 2008, it's about 12.6% of total registrations. And last year at this time, it was about 9% of total registrations.

So FSA is growing quite a bit, but the military's still growing. So as a percentage of our students, it's mitigated a little bit by the fact that our military growth continues to be robust. But that's where it is right now. And right now, it's about 12.6% of registrations, up year-to-date for the six months ended June 30th, it's up 119% over the last year.

Great. And one last question, I'll turn it over. You mentioned that one of the reasons that you outperformed in the quarter was a result of deferring some marketing spend due to the delayed launch of a couple of education programs. Can you give us a sense for what your guidance implies in the back half of the fiscal year, in terms of the spend on selling and promotion as a percentage of revenue?

I think it's a penny each quarter. I guess I'd like to just talk about the justification, though, in general. We thought we would do something different with these programs, which was try to get each of our programs approved for licensure by the state of West Virginia and we were the first 100% online school to get these programs approved. So it took awhile, and we actually didn't get our final letter on the final programs until, I think it was June 5th.

And because we pride ourselves on matching our expenditures with availability of programs. Once we got those programs approved, we had to slot them into a schedule, put the teachers up. And so, for the most part they'll all be available for September. And we are absolutely anticipating spending lots of money in the third quarter for those Fall enrollments starting in September. So we think it's about a penny for the third quarter and about a penny for the fourth quarter.

Over and above the run rate that you're at as of the second quarter? Is that the way to look at it?

Yes. Yes. That's right. I mean, I think you should expect somewhere between 12% and 14% of revenue for the remainder of the year for selling and promotion. If you recall, at the beginning of the year, actually when we did our IPO last November, we said that our marketing costs, we anticipate it to be about 12% of revenue for the year.

Right.

Well, so far year-to-date they're running much less than that. But we'll make that up in the third and fourth quarter, mostly because we're going into new markets. We're really optimistic about the impact of these Master's in Education programs, which we feel are priced at much less than our competition for the same quality product. And our programs lead to certification for teachers, whereas others that are out there do not.

So we think they're quality programs. They're going to be at a much less price. And we want to get that word out. And we're going to spend a little bit in the third and fourth quarter to do that. But we anticipate that having a huge impact next year for us.

Great. Thank you.

Our next question comes from the line of Jeff Silber from BMO Capital. Please proceed.

Thanks. I'm just going to follow-up with Mark's questions, asking the same thing on G&A. You mentioned in terms of Sarbanes-Oxley costs maybe in the fourth quarter, but what should we be looking for for a normalized G&A rate?

Yes, I don't know if we're going to give guidance. What we do say is that we think that's where we can get some leverage as far as margin improvement goes -- that G&A should not increase at the same percentage that revenue increases. So our G&A costs will continue to go up, but at much less of a percentage than revenue. And I really hesitate to give any specific guidance beyond that.

Okay. That's fair. Some of the other companies in this space have been commenting about the effect of higher gas prices, kind of boosting their online enrollment. And I'm wondering if you've seen any of that with your civilian population? Thanks.

We haven't seen it in a noticeable way, but some of those companies that have been issuing those comments aren't 100% online. We actually did have an article, in one of the San Francisco newspapers, where they quoted one of our students that was in New Jersey, who basically said he chose our program because it was 45 minutes each way to the local college and he figured he was saving $400 a month.

And given our nice price point, he thought it was almost a wash in making his education much more affordable. But quite frankly, we were surprised to see the article got published and see a student got quoted. And we haven't noticed any flood of inquiries from that, but I think it may be just the fact that we're 100% online, so we don't have any base of business to shift from land to online.

Okay. Great. Just a couple of quick numbers questions. Harry, you're still guiding for a tax rate of 41% for the year, but the first half year-to-date, it's only about 37%. Does it make sense that the tax rate in the back half of the year is going to be higher than 41% to get us to [that point]?

Yes, I guess just to make things clear, and maybe we haven't made it clear yet. Let's try to make it clear right now. We should have 41% effective tax rate. Our effective tax rate for the year is going to be about 38.5% because of the impact of the adjustment to 2007.

But going forward, if you're doing a quarter-by-quarter basis, it should be 41%. But because the second quarter is only 34%, it's going to annualize in 2008 to about a 38.5% rate.

All right. Thank you for clarifying that. And then finally on capital spending, you had some comments on that. What are you budgeting for this year, and what would a normalized rate going forward be?

Well, I think this year's going to be high because we really built out a huge expansion of our facilities in Manassas, and we're building out a large new building for our IT department in Charles Town. So our CapEx maintenance, as we have said historically, is about $3.5 million to $4 million a year, just to maintain our IT infrastructure and to develop new programs.

This year, with the development of PhD programs, some of which we capitalized those costs of program development and our facilities, we've given guidance of about 7.4 million to 7.9 million of CapEx for this year. Going forward, I would expect it to be a little less than that for next year. Beyond that, I don't know.

All right. That's fair enough. I appreciate it. Thanks, Harry.

Our next question comes from the line of Trace Urdan from Signal Hill. Please proceed.

Hey. Good afternoon. Wally -- could you speak to the impact that re-enrollments are having in your enrollments? And maybe remind us where those get categorized? Do they come back into new students after some point? And is there any kind of material trend that's taking place in terms of re-enrollments?

I'll tell you what we've said before, Trace, because I actually haven't seen a change. But we disenroll a student after 13 months of inactivity. And that's following procedures that are prescribed by AACRAO, that's A-A-C-R-A-O. And the trend, prior to regional accreditation, was that each month we'd get approximately 200 students re-enrolling who had been disenrolled.

Since our regional accreditation, that number has shot up to about 1,000 students a month who are re-enrolling. And I haven't looked at it recently, but no one has reported to me that it has shifted from that 1,000 number. So we basically increased five-fold once students who had disenrolled came back and found we were regionally accredited, they came back to us at a much higher percentage than they had historically.

And part of the reason is we can actually only give extensions for deployments up to a year, and so the 13 month is a 30-day administrative procedure. So there are some people who get deployed who just need the down time with their family when they come back to the states.

They get disenrolled and then they -- all of a sudden, they realize that maybe they don't want to re-up or, if they do want to re-up, that they want that degree to get promoted. So the nice part about it, I think, that the five-fold increase in re-enrollments has been reflective of the fact that getting the regional accreditation made their degree worth more.

And Trace, just to re-emphasize, re-enrolled students are not included in new students with us. They're certainly being included in net course registrations, but we don't include them as new students.

You're only a new student once.

Right. Okay. And then maybe -- could you give us a little bit more color on what you felt was driving the new course registrations in the quarter which looked pretty strong?

Sure. Well some of it was we reported that we had a little block with our FSA last quarter, and so we had some FSA students who instead of going into March, went into April. That was some of it. But we did have rather strong growth in the military, beyond our expectations. And when you have a base as big as ours, making that estimate accurate and trying to explain it, it'll take us more than a couple of months to try to explain it.

We try not to read too much into just one quarter fluctuation, but it was obviously a very good quarter. But we're still projecting, as we have all along, new student growth to be in the mid-30% to near 40% range. We've upped our guidance now for the full year to 40%. But that's what we anticipate long term. At the current time, we're just pleased with these results, but we're not really changing our long-term thinking because of them.

Okay. And then last question. How many days has the website been up and running, and can you see any change as a result of that?

Oh, the Navy website?

Yes.

I think when I gave a presentation right around the 25th of June, when we were told we were going to be up, we were not up. And I believe it came up right around the 20th of July. I'm not positive about that exact date, but somewhere about a month after we expected it be up, it came up.

And prior to us going on the website though, the moment the announcement was made, which had been earlier than that, our field representatives were given access to just about all of the bases. And so, really we saw the fruits of being placed in the program from having our reps get access so that they could participate in Ed fairs and set up office hours and meet with prospective students.

So we're seeing the short-term early benefits of being in the program. Really, it's been not long enough to see what the benefits of being on the website would be.

Fair enough. Okay. Thank you.

Yes.

Our next question comes from the line of Jerry Herman from Stifel Nicolaus. Please proceed.

Thanks. Good afternoon, guys.

Hey, Jerry.

Just a follow-up question with regard to the student volumes. Some of the stuff you guys said earlier and also what looks to be some verbiage in your 10-Q would indicate that really the military did drive the growth. I guess it begs the question, the [T-4 side], last, last quarter, you guys did talk about some bottlenecks. Could you give us an update there in terms of where you are with the financial aid process?

Yes, we think we made all the process improvements we need to make for financial aid to open up a pipeline for the foreseeable future. And we're real pleased with -- year-over-year we're up 119% in financial aid students and that's without having the impact of these Master's in Education programs, which we think will lead to a lot of FSA growth.

We really thought that would be happening by the second quarter, but it's not going to happen, probably now, until the fourth quarter and next year. So we're happy with the path we're headed for civilian students.

Can you talk about capacity? I think last quarter, Harry, you talked about the capability to process like 1,500 a month. You were hoping to get to 3,000. Can you maybe -- ?

It's hard to put a specific number on it. Because we have the IT structure in place now to handle as many students as we could get in. We are still relying on our third-party loan servicer and our own people in house. So there is a human aspect of it.

So, we'd have to add more people once we get to increased levels. And it's always a management decision when you add those people, do you add them before you get the students or do you wait until the student demand is such that it warrants hiring more people? But right now there's no capacity issues with FSA. We're getting as many students in as we like.

Okay. Great. And then just with regard to selling and promotion, I know previously you talked about sort of a 12% range for the full year. Should we think about that sort of as the run rate for the second half of the year, rather than some catch up in the second half of the year that puts you at 12% for the full year? Kind of like the tax rate, I guess.

I think you're right. We are going to have a catch up in the second half. We delayed some spending in the first half of the year, and we're going to spend that money in the second half of the year to market these education degrees. So, I think the full year is going to be closer to the 12% that we had anticipated, which means there'll be a catch up of between 12% and 14% in the second half of the year.

Okay. And then just one final question. The new registration guidance -- maybe push you a little bit -- is 37%. It seems conservative coming off the 60, especially in light of some of the new [programmic] offering as well as the Navy. Could you maybe comment on that?

Well, we're still fairly seasonal. Okay? The third quarter's a traditionally weaker quarter for us. And especially the civilian population we rely on more as it seems to be a little bit more traditional in signing up for classes in the Fall and the first part of the year. And we're comping on some really good quarters last year.

So our long-term goal is to try to grow this business 40% top line, as we said, and to do that we need new student growth to be in the 35 -- 34% to 37% range. And that's what we're trying to do as a management team. That's our long-term strategy. It'll remain to be seen whether the second quarter growth spurt was an anomaly or whether it was something that can be sustained. There's nothing wrong with growing a company 40% a year and that's what we're trying to do.

The other thing I would add to that too, Jerry, is that some of you know that the TA program maxes out reimbursement at six classes a year. And while there's only a small minority of our military students who take six classes or more a year, the month of September, typically our students that take the most classes have actually maxed out and won't sign up and register.

So we can actually see some good wind in July and August, and then we can sometimes see slack in September because they have to wait until October for the new fiscal year to re-register for a class.

Great. Thanks, guys.

Our next question comes from the line of Corey Greendale of First Analysis. Please proceed.

Hi. Good afternoon. First, I wanted to ask you about the trends in revenue per student. You talked about the effect of the greater labs this quarter. It looks like the guidance for next quarter suggests that revenue growth will be back to above enrollment growth or course registration growth. So what's offsetting the lab growth to cause that?

A lot of it's just timing. As you know, we've published a balance sheet now. So the way you can normalize, as we call it, our registration growth and our revenue is to look at the deferred revenue liability. You have to factor that in. Because we recognize revenue over the eight or 16 weeks that the students are taking classes.

So for instance, if June happens to be a really good enrollment month, we don't recognize all of that revenue in the second quarter. A lot of that's going to the third quarter and vice versa. So, you really have to add the change in deferred revenue to your estimated revenue from registrations to try to normalize that if you're looking at just one quarter versus another. If you follow.

Yes, I follow. That's helpful. Thanks. And following up on a couple of questions about the S&P spend. From what you know right now, do you still think 12% is kind of the long run right percent to model for sales and promotion spending?

We do. We do. And of course, that's a big increase in marketing expense dollars from one year to the next, but 12% of revenue is what we think we can sustain our growth with that kind of spend.

Okay. And, Wally, I wanted to ask you about the Master's -- the education program, the 200 students. Are those localized in a couple of districts that you particularly visited and built relationships with? Or, are those people who managed to find your programs on their own? Or -- is there some concentration?

They actually managed to find the programs on their own. In fact, the gentleman that I mentioned, who was quoted in the San Francisco newspaper is a teacher in New Jersey who found our program in administration and supervision just by surfing the net. That was one of the two programs we had open.

Okay. And if I could, I wanted to ask you a question. Out of the Q, there was a statement I found interesting, which says we expect that a change of control will occur in the near future as a result of either future transactions in which we are involved, or as a result of actions by ABS. Is there any commentary you can put around that, or elaborate on the first piece of that? The part about the transactions you might be involved in.

Well, I think we said at one of our previous investor meetings, that was recorded or at our last earnings release that prior to going public, we never saw acquisition opportunities and then since we've gone public, it seems like some of your brethren on the investment banking side and everybody else sends us a couple of deals a week.

So opportunities pass by our desk that never passed by our desk before we had public currency. But that said, we always said that, I think, by the end of 2010 that ABS Capital had funds that had to be liquidated. And so, we did expect them as our primary and largest investor, who had been with us back since 2002, that they would be liquidating their position over time.

We have no control over that. So all we simply did was just point out the fact that, since they're just under 26%, that if enough executives exercised stock options or any other transaction might be done, without them doing anything that they could potentially go below 25%.

Okay. And I'm sorry, the last question. On the acquisitions, should we expect if you do an acquisition that it would likely be another online post-secondary platform? Or, could you go outside that?

If we were to do one, I'd prefer to stay -- online's our environment. I like staying close to what we know best.

Okay. Thank you.

Our next question comes from the line of Brandon Dobell from William, Blair. Please proceed.

Hi. Thanks, guys. A couple of follow-ups on the revenue per student. Just wanted to make sure I understand the assumptions that you guys are kind of building into how you think about the back half of the year.

In particular, with the impact of either kind of starts, timing during the quarter compared to where we were last year or the growth in the number of labs, is that from a particular demographic in the student base you're seeing? Is it FSA students, or is it education students? How should we think about those different drivers that could impact how we should model revenue per student in the next two or three quarters?

Yes, I think the lab courses are actually coming more from the civilian students who are coming through FSA. Our average military student comes to us with transcripts from between four and five colleges, and in many cases they've gotten those courses out of the way. But our civilian students, we're finding, have not gotten those courses out of the way. So they need to take them in our fold to meet the requirements.

Okay. So it's fair to assume that as that civilian population grows, it's least in the near term a bit of a drag on the revenue per student, if you're seeing outsized growth from that part of the population, until you see maybe an offsetting trends from graduate school enrollees?

I think that's probably fair. Yes.

Okay. Fair enough. As you look out the next, let's call it, two to four quarters or so, from a technology build perspective, anything that we should be aware of that you guys are planning or doing or revamping? Kind of like you went through with the financial aid process. Anything from a customer service perspective, or an infrastructure perspective that we should be aware of that you guys are going to be rolling out or changing?

Well, I would say that, and we have a home grown system for our back-end, which we call PAD and that process has been pretty good. And, quite frankly, when we had a little bit of the hiccup with FSA, it was only because we grew so doggoned fast that we exceeded where we had originally planned it. But we've typically had very good success at our upgrades to PAD.

We will be doing something that internally we call Dr. PAD. So assuming that we get approval for our PhD programs, PhD students have a different tracking mechanism, a different billing mechanism, a lot of different things happen -- have to happen with PhD students to administer them through the program.

So we will be launching a new version of PAD for Dr. PAD, but it will not impact non-PhD students. So as far as how it would impact the bulk of our 36,000 students, that's not a big deal. And we don't anticipate starting PhD students until, at the earliest, September of '09, assuming we get approval. But we will be spending about $1 million on Dr. PAD.

Okay. Fair enough. And somewhat related to that, I guess, as you look at the programs you have now, especially as you move into the education space, and potentially down the line into other spaces, that may from an accreditation perspective or a regulatory perspective, require some sort of in-class time from the students, maybe Wally you can comment on kind of your comfort level with managing that kind of a hybrid student, if you want to call it that. Or, how you expect some programs in those areas to play out the next couple of years?

Yes. I mean, we're not planning on doing any classroom instruction. There is a -- like a teaching internship component of the licensing --

Right.

-- where have worked out agreements with --. And similarly, we do now, we work out agreements that have proctored exams for students too. So, I mean, we're used to being in an environment where we're hiring agents or working with agents in the field to monitor student testing. And we have worked out a system for helping students get internships and monitoring their progress in internships. But all of our instruction will still be taking place online.

Okay.

There's really no classroom component of what we're doing that requires an individual to be at the same physical location with an instructor.

Yes. And we're on top of the licensure issue. Should a state, if we have students going through a student teaching practicum in that state, if it requires a change in licensure, our efforts that we did prior to the IPO, we have two full-time people involved in licensure and we'll deal with the issue once it happens.

Okay. And then a final question maybe for you, Harry, some update on headcount. If you can kind of give us teacher counts or infrastructure counts? Processors? Those kinds of things. Just trying to get an idea of where you guys stand from a headcount perspective.

Well, I mean, we're able to find all the people that we need. I think we give some information in the K. I'm not sure if we have the actual employee information here by department in the Q, which I know we don't. But, I think we do update that information every year. And, I mean, you can see from our G&A costs, from our instructional costs, that our personnel costs -- we're getting some scalability there.

Yes.

So we're, so far -- finding adequate personnel, finding adequate teachers has not been an issue. We still have many hundreds if not 1,000 teachers on the waiting list who want to teach with us. And actually, as we get more diverse -- you have to really look at us. We really feel we're one of the very few truly online universities. We have over 70 -- I think, 73 programs now online -- degree programs and certificate programs.

Not many schools have that diversity of programs. And because of that diversity, we're attracting a lot of people who wouldn't ordinarily, I don't think, go to work for an online school that only had four or four programs. But that hasn't been an issue. We've been finding a lot of good people. They've been coming to us. It seems the larger we get and the more popular we get and the more people find out about us, the more we attract people to us. And that hasn't been an issue. Personnel had not been an issue.

Okay. Great. Thanks, guys.

Our next question is from the line of James Maher of ThinkPanmure. Please proceed.

Thank you. Nice quarter, guys.

Thanks.

A couple of my questions have already been addressed. Maybe you could, if you would, elaborate a bit on instructional costs and how you were able to get the margin gains. Was that simply the leverage from higher enrollment? Or, were you able to find some additional efficiencies?

I think both. I really think that last year was such a dynamic environment that we struggled actually scheduling classes properly to keep up with the demand. I think we've got a much better handle on it this year. And actually, we're doing a better job of getting enough classes out there and having the class size that warrants having the classes out there.

And our full-time faculty, we're doing a better job of making sure that their efficiently utilized. So that's been a real emphasis for our provost, and he's done a very good job at helping to get better leverage of our faculty. At the same time, we're offering some programs like in IT. That has been booming for us since we started it at the end of last year. We have full-time faculty there that are committed. Because that was a fledgling program last year, they were a little bit underutilized and we still have the full salary costs.

We may see something similar in the fourth quarter however, as we launch these education programs, we're going to have more faculty capability than we probably have students for the first quarter or two. So we actually may see that the instructional costs and services go the other way just a tad in the third and fourth quarter.

But we certainly think you'll see the same thing happen with that program next year. As we build our programs, we really do get more efficient and utilize the faculty better. So that really comes with the maturity of building out the programs.

And the of course by the Fall of 2009, we hope to roll out PhD programs. And you'll see the same thing there. We'll have to have a really high quality full-time faculty there committed to that program, but for the first few quarters, we won't have enough students to get good margins, but then we'll see it as the program builds.

Great. That's helpful. And let me ask a follow-up or additionally, in terms of referral rate. It seems like just with the growth that you're experiencing, that even having delayed the spending on the new education programs, the referral rate has to still to be quite strong in order to be achieving especially the number of new student starts. Can you elaborate on that a little?

Yes, our referral rate continues to be strong. I don't have the number for the quarter in front of me, but typically that number has ranged between 46% and 54% in the six years that I've been with the Company. And based upon our SSQ pay-out for the second quarter, I don't recall it going down.

So it's different between graduate and undergraduate, civilian and military. Probably the highest referral rate we have is in the military undergraduate and the lowest would be in the civilian graduate because that's a newer market for us. So that's kind of how it works.

And therefore, would it be reasonable to expect in the relatively near term, as the pickup in the Navy program begins, simultaneously you're picking up additional students in the education program that those might be relatively offsetting, and the referral rate would be roughly equivalent?

Well, yes, it might net out. In other words, the Navy business, because of word of mouth, might net out against the education business, which until we get enough students in the program to start the referrals, we're going to have to spend more money, which is why we project spending more money in the third and fourth quarters. Mathematically, trying to model that, it's sort of a crap shoot, which is why we said let's plan on increased marketing spend in the third and fourth quarter.

Right. That makes sense. Okay, guys, thank you.

Thank you.

Our next question comes from the line of Jerry Herman from Stifel Nicolaus. Please proceed.

Just a quick follow-up, guys. Is there any new news on the provisional status that was good through June of '08?

We got off of provisional status at the end of June. And, I actually thought I made that announcement in a conference or on a call. I can't remember where. But we didn't issue a press release. We had some public announcement. And you can see in the Q, our status goes through June of 2012.

Great. Thanks a lot. I appreciate that.

Sure.

And then, maybe could you just talk about the -- maybe the productivity distribution of the program offering? Harry, you mentioned the 73, it was in a recent press release. Can you give me any indication sort of what percent of revenue comes from what percent of those programs?

I don't know that we know that exactly. When we did our road show, we talked about the long tail and talked about how there were five degree programs with Bachelor's and Master's, so it's really ten of our 73 degrees where we had just under 50% of our students in those programs.

But at the same time, we have 63 more degree programs and then we have certificates on top of that, that has the other half of our revenues. And that's kind of how its been working. But we think with the theory of the long tail that as more civilians get to know our brand and see the fact that we have liberal arts degrees online, which a lot of schools don't have, we think they'll find that pretty attractive.

We really don't release that type of information by program, Jerry.

Okay. Thanks, guys.

(OPERATOR INSTRUCTIONS)

At this time, there are no questions. I would like to turn the call back over to Chris Symanoskie. Please proceed, sir.

Great. Thank you. Since there's no further questions, we will now conclude the conference call today. Thank you for your interest in American Public Education, and have a great evening.

Thanks for your participation in today's conference. This concludes the presentation. You may now disconnect.